Re Care Super Pty Ltd (No 2)
[2021] VSC 854
•20 December 2021
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
COMMERCIAL LIST
S ECI 2021 03963
IN THE MATTER OF AN APPLICATION BY CARE SUPER PTY LTD (ABN 91 006 670 060) (IN ITS CAPACITY AS TRUSTEE OF CARE SUPER (ABN 98 172 275 725))
| BETWEEN: | |
| CARE SUPER PTY LTD (ABN 91 006 670 060) (IN ITS CAPACITY AS TRUSTEE OF CARE SUPER (ABN 98 172 275 725)) | Plaintiff |
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JUDGE: | LYONS J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 17 December 2021 |
DATE OF JUDGMENT: | 20 December 2021 |
CASE MAY BE CITED AS: | Re Care Super Pty Ltd (No 2) |
MEDIUM NEUTRAL CITATION: | [2021] VSC 854 |
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EQUITY – Judicial advice – Supreme Court (General Civil Procedure) Rules 2015 (Vic) r 54.02 – Trust Deed provided for trustee to be remunerated for the bona fide provision of services to the Fund on such basis as the trustee determines to be ‘fair and reasonable’ – Whether trustee justified in determining a fair and reasonable fee for services including by reference to a risk that penalties may be imposed under Commonwealth legislation for which the trustee cannot be indemnified under the Superannuation Industry (Supervision) Act 1993 (Cth) ss 56(2) and 57(2) – Whether the trustee satisfied the Court to a reasonable degree of satisfaction that the exercise or the proposed exercise of the power under the remuneration clause was not improper for the purpose of giving judicial advice – Whether the trustee satisfied the Court to a reasonable degree of satisfaction that the exercise or proposed exercise was consistent with the judicial advice sought – Advice provided.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Ms D. Hogan-Doran SC with Ms E. Poole | Mills Oakley |
| For the Australian Prudential Regulation Authority (appearing as amicus curiae) | Dr R. Austin with Mr D. Allen | |
| Appearing as amicus curiae appointed by the Court | Ms W. Harris QC with Ms G. Crafti | Herbert Smith Freehills |
HIS HONOUR:
INTRODUCTION
I delivered reasons for judgment on 6 December 2021 following an initial hearing on 1 December 2021 (the Reasons).[1] Relevantly, for the purpose of these reasons, the plaintiff sought judicial advice that it was justified in determining a fee under the remuneration clause in cl 2.8(d) of the Trust Deed including, among other things, by reference to a risk of a statutory liability for which it could not be indemnified from the Fund by reason of the SIS amendments (i.e. the fee proposal).
[1]Re Care Super Pty Ltd [2021] VSC 805. For convenience, I will adopt the terms defined in the Reasons.
I concluded that the fee proposal was not in contravention of the SIS amendments.[2] I also concluded that the fee proposal was not inconsistent with cl 2.6(a)(iii) or cl 2.6(d)(iii) of the Trust Deed. However, I expressed concern that the manner in which the Board made the fee determination on 10 November 2021 appeared inconsistent with the power conferred under the remuneration clause (the power issue). This is because, on the evidence before me at the time of the Reasons, it appeared that the fee determination was made having regard only to the risk of a statutory liability and not having regard to other matters.
[2]This is confirmed by the decision of Button J in Re HEST Australia Ltd [2021] VSC 809 (the HESTA reasons) and the decisions of Ward CJ in Application by LGSS Pty Ltd atf Local Government Super [2021] NSWSC 1613 and Application by Maritime Super Pty Ltd atf Maritime Super [2021] NSWSC 1614.
It was unnecessary for me to form a concluded view about the power issue in the Reasons. This is because, on the evidence before me at the time, in particular the Board resolution and the Board papers, the plaintiff did not satisfy me that it had acted or intended to act in accordance with the judicial advice sought on the third issue. As a consequence, I declined to provide the judicial advice sought.
As a result of the Reasons, before final orders were made, the plaintiff sought leave to file further material which disclosed that the Board had reviewed the fee determination at Board meetings on 8 and 13 December 2021. The further evidence was to address the Court’s concerns by establishing that the Board was acting consistently with the power conferred under the remuneration clause and intended to act in accordance with the judicial advice sought on the third issue.
I granted leave to the plaintiff to rely upon the further affidavits of Mark Bland, both affirmed 14 December 2021 (the seventh and eighth Bland affidavits). I heard argument in relation to the further evidence on 17 December 2021. Once again, I was much assisted by the submissions of APRA and the Amicus. Each of APRA and the Amicus submitted that it was open to the Court to provide the judicial advice sought in light of the further evidence as the Court could be satisfied that the Board is acting consistently with the power conferred under the remuneration clause and intended to act in accordance with the judicial advice.
Given the urgency in relation to the judicial advice sought (namely, the SIS amendments coming into operation on 1 January 2022), I informed the parties at the end of the hearing that I intended to grant the judicial advice sought on the third issue. These are my reasons for doing so.
REASONS, CONFIDENTIALITY AND EVIDENCE AT INITIAL HEARING
As to the legal principles to be applied in determining whether to provide the further advice, I refer to section 3 of the Reasons.
As to the circumstances in which the further advice is sought, I refer to sections 4, 5, 8.2, 8.4 and 8.5 of the Reasons. I will deal with the further affidavit evidence filed since the Reasons in section 3 below.
However, as noted in [148] and [152] of the Reasons, I accept the evidence of Ms Lander, Mr Horskins and Mr Bland referred to in sections 8.4 and 8.5 of the Reasons. They deposed to the risks faced by the plaintiff in relation to statutory liabilities and the steps taken in an attempt to seek to address those risks. As to the risks faced by the plaintiff, these may be summarised as follows:
(1) the plaintiff faces an increased risk of exposure to statutory liabilities, including statutory liabilities under the Corporations Act by reason of the Hayne Commission Act;
(2) the plaintiff’s ability to obtain an indemnity from the Fund for such statutory liabilities will be significantly reduced by reason of the SIS amendments;
(3) there is an imminent and significant risk of insolvency if a statutory liability is imposed in light of the current capital of the plaintiff of $60;
(4) the financial impact of the insolvency of the plaintiff on the Fund is likely to be significant. An estimate of this financial effect far exceeded any proposed fee considered by the plaintiff, with the result that the likely costs associated with the plaintiff’s insolvency are liable to outweigh significantly the costs to members of any proposed fee considered by the plaintiff;
(5) it is not in the financial interests of the members of the Fund for the plaintiff to become insolvent by reason of its inability to meet even a modest statutory penalty; and
(6) if there is a risk that the plaintiff will be unable to adequately indemnify its directors or otherwise in respect of statutory liabilities, then there is a real risk that the plaintiff will be unable to retain is directors or appoint other directors who meet the fit and proper person requirements and other equal representation rules.
