VBN and Ors and Australian Prudential Regulation Authority and Anor
[2006] AATA 710
•25 July 2006
CATCHWORDS – SUPERANNUATION – prudential regulation – disqualification of directors – whether Trustee breached covenants – meaning of covenants – meaning of ordinary prudent person covenant – meaning of best interests covenant – meaning of “reserve” – meaning of fit and proper person – decisions set aside
Acts Interpretation Act 1901 ss 15AA, 15AB, 33 and 34AB
Administrative Appeals Tribunal Act 1975 ss 27, 28, 33, 34, 37, 39 and 43
Air Navigation Regulations 1947
Australian Prudential Regulation Authority Act 1998 ss 7, 8, 9, 11, 15, 16, 45, 46 and 47
Broadcasting Act 1942 s 83, 83A, 86AA and 88
Civil Aviation Act 1988
Compensation (Commonwealth Employees) Act 1971
Corporate Law Economic Reform Program Act 1999
Corporations Act ss 179, 180, 189, 198D, 1317E, 1317G, 1317J and 1318
Corporations Code s 228
Corporations Law
Customs (Prohibited Imports) Regulations 1956
Evidence Act 1995 s 4
Income Tax Assessment Act 1936 s 80A
Insurance Contracts Act 1984
Judiciary Act 1901 ss 55ZG and 55N
Judiciary Act 1903 s 55ZF
Life Insurance Act 1945
Safety, Rehabilitation and Compensation Act 1988 s 62
Superannuation Industry (Supervision) Act 1993 ss 3, 10, 16, 19, 31, 34, 52, 55, 58, 59, 86, 93, 89, 93, 115, 120, 120A, 121, 126, 126A, 126B, 126D, 126E, 129, 130, 344 and 262A
Superannuation Industry (Supervision) Bill
Superannuation Industry Supervision Regulations rr. 1.03, 2.15, 2.22 to 2.25, 2.35, 2.36, 2.40, 2.41, 4.03, 4.04, 5.01, 5.01A, 5.03, 9.04, 9.06, 9.08, 9.09, 9.10, 9.15, 9.29, 9.30, 9.3 and 13.16
Trustee Act 1958 (Vic) s 28
Adler v Australian Securities and Investments Commission (2003) 179 FLR 1
Aerolink Air Services Pty Ltd v Civil Aviation Safety Authority [2003] AATA 1357
Alexandra Private Geriatric Hospital v Blewett (1984) 2 FCR 368; 56 ALR 265
Attorney-General v Breckler (1999) 197 CLR 83; 163 ALR 576
Austin v Austin (1906) 3 CLR 516
Australian Broadcasting Tribunal v Bond and Others (1990) 94 ALR 11
Australian Gaslight Co v Valuer-General: (1940) 40 SR (NSW) 126
Australian Securities and Investments Commission v Parker (2003) 21 ACLC 888, [2003] FCA 262
Australian Securities and Investments Commission v Pegasus (2002) 41 ACSR 561
Australian Securities Commission v AS Nominees Ltd & others (1995) 62 FCR 504; 133 ALR 1
Australian Securities Commission v AS Nominees Ltd & others (1995) 62 FCR 504
Australian Securities Commission v Donovan (1998) 28 ACSR 583
Australian Securities Commission v Gallagher (1993) 11 ACLC 286
Bartlett v Barclays Bank Co Ltd [1980] Ch 515
Blount Inc v Registrar of Trade Marks (1998) 83 FCR 50
Boland v Yates Property Corporation Pty Ltd [1999] HCA 64; (1999) 74 ALJR 209; 167 ALR 575
Bond v Barrow Haematite Steel Co [1902] 1 Ch 353
Bray v Ford [1896] AC 44
Breen v Williams (1996) 186 CLR 71
Burrows v Walls [1855] 5 De GM & G 233; 3 ER 859
Casarotto v Australian Postal Commission (1989) 86 ALR 399; 17 ALD 321
Centofanti v Eekimitor Pty Ltd (1995) 65 SASR 31; 15 ACSR 629
Charlton v Baber (2003) 47 ACSR 31
CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384; 141 ALR 618
Civiti and Secretary, Tax Agents' Board of Victoria (1990) 90 ATC 2039
Clark v Ryan (1960) 103 CLR 486
Commissioner of Taxation v Murray (1990) 21 FCR 436; 92 ALR 671
Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115
Cooper Brookes (Wollongong) Pty Ltd v Commissioner of Taxation (1981) 147 CLR 297; 35 ALR 151
Cowan v Scargill [1985] 1 Ch D 270
Craig v Federal Commissioner of Taxation (1945) 70 CLR 441
Daniels v Anderson (1995) 37 NSWLR 438
Davies v Australian Securities Commission (1995) 59 FCR 221; 131 ALR 295
Drake v Minister for Immigration and Ethnic Affairs (1979) 24 ALR 577; 2 ALD 60
Duchess of Argyll v Beuselinck (1972) 2 LLR 172
Duke Group Ltd (in liq) v Pilmer (No 5) (2003) 87 SASR 325
Edge v Pensions Ombudsman [1998] Ch 512
Epeabaka v Minister for Immigration and Multicultural Affairs (1997) 150 ALR 397; 47 ALD 555
Esso Australia Ltd v Australian Petroleum Agents’ & Distributors’ Association [1999] 3 VR 642
Fearnley and Australian Fisheries Management Authority (2005) 87 ALD 159; 41 AAR 384; [2005] AATA 147
Federal Commissioner of Taxation v Linter Textiles Australia Ltd (in liq) (2005) 220 CLR 542; 215 ALR 1
Federal Commissioner of Taxation v Stone (2005) 215 ALR 61
Fouche v Superannuation Fund Board (1952) 88 CLR 609
Gold Ribbon (Accountants) P/L v Sheers and Ors [2005] QSC 198
Golosky and Anor v Golosky unreported, NSW Court of Appeal, 5 October 1993
Heydon and Ors v NRMA Ltd and Ors [2000] NSWCA 374
HG v The Queen (1999) 197 CLR 414; 160 ALR 554
HR Products Pty Ltd v Collector of Customs (1990) 20 ALD 340
Hughes and Vale Pty Ltd and Anor v State of New South Wales and Ors [No.2] (1955) 93 CLR 127
Hurley v BGH Nominees Pty Ltd (1982) 1 ACLC 387
In re Drexel Burnham Lambert UK Pension Plan [1995] 1 WLR 32
In re Whiteley; Whiteley v Learoyd (1886) 33 Ch D 347
In the matter of Estate of Hancock (dec); Porteous v Rinehart (as executor and trustee of the estate of Hancock) (1998) 19 WAR 495
Inland Revenue Commissioners v National Federation of Self Employed and Small Business Ltd [1982] AC 617
K & S Lake City Freighters Pty Ltd v Gordon & Gotch Ltd (1985) 157 CLR 309
Karger v Paul [1984] VR 161
Kelso v Forward (1995) 60 FCR 39
King v Talbot 40 NY 76 (1869)
Kioa v West (1985) 59 CLR 550
Martin v Martin [1988] 1 NZLR 722
McDonald v Director-General of Social Security (1984) 1 FCR 354; 6 ALD 6
McMillan v McMillan (1891) 17 VLR 33
Melbourne Steamship Co Ltd v Moorehead (1912) 15 CLR 333
