Re HEST Australia Ltd

[2021] VSC 809

IN THE SUPREME COURT OF VICTORIA Not Restricted

AT MELBOURNE

COMMERCIAL COURT

S ECI 2021 03668

IN THE MATTER of an application by HEST AUSTRALIA LTD (ACN 006 818 695) (as trustee of the Health Employees Superannuation Trust Australia) for judicial advice under rule 54.02 of the Supreme Court (General Civil Procedure) Rules 2015 and orders under sections 63 and 63A of the Trustee Act 1958

HEST AUSTRALIA LTD (ACN 006 818 695) Plaintiff

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JUDGE:	Button J
WHERE HELD:	Melbourne
DATE OF HEARING:	18 November 2021
DATE OF JUDGMENT:	7 December 2021
CASE MAY BE CITED AS:	Re HEST Australia Ltd
MEDIUM NEUTRAL CITATION:	[2021] VSC 809

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TRUSTS AND TRUSTEES — Application by trustee of superannuation fund for judicial advice — Whether trustee justified in amending its trust deed to add a fee charging power — Whether proposed amendments were within power — Whether proposed amendments were inconsistent with ss 56 and 57 of the Superannuation Industry (Supervision) Act 1993 (Cth) — Whether proposed amendments were inconsistent with other clauses of the trust deed —Judicial advice given — Supreme Court (General Civil Procedure) Rules 2015 r 54.02.

CONFIDENTIALITY — Application for confidentiality order — Where documents contain risk modelling analysis and insurance policies — Where plaintiff operates in a competitive market — Whether disclosure would cause commercial prejudice — Confidentiality orders made — Cargill Australia Ltd v Viterra Malt Pty Ltd (No 23) (2019) 58 VR 611.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr P H Solomon QC Mr J A G McComish Ms J R Wang	Allens
For the Contradictor	Ms W A Harris QC Ms G Crafti	Herbert Smith Freehills
For the Australian Prudential Regulation Authority (appearing as amicus curiae)	Dr R P Austin Mr D Allen	Australian Prudential Regulation Authority

TABLE OF CONTENTS

Background......................................................................................................................................... 1

The Proposed Amendments and the SIS Act amendments.................................................... 3

Evidence....................................................................................................................................... 11

The submissions in overview.................................................................................................... 16

Order 54 application........................................................................................................................ 18

Principles and approach............................................................................................................. 18

Issues............................................................................................................................................. 19

HESTA’s power to amend the Trust Deed.................................................................... 20

Whether the Proposed Amendments are inconsistent with the SIS Amendments. 24

Whether the Proposed Amendments are inconsistent with other provisions of the Trust Deed......................................................................................................................... 40

Other considerations affecting whether to give the judicial advice sought............. 42

Conclusion on judicial advice application.............................................................................. 45

Application for relief under the Trustee Act.............................................................................. 46

Confidentiality................................................................................................................................. 47

Orders................................................................................................................................................. 49

HER HONOUR:

Background

1           The Plaintiff (HESTA) is the trustee of a large ‘profit-for-members’ superannuation fund[1] known as the Heath Employees Superannuation Trust Australia (the Plan).  As at 30 June 2021, the Plan had in the order of $66.8 billion in funds under management.  The Plan was established in 1987.  It is governed by a set of rules, set out in a schedule to the Trust Deed establishing the Plan.  I will refer to those rules as the Trust Deed. 

[1]Also known as ‘industry’ (as distinct from ‘retail’) superannuation fund.

2 HESTA is a public company limited by guarantee. Its corporate members (referred to in its Constitution as ‘Guarantors’) comprise a number of unions which are the ‘Employee Guarantors’, and a number of employer-affiliated associations, which are the ‘Employer Guarantors’.

3           By an Originating Motion dated 5 October 2021,[2] HESTA applied for:

[2]Although dated 5 October 2021, the Originating Motion was filed on 6 October 2021.

(a) judicial advice under r 54.02 of the Supreme Court (General Civil Procedure) Rules 2015 (Vic) (the Rules) answering the question:

In the events that have happened, is HEST Australia Ltd as trustee of the Health Employees Superannuation Trust Australia authorised to amend the trust deed dated 30 July 1987 in the manner set out in pages 484 to 490 of Confidential Exhibit DB-1 to the affidavit of Deborah Jane Blakey sworn 1 October 2021?

(b) an order under s 63 and/or s 63A of the Trustee Act 1958 (Vic) (the Trustee Act) amending the Trust Deed in the same manner;

(c)        an order that its costs of the application be paid or reimbursed out of the funds of the Plan on an indemnity basis; and

(d)       confidentiality orders.

4           HESTA’s application was listed for urgent hearing in view of certain changes to the Superannuation Industry (Supervision) Act 1993 (Cth) (the SIS Act) that are to take effect on 1 January 2022. 

5           In these reasons, I will refer to the changes HESTA proposes to make to the Trust Deed by paragraphs 1, 2, 6 and 7 of the Schedule to the draft Deed of Amendment[3] as the Proposed Amendments. I was not addressed on other aspects of the draft Deed of Amendment and confine my consideration to the Proposed Amendments.[4] The full Schedule to the draft Deed of Amendment is replicated in the Annexure to these reasons. 

[3]Being the document at pages 484 to 490 of the Confidential Exhibit DB-1 to the affidavit of Deborah Jane Blakey sworn 1 October 2021 referred to in HESTA’s Originating Motion.

[4]That is not to say that there is anything obviously controversial in the other aspects of the draft Deed of Amendment; they appear consequent on the removal of s 56(2)(e) and s 57(2)(e) as part of the SIS Amendments.

6           HESTA has sought judicial advice in relation to the Proposed Amendments having recognised, correctly, that it is in a position of actual, or at least apparent, conflict.[5]

[5]The existence of a position of conflict is not an uncommon circumstance in cases where judicial advice is sought (see, eg, Baymill Investments Pty Ltd v Drewlock Pty Ltd [2019] VSC 827 (Baymill), [83] (Sloss J); Re Salvation Army (Victoria) Property Trust [2017] VSC 553; Re Timbercorp Securities Ltd (in liq) (No 2) [2009] VSC 411; Re Timbercorp Ltd (in liq) [2011] VSC 189; Re Gunns Plantations Ltd (in liq) (recs & mgrs apptd) [2014] VSC 239). In fact, Sloss J in Baymill considered the very potential for conflict between duty and interest to justify the application for advice (at [90]).

7           I gave leave to the Australian Prudential Regulation Authority (APRA) to make submissions as amicus curiae and appointed Ms Wendy Harris QC as Contradictor.[6] The appointment of a Contradictor was intended to ensure, so far as possible, that all relevant matters were brought to the Court’s attention and considered, lest the giving of judicial advice affect the rights of persons not before the Court without relevant matters being ventilated and considered.[7]  I was much assisted by the submissions of counsel for HESTA, Dr Austin (with him, Mr Allen) for APRA, and Ms Harris QC (with her, Ms Crafti) as Contradictor.  With no discourtesy intended, I will refer to Ms Harris QC’s submissions as the submissions of the Contradictor.  Both the Contradictor and APRA were provided with full access to the material before me.

[6]No members were joined by HESTA to the application.  Pursuant to r 54.03(c), persons with a beneficial interest under the trust may be, but need not be, parties. 

[7]In MTM Funds Management Ltd v Cavalane Holdings Pty Ltd (2000) 158 FLR 121, Austin J considered that the question of whether to give judicial advice notwithstanding that the advice may affect the rights of persons not represented was a matter within the Court’s discretion (at [17]).

8           In support of its application, HESTA read the following affidavits:

(a)        an affidavit of Sean Andrew Lindsay sworn 30 September 2021;

(b)       an affidavit of Deborah Jane Blakey sworn 1 October 2021; and

(c)        an affidavit of Eva Scheerlinck affirmed 4 October 2021.

9           HESTA also relied on an expert report of Associate Professor Vivienne Brand dated 1 October 2021.

10         In support of its application for confidentiality orders to be made over certain parts of the evidence, HESTA relied on two affidavits of Andrew David Major affirmed 5 October 2021 and 17 November 2021, which set out the reasons it considered confidentiality orders to be justified.

11        On 19 November 2021, I made orders vacating interim confidentiality orders over the documents exhibited to the affidavits of Mr Lindsay, Ms Blakey and Ms Scheerlinck, and made further orders that certain pages of the exhibit to Ms Blakey’s affidavit, the exhibits to Mr Lindsay’s affidavit (being HESTA’s insurance policies) and Parts F.2 and F.3 of HESTA’s submissions are to remain confidential and are not to be made available to non-parties.  I give brief reasons for those orders below. 

The Proposed Amendments and the SIS Act amendments

12 To put the evidence relied on by HESTA in context, it is necessary to introduce the Proposed Amendments, and the amendments to the SIS Act which prompted HESTA to propose those amendments.

13        The Proposed Amendments would, if made, introduce a new cl 7.3 into the Trust Deed.  Clause 7.3(a) would authorise HESTA to ‘determine that a trustee fee is payable to the Trustee’ if the Trustee Capital Reserve Condition and the Trustee Fee Condition are both satisfied on each date on which HESTA pays a trustee fee from the Plan. 

14        The Trustee Capital Reserve Condition is a condition that is satisfied if, at the relevant date on which HESTA pays itself a trustee fee, the balance of the Trustee Capital Reserve does not exceed 0.125% of the net assets of the Plan, or such amount (if any) that (to paraphrase) relevant law or regulators require HESTA to hold on its own account, whichever is the greater.  The Trustee Capital Reserve is the net tangible assets held by HESTA in its personal capacity.

15        The Trustee Fee Condition, being the second precondition to a trustee fee being chargeable, is satisfied if the aggregate value of the trustee fee paid under cl 7.3(a) in each three year period (defined as the Reference Period) does not exceed 0.125% of the net assets of the Plan.

16        In simple terms, the Proposed Amendments would authorise (but not require) HESTA to charge a trustee fee.  The fee could be charged at any date; it need not be charged on a regular schedule.  In any sequential[8] three year period the total fee could not exceed 0.125% of the net assets of the trust; ie, there is a cap on the fees calculated over successive three year periods, but HESTA would have flexibility[9] to determine whether to take any fee, when and how much, within that limit.  HESTA’s ability to charge the trustee fee would also be constrained in that, if the size of the Trustee Capital Reserve has reached the stipulated ceiling (0.125% of the assets of the trust), it could not continue to grow the Trustee Capital Reserve beyond that level.

[8]Ie, years 1 to 3 represents one three year period, years 4 to 6 represent the second three year period, etc.

[9]Subject to adhering to its duties as trustee: see paragraph 122 below.

17        The Proposed Amendments also seek to introduce cl 7.3(b), which would oblige HESTA to disclose annually:

(a)        the amount(s) of the trustee fee paid in the previous financial year;

(b)       the balance of the Trustee Capital Reserve as at the end of that financial year;

(c)        any net earnings on the Trustee Capital Reserve as at the end of that financial year; and

(d)       any payments out of the Trustee Capital Reserve in the previous financial year. 