As to the steps taken by the plaintiff leading up to this proceeding, I refer to [154] of the Reasons. In addition, the plaintiff and its advisers have now considered the Reasons and the submissions of the Amicus and APRA at the hearing which led to the delivery of the Reasons in making the December fee determination. I will address these matters further below.
Before doing so, I wish to address three issues: one relating to confidentiality and two matters which were the subject of debate at the hearing before me on 1 December 2021, namely the availability of insurance cover and contractual indemnities from external service providers in respect of any statutory liabilities that may be imposed.
As to confidentiality, the plaintiff claimed that the eighth Bland affidavit, exhibit ‘Confidential MAB-8’ thereto and parts of exhibit ‘Confidential MAB-7’ to the seventh Bland affidavit were confidential or commercial in confidence. As a result, the plaintiff sought orders that they be kept confidential pursuant to r 28A.06 of the Rules. The plaintiff also sought orders that the PwC Framework which formed part of the November Board papers remain confidential.
In light of these submissions, on 16 December 2021, I arranged for my chambers to circulate a draft form of order in light of the plaintiff’s claims for confidentiality (the draft orders). The draft orders limited the paragraphs of the eighth Bland affidavit which were to remain confidential. Further, the covering email from my chambers expressed reservations as to whether exhibit Confidential MAB-8 (which consisted of redacted board minutes of the plaintiff from 12 May 2021 to 26 October 2021) should be treated as confidential.
For the most part, no person appearing before me objected to the draft orders. However, APRA sought that the reference to the amount in dollars or percentage terms of the proposed trustee fee determined at the 8 December Board meeting (which was the subject of the further evidence) be made public. This is in a context where, as is evident from the Reasons, the target range and target amount which formed the basis of the 10 November Board resolution was ordered to remain confidential. At the further hearing, no person appearing before me objected to the suggested APRA amendment.
There remains the issue of whether exhibit Confidential MAB-8 should be treated as confidential. Counsel for the plaintiff submitted that these documents were confidential and commercially sensitive disclosing, among other things, the workings and reasoning of the Board and advice received by it in addressing the issues posed by reason of the SIS amendments. I have now reviewed exhibit Confidential MAB-8 in light of these submissions. I am of the view that the minutes of the 12 May 2021 meeting do not contain any confidential or commercially sensitive information. However, I am satisfied that the 18 August 2021 and 26 October 2021 minutes contain information that is confidential or commercially sensitive, including legal advice, consideration of matters from expert consultants and project budgets and costs. In these circumstances, I consider that only pages 18 to 32 of exhibit Confidential MAB-8 should be confidential.
As a result, I will make the draft orders subject to the amendments proposed by APRA referred to in [14] above and the amendments referred to in [15] above. These reasons have been prepared having regard to those orders.
As to insurance issues, in the second Lander affidavit, Ms Lander produced certificates of insurance for the period between 19 October 2021 and 19 October 2022. The insurance policies are not provided because of objections from the plaintiff’s insurers. Those certificates of insurance record that the plaintiff has in place crime insurance, cyber insurance and directors and officers liability insurance. Ms Lander also produced a document entitled ‘Financial Lines Insurance Renewal Report 19 October 2021 to 19 October 2022’, dated 11 October 2021, provided by the plaintiff’s insurance broker (the renewal report). There is reference in this document to regulators increasingly focussing on the failure of superannuation fund trustees to meet their obligations and commencing legal action as a result. However, this document does not specifically address the increased risks including by reference to the SIS amendments.
Ms Lander further deposed that, while the current insurance arrangements may assist in replenishing the Trustee Reserve to meet any statutory liabilities, the plaintiff has concerns about relying upon insurance to remove or partially remove the need for the plaintiff to have more than nominal capital for the purpose of meeting any statutory liability. This is in circumstances where:
(1) the insurer’s liability to indemnify the insured for any claim arising from wrongdoing by an insured may be excluded or limited to a maximum limit in the aggregate;
(2) there would generally be an excess for any one claim requiring the payment of a deductible;
(3) there is a risk that a non-disclosure might be relied upon to avoid liability; and
(4) there are likely to be delays in the processing and admission of any liability under insurance policies, with the result that the time for payment of any statutory liability may accrue before any insurance claim is in fact paid.
In the first Horskins affidavit, Mr Horskins deposed that:
(1) between March and October 2021 the plaintiff, both directly and through its solicitors, engaged Mr Sean Lindsay, senior account manager of the plaintiff’s insurance broker, to make enquiries about the availability, policy terms and cost of insurance having regard, among other things, to the increased enforcement action by ASIC against industry superannuation fund trustees and the increased risk faced by such trustees from 1 January 2022;
(2) Mr Lindsay informed Mr Horskins that insurance markets have responded to ASIC’s increased level of enforcement activity against superannuation trustees by increasing premiums, restrictions in policy terms and exclusions at high levels of cover, making additional coverage of little or no value to the plaintiff; and
(3) in addition to the policies set out above, the plaintiff also obtained additional cover for superannuation trustee legal expenses with zero excess from 1 December 2021.
I accept the evidence of Ms Lander and Mr Horskins in relation to these matters.