Minister for Health v Thomson (1985) 98 FCR 213; 60 ALR 701
Minister for Immigration and Multicultural Affairs v Bhardwaj (2002) 209 CLR 597
Minister for Immigration and Multicultural Affairs v Wang (2003) 215 CLR 518; 196 ALR 385; 72 ALD 577
Minister for Immigration and Multicultural Affairs v Yusuf (2001) 206 CLR 323; 180 ALR 1; 62 ALD 225
Minister for Immigration and Multicultural and Indigenous Affairs v Watson (2005) 145 FCR 542
Minister for Immigration and Multicultural and Indigenous Affairs v SZAYW [2005] FCAFC 154
Mobil Oil Australia Pty Ltd v Federal Commissioner of Taxation (1963) 113 CLR 475
Murphy v R (1989) 167 CLR 94
Pepsi Seven-Up Bottlers v Commissioner of Taxation (1995) 62 FCR 289; 95 ATC 4746; 132 ALR 632
Percival v Wright [1902] 2 Ch 421
Permanent Building Society (in liq) v McGee (1993) 11 ACSR 260
Phipps v Boardman [1967] 2 AC 46
Pikos Holdings (Northern Territory) Pty Ltd v Territory Homes Pty Ltd [1997] NTSC 30
Pochi v Minister for Immigration and Ethnic Affairs (1979) 36 FLR 482
Preuss and Australian Prudential Regulation Authority [2005] AATA 748
Prince Ernest Augustus of Hanover [1957] AC 436
Princess Ann of Hesse v Field and Ors (1962) 80 WN (NSW) 66
R v Bonython (1984) 38 SASR 45
R v J (1994) 75 A Crim R 522 (Vic CCA)
R v Toohey; Ex parte Meneling Station Pty Ltd (1982) 158 CLR 327; 44 ALR 63
Rana v Military Rehabilitation and Compensation Commission [2005] FCA 6
Rankine v Rankine [1998] QSC 48
Rathbone v Abel (1964) 38 ALJR 293
Re Becker and Minister for Immigration and Ethnic Affairs (1977) 1 ALD 158; 15 ALR 696
Re Beloved Wilkes’ Charity (1851) 3 Mac & G 440; 42 ER 330
Re Charteris [1917] 2 Ch 379
Re Dowling and Secretary to Department of Health (1985) 8 ALD 171
Re HIH Insurance Ltd (in liq) & Australian Securities and Investments Commission v Adler [2002] 42 ACSR 80
Re Londonderry’s Settlement [1965] Ch 918; [1964] 3 All ER 855
Re Payne and Comcare (1997) 48 ALD 733
Re Preston [1985] AC 385
Re Slater and Cox (1988) 15 ALD 20
Re Taylor and Department of Transport (1978) 1 ALD 312
Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134
Rich v Australian Securities and Investments Commission [2004] HCA 42; (2004) 209 ALR 271
Russell v Duke of Norfolk [1949] 1 All ER 109
Sargeant v National Westminster Bank Plc (1990) 61 P & CR 518
Scott v Handley (1999) 58 ALD 373
Secretary, Department of Social Security v Willee (1990) 96 ALR 211; 20 ALD 557
Shell Pensions Trust Ltd v Pell Rrischmann & Partners [1986] 2 All ER 911 (QBD)
Singer v Berghouse (1994) 181 CLR 201; 123 ALR 481; 68 ALJR 653
Smith v Langford (1844) 2 Beav 362; 48 ER 1221
Speight v Gaunt (1883) 9 App Cas 1
Stasos v Tax Agents’ Board (1990) 21 ALD 437
Sullivan v Department of Transport (1978) 20 ALR 323
Tanti v Carlson [1948] VLR 401
TCN Channel Nine Pty Ltd v Australian Mutual Provident Society (1982) 42 ALR 496
The Commonwealth v Muratore (1978) 141 CLR 296; 22 ALR 176
Theo v Secretary, Department of Family and Community Services [2006] FCA 279
Trade Practices Commission v Arnotts (No 5) (1990) 21 FCR 324; 92 ALR 527
Turner v Corney (1841) 5 Beav 515
Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd (1992) 192 CLR 603; 154 ALR 361
Vision Super Pty Ltd v Poulter [2006] FCA 849
Vrisakis v Australian Securities Commission [1993] 9 WAR
Wacando v Commonwealth of Australia and State of Queensland (1981) 148 CLR 1; 37 ALR 317
Waimond Pty Ltd v Byrne (1989) 18 NSWLR 642
Water Administration Ministerial Corporation v Jones (2005) 139 LGERA 198 (NWSCA)
Webster v McIntosh (1980) 32 ALR 603
Whitten v Falkiner (1915) 20 CLR 118
Wilkinson v Clerical Administrative and Related Employees Superannuation Pty Ltd (1997) 79 FCR 469; 152 ALR 332
Wilson v Minister for Aboriginal and Torres Strait Islander Affairs (1996) 189 CLR 1
Woolworths Ltd v Kelly (1991) 22 NSWLR 189
Yager v R (1977) 13 ALR 247
DECISION AND REASONS FOR DECISION [2006] AATA 710
ADMINISTRATIVE APPEALS TRIBUNAL )
) V2005/686
GENERAL ADMINISTRATIVE DIVISION )
Re VBN
Applicant
AndAUSTRALIAN PRUDENTIAL REGULATION AUTHORITY
Respondent
AndVBT
Party Joined
V2005/793
Re VBV
Applicant
AndAUSTRALIAN PRUDENTIAL REGULATION AUTHORITY
Respondent
And VBT
Party Joined
V2005/821
Re VBW
Applicant
AndAUSTRALIAN PRUDENTIAL REGULATION AUTHORITY
Respondent
AndVBT
Party Joined
V2005/906
Re VBO
Applicant
AndAUSTRALIAN PRUDENTIAL REGULATION AUTHORITY
Respondent
AndVBT
Party Joined
V2005/907
Re VBP
Applicant
AndAUSTRALIAN PRUDENTIAL REGULATION AUTHORITY
Respondent
AndVBT
Party Joined
V2005/908
Re VBQ
Applicant
AndAUSTRALIAN PRUDENTIAL REGULATION AUTHORITY
Respondent
AndVBT
Party Joined
V2005/909
Re VBR
Applicant
AndAUSTRALIAN PRUDENTIAL REGULATION AUTHORITY
Respondent
AndVBT
Party Joined
DECISION
Tribunal: Deputy President S A Forgie
Mr B H Pascoe, Senior Member
Date: 25 July 2006
Place: Melbourne
Decision:The Tribunal:
1.sets aside the decisions of the respondent dated:
(1) 3 August 2005 and confirming a decision of its delegate dated 9 June 2005 in respect of VBN;
(2) 7 October 2005 and confirming a decision of its delegate dated 5 August 2005 in respect of VBO;
(3) 7 October 2005 and confirming a decision of its delegate dated 9 August 2005 in respect of VBP;
(4) 7 October 2005 and confirming a decision of its delegate dated 9 August 2005 in respect of VBQ;
(5) 7 October 2005 and confirming a decision of its delegate dated 12 August 2005 in respect of VBR;
(6) 2 September 2005 and confirming a decision of its delegate dated 5 July 2005 in respect of VBV; and
(7) 13 September 2005 and confirming a decision of its delegate dated 22 July 2005 in respect of VBW.