18 HESTA has, hitherto, not held any capital in its personal capacity. Its determination that it should depart from that course and charge a trustee fee (so that it can accumulate capital in its personal capacity) has been prompted by amendments to ss 56(2) and 57(2) of the SIS Act, made by the Financial Sector Reform (Hayne Royal Commission Response Act) 2020 (Cth) (the Amending Act), which will come into effect on 1 January 2022 (the SIS Amendments).

19 The SIS Amendments will amend ss 56(2) and 57(2) as shown in the following mark‑up:

56       Indemnification of trustee from assets of entity

…

(2)A provision in the governing rules of a superannuation entity is void in so far as it would have the effect of exempting a trustee of the entity from, or indemnifying a trustee of the entity against:

(a)liability for breach of trust if the trustee:

(i)fails to act honestly in a matter concerning the entity; or

(ii)intentionally or recklessly fails to exercise, in relation to a matter affecting the entity, the degree of care and diligence that the trustee was required to exercise; or

(b)liability for a monetary penalty under a civil penalty order an amount of a criminal, civil or administrative penalty incurred by the trustee of the entity in relation to a contravention of a law of the Commonwealth (including this Act); or

(c)the payment of any amount payable under an infringement notice (however described) given under a law of the Commonwealth (including this Act); or

(d)liability for the costs of undertaking a course of education in compliance with an education direction (within the meaning of this Act).  ; or

(e)liability for an administrative penalty imposed by Section 166.

…

57       Indemnification of directors of trustee from assets of entity

…

(2)A provision of the governing rules of a superannuation entity is void in so far as it would have the effect of indemnifying a director of the trustee against:

(a)a liability that arises because the director:

(i)fails to act honestly in a matter concerning the entity; or

(ii)intentionally or recklessly fails to exercise, in relation to a matter affecting the entity, the degree of care and diligence that the director is required to exercise; or

(b)liability for a monetary penalty under a civil penalty order an amount of a criminal, civil or administrative penalty incurred by the director in relation to a contravention of a law of the Commonwealth (including this Act); or

(c) the payment of any amount payable under an infringement notice (however described) given under a law of the Commonwealth (including this Act); or

(d)liability for the costs of undertaking a course of education in compliance with an education direction (within the meaning of this Act).  ; or

(e)liability for an administrative penalty imposed by Section 166.

20        The Explanatory Memorandum to the Bill that introduced the Amending Act explained the SIS Amendments as follows:

Extending the SIS Act indemnification prohibitions

9.164 Sections 56 and 57 of the SIS Act currently operate to prevent a superannuation trustee or a director of a superannuation trustee from using trust assets to pay a penalty that they incurred for liabilities arising from breach of trust in certain circumstances or the contravention of certain provisions and types of provisions under the SIS Act.

9.165 In view of the extension of the Australian financial services licensing regime to cover the provision of a superannuation trustee service, Schedule 9 also extends the existing indemnification prohibitions. Specifically, sections 56 and 57 of the SIS Act now prevent trustees and directors from using trust assets to pay a criminal, civil or administrative penalty incurred in relation to a contravention of a Commonwealth law.

9.166 This means that a superannuation trustee or a director of a superannuation trustee cannot use trust assets to pay a penalty that they incurred for the contravention of a provision of the Corporations Act or ASIC Act.

9.167  An application provision clarifies that these amendments apply in relation to liabilities imposed on or after this Schedule’s commencement day.

9.168 Note that a contravention of a state or territory law, depending on the circumstances, may amount to a breach of trust within the meaning of sections 56 and 57 of the SIS Act. Such a law would prevent a trustee or director using trust assets to pay a penalty for such a contravention if they failed to act honestly, or intentionally or recklessly failed to exercise the requisite care and diligence, as set out in those sections.[10]

[10]Explanatory Memorandum, Financial Sector Reform (Hayne Royal Commission Response) Bill 2020 (Cth), [9.164]-[9.168].

21 As may be seen from the statutory text, ss 56(2) and 57(2) will render a provision of the governing rules void insofar as that provision has the effect of indemnifying the trustee or a director against liabilities of the kinds specified. The SIS Amendments are of significant concern to HESTA as they greatly expand the range of liabilities against which HESTA and its directors can no longer be indemnified from trust assets. Prior to the SIS Amendments, ss 56(2)(b) and 57(2)(b) only rendered void provisions that provided an indemnity for ‘a monetary penalty under a civil penalty order’. A ‘civil penalty order’ was (and is) defined by s 10 of the SIS Act to mean ‘a declaration or order made under Section 196’ of the SIS Act, which permits the Court to make an order if satisfied a person has contravened a civil penalty provision of the SIS Act.

22 Similarly, prior to the SIS Amendments, the relevant ‘infringement notice’ for the purposes of ss 56(2)(c) and 57(2)(c) could be given for offences against sections of the SIS Act listed in ss 34R and 223A of the SIS Act. The relevant ‘administrative penalty’ for the purposes of ss 56(2)(e) and 57(2)(e) was limited to those arising from contraventions of specified provisions of the SIS Act.

23 In substance, prior to the SIS Amendments coming into effect, ss 56(2) and 57(2) only precluded indemnification in respect of specific penalties incurred in relation to a contravention of the SIS Act itself, whereas, following the SIS Amendments, those sections will address a much expanded range of penalties incurred in relation to a contravention of any Commonwealth law. It is this expanded scope with which HESTA is concerned.

24 As first enacted, ss 56(2) and 57(2) contained the chapeau and paragraphs (a) and (b) in near identical terms to those in force prior to the SIS Amendments,[11] but did not yet contain paragraphs (c) to (e). The Explanatory Memorandum to the Bill that introduced the SIS Act[12] (the SIS Bill) explained the purpose of the clause that became s 56(2) in the following terms:

Subclause (2) renders void any provision in the governing rules of a superannuation entity that exempts the trustee from, or indemnifies the trustee against, liability for breach of trust in the circumstances set out in paragraph (a) or liability for a monetary penalty under a civil penalty order.[13]

The clause that became s 57(2) was explained in the Supplementary Explanatory Memorandum to the SIS Bill in substantially similar terms.[14]

[11]The only difference being that, when first enacted, the references to ‘a trustee’ in the chapeau to ss 56(2) were references to ‘the trustee’.

[12]Superannuation Industry (Supervision) Bill 1993 (Cth).

[13]Explanatory Memorandum, Superannuation Industry (Supervision) Bill 1993 (Cth), [88].

[14]Supplementary Explanatory Memorandum, Superannuation Industry (Supervision) Bill 1993 (Cth), [13].

25 In 2013, ss 56(2)(c) and 57(2)(c) were inserted by the Superannuation Legislation Amendment (Service Providers and Other Governance Measures) Act2013 (Cth). The Explanatory Memorandum to the Bill that introduced that Act explained the amendment as follows:

2.28 The Bill also amends sections 56 and 57 of the Act to ensure that a provision in the governing rules of a superannuation entity is void if it would have the effect of indemnifying a trustee or a director out of the assets of the fund in relation to the payment of an infringement notice which is issued under the SIS Act or another Act such as the [Financial Sector (Collection of Data) Act 2001 (Cth)].

2.29     One of the reasons the Review recommended providing APRA with the ability to issue infringement notices is to deter uncompliant behaviour.  This objective would be undermined if trustees and directors were able to use fund money to pay for the infringement notice. 

2.30     Not enabling indemnification in relation to infringement notices is consistent with the existing provisions which exclude indemnity for a monetary penalty under a civil penalty order.[15]

[15]Explanatory Memorandum, Superannuation Legislation Amendment (Service Providers and Other Governance Measures) Bill 2013 (Cth), [2.28]-[2.30].

26 Finally, in 2014, ss 56(2)(d)-(e) and 57(2)(d)-(e), which are not of direct relevance to this proceeding, were inserted by the Tax and Superannuation Laws Amendment (2014 Measures No.  1) Act 2014 (Cth). This was the final amendment to ss 56 and 57 prior to the SIS Amendments.

27        The effect of the SIS Amendments is amplified by recent changes to the superannuation landscape which increase the range and circumstances in which penalties may be imposed on trustees of superannuation entities.  The expansion of the range of penalties to which superannuation trustees are exposed was summarised by Kelly J in the recent decision of Re QSuper Board[16] (footnotes omitted):

[16][2021] QSC 276 (QSuper).

[22] Historically, a breach of the trustee covenants in sections 52 and 52A of the SIS Act did not create the risk of an imposition of a pecuniary penalty. The situation changed as the result of the Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No.  1) Act 2019 (Cth) (the Improving Accountability Act). Relevantly, the Improving Accountability Act inserted sections 54B and 54C into the SIS Act, which prohibit the contravention of a covenant referred to in sections 52 and 52A of the SIS Act and provide that the contravention of such covenants is a civil penalty provision as defined by Section 193 of the SIS Act.

[23]     The Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Act 2019 (Cth) (the Strengthened Penalties Act) has amended a number of Acts administered by ASIC, including Chapter 7 of the Corporations Act, increased the severity of penalties for criminal offences, enlarged the scope of the civil penalty regime and the range of scenarios for which infringement notices can be issued and lowered the threshold for establishing “dishonesty” under dishonesty offences under the Corporations Act. The new test for dishonesty is a “single limb” test: conduct is dishonest if it is “dishonest according to the standards of ordinary people”. It is no longer necessary to prove that the conduct was known by the person to be dishonest, according to the standards of ordinary people. The Treasury Laws Amendment (Your Super, Your Future) Act 2021 (Cth) (the Your Super Act) introduced amendments to the regulatory regime to change the statutory duty to act in sections 52(2)(c) and 52A(2)(c) of the SIS Act by substituting the phrase “best financial interests” for the phrase “best interests”. 

[24]     Finally, the Financial Sector Reform (Hayne Royal Commission Response) Act 2020 (Cth) (the Hayne Royal Commission Act) [the Amending Act] also introduced three important legislative changes. 

[25]     First, the Hayne Royal Commission Act amended Chapter 7 of the Corporations Act to the effect of providing that a person provides a financial service within the meaning of Section 766A (and therefore is subject to regulation under Chapter 7 of the Corporations Act) if they “provide a superannuation trustee service”, which is defined to include any circumstance in which a person operates a registrable superannuation entity as trustee of the entity.

[26]     Secondly, the Hayne Royal Commission Act introduced a condition that an RSE licensee must not have a duty to act in the interests of another person other than a duty that arises in the course of performing its duties or exercising its powers as a trustee of a registrable superannuation entity or providing personal advice.

[27]     Thirdly, the Hayne Royal Commission Act amended sections 56(2) and 57(2) of the SIS Act with effect from 1 January 2022. …[17]

[17]QSuper, [22]-[27].