As to contractual indemnities, the plaintiff engages external service providers to provide skills and expertise to the operation and management of the Fund. As to whether these external service providers might be financially responsible for any statutory liabilities imposed on the plaintiff by reason of their conduct, in the first Horskins affidavit, Mr Horskins deposed that:
(1) in or around April 2021 the plaintiff reviewed the indemnity provisions in its significant material outsourced service agreements and identified that any re-negotiation of those contracts would be restricted by staggered renewal dates and exit fees payable under them;
(2) the plaintiff’s solicitors have undertaken a further review of the indemnity provisions in the material outsourced service agreements with the plaintiff’s administrator, Mercer Outsourcing (Australia) Pty Ltd (Mercer), and its custodian, JP Morgan (collectively, the material service agreements);
(3) there are limitations upon the plaintiff’s ability to claim an indemnity under the material service agreements in respect of any statutory liability; and
(4) in any event, the ability to claim an indemnity under the material service agreements in respect of any statutory liability does not affect the need for the plaintiff to have in place a contingency plan to pay any statutory liability in the event that the indemnity is not honoured or admitted and paid in a timely way.
I also accept the evidence of Mr Horskins in relation to these matters.
THE DECEMBER FEE DETERMINATION
Mr Bland deposed in the seventh and eighth Bland affidavits that the Board of the plaintiff met on 8 December and 13 December 2021 (the December Board meetings).
Mr Bland deposed that, at the 8 December Board meeting, the Board discussed matters arising out of the Reasons, including the scope of the judicial advice sought, other factors raised as being relevant to the determination of the proposed fee, and the acknowledgment of the complexity and risk in the superannuation industry. Mr Bland gave evidence about issues raised and discussed at the December Board meetings including further legal advice he gave in relation to matters relevant to the determination of the proposed fee. The Board then reconsidered the basis of the proposed fee and the Policy. I will refer to this evidence further below.
The papers before the Board included a trustee remuneration management recommendation dated 8 December 2021 (the December Management Recommendation). That document had a number of attachments including:
(1) the Reasons;
(2) the HESTA reasons;
(3) the submissions of APRA and the Amicus in this proceeding;
(4) a confidential memorandum from Mills Oakley dated 26 November 2021 in relation to contractual indemnities for any statutory liabilities from external service providers; and
(5) a confidential memorandum from Mills Oakley dated 8 December 2021 in relation to the proceeding and matters arising from the Reasons.
Further, Mr Bland deposed that, at the December Board meetings, the Board was asked to consider and approve the revised draft Trustee Resilience Policy (the revised Policy), including the revised Appendix 1 entitled ‘Basis for Calculation of Trustee Resilience Reserve and Trustee Fee’.
The December Management Recommendation provided a summary of the Reasons and the HESTA reasons. It recorded a number of matters, many of which were the subject of Mr Bland’s evidence. I shall deal with each in turn.
First, the Board noted and discussed that, without the proposed fee, the plaintiff may become insolvent or may be unable to secure fit and proper directors due to the increased risk of statutory liabilities and that, if the plaintiff were to become insolvent, the transfer to a new trustee would be expensive to members. The Board noted the first Horskins affidavit which produced an estimate of the cost to the Fund should the plaintiff become insolvent, which was in excess of any proposed fee considered by the plaintiff. The Board considered that the financial interests of members would be better served by avoiding the risk of an insolvency event by charging remuneration for its services to the Fund.
Second, the Board noted and discussed the nature of the services provided by the plaintiff as trustee in operating and administering the Fund for the benefit of members. At the Board meeting, management noted:
(1) that all services involved in operating and administering the Fund had grown increasingly onerous, including the high degree of responsibility under the plaintiff’s RSE and AFS licences; and
(2) the total administration fees charged by the plaintiff did not presently include any amount or premium having regard to the additional penalty risk in providing these services to the Fund.
Third, the Board noted and discussed that in these circumstances the purpose of the proposed fee is to manage the governance risk, legal and regulatory risk, insurance risk, fit and proper risk and solvency risk so as to act in the best financial interests of members.
Fourth, the Board considered and compared the proposed fees to be charged by Hostplus and HESTA (in the case of HESTA, a maximum fee of 0.125% to be charged over a three year period). Further, the Board noted as a guide the market benchmark remuneration for services provided by RSE licensees published by APRA at the rate of 0.3286% for 2020/2021. The Board noted that leading up to and during the 26 October 2021 Board meeting, the directors discussed charging a higher fee but this was reduced having regard to factors including reducing the costs to the Fund in the best interests of members and the available information about proposed fees charged by comparator funds.
Fifth, the Board noted and considered the ability of the plaintiff to obtain insurance in respect of any statutory liability, noting the significant excess in relation to each claim, some limitations on cover relating to wrong doing and issues of timing for payment of insurance claims. These matters meant that insurance would only be available as a replenishment following payments out of the Trustee Reserve, and that such funds would not be available to reduce the proposed fee at this time.
Mr Bland gave evidence that, at the 8 December Board meeting, he addressed potential claims against the plaintiff’s insurance, the importance of considering insurance coverage to understand the significant gap between the plaintiff’s overall potential statutory liability and its insured liability and the incapacity of insurance to minimise the fee required in order to address the solvency risk. Mr Bland explained the enquiries undertaken with the plaintiff’s insurance broker and the role the solicitors for the plaintiff played in negotiating policy terms for the new zero excess legal expenses policy for defending civil penalty proceedings (as referred to at [19] above).
Sixth, the Board noted and considered the limited nature of the plaintiff’s right of indemnity against external service providers who might be responsible for any statutory liabilities, issues of timing for payment where an indemnity is available, and the plaintiff’s present limited ability to negotiate contractual terms to enhance its indemnity protections.
Mr Bland gave evidence that, at the 8 December Board meeting, he summarised the advice on the nature and scope of the indemnities available from external service providers. After a request from the directors, Mr Bland gave further advice at the meeting in relation to the limited scope of indemnities in the material contractual agreements for tax advice, internal audit and external audit.
Seventh, Mr Bland gave evidence that, at the 8 December Board meeting, the Board queried whether there would be any tax advantage for the Fund and members as a result of a proposed fee paid over successive years. Mr Horskins, the Chief Financial Officer, advised that, based on external tax advice, there would not be as the tax treatment would be the same from year to year.[3]
[3]I note that Mr Bland also gave evidence that, at the 13 December Board meeting, Mr Horskins informed the Board of Deloitte’s preliminary view that the ATO might consider the trustee fee as capital in nature and deductible over five years for the Fund, regardless of whether the fee is a one-off fee or is charged over successive years.