(Sgd. S A Forgie)
S A FORGIE
Deputy President
REASONS FOR DECISION
The Australian Prudential Regulation Authority (APRA) decided that the Trustee of a superannuation fund (Trustee) had contravened the Superannuation Industry (Supervision) Act 1993 (SIS Act).[1] It went on to decide to disqualify seven of the nine people who had been directors of the Trustee at the time of one or more of the contraventions under s 120A(2). With regard to all seven of the directors, it did so under s 120A(2) on the basis that the nature or seriousness of the Trustee’s contraventions provided grounds for their disqualification. We have decided that the Trustee had not contravened the SIS Act. That means that, with regard to all seven of the directors, there is no power to disqualify them under s 120A(2) and we have set aside each of APRA’s decisions on that basis. That is an end of the matter so far as five of the seven directors, VBO, VBP, VBQ, VBR and VBV, are concerned. With regard to the remaining two, VBW and VBN, APRA also based its decisions on their not being fit and proper persons to be responsible officers of body corporate that is a trustee. We have decided that APRA’s decisions on this basis should also be set aside. The effect of our setting aside all of APRA’s decisions is that none of the applicants is a disqualified person within the meaning of the SIS Act.
THE ISSUES
[1] Except in relation to s 120A, references to the SIS Act include amendments up to Act No 61 of 2001. In the absence of any indication that subsequent amendments were intended to apply retrospectively, that was the law that governed the actions of the Trustee and of the Directors with which we are concerned. In any event, those amendments are, in the circumstances of this case, of a minor nature and do not alter the substance of the SIS Act or its application to their actions. No relevant amendments have been made to APRA’s powers to make the decisions under review. Amendments made to s 120A are expressed to apply to events whether before or after the commencement of the section and have been shown in their current form.
On the view that we have taken of the case, there are two main issues in this case. The first relates to the Trustee. Has it contravened the covenants in s 52(2)(b), (c) and (g) of the SIS Act? This raises the following sub-issue:
·what is the scope of the covenants – are they restatements of the common law giving APRA, and so the Tribunal, no greater power to consider their breach than enjoyed by a court?
The second main issue relates to VBN and VBW. Should they be disqualified under s 120A(3). The sub-issues are:
·what is meant by the expression “fit and proper”?
·did VBN and VBW, or either of them, have a conflict of the duties they owed to the Employer and those they owed as Directors of the Trustee?
As well as the two main issues, there were also a number of what we would call satellite issues. These included:
·if APRA did not confine itself to the matters raised in its Statements of Facts and Contentions lodged on 3 October 1995 or in its opening, should it be permitted to raise new matters during the course of the hearing?
·did APRA act in accordance with the model litigant policy?
·if APRA did not, is it required to act in accordance with the model litigant policy and, if so, what are the consequences of its not doing so?
LEGISLATIVE FRAMEWORK
The object of the SIS Act is to:
“… make provision for the prudent management of certain superannuation funds, approved deposit funds and pooled superannuation trusts and for their supervision by APRA, ASIC and the Commissioner of Taxation.”[2]
Together, these entities are referred to as “superannuation entities”[3]. The foundation of the Commonwealth’s power to regulate these matters lies in its powers with respect to corporations or pensions. Those funds and trusts that come within the terms of the SIS Act[4] and comply with it may be eligible for concessional taxation treatment.[5]
[2] SIS Act, s 3(1)
[3] SIS Act, s 10(1)
[4] SIS Act, s 3(3) makes it clear that it does not regulate other entities engaged in the superannuation industry.
[5] SIS Act, s 3(2)
We are concerned only with a regulated superannuation fund. In summary, a “regulated superannuation fund” is a superannuation fund which has a trustee, is either a constitutional corporation[6] or has as its sole or primary purpose the provision of old-age pensions and has elected that the SIS Act apply in relation to the fund.[7] A “superannuation fund” means a fund that is either an indefinitely continuing fund and is a provident, benefit, superannuation or retirement fund or a public sector superannuation fund.[8] The Fund is also an employer-sponsored fund because it is a regulated superannuation fund and has at least one employer-sponsor[9] as well as a standard employer-sponsored fund.[10]
[6] A “constitutional corporation” is a body corporate that is a trading or financial corporation formed within the limits of the Commonwealth within the meaning of paragraph 51(xx) of the Commonwealth of Australia Constitution Act
[7] SIS Act, ss 10(1) and 19(1)-(4)
[8] SIS Act, s 10(1)
[9] SIS Act, ss 10(1) and 16(3). An “employer-sponsor of a regulated superannuation fund” is an employer, who contributes to a fund (or who would do so apart from a temporary cessation of contributions) for the benefit of a member of the fund (or of that member’s dependants) and that member is an employee of the employer or of the employer’s associate: SIS Act, ss 10(1) and 16(1).
[10] A “standard employer-sponsored fund” is a regulated superannuation fund with at least one standard employer-sponsor: SIS Act, ss 10(1) and 16(4). A “standard employer-sponsor” of a fund is an employer who contributes, or would contribute, wholly or partly under an arrangement between that employer and the trustee of a regulated superannuation fund: SIS Act, ss 10(1) and 16(2).