28 There has been very little judicial consideration of ss 56 and 57, as those provisions stand prior to the SIS Amendments taking effect.[18]   With the effective date of the SIS Amendments approaching, it is perhaps unsurprising that ‘profit-for-members’ funds have closely examined their position, assisted (as the evidence discloses) by the Australian Institute of Superannuation Trustees (AIST), which has facilitated obtaining legal advice and exposure modelling for its members, who largely comprise ‘profit-for-members’ funds.  At the time of writing, I am aware of only one application by such a fund for judicial advice in respect of the introduction of a fee taking power to build a personal fund having been determined, that being the decision of Kelly J in QSuper.  That case concerned an application by the trustee of the QSuper superannuation fund for advice that it was justified in consenting to an amendment to the relevant trust deed to include a remuneration power allowing it to hold personal capital.  The proposed amendment in QSuper allowed the trustee to charge remuneration it determined to be reasonable.  Justice Kelly held that, in the circumstances of that case, the proposed amendment was appropriate.

[18]Sections 56 and 57 were briefly considered in APRA v Kelaher (2019) 138 ACSR 459; [2019] FCA 1521. There, Jagot J held (at [21]) that it was not a defence to liability arising from a breach of a covenant of a superannuation entity’s governing rules to rely on an exemption or indemnity in those rules. In so holding, Jagot J noted that ss 56 and 57 did not operate on the code created by former s 55 of the SIS Act (the predecessor to current s 54B of the SIS Act), and observed that ‘[s]ection 56(2) … is not a code of any kind. It is identifying some kinds of provisions of governing rules which will be void.’

29 In deciding to give the advice sought, Kelly J held that the proposed amendments were not precluded by ss 56(2) and 57(2) of the SIS Act.[19] Two key matters appear to have influenced Kelly J’s decision in this regard.  First, the funds obtained through the remuneration power were to be used to address prospective liabilities, rather than extant liabilities, meaning that, in Kelly J’s view, they were not for ‘indemnification’ or ‘exemption’ of liabilities because these words were ‘apt to apply to liabilities which have arisen, as distinct from possible, prospective liabilities.’[20] Secondly, the object of the trustee’s proposed amendment, being to aid the trustee’s obligation to keep itself in a sound financial position, was ‘fundamentally a prudential matter’ consistent with the object of the SIS Act contained in s 3(1) of the SIS Act.[21]

[19]QSuper, [31]-[32].

[20]QSuper, [32], citing Miller v Miller (1995) 16 ACSR 73, 88 (Santow J).

[21]QSuper, [32], citing APRA Prudential Standard SPS 220 – Risk Management, [8] (made under s 34C of the SIS Act), which states: ‘The Board [of an RSE licencee] is ultimately responsible for maintaining the solvency of the RSE licensee and ensuring that the RSE licensee’s business operations have adequate resources to undertake the activities for which it holds an RSE licence.’

30        While accepting that the decision in QSuper was relevant to the determination of the case before me, the Contradictor advanced a number of criticisms of the reasoning in that case, and distinguished it on several bases.  It may be noted that, while APRA appeared as amicus curiae in QSuper, there was no contradictor.  I return to QSuper later in these reasons.

Evidence

31        In support of its application, HESTA relied on the affidavits of Ms Blakey, Mr Lindsay and Ms Scheerlinck, and on the expert report of Associate Professor Brand.

32 Ms Blakey is the CEO of HESTA. Her affidavit addressed the central components of HESTA’s application, including the reasons why HESTA seeks to amend the Trust Deed, the work undertaken by HESTA to consider its position in light of the forthcoming amendments to the SIS Act, its participation in wider industry debate and analysis through the AIST, its consideration of alternative courses of action, the Board’s consideration of the matter, and the reasons why HESTA considers the Proposed Amendments to be in the best interests of the members of the Plan.

33        Ms Blakey deposed that, historically, HESTA considered that the personal financial risk it faced was capable of being, and had been, appropriately managed without it having personal capital of its own.  However, due to the changes to the regulatory and enforcement environment (including the SIS Amendments and the expansion of the applicable penalty regimes following the Hayne Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry), she no longer considered the historical position to hold true.  In essence, HESTA considers it can no longer bear the personal risk to which it is exposed, which will materially increase come 1 January 2022, without any personal capital, prompting the present application.

34        As Ms Blakey explained in her evidence, this conclusion was based on the steps that HESTA’s Executive had taken to understand and assess the impact of the changed regulatory and enforcement environment.  In addition to reviewing analysis commissioned by the AIST, HESTA also commissioned its own external financial and legal analysis and undertook additional internal tax and risk management analysis.  This analysis culminated in the preparation of a memorandum entitled ‘Trustee Indemnity: Risk Assessment’, prepared by HESTA’s Chief Risk and Compliance Officer (the Trustee Indemnity Risk Assessment Memorandum).  Based on that analysis, the HESTA Executive considered that, in the absence of any independent capital, there was a very real risk that HESTA could be rendered insolvent at some point in the foreseeable future, not only by reason of a significant penalty, but also in the event that a trivial and inadvertent error led to the imposition of a small no-fault penalty. 

35        Ms Blakey’s evidence addressed in detail what would occur if HESTA were to become insolvent.  In short, HESTA’s insolvency would set in train a sequence of events involving its removal as trustee, the appointment of administrators and, eventually, the appointment of a new trustee or a successor fund transfer.  Ms Blakey deposed, and it may be accepted, that such a sequence of events would be likely to result in significant transaction costs, which would fall on members as those costs would be borne out of the Plan assets.  In particular:[22]

[22]HESTA’s evidence included a spreadsheet detailing how these sums were calculated.

(a)        an administrator would need to be appointed, at an approximate cost of $200,000 per month of administration;

(b)       a new, potentially temporary, trustee would need to be appointed, with the associated transaction costs estimated by HESTA’s Executive to be in the order of $45.2 million, and the new trustee almost certainly requiring the ability to charge a trustee fee as a condition of accepting the appointment;

(c)        a successor fund transfer may need to be effected, the transaction costs of which would be in the order of $115.7 million, and again only likely to be possible if the trustee of the successor fund could charge a trustee fee.

36        In addition to these direct costs, it was Ms Blakey’s evidence that the insolvency of HESTA could result in a loss of confidence, causing a ‘run’ on the fund, leading to liquidity difficulties.  She also explained the ways in which even the real risk of insolvency — before its actual occurrence — would detrimentally affect members by undermining HESTA’s ability to attract appropriately qualified directors, causing more conservative decision making at Board level, and affecting HESTA’s ability to attract and retain members. 

37        Ms Blakey deposed that, prior to seeking the advice it now seeks, HESTA considered a range of alternatives to address its increased risk, including exercising its current fee charging power under cl 7.1 of the Trust Deed, obtaining further insurance, establishing a separate fee-for-service management company, seeking funds from its guarantor organisations, or exercising the power of amendment contained in cl 21 of the Trust Deed without seeking the advice of the Court.  However, based on its legal and financial advice, HESTA’s Executive did not consider any of these alternatives to offer a real practical solution that was clearly in the best interests of members.  Accordingly, it recommended to HESTA’s Board, and the Board resolved, to bring the present application for advice.

38 Ms Blakey deposed that she strongly considered the Proposed Amendments to be in the best interests of members, as well as being consistent with the statutory covenants imposed on HESTA pursuant to s 52 of the SIS Act. She explained that the proposed 0.125% limit (per three year period) on the fee taking power represented HESTA’s best assessment of a fair and reasonable reflection of the personal financial risk faced by HESTA as trustee of the Plan, based on its detailed modelling and advice, which (with the exception of counsel’s advice, over which privilege was maintained) was put before the Court.

39        Ms Blakey further explained that the three year period had been chosen to provide HESTA increased flexibility to maximise the years in which it is not necessary to charge a fee or in which it would be sufficient to charge a fee lower than the 0.125% cap.  According to HESTA’s analysis, retaining this flexibility is of benefit to members given that any fee taken will attract income tax.  Ms Blakey explained that HESTA’s proposal includes a number of additional protections for the interests of members.  In particular: no further fee can be taken if the aggregate amount of capital in the Trustee Capital Reserve exceeds the maximum fee payable over the three year period; the Trustee Capital Reserve will be governed by a governance framework (the Framework) which will limit the application of the funds contained in the Trustee Capital Reserve; and the Proposed Amendments would require HESTA to disclose, on an annual basis, both the amounts of any trustee fee paid in the previous financial year and the balance of the Trustee Capital Reserve at the end of the financial year. 

40        Mr Lindsay is the insurance broker handling HESTA’s insurance portfolio.  His evidence addressed HESTA’s current insurance coverage for trustee liability, crime insurance, directors and officers insurance, and cyber insurance.  His evidence also addressed the current state of the insurance markets.  The thrust of his evidence was that HESTA’s current insurance policies, while comprehensive, generally provide for an excess of $1.5 million per claim, meaning that those policies are unlikely to respond to smaller penalties.  While HESTA’s insurer has indicated a willingness to reduce this excess to $1 million (for a corresponding increase in premium), Mr Lindsay deposed that, in the current market conditions, it would be difficult for HESTA to find another insurer willing to reduce it further.  Even if it could, the premium it would be required to pay would be multiples of its current premium.  Mr Lindsay considered it would be difficult for HESTA to obtain insurance on broader terms, or with narrower exclusion clauses, than contained in HESTA’s current policies.  Mr Lindsay’s evidence was deployed to support the proposition that HESTA was unable to completely insure against the materially increased insolvency risk it faced due to the SIS Amendments.

41        Ms Scheerlinck is the CEO of the AIST, a not-for-profit membership organisation that represents the interest of Australia’s ‘profit-for-members’ superannuation industry.  Her evidence addressed what she considered to be the ‘significant and disproportionate’ effect the SIS Amendments will have on ‘profit-for-members’ funds such as HESTA, and the steps the AIST had taken in response to the SIS Amendments.  Her evidence explained that the SIS Amendments are significant to ‘profit-for-members’ funds because they rarely have capital held independently of the underlying superannuation trust of which they are trustee and, in the absence of the ability to seek indemnity from the trust, or from an independent source of capital, any civil or administrative penalty — however small — could render a trustee company insolvent.  Ms Scheerlinck deposed that, in the event of a trustee insolvency, in addition to the transaction costs that would be borne by members, the AIST was concerned about the adverse effect on public confidence in the APRA-regulated superannuation system as a whole.  Ms Scheerlinck gave evidence that the AIST considered the SIS Amendments to ‘represent the most significant regulatory threat to the profit-for-members model since compulsory superannuation was introduced’.  She deposed that AIST considered an amendment to a registered fund’s trust deed to permit a fee for building a capital reserve to be within the range of appropriate responses to this risk, but did not comment on the Proposed Amendments the subject of this application.

42        Associate Professor Brand of the College of Business, Government and Law at Flinders University gave evidence through an expert report prepared at HESTA’s request.  I am satisfied that she is suitably qualified to opine on the matters the subject of her report.  Associate Professor Brand opined that the regulation of superannuation trustees and the associated civil, administrative and criminal penalties have expanded over time.  Her report explained the ways in which the financial services and superannuation laws in Australia are notoriously complex and multi-layered, and addressed the expanding risks of superannuation trustees incurring civil, criminal or administrative penalties.  She opined that the regulatory system is complex and evolving. 