Eighth, the Board noted the strength of the plaintiff’s risk management framework which had the impact of reducing the likelihood of a statutory liability and a consequent effect upon the amount of the proposed fee.
Ninth, the Board noted that each director confirmed that they were not in a financial position to contribute capital to the plaintiff.
Tenth, the Board noted that the plaintiff does not presently intend to charge a fee in future years for its services but that it was possible it may do so in accordance with the revised Policy. The Board noted the importance, in determining a proposed fee, of striking a balance between the need for resilience and the objective of minimising cost to members.
Eleventh, the Board noted the concerns expressed by the Amicus and APRA in the proceeding about the use of funds to indemnify directors. The Board noted there is presently no indication of any potential statutory liability being imposed on the plaintiff or a director. The Board noted that director indemnification is limited by cl 33 of the Constitution and s 199A of the Corporations Act.
Pursuant to the December Management Recommendation, the Board then resolved at the 8 December Board meeting that, in all the circumstances, a fair and reasonable basis to charge a trustee fee pursuant to cl 2.8(d) was a target amount of 0.10% of the Fund assets in the sum of $19.621 million (excl. GST) (the December fee determination), with such fee to be paid out of the General Reserve and used to establish the Trustee Reserve. This resolution was subject to obtaining the judicial advice. The December fee determination is the same amount as the fee determination made at the Board meeting on 10 November 2021 (the 10 November Board meeting).
At the 13 December Board meeting, the Board also resolved to adopt the revised Policy. I set out the details of the Policy in [163]-[167] and [169] of the Reasons. For the most part, the revised Policy contained the same terms as the Policy. Like the Policy, the revised Policy contains provisions relating to the establishment and maintenance of the Trustee Reserve including its funding, use, administration, investment, how it will be monitored and, if necessary, replenished. As the revised Policy makes clear:
(1) it concerns how the plaintiff will conduct its affairs in order to keep itself in a sound financial position, which is fundamental to protecting the financial interests of the members of the Fund; and
(2) its terms provide that, in operating the Fund, the plaintiff will ensure that it adequately manages risk to minimise the probability and impact of events that could threaten the financial soundness of the plaintiff as trustee.
The revised Policy set out the same target range for the Trustee Reserve as referred to in the Reasons (which target range was adopted at the 10 November Board meeting). As to the adequacy of the Trustee Reserve, the revised Policy noted that the plaintiff had set the initial target range and determined the initial trustee fee by a process including by reference to:
(1) the nature of the services provided by the plaintiff as trustee of the Fund, the work done in the performance of its duties and the number of members and size of the Fund; and
(2) the availability, effectiveness and cost of insurance and the availability of indemnities from service providers in order to reduce any statutory liabilities imposed.
The revised Policy also contained additional provisions relating to the monitoring of the Trustee Reserve. It provided that the level of the Trustee Reserve is to be reported quarterly to the Compliance, Audit and Risk Management Committee and reviewed quarterly by that committee taking into account any changes in material operational risks that might impact the level of the Trustee Reserve. That committee is to recommend any changes to the Board.
For the most part, the revised Appendix 1 contained the same terms as Appendix 1 referred to in the Reasons at [167]. Those terms relate to the basis of calculating the Trustee Reserve. The relevant amendments in the revised Appendix 1 record that the Board determined the December fee determination having regard to:
(1) the nature of the services provided by the plaintiff as trustee of the Fund, the work done in the performance of its duties and the number of members and size of the Fund; and
(2) the availability, effectiveness and cost of insurance and the availability of indemnities from service providers in order to reduce any statutory liabilities imposed.
It also included the relevant factors for assessment, including the remuneration charged by other RSE licensees. However, I note that the target range and the target amount set out in the revised Appendix 1 are the same as previously approved by the Board at the 10 November Board meeting.
Further, the revised Policy, like the Policy, provides that the plaintiff will disclose any fee in the public disclosure statements for new members and, where required, will provide existing members with a significant event notice regarding an increase in fees in accordance with the requirements under the Corporations Law.
Further, at the 13 December Board meeting, the Board resolved to confirm its intention to follow the judicial advice in fact provided by the Court in this proceeding.
SUBMISSIONS
4.1 The Plaintiff’s Submissions
The plaintiff’s submissions at this hearing were made in light of the submissions made by the parties appearing in the earlier hearing on 1 December 2021, summarised in section 8.1 of the Reasons.
In summary, the plaintiff submitted that the Court should give the judicial advice sought in relation to the third issue. This was because, consistent with the Reasons, the plaintiff had the power to determine a fee under the remuneration clause including, among other things, by reference to a risk of a statutory liability for which it could not be indemnified from the Fund by reason of the SIS amendments.
This was also because the Court could be satisfied on the evidence now before the Court that:
(1) the exercise of that power in making the December fee determination was not improper for the purpose of providing judicial advice in the sense discussed in [27] of the Reasons; and
(2) by reason of the December fee determination, the plaintiff intended to act in accordance with the judicial advice sought.
As to the power issue, the plaintiff submitted that the December Management Recommendation and the evidence of the December Board meetings confirmed that the Board made the December fee determination having regard, in particular, to the services provided by the plaintiff as trustee of the Fund. The plaintiff highlighted the range of services involved in operating and administering the Fund which has grown increasingly onerous, including the high degree of responsibility under its AFS and RSE licences. The plaintiff also highlighted the risks to which the plaintiff is exposed, including by reason of the Hayne Commission Act and the SIS amendments. In short, the plaintiff submitted that a superannuation fund trustee now requires a capital base in order to provide the service of being a superannuation fund trustee, and therefore, is required to charge a fee to establish and maintain such a capital base referable to that of continuing to exist and act as trustee.