Equal representation of employer and member representatives
Part 9 of the SIS Act sets out rules about representation of employers and members in relation to the management and control of standard employer-sponsored funds.[11] As the Fund is not a public offer superannuation fund and has more than 49 members, it must comply with what are called the “basic equal representation rules.”[12] Section 89(1) provides that a fund complies with the “basic equal representation rules” if:
[11] SIS Act, s 86
[12] SIS Act, s 93(4)
“(a) both:
(i)the fund has a group of 2 or more individual trustees;
(ii)the group of trustees consists of equal numbers of employer representatives and member representatives; or
(b)both:
(i)the fund has a single corporate trustee;
(ii)the board of the corporate trustee consists of equal numbers of employer-representatives and member representatives.”
An “employer representative”:
“… in relation to a group of trustees of a fund, a policy committee of a fund or the board of directors of a corporate trustee of a fund, means a member of the group, committee or board, as the case may be, nominated by:
(a)the employer or employers of the members of the fund; or
(b)an organisation representing the interests of that employer or those employers.”[13]
A “member representative”:
“… in relation to a group of trustees of a fund, a policy committee of a fund or the board of directors of a corporate trustee of a fund, means a member of the group, committee or board, as the case may be, nominated by:
(a)the members of the fund; or
(b)a trade union, or other organisation, representing the interests of those members.”[14]
[13] SIS Act, s 10(1)
[14] SIS Act, s 10(1)
Standards of operation of a regulated superannuation fund
Part 3 of the SIS Act provides a system of prescribed standards applicable to the operation of superannuation entities. In so far as a regulated superannuation fund is concerned, regulations may prescribe standards for their operation (prescribed standards).[15] Examples of the matters that may be prescribed are set out in s 31(2). These matters include the actuarial standards that will apply to funds,[16] the level of benefits that may be provided by funds and the levels of assets that a fund may hold,[17] the financial and actuarial reports to be prepared in relation to funds,[18] the disclosure of information to beneficiaries in funds[19] and the financial position of funds.[20] The trustee of a superannuation entity must ensure that the prescribed standards applicable to the operation of the entity are complied with at all times.[21] A trustee of a superannuation entity must ensure that the prescribed standards applicable to the entity are complied with.[22] A person who does not comply with that obligation, is guilty of an offence[23] but a contravention of the obligation does not affect the validity of the transaction.[24]
[15] SIS Act, s 31(1)
[16] SIS Act, s 31(2)(f)
[17] SIS Act, s 31(2)(j)
[18] SIS Act, s 31(2)(o)
[19] SIS Act, s 31(2)(p)
[20] SIS Act, s 31(2)(s)
[21] SIS Act, s 34(1)
[22] SIS Act, s 34(1)
[23] SIS Act, s 34(2)
[24] SIS Act, s 34(3)
Prescribed standards in relation to accrued benefits
Regulation 13.16 of the Superannuation Industry Supervision Regulations (Regulations) provides that, subject to qualifications that are not relevant in this case:
“… a beneficiary’s right or claim to accrued benefits, and the amount of those accrued benefits, must not be altered adversely to the beneficiary by amendment of the governing rules of by any other act carried out, or consented to, by the trustee of the fund.”
Prescribed standards in relation to financial management
Part 9 of the Regulations is concerned with the financial management of funds. Regulation 9.08 requires an employer-sponsor, in respect of each year of income of the fund, to pay contributions to the fund in an amount “not less than the certified minimum contributions relating to the fund”. The “certified minimum contributions” are defined in r 9.06 to mean “the minimum contributions certified, in accordance with subreg 9.10(1) or 9.18, in a funding and solvency certificate.” An actuary must provide a funding and solvency certificate.[25] In addition to other matters required by the Regulations, the actuary must certify in that certificate the solvency of the fund[26] together with:
“…the minimum contributions reasonably expected by the actuary to be required in respect of any member or class of members to secure the solvency of the fund on the expiry date of the certificate …”[27]
[25] Regulations, r 9.09. As to other responsibilities of the actuary, see [30]-[36] below.
[26] Regulations, r 9.10(1)(e)
[27] Regulations, r 9.10(1)(f)
The “solvency of the fund” “…is to be read as a reference to the minimum benefit index of the fund being certified in accordance with this Division [9.3] as not less than 1.”[28] A reference to a “technical insolvency of the fund” “… is to be read as a reference to the minimum benefit index of the fund not being able to be certified in accordance with this Division [9.3] as not less than 1.”[29] The “minimum benefit index” (MBI) in relation to a defined benefit fund means the index calculated in accordance with r 9.15. The MBI is calculated by reference to the formula:
[28] Regulations, r 9.06(2)
[29] Regulations, r 9.06(3)
In relation to a defined benefit fund:
“NRV” means “… the net realisable value of the assets of the fund”;
“BEF” means “… the value of the benefit entitlements of former members of the fund”; and
“FMRB” means the “funded minimum requisite benefit” and, in relation to a defined benefit fund, means “… the amount that is the sum of:
(a)the value of the pre-initial date component of the MRB multiplied by the adjusted minimum benefit index; and
(b)the value of the post-initial date component of the MRB”[30]
The “MRB” referred to in the definition of “FMRB” means “… the total amount of the minimum requisite benefits (including any amount that would be payable out of those benefits to the member’s spouse or former spouse under a payment split) of all current members of the fund”.[31]
[30] Regulations, r 9.15(2)
[31] Regulations, r 9.15(2)
Prescribed standards in relation to the disclosure of information to fund beneficiaries
At all relevant times, Divisions 2.3 to 2.7 of the Regulations set out the Trustees’ obligations to provide information.[32] Among the prescribed standards that a trustee must meet are the requirements that it:
provide new members and existing members all information that it reasonably believes those members would reasonably need for the purpose of understanding the main features of the relevant fund or plan, its management and financial condition and its investment performance;[33] and
at the end of each reporting period, provide existing members with information such as the amount of their contributions, roll-overs and withdrawals during that period, the amount of any fees, charges and other expenses deducted and employer contributions and investment earnings allotted, the amount of members’ withdrawal benefit at the start and end of the reporting period and the amount payable in the event of members’ dying or being disabled.[34]
[32] Disclosure is now governed by the Corporations Regulations
[33] Regulations, r 2.15 and 2.40 and 2.41
[34] Regulations, r 2.22 to 2.25
Division 2.5 of the Regulations as it then applied, was entitled “Information concerning significant events”. Regulation 2.35 set out the general requirement that:
“The trustee of a fund must give information to a member concerning any event in relation to the fund that the trustee reasonably believes the member would reasonably be expected to be informed of.”