43        As set out in Associate Professor Brand’s report, the combined effect of legislation passed since 2019 expands the monetary exposure of superannuation trustees in respect of penalties and infringement notices.  Further, this expanded exposure to penalties has been accompanied by a recent increase in regulatory enforcement activity.  In her opinion, it is reasonable to expect that the relevant maximum penalties and regulatory enforcement activities will increase in the future.  Given these matters, Associate Professor Brand opined that the risk of a trustee now being liable to a large monetary penalty, even where it has not intentionally or recklessly broken the law or acted in breach of trust, is far greater than it was previously.  Associate Professor Brand’s report annexed and relied on a background paper prepared by Professor Hanrahan of the UNSW Business School Sydney, which set out the exposure of trustees of large public superannuation funds, and their directors, to Commonwealth penalties. 

The submissions in overview

44 HESTA submitted that the Court should give HESTA the judicial advice it seeks under r 54.02 of the Rules, and should, in addition, make orders authorising the Proposed Amendments under the Trustee Act.

45        The crux of HESTA’s submission in support of that position was that changes to the regulatory environment have increased the risk of HESTA incurring a liability in the nature of a penalty for which it could not indemnify itself out of the trust assets, such that the risk of HESTA becoming insolvent is real and material.  In those circumstances, HESTA submitted that it is necessary and in the best interests of members for it to be authorised to charge a trustee fee so that it can build up a personal capital reserve in order to meet any future personal liability.  HESTA’s submissions did not shy away from the genesis of its application lying in the SIS Amendments — which raised the risk to a level which its management and Board consider not to be tolerable — but stressed the far-reaching and negative consequences of HESTA’s actual, and potential, insolvency for members.  Those consequences involve not only very substantial direct costs were HESTA to become insolvent, but also indirect costs and impacts which attend even the risk of insolvency.  HESTA submitted that it had considered and obtained advice on alternatives to the Proposed Amendments, but that no other alternative is lawful or practicable.  It submitted that, in the circumstances, the Proposed Amendments are an appropriately tailored response to the real risk it faces and in the best interests of its members.

46        The Contradictor submitted that the Court could be satisfied that, by reason of the SIS Amendments, there has been a material increase in the financial risk faced by HESTA, that this risk cannot be completely insured and that, all else being equal, it was not in the best interests of members for HESTA to become insolvent.  However, the Contradictor submitted that the Proposed Amendments were not compatible with the SIS Amendments or cll 5.2 to 5.5 of the Trust Deed, and therefore the advice sought ought not be given by the Court.

47        The Contradictor submitted that if, contrary to her submission, the Court took the view that the Proposed Amendments were not inconsistent with the SIS Amendments and the Trust Deed, then the Court could be satisfied that the Proposed Amendments were appropriate insofar as they concerned the payment of liabilities incurred by HESTA.  The Contradictor questioned whether levying a fee to create trustee capital to be used for the payment of liabilities incurred by directors was compatible with the interests of members.[23]

[23]However, it appears the point taken was based on an understanding that the amount of the fund HESTA seeks to be able to accumulate was modelled taking into account potential director liabilities.  The fact that the modelling was not undertaken on that basis was addressed by senior counsel for HESTA in oral submissions.

48 While the Contradictor accepted that the Court had jurisdiction to provide judicial advice under r 54.02 of the Rules, she submitted that the question for the Court might more properly be expressed as asking whether HESTA is ‘justified’ (cf, ‘authorised’) in making the Proposed Amendments. HESTA considered either term to be sufficient. However, the Contradictor submitted that the Court could not grant the orders sought under the Trustee Act on the basis that the powers in ss 63 and 63A of the Trustee Act are not available in the present circumstances.

49        APRA appeared as amicus curiae. APRA’s submissions set out changes to the regulatory landscape affecting superannuation trustees, including the enlargement of the range of circumstances in which trustees may be exposed to penalties, and the size of the potential penalties. APRA submitted that, consistent with the SIS Act and registrable superannuation entity[24] (RSE) licensing regime being designed primarily with prudential supervision in mind, member outcomes constituted a critical consideration in the determination of HESTA’s application.

[24]A regulated superannuation fund is within the definition of registrable superannuation entity: SIS Act, s 10.

50        APRA submitted that the Proposed Amendments were not inconsistent with the SIS Amendments as the levying of a fee which is intended to build up over time into an asset that may be deployed in the event that HESTA or a director becomes subject to a liability against which it or the director cannot be indemnified, does not have the substantive effect of conferring an exemption from or indemnifying against that liability. 

51 APRA, understandably, did not advance any submission on the question of whether HESTA’s power of amendment under cl 21 of the Trust Deed was enlivened. It did, however, make helpful submissions which identified the evidence going to whether the process of trustee decision-making leading to the present application was consistent with HESTA’s covenants under ss 52(2)(b)-(f) of the SIS Act (being the covenants relating to the trustee’s care, skill and diligence, members’ best financial interests, management of conflicts and acting fairly in dealing with classes of beneficiaries and with beneficiaries within a class). Aspects of APRA’s submissions are set out further below.

Order 54 application

Principles and approach

52        HESTA has brought the application for judicial advice, recognising the apparent conflict between its position as trustee and its self-interest in the fees to be generated by the exercise of the new trustee fee power.  That course is consistent with other cases in which superannuation trustees have sought judicial advice in relation to fee charging powers.[25] It was common ground that r 54.02 is engaged and is suitable to provide the advice sought by HESTA, provided I am persuaded of the merits of the application.

[25]See, eg, Re Cuesuper Pty Ltd [2009] NSWSC 981; QSuper.

53 Rule 54.02 enables a trustee to seek and receive judicial guidance from the Court. The Contradictor made helpful submissions regarding the Court’s task and the matters to be assessed in an application under r 54.02. The following summary of those matters is based on the submissions of the Contradictor, and her junior. The central question for the Court in an application under r 54.02 is whether, on the material before it, the Court can be satisfied of the propriety of what the trustee proposes; it is not the Court’s task to evaluate the commercial wisdom of the course proposed, nor its correctness.[26]

[26]Longboat Holdings Groupno3 v Zacole Pty Ltd [2021] VSC 280 (Longboat), [58] (M Osborne J), citing: Re Primary Securities Ltd [2016] VSC 536, [10] (Kennedy J); Morris v Smoel [2013] VSCA 11, [25] (Maxwell P, Whelan JA agreeing); Re Centro Retail Australia Ltd (2012) 35 VR 512, 516-18 [16]-[21], [25] (Almond J).

54        Provided the necessary power exists for the trustee to do what it proposes, the question of propriety is addressed by considering whether the power is being exercised in good faith, whether the trustee has given real and genuine consideration to the exercise of the power and whether the exercise of the power accords with the purpose for which the power was conferred and not for an ulterior purpose.[27]

[27]Longboat, [60] (M Osborne J); Karger v Paul [1984] VR 161, 164–5 (McGarvie J).

55        The propriety of the proposed exercise of power is ascertained by looking at the evidence advanced and the enquiries made by the trustee, the information the trustee had available to it and the trustee’s reasons for and manner of exercising its discretion.[28] There must be sufficient information to enable the Court to form a view.[29]

[28]Longboat, [68] (M Osborne J); Karger v Paul [1984] VR 161, 164 (McGarvie J).

[29]Longboat, [76] (M Osborne J); cf Re AGW Funds Management Ltd [2017] VSC 124, [24] (Sifris J).

Issues

56        In my view, whether or not judicial advice should be given that HESTA is justified in amending the Trust Deed in accordance with the Proposed Amendments turns on the following issues:

(a)        Whether HESTA has the power under the Trust Deed to amend the Trust Deed in the manner proposed, noting that the power to amend is conditioned on (amongst other things) the trustee forming the ‘reasonable opinion’ that the amendment ‘is in the interests of beneficiaries’. 

(b)       Whether, if the power exists, HESTA would be justified in exercising it, or conversely whether it would not be justified on the basis that (as the Contradictor submitted):

(i)     the Proposed Amendments are inconsistent with other terms of the Trust Deed; or

(ii)  the Proposed Amendments are inconsistent with the SIS Amendments.

HESTA’s power to amend the Trust Deed

57 Pursuant to cl 21.1 of the Trust Deed, HESTA has a power of amendment. That power is conferred in the following terms:

21 Amendment

21.1 Power

The Trustee may amend this Trust Deed (including this clause) by a deed of amendment if, in the reasonable opinion of the Trustee, the amendment:

(a)       is in the interests of beneficiaries; and

(b)would not result in one class of beneficiaries being unfairly advantaged to the prejudice of another class of beneficiaries.

The effective date of the amendment will be the date the deed is made or the date specified in the deed, which may be before the date the deed is made.

58        Clause 21.2 imposes some limits on the power to amend, none of which is presently relevant. Clause 21.3 permits some amendments that would otherwise be precluded by cl 21.2.

59 Absent an amendment to cl 21.1 itself — no such amendment is proposed — HESTA’s power to amend the Trust Deed is only enlivened if, in its reasonable opinion, the amendment is in the ‘interests of beneficiaries’. No submission was made by the Contradictor, or APRA, that the Proposed Amendments would result in one class of beneficiaries being unfairly advantaged to the prejudice of another class of beneficiaries.

60        Ms Blakey deposed to HESTA’s Board and Executive, including herself, being of the belief that it would not be prudent, or in the interests of the members, for the company to operate without any personal capital and, for that reason, consider the Proposed Amendments to be in the best interests of members (ie, beneficiaries).  The reasons for HESTA’s Board and Executive holding those views have been set out above in summarising Ms Blakey’s evidence. 

61        While the Contradictor ultimately opposed the giving of judicial advice of the kind sought (principally on the basis that the Proposed Amendments are inconsistent with the SIS Amendments and are inconsistent with existing terms in the Trust Deed), she submitted that the Court could be satisfied of a number of matters, as follows.

62        First, the Court could be comfortably satisfied that the risk and regulatory enforcement environment has changed, leading to a material increase in the financial risk faced by industry fund trustees such as HESTA.

63        Secondly, the Court could be satisfied that, other things being equal, it was not in the financial interests of members of the Plan for HESTA to become insolvent by reason of an inability to meet even a modest civil or administrative penalty.  The submission was that it is no longer tenable for a trustee of the Plan not to have resources of its own.

64        Thirdly, while the insurance evidence of Mr Lindsay was not as fulsome as it might have been, the Court could accept that HESTA is not in a position to obtain a complete prophylaxis against the increased financial risk to which HESTA is exposed.

65        Fourthly, the amount of the proposed fee and the conditions attending its imposition are appropriate.

66 While APRA’s submissions approached the question of member interests through consideration of HESTA’s obligations under s 52(2)(c) of the SIS Act, its submissions on that topic are relevant to consideration of the ‘best interests’ criterion enlivening HESTA’s power of amendment in cl 21.1 of the Trust Deed. APRA did not advance a positive submission regarding whether or not the Proposed Amendments are in the best interests of the members, but emphasised that:

[T]he question for the Court is not what is in the best financial interests of members, but whether the decision of the Trustee to consent to the Proposed Amendment is reasonably justifiable on that basis.  This distinction recognises that the test does not presuppose that only one course of action is permissible in response to a given problem.[30]

[30]Citing APRA v Kelaher (2019) 138 ACSR 459; [2019] FCA 1521.