Consistent with its original submissions, the plaintiff acknowledged that the exercise of the power under the remuneration clause had to be in accordance with other relevant obligations imposed on the plaintiff, namely:
(1) the s 52 covenants, most relevantly the best financial interests covenant and the diligence covenant; and
(2) the December fee determination was made in good faith with a real and genuine consideration to the exercise of the power, was made in accordance with the purpose for which the remuneration power was conferred, and was not made for an ulterior purpose.[4]
[4]Longboat Holdings Groupno3 v Zacole Pty Ltd [2021] VSC 280, [58]-[60].
The plaintiff submitted that these matters were relevant to whether the Court was satisfied that the exercise of the remuneration power in this case (i.e. the December fee determination) was not improper for the purpose of providing judicial advice. The plaintiff submitted that the Court could be satisfied to a reasonable degree of satisfaction that the December fee determination was not improper in light of the matters considered by the Board at and leading up to the December Board meetings.
Most relevantly, the plaintiff submitted that the December fee determination was made having regard to the best financial interests of the members of the Fund given the insolvency risk and the need to secure the competent administration of the Fund. The plaintiff submitted that, based on the evidence, the purpose of the December fee determination is to manage governance risk, legal and regulatory risk, insurance risk, fit and proper risk and solvency risk so as to act in the best financial interests of members. This is in a context where APRA requires that RSE licensees must be financially resilient to operate in the best interests of members of the Fund.
The plaintiff noted the internal modelling and risk assessment that led up to and formed part of the December fee determination. The plaintiff also noted that a higher fee had been considered but rejected.
The plaintiff acknowledged that the availability and effectiveness of insurance and indemnities from external service providers was a relevant consideration which had been taken into account. The plaintiff referred to the further investigations and advice sought in relation to insurance issues and indemnity issues which had been the subject of Board consideration leading up to the December fee determination (referred to in sections 2 and 3 above). The plaintiff submitted that the continuing relevance of these issues was acknowledged in section 2 of the revised Policy headed ‘Adequacy of Reserve’.
In this context, the plaintiff rejected the submission of the Amicus that it was appropriate to set a fee having regard to the ‘gap’ between any statutory liability and any entitlement to insurance or indemnity. This was in light of the likely delay between the imposition of the statutory liability and receipt of payment pursuant to an applicable insurance policy or indemnity. The plaintiff submitted that it was appropriate that any such payments be used to replenish the Trustee Reserve, rather than as a basis for calculating the fee to establish that reserve.
The plaintiff addressed the submissions of the Amicus to the effect that the proposed fee represented a significant premium over the administration costs currently incurred and charged to members by the plaintiff. The plaintiff noted that the Court was not being asked to give judicial advice in respect of the amount of the December fee determination, which was a matter for the plaintiff. Rather, the Court was being asked to provide judicial advice as to the power of the plaintiff to impose a fee including by reference to the risk of personal liability in respect of the SIS amendments. In order to give such advice, the Court had to be satisfied that the proposed exercise of the power would not be improper. It submitted that the evidence before the Court in this proceeding enabled the Court to be so satisfied.
In this context, the plaintiff noted that the APRA discussion paper ‘Strengthening Financial Resilience in Superannuation’ set out some relevant considerations to fee design and fee setting for trustees building a trustee reserve in light of the SIS amendments. In this discussion paper, APRA:
(1) highlighted the need for RSE licensees to ensure that they have access to adequate financial resources to fund their business operations;
(2) acknowledged that, in light of recent amendments, the process for designing and setting fees must support member outcomes and meet obligations to act in the best financial interests of beneficiaries; and
(3) identified a number of principles to inform RSE licensees’ decisions in relation to the design and setting of fees, including principles for determining the level of the fee and the legal duties imposed in exercising a power to levy a fee including to act in the best financial interests of members and to act prudently and transparently.
A summary of this discussion paper was considered by the Board at the 8 December Board meeting and its principles were incorporated into the revised Policy and the decision making process leading to the December fee determination.
The plaintiff submitted that, in QSuper and in the HESTA reasons, courts had approved amendments introducing a fee charging power which took a similar approach to determining the size of the required reserve and fee to fund such a reserve in light of the SIS amendments.
The plaintiff noted that the fee charging power addressed in the HESTA reasons was premised on building the capital reserve over a period of years. In this case, the plaintiff proposed to exercise the remuneration power to charge an initial fee to fully fund a capital reserve. The plaintiff submitted that each approach meets the s 52 covenants and, in particular, the diligence covenant. This is because under either approach the impact of the fee is distributed equitably across past, current and future members and across different classes of members. However, the plaintiff noted that the option to charge a smaller initial fee exposed the trustee to a higher risk of insolvency should a penalty be incurred in the meantime that exceeds the capital reserve.
The plaintiff addressed the submissions of the Amicus to the effect that there was limited evidence as to why it was in the best financial interests of the members for the plaintiff to be provided with sufficient funds for non-indemnified liabilities incurred by its directors. The plaintiff submitted that the purpose of the fee was to promote the due and beneficial administration of the Fund. It submitted that limiting the directors’ personal exposure to any statutory liability was consistent with, or at least incidental to, that purpose. This is because, if the plaintiff remained unable to offer any indemnity to its directors against personal liability for statutory liabilities imposed by reason of their duties as directors of the Fund, then there is a real risk that the plaintiff would be unable to retain is directors or appoint other directors who meet the fit and proper person requirements and other equal representation rules.
In any event, the plaintiff noted that its ability to indemnify its directors is necessarily limited in light of the relevant statutory provisions of the Corporations Act (being s 199A), cl 33 of the Constitution and the provisions of the revised Policy.
4.2 The Submissions of the Amicus
In summary, the Amicus submitted that, in light of the conclusions in the Reasons and the further evidence filed, it was open for the Court to be satisfied that:
(1) in exercising its power under the remuneration clause (i.e. by adopting the revised Policy and making the December fee determination), the plaintiff has given appropriate consideration to matters relevant to the determination of a fair and reasonable remuneration for its services pursuant to the remuneration clause;
(2) the December fee determination was not improper for the purpose of providing judicial advice in the sense discussed in [27] of the Reasons; and
(3) by reason of the December fee determination, the plaintiff intended to act in accordance with the judicial advice sought.
As a result, the Amicus submitted that the Court was entitled to provide the judicial advice. Notwithstanding this conclusion, it is appropriate that I set out some of the submissions of the Amicus.