Regulation 2.36 was entitled “Specific requirements” and provided:
“(1) If the governing rules of a fund are changed or, because of any other act carried out, or consented to, by the trustee, a change occurs in relation to a fund and the change is of a kind stated in subregulation (2), the trustee of the fund must give information concerning the change to each member affected by the change.
(2) The kinds of changes are those that:
(a)have an adverse effect on a member’s right or claim to accrued benefits or the amount of those benefits; or
(b) have an adverse effect on the benefits to which a member may become entitled; or
(c)have an adverse effect for the member on the circumstances in which those benefits would become payable; or
(d)have an adverse effect for the member on the manner in which those benefits would be worked out; or
(e)have an adverse effect on the security of the member’s benefits.”
The covenants in the governing rules of a superannuation entity
As a regulated superannuation fund, the Fund is a “superannuation entity”.[35] The content of the governing rules of a superannuation entity are the subject of Part 6 of the SIS Act. Section 52(2) sets out a number of covenants. If the governing rules of a superannuation entity do not contain covenants to the same effect, its governing rules are taken to contain them.[36] Among the covenants set out in s 52(2) are:
[35] SIS Act, s 10(1)
[36] SIS Act, s 52(1)
“… the following covenants by the trustee:
(a)to act honestly in all matters concerning the entity;
(b) to exercise, in relation to all matters affecting the entity, the same degree of care, skill and diligence as an ordinary prudent person would exercise in dealing with property of another for whom the person felt morally bound to provide;
(c)to ensure that the trustee’s duties and powers are performed and exercised in the best interests of the beneficiaries;
…
(g)if there are any reserves of the entity – to formulate and to give effect to a strategy for their prudential management, consistent with the entity’s investment strategy and its capacity to discharge its liabilities (whether actual or contingent) as and when they fall due;
…”
The regulations may prescribe a covenant to be included in the governing rules of a superannuation entity.[37] Without limiting their generality, the regulations may prescribe a covenant that elaborates, supplements or otherwise deals with any aspect of a matter to which a covenant in s 52(2) relates to a matter to which a provision of the SIS Act relates.[38]
[37] SIS Act, s 52(5)
[38] SIS Act, s 52(6)
Section 52(8) is also relevant. It provides:
“A covenant by a corporate trustee[[39]] of a superannuation entity that is to the effect of a covenant referred to in subsection (2), or to the effect of a covenant prescribed by regulations referred to in subsection (5), also operates as a covenant by each of the directors of the trustee to exercise a reasonable degree of care and diligence for the purposes of ensuring that the trustee carries out the first-mentioned covenant, and so operates as if the directors were parties to the governing rules.”
The reference in this provision to “a reasonable degree of care and diligence” is:
“… a reference to the degree of care and diligence that a reasonable person in the position of director of the trustee would exercise in the trustee’s circumstances.”[40]
[39] A “‘corporate trustee’ in relation to a fund, scheme or trust means a body corporate that is a trustee of the fund, scheme or trust”: SIS Act, s 10(1)
[40] SIS Act, s 52(9)
Although a person must not contravene a covenant,[41] contravention is not an offence and does not result in the invalidity of an inaction.[42] This does not mean that a person is without remedy after suffering loss or damage as a result of the conduct of a person in contravention of a covenant. Such a person may recover the amount of the loss or damage by action against any person involved in the contravention.[43] Defences to such an action are set out in ss 55(5) and (6).
[41] SIS Act, s 52(1)
[42] SIS Act, s 55(2)
[43] SIS Act, s 55(3)
Relationship between trustee and employer
Subject only to the qualifications in s 58(2) of the SIS Act, the governing rules of a superannuation entity such as the Fund “… must not permit the trustee to be subject, in the exercise of any of the trustee’s powers under those rules, to direction by any other person.”[44] To the extent that the governing rules of a superannuation fund provide otherwise, they are invalid.[45] The qualifications permit a direction to be given to a trustee by a court, the Regulator,[46] a direction payable by a beneficiary relating to benefits payable to that beneficiary and, in the case of an employer-sponsored fund, by an employer-sponsor in circumstances prescribed by the regulations.
[44] SIS Act, s 58(1)
[45] SIS Act, s 58(3)
[46] The “Regulator” means APRA, the Australian Securities and Investment Commission (ASIC) or the Commissioner of Taxation (Commissioner) according to whether the provision in which the word is used is administered by APRA, ASIC or the Commissioner.
Regulation 4.03(1) provides for an exception relevant to this case. It provides that the governing rules may allow an employer to give a direction to a trustee if, after the implementation of that direction, a defined benefit fund would not become technically insolvent as defined in r 9.06(3), the direction would not require the Trustee to breach a provision of the SIS Act, other than s 55, or the Regulations and if:
“(a) the contributions of the employer-sponsor to the fund include contributions that are not mandated employer contributions (within the meaning of Part 5) and the direction relates solely to either or both of the following:
(i)those non-mandated employer-contributions; or
(ii)benefits related to those non-mandated employer contributions; or
(b)whether or not paragraph (a) applies – the direction relates solely to one or more of the following:
(i)the admission of the new members to the fund; or
(ii)the category of members into which a new member or existing member is to be placed; or
(iii)allowing a person to become an employer-sponsor of the fund; or
(iv)the termination of the fund; or
(v)the appointment of a trustee to an entity that does not have a trustee.”[47]
[47] Regulations, r 4.03(2)
Generally speaking, the governing rules of a superannuation entity (other than a self-managed superannuation fund) may not permit anyone other than a trustee to exercise discretions under the Trust Deed.[48] Again, there are exceptions. One arises if the governing rules require the Trustee’s consent to the exercise of the discretion. Others arise if:
“(i) the exercise of the discretion relates to the contributions that an employer-sponsor will, after the discretion is exercised, be required or permitted to pay to the fund; or
(ii)the exercise of the discretion relates solely to a decision to terminate the fund; or
(iii)the circumstances in which the discretion was exercised are covered by regulations made for the purposes of this subparagraph.”[49]
Regulation 4.04 is made for the purposes of s 59(1)(b)(iii) and mirrors the qualifications set out in r 4.03 in relation to an employer’s giving a trustee a direction.