67 APRA submitted that, in assessing the best financial interests of members, the charging of a new fee needed to be weighed against the financial impact to members of the actual or potential insolvency of their trustee. APRA’s submissions noted, among other matters, that HESTA would itself be restricted to some degree in its use of the funds it accumulates through charging a fee because of the terms of its Constitution which require it to apply its profits (if any) and other income in promoting its objects and preclude it carrying on its activities for the purpose of profit or gain to its Guarantors.[31]

[31]Constitution of HEST Australia Ltd, cll 1.2(a), (c)-(d), 1.4.

68        In my view, HESTA’s power of amendment is enlivened on the basis that it holds a reasonable opinion that the Proposed Amendments are in the interests of beneficiaries.  That is so whether the question of the reasonableness of the trustee’s opinion is approached substantively — by assessing whether the opinion is, analysed objectively, reasonable — or having regard to the processes adopted in forming that opinion, or both.  Clearly, the trustee has given anxious consideration to the desirability of building personal capital through the creation and exercise of a new fee charging power.  HESTA has considered carefully a range of relevant matters, including the impact on beneficiaries of its actual and even potential insolvency, and the availability of alternative means by which its solvency could be assured.  None of those alternate means is adequate to address the risks it faces. 

69        HESTA has also structured the Proposed Amendments so that the fee charged to members can be minimised (rather than levying a trustee fee at a fixed level and with no ceiling on the size of the fund to be created) and information is to be provided to members annually.  The maximum amount of the fee which may be taken in each successive three year period and the maximum size of the Trustee Capital Reserve have been fixed following a close and detailed analysis of the risks faced by HESTA, both in terms of the penalties to which it may be exposed, and the size of the potential penalties.  While the maximum size of the fund has been set towards the upper end of the range presented by HESTA’s own modelling (at the 95^th percentile), the fund size equates to the lower, 85^th percentile when modelled by PricewaterhouseCoopers using stochastic modelling methods.  However, the range of exposures by reference to which that modelling was undertaken was not comprehensive.  APRA submitted that the modelling approach taken meant that the personal financial risk to which HESTA is exposed is materially higher than the range modelled.  APRA also noted that there is no evidence to suggest that HESTA’s purpose is to accumulate a capital reserve which is larger than necessary in place of proper diligence in implementing risk management controls, or to eliminate any residual risk to the trustee.

70        In addition, while the levying of the fee on any particular occasion is not part of the Proposed Amendments or the application for judicial advice regarding amendment of the Trust Deed, HESTA’s evidence addressed the way in which it intends to determine the fee to be taken.  Suffice to say, the initial size of the fund it intends to accumulate is a small fraction of the overall maximum that would be established by the Proposed Amendments.  Further, HESTA anticipates that it will be able to draw from an existing reserve to pay the trustee fee, meaning that it does not anticipate members’ fees will increase in real terms, as long as that reserve remains adequate to meet the fees and fulfill the other purposes for which it exists.

71        It may, at first blush, appear perverse to consider that the imposition of a trustee fee, not hitherto imposed on beneficiaries, is in their interests. However, as APRA has submitted, the impost represented by the fee is to be balanced against the implications for beneficiaries of HESTA’s actual or potential insolvency.  In my view, the evidence advanced by HESTA, and not contested by the Contradictor, amply demonstrates that it is not in the interests of beneficiaries of the Plan for HESTA to have no personal capital and to be exposed to the risk of insolvency for even relatively minor penalties.  In addition to the very significant direct costs that would be borne by beneficiaries (through costs being incurred by the Plan) in the event of insolvency, the very inability of a superannuation trustee to put itself in a reasonably secure prudential position is deleterious to the interests of members.  Their interests lie in having a financially sound, well-managed trustee with a highly qualified Board and Executive.  HESTA is justifiably concerned that the spectre of corporate insolvency may result in otherwise qualified persons being unwilling to serve as directors, and may otherwise distort decision-making at the Board level.

72 Notwithstanding that, in my view, HESTA’s power of amendment is enlivened, I would not give judicial advice that it would be justified in effecting the Proposed Amendments if I considered that the Proposed Amendments would be inconsistent with other provisions in the Trust Deed, or are inconsistent with the SIS Amendments. Of course, whatever view I take on the latter question in determining whether I should decline to give HESTA the advice it seeks under r 54.02 does not preclude a different view being taken if the matter were directly tested at a later point.[32] My frame of reference is, as noted, whether judicial advice should be declined on the basis of an apparent inconsistency with the SIS Amendments.

[32]In that regard, I note that ss 56 and 57 are framed to render a provision void ‘in so far as’ it would have ‘the effect’ stipulated. It may therefore be the case that ss 56 and 57 are statutory provisions whose impact on a given provision in a trust deed cannot necessarily be determined once and for all (even though, as APRA submitted, that would be desirable).

Whether the Proposed Amendments are inconsistent with the SIS Amendments

73        It is convenient first to address consistency with the SIS Amendments, as the arguments advanced by the Contradictor in relation to consistency with other parts of the Trust Deed involve consideration of whether or not the Proposed Amendments indemnify (as a matter of substance) HESTA against certain liabilities from trust assets.

74        HESTA and APRA submitted that the Proposed Amendments are not inconsistent with the SIS Amendments; the Contradictor submitted that they are.  In this regard, HESTA invited me to follow QSuper.  HESTA also contended that the Proposed Amendments are simply not indemnities, either in form or effect.  The fees to be taken are not, in HESTA’s submission, an indemnity either in the sense of exoneration or reimbursement.[33]

[33]In support of this submission, senior counsel for HESTA relied on a number of passages of the High Court’s judgment in Carter Holt Harvey Woodproducts Australia Pty Ltd v Commonwealth (2019) 268 CLR 524 (Carter Holt Harvey).  These passages are referred to below.

75        HESTA also endorsed APRA’s submission that the Proposed Amendments did not have the substantive effect of conferring an exemption from, or indemnifying against, liability for a penalty and that this did not render the SIS Amendments pointless because the fee charged may prove to be insufficient.  HESTA also embraced APRA’s further submission that the Proposed Amendments do not give the trustee the kind of ‘blanket immunity’ that may disincentivise it from performing its duties carefully and diligently. 

76        I refer to the Contradictor’s submissions in more detail below.  It suffices, by way of overview, to record that her submissions contended that the purpose for which HESTA seeks the Proposed Amendments (namely to build a personally held fund so as to be in a position to meet potential liabilities which can no longer be indemnified from trust assets) reveals that the effect of the governing rules, if amended, will be to indemnify HESTA against liabilities for penalties, contrary to the SIS Amendments.

77 As will be apparent, the potential for inconsistency with ss 56 and 57 relates to the indemnification limb of those provisions, not the exemption from liability limb: the Proposed Amendments do not purport to, nor do they have the effect of, exempting HESTA or its directors from liability.

78 As is clear from the text of ss 56(2) and 57(2) (as amended, set out at paragraph 19 above), those sections will operate to render provisions of the governing rules of a superannuation entity ‘void’ insofar as they have the stated effect.

79 The term ‘governing rules’ is defined in the SIS Act as follows (emphasis added):

[G]overning rules in relation to a fund, scheme or trust, means:

(a) any rules contained in a trust instrument, other document or legislation, or combination of them; or

(b)       any unwritten rules;

governing the establishment or operation of the fund, scheme or trust.[34]

[34]SIS Act, s 10(1).

80        The terms of the Trust Deed are the ‘governing rules’ of the Plan, which is a ‘regulated superannuation fund’.[35] The term ‘regulated superannuation fund’ is defined by s 19 of the SIS Act as a ‘superannuation fund in respect of which subsections (2) to (4) have been complied with’.[36] Section 10(1) of the SIS Act relevantly defines ‘superannuation fund’ as a ‘fund’ that is an ‘indefinitely continuing fund’ and is a ‘provident, benefit, superannuation or retirement fund’.

[35]Because the Plan is a regulated superannuation fund, it is a ‘superannuation entity’ for the purposes of the SIS Act: SIS Act, s 10(1) (definition of ‘superannuation entity).

[36]Section 19(2) requires the superannuation fund to have a trustee. Section 19(4) requires the trustee to elect that the SIS Act applies in relation to the fund.

81 I have dwelled somewhat on the relevant chain of definitions as it is important to construe ss 56 and 57 in context. They are provisions that render certain ‘rules’, which concern the ‘operation’ of the ‘fund’, void insofar as they have a stated effect. The SIS Amendments are relevantly concerned with the manner in which the ‘fund’ — that is the Plan — is operated. They are not provisions that are directed to what superannuation trustees may or may not do with the fees they charge. Fees charged by superannuation trustees of any ilk are, once earned or otherwise taken by them, assets held personally by the trustee; they are not assets of the ‘fund’.[37]

[37]Rather, such amounts would be money or assets to be held separately from money and assets of the RSE: SIS Act, s 52(2)(g).

82        Superannuation trustees can and do earn fees for their services.[38] The SIS Act contains detailed provisions concerning the fee rules applicable to ‘MySuper’ products,[39] as well as general fee rules.  The fee rules for ‘MySuper’ products contemplate that fees may be charged beyond bare cost recovery.[40]

[38]That is so notwithstanding that, as the plurality in Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar the Diocesan Bishop of the Macedonian Orthodox Diocese of Australia and New Zealand (2008) 237 CLR 66, 93 [69] (Gummow ACJ, Kirby, Hayne and Heydon JJ) observed, the office of trustee is traditionally a gratuitous one, unless a special arrangement to the contrary is made.

[39]HESTA holds an authorisation from APRA to issue a ‘MySuper’ product.

[40]See SIS Act, s 29V. The ‘general fee rules’ in Pt 11A of the SIS Act contain prohibitions on some kinds of fees, and limits on some other kinds of fees, but do not preclude the charging of profit-taking fees.

83        Once any legal person holds assets, if that person becomes liable to pay a penalty, it follows that the person’s assets (including funds held in a bank account) will be available to answer the liability; that is so whether or not the person willingly pays the penalty to the Commonwealth, or the Commonwealth takes action to enforce the penalty.  As such, it is inevitable (at least as a matter of practicality) that, if HESTA exercises its new fee taking power and accumulates personally held capital, those funds will be available to meet, in whole or in part, any liability it incurs for a criminal, civil or administrative penalty, or infringement notice. 

84        But does the fact that HESTA — having exercised the fee charging power and accumulated capital — may use (whether willingly or not) that fund to pay a penalty, mean that the ‘rule’ which enables it to take the fee in the first place is a rule which ‘would have the effect’ of ‘indemnifying’ it, as trustee, against liability for the amount of a penalty or an amount payable under an infringement notice? In my view, the answer that question is ‘no’, and the reason why the answer is ‘no’ lies in the nature of indemnification as a concept at law.

85        In her submissions, the Contradictor succinctly stated the nature of an indemnity as follows, citing Sunbird Plaza Pty Ltd v Maloney[41] and Andar Transport Pty Ltd v Brambles Pty Ltd:[42]

An indemnity keeps a promisee harmless against loss; it satisfies a liability owed by someone other than the indemnifier to a third person.