First, the Amicus submitted that the Court could be satisfied that the Board has had regard to considerations that are broader than the impact of the SIS amendments in making the December fee determination, and which engage with matters relevant to the determination of fair and reasonable remuneration for the plaintiff.
Second, the Amicus referred to her previous concerns about the evidence adduced in relation the Board’s consideration of the proposed fee in light of insurance issues, indemnities available from third party service providers and/or the availability of capital from shareholders. However, the Amicus submitted that these concerns had been addressed by the further evidence.
Third, the Amicus submitted that, in light of the evidence now available, it was open to the Court to be satisfied that the Board has taken appropriate steps to ensure that it acts in the best financial interests of members in determining to exercise the power to charge a trustee fee.
Fourth, the Amicus submitted that the Court could comfortably accept the plaintiff’s submission that, if it is unable to offer an indemnity to its directors against personal liabilities for penalties, the Fund would risk the plaintiff being unable to attract competent directors. In light of the Court’s finding at [178] to [184] of the Reasons, the Amicus made no further submissions as to the plaintiff’s proposed use of the trustee fee to indemnify directors, even if such an indemnity is capped.
Fifth, the Amicus noted that the plaintiff had now adduced evidence that it had considered whether it would be more advantageous from the point of view of the Fund or its members for it to charge a fee over successive years, rather than a one-off fee as initially proposed. The plaintiff’s evidence is to the effect that there is likely to be no difference in the deductibility of the fee charged as a one-off fee as opposed to a fee charged over successive years. Nor would it be less advantageous in terms of tax treatment if there is a one-off fee as opposed to a fee charged over successive years. The Amicus submitted this reinforces the conclusion, to the extent it is relevant, that the Board has turned its mind to matters relevant to whether the proposed fee structure is in the best financial interests of members.
4.3 The Submissions of APRA
APRA submitted that, in light of the Reasons, the question for the Court is whether the further evidence satisfies the Court to the requisite degree of satisfaction that the December fee determination was made including, and not solely, by reference to the risk that the plaintiff might incur statutory liabilities for which it is not entitled to an indemnity (i.e. the non-indemnified liabilities).
APRA submitted that, notwithstanding the further material that was presented to the Board at the December Board meetings, it was open to the Court to infer that the December fee determination was made solely by reference to the risk of non-indemnified liabilities. This is because the amount of the proposed fee (i.e. the revised fee determination) did not change since the 10 November Board meeting (i.e. the original fee determination). However, APRA submitted that the plaintiff had now advanced further evidence that it has had regard to other relevant considerations in determining the basis for the trustee fee.
APRA submitted that it was open to the Court to find that the plaintiff had determined what target range to adopt for the Trustee Reserve, and thereby what trustee fee to charge, on the basis of factors other than the risk of incurring non-indemnified liabilities. These included:
(1) the complexity and onerous nature of the services provided by the plaintiff as trustee of the Fund;
(2) the number of members and the size of the fund itself when it made the December fee determination;
(3) the financial impact on members by the charging of fees; and
(4) the remuneration charged by other RSE licensees;
In all these circumstances, APRA submitted that it is open to the Court to be satisfied that the plaintiff intends to act in accordance with the judicial advice sought by charging the proposed trustee fee.
CONSIDERATION
5.1 The Power Issue
I am satisfied that the plaintiff has the power to determine a fee which is fair and reasonable under the remuneration clause including, among other things, by reference to a risk of a statutory liability for which it could not be indemnified from the Fund by reason of the SIS amendments.
This is in light of my conclusions in the Reasons that the fee proposal was not in contravention of the SIS amendments and was not inconsistent with cl 2.6(a)(iii) or cl 2.6(d)(iii) of the Trust Deed.
As set out in the Reasons, the remuneration clause in cl 2.8(d) of the Trust Deed provides:
The Trustee, any person on the Board of Directors of the Trustee and any member of a Committee appointed pursuant to sub-clause 2.5 hereof may be remunerated for the bona fide provision of services to the Fund on such basis as the Trustee determines to be fair and reasonable.
Thus, the power under that clause is to determine a fee ‘for the bona fide provision of services [by the plaintiff as trustee] to the Fund’ which is ‘fair and reasonable’.
In my view, the plaintiff must have regard to the services undertaken by the plaintiff and its directors in the operation and administration of the Fund in determining a fee that is fair and reasonable under the remuneration clause. As to the services provided, I accept that the plaintiff and its directors undertake a range of services in the operation and administration of the Fund, in particular, in exercising supervision and oversight over its operation and administration. It is of significance in noting the services provided by the plaintiff that the Fund, as at 30 June 2021, had over 221,000 members and net assets available for members in excess of $19.2 billion.
Moreover, I accept that the role of the plaintiff as trustee of the Fund has grown increasingly onerous in light of recent legislative amendments, including the plaintiff’s significant obligations under its AFS and RSE licences. Further, by reason of recent legislative amendments, in particular the Hayne Commission Act, the plaintiff and its directors have an increased exposure to the possibility of substantial statutory liabilities. Further, by reason of the SIS amendments, the ability of the plaintiff and its directors to obtain an indemnity from the Fund for such statutory liabilities will be significantly reduced. I refer to my comments at [9(1)] and [9(2)] above.
These liabilities may be imposed on the plaintiff and its directors solely by reason of the services that they provide as trustee of the Fund. As a result, I consider that the exposure of the plaintiff and its directors to these non-indemnified statutory liabilities is an integral consequence or part of the services provided by the plaintiff and its directors, which the plaintiff is entitled to take into account in determining fees that are fair and reasonable in accordance with the remuneration clause.
This is in circumstances where non-indemnified statutory liabilities may result in the insolvency of the plaintiff in light of its current capital of $60. As set out above, the financial impact of the insolvency of the plaintiff on the Fund is likely to be significant. Thus, the insolvency of the plaintiff would have an enormous consequential effect not only on the Fund but more importantly on its members. I refer to my comments at [9(3)] to [9(5)] above.