Standards for trustees, custodians and investment managers of superannuation entities
[48] SIS Act, s 59(1)
[49] SIS Act, s 59(1)(b)
Standards for trustees, custodians and investment managers of superannuation entities is the subject of Part 15 of the SIS Act. In so far as it is relevant to this case, it does so by providing that a “… person must not intentionally be, or act as, a responsible officer of a body corporate that is a trustee of a superannuation entity if the person is, and knows that the person is, a disqualified person.”[50] A disqualified person may not be an investment manager[51] or a custodian[52] of a superannuation entity or a responsible officer of a body corporate that holds such a position.
[50] SIS Act, s 121(2)
[51] SIS Act, s 126
[52] SIS Act, s 126A
What is a “disqualified person”? The answer lies in ss 120 and 120A of the SIS Act. Only those provisions relating to individuals are relevant in this case. We will begin with s 120(1):
“(1) For the purposes of this Part, an individual is a disqualified person if:
(a)at any time (including a time before the commencement of this section):
(i) the individual was convicted of an offence against or arising out of a law of the Commonwealth, a State, a Territory or a foreign country, being an offence in respect of dishonest conduct; or
(ii) a civil penalty was made in relation to the person; or
(b)the person is an insolvent under administration; or
(c)the Regulator has disqualified the individual under section 120A.
…”
Section 120A is also relevant. It provides for three ways in which the Regulator may disqualify an individual. The first is that it:
“… may disqualify an individual if satisfied that:
(a)the person has contravened this Act … on one or more occasions …; and
(b)the nature or seriousness of the contravention or contraventions, or the number of contraventions, provides grounds for disqualifying the individual.”[53]
[53] SIS Act, s 120A(1)
The second way in which the Regulator may disqualify an individual arises if the individual is a responsible officer of a trustee, investment manager or custodian. The Regulator may disqualify such an individual if:
“… satisfied that:
(a)the body corporate has contravened this Act … on one or more occasions (whether before or after the commencement of this section); and
(b)at the time of the contraventions, the individual was a responsible officer of the body corporate; and
(c)in respect of the contravention or contraventions that occurred while the individual was a responsible officer of the body corporate – the nature or seriousness of it or them, or the number of them, provides grounds for the disqualification of the individual.”[54]
[54] SIS Act, s 120A(2)
The third way is found in s 120A(3). It provides that:
“The Regulator may disqualify an individual if satisfied that the individual is otherwise not a fit and proper person to be a trustee, investment manager or custodian, or a responsible officer of a body corporate that is a trustee, investment manager or custodian.”
The SIS Act provides for both revocation of the disqualification and waiver of the status of an individual as a disqualified person. Revocation is provided for in s 120A(5). The Regulator may revoke a disqualification either on application by the disqualified individual or on its own initiative. Waiver is provided for in s 126B. An individual may apply for waiver of the status of a disqualified person but only if disqualification has come about solely because of the operation of s 120(1)(a)(i) i.e. by having been convicted of an offence in respect of dishonest conduct within the meaning of s 120(1)(s)(i) and the offence did not involve serious dishonest misconduct.[55]
[55] SIS Act, s 126B(1) and see also (2)
The SIS Act requires the Regulator to take certain matters into account in deciding whether or not to waive an individual’s status as a disqualified person under s 126B. When the Regulator is APRA, the matters that it must take into account are set out in s 126D(1). That section provides:
“If APRA is satisfied, having regard to any of the following:
(a)the offence to which the application relates;
(b)the time that has passed since the applicant committed the offence;
(c)the applicant’s age when the applicant committed the offence;
(d)the orders made by the court in relation to the offence;
(e)any other relevant matter;
that the applicant is highly unlikely to be a prudential risk to any superannuation entity, APRA must, by notice in writing given to the applicant, make a declaration waiving the applicant’s status as a disqualified person for the purposes of this Part.”
Section 126E deals with the effect of a person’s applying for a declaration waiving his or her status as a disqualified person. Section 126E(1) applies if:
“(a) a person is a disqualified person; and
(b)the person is eligible to make application for a declaration waiving his or her status as a disqualified person; and
(c)the person makes application for such a declaration under subsection 126B(3) within the application period specified in that subsection;
…”
If the section applies, the consequences are that:
“the person is treated, for the purposes of this Act, (other than the purpose of the application for the declaration) as not being, and as never having been, a disqualified person until that application is decided.”[56]
[56] SIS Act, s. 126E(1)
If the Regulator decides to make a declaration in relation to a person meeting the description set out in ss 126E(1)(a), (b) and (c), the SIS Act applies as if the person had never been disqualified.[57] If the Regulator decides not to make a declaration, the person again becomes a disqualified person from the date of the decision.[58]
[57] SIS Act, s. 126E(2)(a)
[58] SIS Act, s. 126E(2)(b)
If the person is a disqualified person, who is eligible to make an application for a declaration waiving his or her status as a disqualified person, and makes an application for waiver under s 126B(4), the person continues to be a disqualified person for the purposes of the SIS Act pending the decision.[59] If the Regulator decides to make a declaration waiving the person’s status as a disqualified person, the person is treated for the purposes of the SIS Act as if the person had never been a disqualified person.[60]
[59] SIS Act, s. 126E(3)(d)
[60] SIS Act, s. 126E(3)(e)
The obligations of the actuary or auditor
Part 16 of the SIS Act sets out special rules about actuaries and auditors of superannuation entities. It imposes obligations on them in relation to a superannuation entity’s compliance with the Act or Regulations and with its solvency.
Section 130 of the SIS Act is concerned with solvency. It provides that it is to apply to a person in relation to a superannuation entity if:
“(a) the person forms the opinion that the financial position of the entity may be, or may be about to become, unsatisfactory; and
(b)the person formed the opinion in the course of, or in connection with, the performance by the person of actuarial or audit functions under this Act or the regulations in relation to the entity.”
The person must tell the trustee about that opinion unless informed that the trustee has been told about the matter by another person in writing or otherwise.[61] That person may tell the Regulator about the matter.[62] If the person tells the trustee of the matter but not the Regulator, that person must ask the trustee to provide a written report about any action that the trustee has taken, or proposes to take, to deal with the matter. The trustee must do so within the time specified by the person. If the person has asked for a report and the trustee has either not given it or the person is dissatisfied with the trustee’s action or proposed action or with the trustee’s inaction, “… the person must give the Regulator a written report about the matter as soon as practicable …” either after the expiry of the deadline for the receipt of the report or the person becomes dissatisfied with the trustee’s action or inaction.[63]
[61] SIS Act, ss 130(2) and (2A)
[62] SIS Act, ss 130(3)
[63] SIS Act, s 130(5)
The financial position of an entity is taken to be unsatisfactory if, and only if, it is treated as such under the Regulations.[64] Regulation 9.04 provides that, for the purposes of s 130 and r 9.31(3):
“…the financial position of an entity is treated as unsatisfactory if, in the opinion of a person performing an actuarial or audit function in relation to that entity:
(a)in the case of an entity that is a defined benefit fund – the value of the assets of the fund is inadequate to cover the value of liabilities of the fund in respect of benefits vested in the members of the fund;
…”
It was agreed among the parties that the test determining whether the financial position is unsatisfactory is often referred to as the “Vested Benefits Index” or “VBI”.