[41](1988) 166 CLR 245, 254 (Mason CJ).

[42](2004) 217 CLR 424 (Brambles), 437 [23] (Gleeson CJ, McHugh, Gummow, Hayne and Heydon JJ).

86        In the case of a typical contractual indemnity in a commercial agreement, the indemnifier (person A) may contract to hold the indemnified person (person B) harmless against exposure to loss arising from the third person (person C); the situation is tripartite in that sense.  In the insurance context, the situation may be tripartite (if the indemnity is triggered by person B’s liability to person C) or bilateral (if the indemnity is triggered by loss or harm being suffered by person B). 

87        In either case, the core and defining features of the indemnity are that the economic burden is borne by someone other than the indemnified person, and that the scope of the burden imposed on the indemnifier is dependent on the loss or damage that would otherwise be suffered by the indemnified person.  Similarly, subject to contractual conditions, it is when the indemnified person suffers loss or damage that the indemnity becomes capable of enforcement against the indemnifier.[43]  Such conceptual differences as may arise from whether the foundation of an indemnity lies in the ‘prevent loss’ analysis or the ‘compensate loss’ analysis, are not presently to the point.[44]  Nor are the different approaches of common law and equity concerning whether damage had to be suffered by the indemnified person[45] of present relevance to the defining features of an indemnity just noted. 

[43]Eg, in Globe Church Incorporated v Allianz Australia Insurance Ltd (2019) 99 NSWLR 470, the plurality (Bathurst CJ, Beazley P and Ward JA, sitting on a bench of five) said at [209] that ‘[a]bsent a provision in an indemnity insurance policy that makes lodgement of a claim a condition precedent to liability, the concept of a promise to indemnify (to make good the loss or to hold harmless against loss) in the context of a property damage insurance policy is such that the promise is enlivened when the property damage is suffered. Unless it be necessary for there to be a claim made on the insurer to give rise to the liability, it is at the point of property damage that the insured has not been held harmless against the loss and (leaving aside any defences that might be raised on such a claim) would be entitled to sue to enforce the promise to indemnify.’ The authors of Carter on Contract use the concept of the promise to indemnify being ‘activated’ by the occurrence of a loss caused by an event: LexisNexis, Carter on Contract (online) [40-047].

[44]For a discussion of the two strands of analyses, see Felicity Maher ‘The limitations of contractual indemnities’ (2020) 31 Insurance Law Journal 1.

[45]At common law, damage to the indemnified person had to be suffered (eg, by discharge of the liability to another person) whereas in equity the indemnified may be protected from suffering loss in the first place by the indemnifier being required to discharge the liability to the third party in the first instance: see LexisNexis, Carter on Contract (online) [40-048].  See also the qualifications that may arise having regard to the actual terms of a contract of indemnity where it amounts to a contract to prevent the indemnified person suffering loss (as distinct from indemnifying against loss paid), as discussed in, eg, Paterson v Pongrass Group Operations Pty Ltd [2011] NSWSC 1588, [74]-[77] (White J), referring to BNP Paribas v Pacific Carriers Ltd [2005] NSWCA 72, [112] (Giles JA). See further paragraphs 109-111 below.

88        In the context of a trustee’s right to indemnity at law[46] and (commonly) pursuant to a trust deed against trust assets, the situation does not involve three legal persons (A, B and C), but the economic burden not being borne by the indemnified person remains a defining feature. In the trust context, the liability of the trustee — incurred in its trustee capacity — is not borne by it personally, but is borne by the trust assets.  Moreover, the extent of the trustee’s indemnity is determined by the extent of the expense incurred by the trustee, or its exposure to another person.[47]  The occasion for the exercise, by enforcement, of the trustee’s right of indemnity also lies in exposure to a cost or claim.

[46]Being an example of a right to indemnity that does not depend on the existence of a contract between the indemnifier and the indemnified: Lemery Holdings Pty Ltd v Reliance Financial Services Pty Ltd (2008) 74 NSWLR 550, 553 [16] (Brereton J).

[47]And related costs.

89        As set out in HESTA’s submissions, the trustee’s right of indemnity involves both a right of recoupment, and a right of exoneration (footnotes in original):

Like any trustee, HESTA also has a right “to be indemnified out of the trust assets in respect of liabilities properly incurred in the execution of the trust”.  That right “arises endogenously as an incident of the office of trustee in respect of the trust assets.”[48] It involves both a right of recoupment (that is, a right or power to apply trust funds to meet an expense that the trustee has previously paid from its own assets), and a right of exoneration (that is, a right or power to apply trust funds to meet the expense directly, without prior use of the trustee’s own funds).[49]

[48]Carter Holt Harvey, 561 [83] (Bell, Gageler and Nettle JJ).

[49]Carter Holt Harvey, 543–4 [31]–[32] (Kiefel CJ, Keane and Edelman JJ), 561 [80] (Bell, Gageler and Nettle JJ), 570 [100] (Gordon J).

90        The trustee’s right of indemnity is against the assets of the trust.  It carries with it an interest in the property of the trust.  In Commissioner of Taxation v Lane,[50] Allsop CJ (with whom Perram and Farrell JJ agreed) described the position in relation to the right of exoneration as follows (quoting from the judgment of Gordon J in Carter Holt Harvey):

[50][2020] FCAFC 184 (Lane).

The right of exoneration creates an interest in the property which is not aptly called property held on trust for the beneficiaries, but property held by the trustee in which it has a personal interest and otherwise in respect of which it has limitations as to use by reason of the equitable obligations upon the trustee owed to the beneficiaries.  See also in this regard [Carter Holt Harvey] at [82] in the reasons of the second plurality. The exercise of the right of exoneration brings about the sale of the property. The personal proprietary interest of the trustee is transformed by the sale into proceeds of the company, which is constrained in its use in like fashion. The nature of this is best seen in the way Gordon J put the matter at [Carter Holt Harvey] [133]–[135], [153]–[154] and [156]:

133 Allsop CJ, in Jones, addressed the right of indemnity in the form of exoneration.  Allsop CJ’s description was rightly accepted by the appellant.  His Honour confirmed that the right of exoneration generates a proprietary interest on the part of the trustee in the trust fund as follows:

[T]he right (in a sense personal in that it was distinct from and superior to the interests of cestuis que trust) of the trustee to use trust assets to exonerate itself arises to meet a trust liability, and can be exercised only for that purpose.  The property in the hands of the trustee remains trust property, but subject to the trustee’s proprietary interest that exists for the purpose of paying the creditors.  The property is not held on trust for the beneficiaries alone; the proprietary interest of the trustee is preferential to the interests of the beneficiaries, but that interest of the trustee is shaped by its purpose and origins in the trust relationship — to pay trust creditors in order to exonerate itself from those debts.  The character and limits of the interest are shaped by its purpose and origins.  The obligation of the trustee to use the trust assets to pay trust creditors is reflected by, and provides the foundation for, the creditors’ right of subrogation.  (Emphasis added by Gordon J.)

134 The principle that the right of exoneration generates an equitable interest in the trust fund that is proprietary in nature was subsequently restated by Allsop CJ in the same decision as follows:

Thus, in one sense, what exists can be seen to be an equitable proprietary interest or charge or lien in or over trust assets; but any enforcement by a Court of Equity is not of a security interest or a right created over the interests of the beneficiaries, but rather the enforcement by a Court of Equity of a prior proprietary interest in the trust fund to support the right of indemnity.  (Emphasis added by Gordon J.)

135 The approach of Allsop CJ to the right of exoneration, and, in particular, his explanation that the right of exoneration generates a proprietary interest in the trust fund, was consistent with a number of decisions of this Court.

91        The exercise of a trustee’s right of indemnity is occasioned by, and coextensive with,[51] the liability properly incurred.  It is supported by an equitable charge or lien over the trust assets.[52] Again, the distinction between the trustee’s personal funds and the assets of the trust is fundamental to the concept of an indemnity in the trust context.  Further, in the trust context, the trustee’s proprietary interest in the trust assets is part and parcel of a trustee’s indemnity; a trustee’s right of indemnity goes beyond having the benefit of a mere contractual promise to have damage restored, or to be protected from loss in the first place by the indemnifier paying the debt or liability directly. 

[51]Subject to netting-off of obligations the trustee may have to the trust estate: Carter Holt Harvey, 544 [31] (Kiefel CJ, Keane and Edelman JJ).

[52]Carter Holt Harvey, 561 [83] (Bell, Gageler and Nettle JJ). The equitable lien likely also exists in respect of future and outstanding contingent liabilities: Agusta Pty Ltd v Official Trustee In Bankruptcy As Trustee of Estates of Gustavo Ferella and Angelo Ferella [2009] NSWCA 129, [18]-[21] (Tobias JA, with whom Beazley and Macfarlan JJA agreed).

92        While a trustee may reserve trust property — and retain it against a beneficiary — pending determination of a contingent liability,[53] the trustee is not at liberty to take trust assets from the trust and hold them personally just in case some liability may, in the future, materialise.  There is an important distinction between reserving trust property, and taking property out of the trust and putting it into the hands of the trustee in its personal capacity.

[53]See, eg, the discussion and cases cited in Ludwig v Jeffrey [2019] NSWSC 1550, [29]-[30] (Slattery J).

93        Returning, then, to the Proposed Amendments: the ‘effect’ of the proposed new rule in the governing rules (ie, cl 7.3 of the Trust Deed) is to enable HESTA to charge a trustee fee, and thereby to accumulate a fund (subject to constraints) held personally by it.  The mere inclusion of a power to charge such a fee goes no further than that; the charging of a trustee fee does not involve the trustee in exercising any right of recoupment or exoneration against trust assets to meet a liability, whether crystallised or even contingent.  Nor does a rule providing a fee charging power involve the trustee in reserving trust assets as against beneficiaries in support of its equitable lien or charge.

94        When it uses its personal assets, the trustee will not be exercising a right of recoupment or exoneration against trust assets, nor will it be exercising a right of indemnity against the trust fund.  The fee taking power to be granted through the proposed new cl 7.3 also lacks the characteristics of a trustee’s indemnity in that it does not confer on HESTA any equitable charge or lien over trust assets.

95        This does not, in my view, result in a triumph of form over substance.  The ability to build a fund held personally through charging fees — whatever the motivating factors for the trustee’s desire to build that fund and whatever its uses — is, as a matter of substance, not an indemnity.  If and when the fund is used, whether to meet the costs of an insurance premium, a taxation liability or a penalty incurred by HESTA, the economic burden will fall on and be met by HESTA, the person liable; it will not fall on and be met by trust assets, let alone fall on trust assets supported by a charge or lien over those assets. 

96 In this regard, it is worth recalling that ss 56 and 57 operate to render certain provisions of the governing rules void in circumstances where those provisions are rules that govern the operation of the fund. Sections 56 and 57 are not, by their terms, directed to the use of moneys and assets which do not form part of the fund. Further, given that a RSE’s governing rules are to (relevantly) address the operation of the fund, it is by no means clear that the governing rules could sensibly address the use of moneys and assets held by a trustee personally.