This is also in circumstances where I accept there is a real risk that the plaintiff will be unable to retain its directors or appoint other directors who meet the fit and proper person requirements and other equal representation rules. I refer to my comments at [9(6)] above. As a result, the plaintiff may well be unable to continue to function as trustee despite its expertise in the supervision of the operation and management of the Fund to date.
In my view, all these matters are of relevance in determining a fee which is fair and reasonable under the remuneration clause.
Further, for similar reasons, I am satisfied to a reasonable degree of satisfaction that the December fee determination falls within the definition of an ‘administration fee’ under s 29V(2) of the SIS Act. Section 29V of the SIS Act relevantly provides:
(1)The trustee, or the trustees, of a regulated superannuation fund that offers a MySuper product may only charge fees of one or more of the following kinds in relation to that product:
(a) an administration fee;
(b) an investment fee;
(c) a buy-sell spread;
(d) a switching fee;
(f) an activity fee;
(g) an advice fee;(h) an insurance fee.
(2)An administration fee is a fee that relates to the administration or operation of the superannuation entity and includes costs incurred by the trustee, or trustees, of the entity that:
(a) relate to the administration or operation of the fund; and
(b)are not otherwise charged as an investment fee, a buy-sell spread, a switching fee, an activity fee, and advice fee or an insurance fee.
It is accepted that the plaintiff offers MySuper products. Indeed, on the evidence before me there are approximately 197,000 MySuper investment accounts in the Fund. Thus, s 29V applies at least in relation to some of the members of the Fund.
In my view, a fee determined by, among other things, reference to a risk of a non- indemnified statutory liability is a fee that ‘relates to the administration or operation’ of the Fund. This is in light of my conclusion above that such a fee is fair and reasonable for the bona fide provision of services provided by the plaintiff as trustee of the Fund. Further, this is in light of the practical consequences to the administration or operation of the Fund in the absence of such a fee, namely in light of the SIS amendments, the risk of insolvency and the risk that the plaintiff will be unable to retain its directors or appoint other suitable directors if the fee is not imposed. In these circumstances, there is a risk that the plaintiff would be unable to continue to function as trustee of the Fund, which would have an enormous consequential effect not only on the Fund but more importantly on its members.
As a result, in my view, the provision of services by the plaintiff as trustee of the Fund and the fee for such services, including by reference to, among other things, non-indemnified liabilities, ‘relates to the administration or operation of’ the Fund and is an administration fee for the purpose of s 29V of the SIS Act.
For completeness, although not strictly relevant to the power issue in light of the judicial advice sought, I do not accept the submission of the Amicus that, because the December fee determination represents a significant premium over administration costs, it is therefore not a fair and proper fee in all the circumstances. Consistent with my reasons above, this submission focuses too narrowly on the matters that may be taken into account in determining whether a fee for the provision of services in respect of this Fund is fair and reasonable. At the risk of repetition, I consider that the exposure to non-indemnified statutory liabilities is an integral part of the services provided by the plaintiff and its directors, and which the plaintiff is entitled to take into account in determining fees that are fair and reasonable in accordance with the remuneration clause.
5.2 The Propriety Issue
Further, in light of the evidence in this proceeding, it is necessary to consider whether I am satisfied to a reasonable degree of satisfaction that the exercise of the power under the remuneration clause by the plaintiff (i.e. the December fee determination) was not improper in the sense discussed in [27] of the Reasons.
In summary, I am satisfied to a reasonable degree of satisfaction that the December fee determination:
(1) is not inconsistent with the relevant s 52 covenants, in particular, the best financial interests covenant and the diligence covenant; and
(2) was not exercised in bad faith, without real or genuine consideration to the exercise of the power, in a manner otherwise than in accordance with the purpose for which the power was conferred or for an ulterior purpose.
I have reached this view in light of my conclusions as to the nature of the power set out in section 5.1 above and the evidence of the matters raised and discussed which led to the December fee determination. These include the matters in sections 8.2, 8.4 and 8.5 of the Reasons and sections 2 and 3 of these reasons.
On the evidence now before me, the plaintiff took into account the following matters in the lead up to, and as part of, resolving to make the December fee determination:
(1) the nature of the services provided by the plaintiff as trustee in operating and administering the Fund for the benefit of members;
(2) the risk posed by reason of the SIS amendments in light of the limited capital reserve of the plaintiff, namely the plaintiff may become insolvent or unable to secure fit and proper directors due to the increased risk of statutory liabilities;
(3) the financial consequences to the Fund if the plaintiff were to become insolvent (estimated to be in excess of any proposed fee considered by the plaintiff);
(4) the amount of the proposed fee (i.e. the target amount) compared with proposed amounts charged by other funds and the market benchmark remuneration for services provided by RSE licensees published by APRA to assess its reasonableness;
(5) the plaintiff’s ability to obtain insurance cover referable to any statutory liability and to recover sums in a timely manner under such cover, and the effect of these matters in determining the amount of a proposed fee;
(6) the limited nature of the plaintiff’s right of indemnity against external providers who might be responsible for any statutory liabilities and the ability to recover sums in a timely manner under such indemnities, and the effect of these matters in determining the amount of a proposed fee;
(7) the tax implications on the Fund of charging a one-off fee as opposed to a fee paid over successive years;
(8) the strength of the plaintiff’s risk management framework which had the impact of reducing the likelihood of a statutory liability;
(9) the director shareholders were not in a financial position to contribute capital to the plaintiff;
(10) the plaintiff does not presently intend to charge a fee in future years for its services but may do so in accordance with the revised Policy; and
(11) the concerns expressed by the Amicus and APRA in the proceeding about the use of funds to indemnify directors and noting that director indemnification is limited by cl 33 of the Constitution and s 199A of the Corporations Act.
In light of this evidence and the nature of the power under the remuneration clause as discussed in section 5.1 above, I am satisfied to a reasonable degree of satisfaction that the exercise of that power by the December fee determination was not improper in the sense discussed in [27] of the Reasons.
However, there are three matters I wish to address in more detail.
First, I am conscious that the amount of the December fee determination is the same as the fee determination made at the 10 November Board meeting. This might lead one to infer that the plaintiff determined the amount of the December fee determination solely by reference to the risk of statutory liabilities. However, in light of the further evidence set out above, I am satisfied that the plaintiff took into account a range of relevant matters in determining the amount of the fee to be charged.