[64] SIS Act, s 130(7)
Regulation 9.31(3) requires an actuary to make a statement regarding a fund’s financial position when making an actuarial report in accordance with r 9.31. An actuary must provide such a report when requested by a trustee of a defined benefit fund and the trustee must request it in relation to each investigation under r 9.29.[65] In the case of a defined benefit fund in operation on 30 June 1994, the trustee must require an actuarial investigation to be made in relation to the fund on a date not more than three years after the previous investigation.[66]
[65] Regulations, r 9.30
[66] Regulations, r 9.29(1)
Compliance is the subject of s 129. The section applies to a person in relation to a superannuation entity if:
“(a) the person forms the opinion that it is likely that a contravention of this Act or the regulations may have occurred, may be occurring, or may occur, in relation to the entity; and
(b)the person formed the opinion in the course of, or in connection with, the performance by the person of actuarial or audit functions under this Act or the regulations in relation to that entity.”[67]
The section has no application if the person has an honest belief that the opinion is not relevant to the performance of actuarial or audit functions under the Act or Regulations.[68]
[67] SIS Act, s 129(1)
[68] SIS Act, s 129(2)
If the section applies, the person must tell the trustee about the matter in writing[69] unless informed that the trustee has been told about the matter by another person in writing or otherwise.[70] That person may tell the Regulator about the matter.[71] If the person tells the trustee of the matter but not the Regulator, that person must ask the trustee to provide a written report about any action that the trustee has taken, or proposes to take, to deal with the matter. The trustee must do so within the time specified by the person.[72] If the person has asked for a report and the trustee has either not given it or the person is dissatisfied with the trustee’s action or proposed action or with the trustee’s inaction, “… the person must give the Regulator a written report about the matter as soon as practicable …” either after the expiry of the deadline for the receipt of the report or the person becomes dissatisfied with the trustee’s action or inaction.[73]
[69] SIS Act, s 129(3)
[70] SIS Act, s 129(3A)
[71] SIS Act, s 129(4)
[72] SIS Act, s 129(5)
[73] SIS Act, s 129(6)
THE TRUST DEED
On or about 6 May 1947, a superannuation plan was established by a trust deed (Trust Deed)[74] for the benefit of employees of a particular employer (Employer) and its employees and those of its related companies (Employees) (the Plan). It was vested in trustees, who held it subject to the trusts, powers, authorities and discretions contained in the Trust Deed and any Rules.[75] Initially, the Trustee comprised natural persons but it was amended to comply with the SIS Act’s requirement that a regulated superannuation fund have a constitutional corporation as its trustee if its sole or primary purpose is other than the provision of old-age pensions.[76]
[74] Hearing Book 9 (HB9)
[75] Trust Deed cl 2; HB9:29
[76] Trust Deed cl 3(a); HB9:30 and see [6] above.
Under the Trustee’s Articles of Association (Articles), it must have no fewer than four directors.[77] During the financial years ending 30 June 2002 and 2003, the Trustee had eight directors. Consistently with ss 89(1)(b)(ii) and 93(4) of the SIS Act, the Articles provide that the Trustee’s Board of Directors must consist of:
“…an equal number of people:
(a)appointed by the … Employer; and
(b)nominated as member representatives in accordance with Superannuation Law.”[78]
The Chairman of the Directors must be appointed by the Employer’s Board of Directors.[79]
[77] Articles, art 10.1; HB10:297
[78] Articles, art 10.4; HB10:297-298
[79] Articles, art 14.7; HB10:301
In so far as the directors appointed by the Employer are concerned, they may be removed by the Employer and a replacement appointed by the Employer’s giving written notice to the company that is the Trustee.[80] A member representative is removed by following the procedure for that member’s appointment.[81] That procedure is set out in the Election Rules established by the Trustee and providing for the eligibility of candidates, their nomination, election and term of office.
[80] Articles, art 10.6; HB10:298
[81] Articles, art 10.8(g); HB10:298
The Trustee’s powers and discretions
The Trustee’s powers are set out in cl 5 of the Trust Deed and, before specifying certain powers, begin with the general statement that:
“The Trustee may do anything it considers appropriate to administer the Plan and complying with the Applicable Requirements …”.[82]
In so far as its discretions are concerned, the Trustee and any of its officers “may exercise individually or jointly a power or discretion even though that person has another interest in the result of the exercise.”[83] In addition, it is “… completely unrestricted in the exercise of its powers and discretions.”[84]
[82] Trust Deed cl 5(a); HB9:30. “Applicable requirements” are any requirements that the Act, Regulations or any other law or the Commissioner imposes on the Trustee or that the Plan must satisfy in order to qualify for the most favoured taxation treatment applicable to superannuation funds: Trust Deed, cl 1(b); HB9:12
[83] Trust Deed, cl 4(a); HB9:30
[84] Trust Deed, cl 4(b); HB9:30
The Trustee may appoint a person to provide services in connection with the administration of the Plan. It may also obtain advice or opinion of any person, including a lawyer, broker, accountant, actuary or medical practitioner and act on that advice or opinion without being responsible for any loss occasioned by so acting.[85]
[85] Trust Deed, cl 6; HB9:34
The Members of the Plan
Until it was closed on 1 April 2001, the Trustee was required by the Trust Deed to invite every Employee to become a Member of the Plan.[86] The Members are entitled to the benefits provided under the Plan but those benefits vary according to the category to which the Member belongs. The allocation is determined by reference to matters such as the date on which an Employee became a Member together with certain personal attributes such as whether they are females, their age and whether they are or were members of other funds.[87] With the exception of the category of Accumulated Members added in 2001, the benefits were defined (Defined Benefits). A Member’s contributions to the Plan are specified in cll 11 to 11B of the Trust Deed according to the date on which they became members of the Plan.