97 The Contradictor submitted that, while the matter is contestable, the better view is that the Proposed Amendments are, in light of HESTA’s primary purpose in introducing the fee charging power, inconsistent with ss 56 and 57. The Contradictor’s submissions rightly emphasised that ss 56 and 57 look, not to the form, but to the effect of the governing rules.  HESTA has (as the Contradictor highlighted) quite openly disclosed that its desire to be authorised to charge the new trustee fee is prompted by the potential for it to incur liability for penalties[54] for which, come 1 January 2022, it will no longer be able to call on its right of indemnity against trust assets.  She submitted that, the purpose of the Proposed Amendments being clear, HESTA cannot accomplish in two steps[55] — charging a fee levied against trust assets and then using the fund thereby created to pay any penalties — what it could not accomplish in one step.[56]

(b)the cost of any premiums reasonably incurred in effecting and maintaining a policy or policies of professional indemnity insurance in respect of its position as Trustee of the Plan.

5.4 No Indemnity

Despite anything to the contrary in the Trust Deed, the Trustee will not be indemnified if the Trustee:

(a)       fails to act honestly in a matter concerning the Plan;

(b)intentionally or recklessly fails to exercise, in relation to a matter affecting the Plan, the degree of care and diligence that the Trustee is required to exercise under Superannuation Law; or

(c)incurs a monetary penalty or liability to pay any amount referred to in section 56(2)(b),(c),(d) or (e) of the SIS Act.

5.5 Directors of the Trustee

Each of clauses 5.3 and 5.4 apply separately to each director of the Trustee and for that purpose, the references in those provisions to:

(a)the ‘Trustee’ are taken to be references to each ‘director of the Trustee’; and

(b)section 56(2)(b),(c),(d) or (e) are taken to be references to section 57(2)(a),(b),(c),(d) or (e).

115 The Contradictor’s argument was that these provisions make it clear that HESTA could not use the existing powers in cll 7.1 and 8.1 of the Trust Deed to deduct a fee from Plan assets and use it to pay a liability or amount of the kind referred to in ss 56 or 57 (as they presently stand, and as they are picked up by cll 5.2-5.5 of the Trust Deed). As it was developed orally, the next step in the argument was that cl 7 could also not be amended to provide that a trustee fee is payable for the purpose of meeting liabilities of the kind referred to in s 56(2) of the SIS Act[69] and that, if cl 7 could not be amended to provide so expressly, it cannot be amended to provide that power implicitly.  The Contradictor submitted that the Proposed Amendments were an attempt to do exactly that.

[69]Or at least could not be so amended without also amending cll 5.2 and 5.4 to deprive them of, or qualify, their primacy. 

116      So far as inconsistency with cl 5.2 is concerned, the submission involved a contention that ‘liable’ means (in substance) ‘liable to bear the economic burden of’, such that cl 5.2 in effect precludes HESTA from having recourse to Plan assets in respect of any matter mentioned in cl 5.2. 

117      In my view, cl 5.2 must be construed in the context of the rest of cl 5.  Clause 5.1 purports to exempt the trustee from liability to ‘any person’ in respect of loss, damage, action, claim, liability, etc ‘arising from’ the matters set out in subparagraphs (a) and (b) of cl 5.1.  Clause 5.2 operates to carve out certain matters from the exemption from liability provided for in cl 5.1.  Being ‘responsible to’ a person (cl 5.1) or ‘liable for’ certain matters (cl 5.2) may or may not have financial consequences.  It is cll 5.3 and 5.4 that address the separate, but related, question of indemnification from the Plan assets.  It is those provisions that address the financial consequences of liability. 

118      In any event, the argument concerning inconsistency within the Trust Deed (if the Proposed Amendments were introduced) only arises if the new fee charging power is regarded as a power that ‘exempts’ the trustee from liability (through meeting the economic cost of penalties) or ‘indemnifies’ the trustee or directors in respect of liabilities.  For the reasons already canvassed, in my view it does not.  Accordingly, I do not consider that I should decline to give advice in substantially the form sought on the basis that the introduction of the Proposed Amendments would result in the Trust Deed becoming internally inconsistent. 

Other considerations affecting whether to give the judicial advice sought

119      One of the submissions made by the Contradictor was that the Proposed Amendments seek to alter the structural bargain between the members of the Plan and their trustee.  As matters presently stand, HESTA bears the risk that it will incur an uninsured and unindemnifiable[70] liability; while the scale of the risk will dramatically increase from 1 January 2022, it is not a new risk.  The Contradictor also pointed to the difference between what might be described as the ‘bargain’ between members and their trustee in industry (or profit-for-members) funds, as compared with retail funds in which members join and participate in the fund on the basis that the fund’s trustee will be earning profit-making fees.

[70]Unindemnifiable due to cl 5.4 of the Trust Deed.

120 I accept that the ‘bargain’ between HESTA and its members will be altered by the Proposed Amendments. The members will be members of a superannuation fund whose trustee previously only recovered its costs and expenses, but now charges a trustee fee over and above its costs and expenses, although the extent in that change of bargain should not be overstated given, as APRA noted, HESTA is still constrained by its Constitution. The direct financial risk of uninsured and unindemnifiable liabilities being incurred will also shift, to the extent that HESTA’s risk of being unable to pay such an amount (and becoming insolvent) will be diminished.[71]  Those changes are, however, the unavoidable consequence of HESTA charging fees so as to have personal capital to guard against the risk of insolvency.  Nor are the benefits of that change to the bargain wholly one-sided; on the contrary, the consequences of trustee insolvency would be very damaging to the interests of beneficiaries, were the risk to materialise. Even the material potential for the trustee to become insolvent carries adverse consequences for members relating to the ability of the trustee to attract suitably qualified directors who will make decisions without being hamstrung by excessive conservatism.  I am satisfied on the material before me that HESTA has carefully considered the design of the fee, and the ‘guardrails’ (referred to below), so as to limit the impact on members, to the extent possible consistently with its broader objectives in seeking the power to charge a trustee fee. 

[71]Conversely, however, the risks to members of their trustee becoming insolvent will be reduced. 

121      The maximum total fee over each three year period and the maximum size of the Trustee Capital Reserve is proposed to be set at 0.125% of the net assets of the Plan.  There is no doubting that, if the trustee fee is levied to the maximum permitted level, HESTA will have a large fund at its disposal (on present figures, up to a maximum of $83 million).  The Contradictor submitted that the fee is ‘at the high end of the spectrum’ but that it was ‘within the boundaries of propriety’ having regard to the principles to which I must have regard in an application for judicial advice.  Having regard to the confidential evidence which addressed HESTA’s potential exposure in some detail and on a number of scenarios, I agree with, and accept, the Contradictor’s submission (which of course accorded with HESTA’s position on its application).  It is also relevant in this context to recall that the advice I am asked to give is that HESTA is justified in amending the Trust Deed to introduce a fee charging power with the stipulated maximum; I am not being asked to give judicial advice regarding the exercise by HESTA of its fee charging power in any given year or on any given occasion. 

122      Whether to charge a fee at any point in time, and how much to charge, will be a decision HESTA’s Board will need to make having regard to the circumstances as they stand at the given time.  HESTA has accepted that, in deciding to exercise its power to charge a trustee fee, it will be burdened with the obligations and duties it has as trustee, including the requirement that the power be exercised for a proper purpose having regard to the best financial interests of members.[72]  In its submissions, APRA noted a concern that a trustee might not satisfy the prudence, best financial interests and conflicts covenants in charging a fee sufficient to cater not only for regulatory liabilities and infringements of ‘an inadvertent and honest kind, but to cater for any and all non-indemnifiable liabilities that a trustee may occur [sic incur] including where it has acted inappropriately’. 

[72]QSuper, [41].

123      While HESTA’s Board will need to make its own decisions in due course concerning the exercise of its fee charging power, I have considered the broader issue which APRA’s submission raises in considering whether to give the advice sought.  I am not of the view that the potential for the Trustee Capital Reserve to be used to fund payment of penalties which are not (as APRA termed them) ‘inadvertent and honest’ should lead me to decline to give advice in substantially the form sought. 

124      First, once the fund exists, it will (for reasons already outlined) necessarily be an asset available to meet all penalties.  It is difficult to see how HESTA’s Board could in practice make a personally held fund available to meet some, but not other, penalties imposed on the company.  Secondly, a sizeable penalty may be incurred by HESTA that is not due to ‘inadvertent and honest’ mistakes, where the conduct of one or more individuals is attributed to HESTA, or for which HESTA is otherwise liable.  HESTA’s Board and management will need to consider what steps they take in relation to such individuals, were that situation to arise.  However, there can be no a priori assumption that the interests of beneficiaries would be better served by HESTA becoming insolvent — with the very significant cost to the Plan and disruption that would ensue[73] — 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 having been incurred.  Thirdly, HESTA will be making disclosures concerning the Trustee Capital Reserve, including disclosing fees taken into the Trustee Capital Reserve, its size and amounts paid from it.  As Mr Major deposed in his second affidavit, HESTA operates in a competitive market and has fee disclosure obligations.  As such, the future use of the Trustee Capital Reserve will be a matter exposed to member scrutiny.

[73]As to which, see paragraph 35 above.

125      The Contradictor made some oral submissions concerning the efficacy of HESTA’s proposal for the disclosures to be made to members concerning the taking, and use, of the fund created.  She pointed out that HESTA’s intention to use an existing reserve (still forming part of the Plan assets) to pay the new trustee fee means that a reserve funded by members’ administration fees will be used (at least in part) for a different purpose than advised to members when those administration fees were previously levied.  However, the Contradictor did not advance any submission that the potential deficiencies in the disclosure regime presented any impediment to judicial advice being given if I were not otherwise persuaded that I should decline to give the advice sought on the basis of inconsistency with other provisions of the Trust Deed or the SIS Amendments.

126      The Proposed Amendments do not delve into detail on the manner of, or level of granularity with which, disclosure will be made of payments out from the newly created Trustee Capital Reserve.  However, given the fund will sit outside the Plan, it is, in my view, not inappropriate that the Trust Deed does not address disclosure in greater detail.

Conclusion on judicial advice application

127      I am satisfied, based on the evidence and submissions before me, that HESTA has the power to amend the Trust Deed to introduce the Proposed Amendments.  I am also satisfied of the propriety of HESTA’s proposed exercise of power.  Without seeking to repeat all that has already been said, I am satisfied that HESTA is acting in good faith in proposing to make the Proposed Amendments, that it is not acting for an ulterior purpose and that it has given real and genuine consideration to the exercise of its power of amendment, having closely examined the dimensions of the problem it faces, the way in which that problem may be addressed (including alternatives which will not sufficiently address the problem) and the interests of members.  I am also not persuaded that I should decline to give HESTA advice in substantially the form it seeks on the basis that the Proposed Amendments are necessarily inconsistent with the SIS Amendments or other parts of the Trust Deed.