It is true that the risk of statutory liabilities was the primary driver of the need to charge a fee, of the target range and of the target amount in fact chosen. The plaintiff and its advisers have frankly acknowledged that is so. However, the evidence before me highlights the range of relevant matters considered by the plaintiff over a period of time and leading up to the December fee determination. Most relevantly, that included:
(1) the onerous nature of the services provided by the plaintiff as trustee;
(2) the risk to which the plaintiff, its directors and the Fund are exposed by reasons of the SIS amendments;
(3) the available information of fees charged or to be charged by trustees with equivalent obligations; and
(4) the limited ability to meet and/or recover statutory liabilities from other sources including insurance policies and external service providers.
Moreover, it is important to recall that the December fee determination is to be used in order to fund the Trustee Reserve, the primary purpose of which is to allow the plaintiff to keep itself in a sound financial position in light of potential statutory liabilities which, in my view, is fundamental to protecting the best financial interests of the members of the Fund. This is particularly so given that, on the evidence before me, the estimated cost to the Fund of the insolvency of the plaintiff well exceeds the amount of any proposed fee considered by the plaintiff including, relevantly, the December fee determination.
Second, I do not accept the submission of the Amicus that it is appropriate to calculate the December fee determination by reference to the ‘gap’ between the estimated potential for any statutory liability and the estimated value of its rights against its insurers and/or external service providers. This is because I consider that there is likely to be a delay in the processing and admission of any indemnity under any relevant insurance policy or external service contract. As a result, it seems likely that the time for payment of any statutory liability may accrue before any such claim for indemnity is admitted and/or paid. In these circumstances, I am not satisfied that there has been any breach of the best financial interests covenant or the diligence covenant in determining the December fee determination without reference to these rights against its insurers or external providers, but to replenish the Trustee Reserve in due course should any such payments be received.
Third, as to concerns that any proposed fee (including the December fee determination) might have the effect of providing indemnification for a statutory liability as a result of serious misconduct or of providing such indemnification for directors, I refer to my conclusions as to the conceptual difference between a fee and an indemnity from the Fund at [179]-[184] of the Reasons.
In any event, I agree with the reasoning of Button J in the HESTA reasons and her Honour’s consequential conclusion that the potential for the fees paid into a reserve to be used to fund payment of penalties which are not ‘inadvertent and honest’ would not lead her to decline to give the advice sought.[5] Most relevantly, as her Honour notes, it cannot be assumed that ‘the interests of beneficiaries would be better served by HESTA becoming insolvent … than by HESTA being able to meet the penalty and take whatever action the Board determines should be taken to address the circumstances that resulted in the penalty’.[6]
[5]HESTA reasons (n 2) [124].
[6]Ibid.
Further, I agree with the submissions of the plaintiff and APRA that the plaintiff, as trustee of the Fund, would be obliged to comply with the provisions of s 199A of the Corporations Act and the Constitution. First, s 199A relevantly limits the ability of a company to indemnify a liability incurred by an officer or auditor of the company that does not arise out of conduct in good faith. Second, cl 33.1 of the Constitution relevantly provides that the Board may not indemnify any officer for an amount in respect of which the company is prohibited by the Corporations Act or any other statute from indemnifying against.
In all these circumstances, I am satisfied to a reasonable degree of satisfaction that the exercise of the remuneration power in making the December fee determination was not improper for the purpose of providing judicial advice in the sense discussed in [27] of the Reasons.
Further, by reason of the December fee determination, I am satisfied to a reasonable degree of satisfaction that the plaintiff has acted and intends to act in accordance with the judicial advice sought, namely that it has or will determine a fee under the remuneration clause including, among other things, by reference to a risk of a statutory liability for which it could not be indemnified from the Fund by reason of the SIS amendments. This is confirmed by the resolution of the Board made on 13 December 2021 referred to in [48] above.
As a result, I have determined to provide the judicial advice sought on the third issue.
THIS PROCEEDING AND COSTS
The plaintiff seeks a direction that it is justified in bringing this proceeding and in funding the costs of the application from the assets of the Fund on an indemnity basis.
The Amicus did not oppose the entitlement of the plaintiff to be indemnified for its costs insofar as they related to the first and second issues. However, the Amicus questioned whether the plaintiff should be awarded costs insofar as they relate to the third issue on the basis that the third issue related to the levying of a fee that would benefit the plaintiff in its personal capacity.
The plaintiff objected to the submissions of the Amicus regarding the costs of the third issue. In any event, the plaintiff submitted that costs relating to the third issue were truly costs relating to the management and administration of the Fund. The plaintiff relied upon the principles set out in Hopkins v Edwards,[7] to the effect that even in proceedings where a trustee’s personal interests are at stake, the Court may order the costs of the proceeding be paid out of the trust fund. The issue is whether the costs of the proceeding can truly be said to relate to the trust and were not improperly incurred by the trustee.
[7][2020] VSC 456, [234]-[235].
The plaintiff submitted that it has adopted the appropriate procedure in seeking judicial advice on the third issue and is entitled to be indemnified for its costs so long as they were not improperly occurred. The plaintiff submitted that, on the evidence before the Court, levying a fee was relevant to the administration of the Fund in light of the risk of insolvency and other risks, and the effect of those risks on the Fund and its members. Further, the plaintiff submitted there was no suggestion that its costs were improperly incurred.
In my view, the plaintiff is entitled to its costs of this proceeding in relation to the third issue. I accept the submission of the plaintiff that the issue of whether the plaintiff was justified in charging a fee including by reference to the risk of statutory liabilities relates to the management and administration of the Fund. This is in the context of the consequences of not charging such a fee to the Fund and its members set out in [9] above. It is also in the context of my conclusions set out at [81]-[90] above.
As a result, I will also order that:
(1) the plaintiff is justified in bringing this proceeding; and
(2) the plaintiff’s costs of this proceeding be paid from the Fund on an indemnity basis.
For the avoidance of doubt, I will also order that the costs of the Amicus of this proceeding be paid from the Fund on an indemnity basis.
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