128      I will answer the question posed for advice as follows:

HEST Australia Pty Ltd as trustee of the Health Employees Superannuation Trust Australia is justified in exercising its powers under cl 21.1 of the Rules contained in the Schedule to the Trust Deed for Health Employees Superannuation Trust Australia to amend that deed to insert the clauses referred to in paragraphs 1, 2, 6 and 7 of the Schedule to the draft Deed of Amendment at pages 484-490 of Confidential Exhibit DB-1 to the affidavit of Deborah Jane Blakey sworn 1 October 2021.

Application for relief under the Trustee Act

1. HESTA sought orders under s 63, alternatively under s 63A, of the Trustee Act, authorising it to make the Proposed Amendments. While detailed submissions were made by HESTA and the Contradictor[74] on the availability of relief under those provisions, I do not propose to address them for two reasons. First, HESTA confirmed in oral submissions that judicial advice of the kind sought under r 54.02 of the Rules would be sufficient for its purposes; it does not need an order under the Trustee Act if it receives advice of the kind sought. Given the advice I have indicated I will give, HESTA’s application under the Trustee Act lacks utility. It may even unnecessarily complicate matters if I were also to make orders under the Trustee Act, as that would introduce ambiguity into the record of the basis upon which the Trust Deed has been amended.

   [74]Including by submission of supplementary written notes following the hearing.

2. Secondly, the Contradictor made detailed submissions contending that:

   (a) the power under s 63 would not be available in the present circumstances as HESTA is seeking to vary the terms of the trust, and not just to deal with specific trust property;[75] and

   [75]The Contradictor referred to WE Pickering Nominees Pty Ltd v Pickering [2016] VSC 71 (Pickering), [64]-[99] (McMillan J) and Re Dion Investments Pty Ltd (2014) 87 NSWLR 753, 773-4 [92]-[95], [96]-[97], [100] (Barrett JA, Beazley P and Gleeson JA agreeing).

   (b) the power under s 63A would likewise not be available as there is no group falling within the terms of s 63A(1) on whose ‘behalf’ the court could approve the trusts being varied — in particular, the Contradictor submitted that subparagraph 1(b) was inapposite.[76]

   [76]The Contradictor again referred to Pickering, [43]-[63] (McMillan J). Section 63A(1)(b) refers to persons who do not presently, but may in the future, have an interest under the trusts. The Contradictor’s argument (citing Knocker v Youle [1986] 1 WLR 934, 937 (Warner J)) was that the present members of the Plan do have an interest in the trust within the meaning of s 63A(1)(b).

3. The points raised by the Contradictor are substantive and would, particularly in relation to s 63A, require full consideration of the power and the nature of the interests of members of the Plan. Given the lack of utility in the Trustee Act limb of HESTA’s application, and the need to give my decision swiftly (in view of the timing of the SIS Amendments coming into effect), the better course is for me to confine myself to proceeding under r 54.02.

   Confidentiality

   132      At the conclusion of the hearing, I made orders preserving the confidentiality of:

   (a)        pages 391 to 410 (insofar as they contain sections 3 and 4 of the Trustee Indemnity Risk Assessment Memorandum), 448 to 452 and 494 to 505 of Confidential Exhibit DB-1 to the affidavit of Deborah Jane Blakey sworn 1 October 2021;

   (b)       the exhibits to the affidavit of Sean Andrew Lindsay sworn 30 September 2021; and

   (c)        Parts F.1 and F.2 of the Plaintiff’s submissions filed 29 October 2021.

   133      I declined to make a further, general order that all exhibits to the affidavit of Ms Blakey remain confidential and not be available for inspection by non-parties.

   134      The principles applying to applications for confidentiality orders — as distinct from suppression orders — are set out in the decision of Elliott J in Cargill Australia Ltd v Viterra Malt Pty Ltd (No 23).[77]  The burden fell on HESTA to demonstrate that the confidentiality orders were reasonably necessary for the administration of justice, rather than merely being convenient, reasonable or sensible, and were warranted by reference to some identifiable harm or damage that disclosure would cause; the desire merely to avoid scrutiny or maintain confidence is not enough. 

   [77](2019) 58 VR 611, 617-21 [34]-[56].

   135 Rule 28.05(2) of the Rules provides that certain documents may not be inspected or copied by a non-party without leave of the Court. Those documents include affidavits, exhibits to affidavits, and written submissions. However, r 28.05(2) does not apply to a document that has been read or relied upon in open court: r 28.05(3). As such, absent a confidentiality order, the documents over which I made confidentiality orders would ordinarily have been available for inspection following the conclusion of the hearing at which they were relied on in open court.

   136      HESTA’s application to maintain the confidentiality of various documents was supported by the two affidavits of Mr Major, its Chief Risk and Compliance Officer.

   137      The final ambit of the pages of the confidential exhibit to Ms Blakey’s affidavit over which HESTA sought specific confidentiality orders was much narrower than the page ranges originally identified in HESTA’s Originating Motion.  The narrowing occurred, along with the filing of the second affidavit of Mr Major, following receipt of written submissions of the Contradictor contending that the original confidentiality orders sought were too wide and inadequately supported.  Following receipt of the Contradictor’s submissions, HESTA narrowed the range of pages over which specific confidentiality orders were sought to the pages that specially contained or replicated HESTA’s risk modelling analysis.  Mr Major’s second affidavit addressed in detail the commercial prejudice that HESTA may suffer if its internal risk modelling analysis, directly linked to the proposed new trustee fee, were to be disclosed in the competitive market in which it operates.

   138      Following that narrowing and the filing of Mr Major’s further supporting affidavit, the Contradictor no longer contended the specific confidentiality order sought was too wide or lacked a proper foundation in the evidence.

   139      For largely the reasons set out in Mr Major’s affidavits, I accept that HESTA may suffer commercial prejudice if its risk assessment analysis, and the analysis it received from PricewaterhouseCoopers, were to be publicly disclosed.  That risk analysis is set out in the relevant pages of the exhibit to Ms Blakey’s affidavit referred to above, and in Parts F.1 and F.2 of HESTA’s submissions.  I also accept that the exhibits to Mr Lindsay’s affidavit, which comprise copies of HESTA’s insurance policies, are commercially sensitive and HESTA may suffer prejudice to its commercial interests if those policies are made publicly available.  Further, so far as HESTA’s insurance position was referred to in the course of submissions, the relevant detail is disclosed in the body of Mr Lindsay’s evidence; the policies themselves were not referred to.

   140      I declined to make a general confidentiality order over the balance of the exhibits to Ms Blakey’s affidavit.  The mere fact that a document (such as Board minutes or a memorandum prepared for the Board) is confidential does not support a confidentiality order.  Moreover, a number of documents exhibited by Ms Blakey were self-evidently not confidential at all, or not confidential to HESTA (eg, HESTA’s 2020 Annual Report, a company search of HESTA, orders made in previous court applications, etc).

   Orders

   141       I will make orders as follows (noting that I have already made the confidentiality orders referred to above):

   1.The question in paragraph A of the Originating Motion be answered as follows:

   HEST Australia Pty Ltd as trustee of the Health Employees Superannuation Trust Australia is justified in exercising its powers under cl 21.1 of the Rules contained in the Schedule to the Trust Deed for Health Employees Superannuation Trust Australia to amend that deed to insert the clauses referred to in paragraphs 1, 2, 6 and 7 of the Schedule to the draft Deed of Amendment at pages 484-490 of Confidential Exhibit DB-1 to the affidavit of Deborah Jane Blakey sworn 1 October 2021.

   2.The Plaintiff’s costs of this application are to be paid or reimbursed out of the funds of the Health Employees Superannuation Trust Australia on an indemnity basis.

   3.The Contradictor’s costs of this application (including the costs of her junior counsel and instructing solicitors) are to be paid or reimbursed out of the funds of the Health Employees Superannuation Trust Australia on an indemnity basis.

   4.The Plaintiff’s Originating Motion is otherwise dismissed.

   ANNEXURE

   Schedule to the draft Deed of Amendment

   1.        Insert the following clauses in clause 1.1:

   Payment Date means each date on which the Trustee pays a Trustee Fee from the Plan.

   Reference Date for a Reference Period, means 31 December in the calendar year immediately before the commencement of that Reference Period.

   Reference Period means the period of three calendar years commencing on 1 January 2022, and each successive period of three calendar years thereafter.

   Trustee Capital Reserve means the net tangible assets held by the Trustee in its personal capacity, and not as trustee of the Plan.

   Trustee Capital Reserve Condition is satisfied if the Trustee determines that the balance of the Trustee Capital Reserve at the relevant Payment Date does not exceed:

   (a)       0.125% of the net assets of the Plan (valued on the Reference Date for that Reference Period); or

   (b)      such amount (if any) as Superannuation Law requires or as a Regulator recommends, requests or directs the Trustee to hold as capital on its own account,

   whichever is the greater.

   Trustee Fee Condition is satisfied if the Trustee determines that the aggregate value of the Trustee Fee paid on each Payment Date falling within the relevant Reference Period does not exceed 0.125% of the net assets of the Plan (valued at the Reference Date for that Reference Period).

   Trustee Fee means a fee paid under clause 7.3.

   2.        Insert the following clause below clause 7.2:

   7.3      Trustee Fee

   (a)       Without limiting clause 7.1, if the Trustee Capital Reserve Condition and the Trustee Fee Condition are both satisfied on the Payment Date, the Trustee may determine that a trustee fee is payable to the Trustee.

   (b)      The Trustee must disclose the following information to members on an annual basis:

   (i)       the amount(s) of the trustee fee, if any, paid in the previous financial year;

   (ii)      the balance of the Trustee Capital Reserve as at the end of that financial year;

   (iii)     any net earnings on the Trustee Capital Reserve as at the end of that financial year; and

   (iv)      any payments out of the Trustee Capital Reserve in the previous financial year.

   3.        Delete ‘or (e)’ in clause 5.2(c) so that it reads as follows:

   (c) incurs a monetary penalty or liability to pay any amount referred to in Section 56(2)(b),(c) or (d) or (e) of the SIS Act.

   4.        Delete ‘or (e)’ in clause 5.4(c) so that it reads as follows:

   (c) incurs a monetary penalty or liability to pay any amount referred to in Section 56(2)(b),(c) or (d) or (e) of the SIS Act.

   5.        Delete ‘or (e)’ each time it appears in clause 5.5(b) so that it reads as follows:

   (b) Section 56(2)(b),(c) or (d) or (e) are taken to be references to Section 57(2)(a),(b),(c) or (d) or (e).

   6.        Replace ‘clause 7.1’ each time it appears in the opening words of clause 8.1 with ‘clause 7’ so that it reads as follows:

   In addition to the power to charge fees under clause 7, the Trustee has the power to deduct, pay and otherwise make provision from the assets of the Plan for all costs and expenses that the Trustee incurs as the Trustee of the Plan and that are not recovered through fees charged under clause 7, including:

   7.        Replace clause 18.2(a) so that it reads as follows:

   (a)       must retain any fees deducted from Member Accounts and any provisions it makes for costs and expenses in a reserve account in the Plan until such time as the amounts are applied to meet any cost or expense of the Plan, or fee paid to the Trustee under clause 7; and