[86] Trust Deed, cl 8; HB9:35
[87] Categories A to Z Members are defined in Trust Deed, cl 1(b); HB9:13-15
Defined Benefit Members
The benefits payable to most members are defined by reference to the category to which they are allocated and are set out in Schedules to the Trust Deed.[88] In the main, these consist of pension benefits, lump sum benefits or a combination of the two (the Benefit) calculated according to formulae set out in the relevant Schedule. Some of the formulae include a component based on the contributions made by the member concerned. Others do not but have regard to such matters as age and years of membership in the Plan. Members entitled to such benefits are known as “Defined Benefit Members” and are decreasing in number given that membership of the Plan has closed.
[88] Trust Deed, cl 17; HB9:49-50
Deferred Benefit Members
Since the Trust Deed was amended on 25 August 1997, there has been a further category of Member; the Deferred Benefit category.[89] An existing Member of the Plan, who has been a member for at least ten years, is entitled to belong to this category on leaving the Employer’s employment. A “Benefit” means any sum paid or payable to a beneficiary under the Trust Deed.[90] Rather than being paid the Benefit under the relevant category of membership under the Plan, such a member may leave that Benefit in the Plan. That is to say, Deferred Benefit Members may leave in the Plan all or part of any Benefit they would otherwise have taken from the Plan on their leaving the Employer’s employment. Deferred Benefit Members may request payment of all or part of the Benefit and the Trustee must pay the requested amount.[91] The amount of Benefit remaining unpaid accrues interest until the Trustee pays the Benefit to the Deferred Members at their request. From that time, it “… shall accrue with interest at a rate determined from time to time by the Trustees after considering the advice of the Actuary from the date on which the Member leaves the Service to the date of payment.”[92]
[89] The Employer and the Trustee had asked the Plan Actuary to advise on the introduction of this category of membership after members had become redundant from the Employer’s employment. Those members had wanted to take advantage of pension commutation factors available under the Plan as, for members who joined before 1 January 1995, they were generous when compared with those in the market. The Plan Actuary advised the Trustee in a letter dated 18 April 1997: HB10:356-357. An actuarial review undertaken in 1996 had assumed that 50% of members would take their benefits as a pension. The Plan Actuary wrote: “Experience to date indicates a lower takeup of the pension option and therefore the provision of the deferred pension benefit will not require a review of company contributions.”
[90] Trust Deed, cl 1(b), HB9:13
[91] Trust Deed, cl 17(i)(1), HB9:53
[92] Trust Deed, cl 17(i); HB9:53
If any part of the Benefit or accrued interest remains in the Plan when the Member attains the age of 55 years, that Member is entitled to an early retirement pension.[93] The amount of that pension is calculated by reference to the Schedule to the Trust Deed dealing with the category of membership to which the Member belonged immediately before leaving the Employer’s employment.[94]
[93] Trust Deed, cl 17(i)(2); HB9:53
[94] Trust Deed, cl 17(i)(2); HB9:53
After the amendment of the Trust Deed on 25 August 1997, the Trustee wrote to those Members with more than ten years’ service enclosing an information paper entitled “… Staff Superannuation Plan: Early Retirement Pension Option” and a benefit payments instruction form. An example of a letter sent to such Members and dated 2001 advised that:
“You may leave all or part of your Leaving Service Benefit in the Plan where it will accumulate with interest from the date you leave service, at a rate determined by the Trustee.”[95]
The Member’s options were, subject to preservation requirements, to take the Benefit at any time as a lump sum or, after the age of 55 years, as an Early Retirement Pension. The letter advised that, if the Member wanted to leave the Benefit, or part of it, in the Plan, that Member would have to advise of the amount on the Benefit Payment Instructions form. If the Member did not do that, the automatic roll-over conditions would apply and the Early Retirement Pension Option would no longer be available.
[95] HB10:468_01
The information paper explained that:
“The amount you decide to leave in the Plan will accumulate with interest from the date you leave service. The interest rate credited will be the Plan’s crediting rate as determined by the Trustee. This rate is determined by smoothing the Plan’s investment return to avoid major fluctuations from year to year. Details of the Trustee’s Investment and Interest Crediting policies are set out in the Trustee’s Report to Members each year.”[96]
[96] HB10:468_02
Accumulation Members
After 1 April 2001, those who became employees of the Employer became members of a new category under the Plan provided they applied and were accepted by the Trustee.[97] They are known as Accumulation Members. Existing members of the Plan, whom the Employer invited on or after 1 July 2001 to become an Accumulation Member and who applied to do so and whom the Trustee accepted, also became Accumulation Members. That category did not provide defined benefits but, in general terms, provided for the payment of a benefit equal to the particular Member’s Accumulated Credit in the Plan on resignation or retirement.[98] An Accumulation Member may contribute any amount or at any rate as agreed with the Employer and the Employer contributes in respect of an Accumulation Member in respect of an amount or at a rate it determines and agrees with the Member.[99]
[97] Trust Deed, cl 1(b); HB9:11-12
[98] Trust Deed, Schedule ZJ, Items 6-11; HB9:281-286
[99] Trust Deed, Schedule ZJ, Items 2 and 3, HB9: 280
The Employer’s obligations
The Employer is required to:
“… contribute to the Plan by paying to the Trustees in respect of the Members such sums as … [the Employer] from time to time determines on the recommendation of the Actuary in order to provide the Benefits set out pursuant to the provisions of this Trust Deed.”[100]
[100] Trust Deed, cl 11C; HB9:45
Every three years and for so long as the Employer continues to make contributions, the Trustees are required to cause the actuary to make an actuarial investigation and a valuation of the Plan.[101] The Actuary’s report must “… include the amount (if any) of surplus or deficit in the Plan at the time of the investigation and all other matters required by the Applicable Requirements to be included.”[102] Should the investigation show that there is a deficiency in the Plan’s assets, then, subject to cl 41 of the Trust Deed, the Employer:
“… undertakes to make good the deficiency and for that purpose to make such further contributions at a time or times and in a manner as … [the Employer] in its absolute discretion thinks fit but so that at all times the Plan shall be in credit … [the Employer] will pay to the Trustees at least an amount as is necessary to meet all admitted claims.”[103]
[101] Trust Deed, cl 16(a); HB9:48
[102] Trust Deed, cl 16(a); HB9:48
[103] Trust Deed, cl 16(b); HB9:48
Clause 41 is concerned with the cessation of contributions by the Employer. If the Employer gives a written notice to the Trustees of its intention to cease making contributions from a certain date and does so cease, no person may become a Member of the Plan and no Member may make any further Contributions.[104] Provision is made for the payment of Benefits.[105] The Trustees must instruct the Actuary to investigate and value the assets and liabilities of the Plan and report whether the assets are sufficient to discharge or provide for the liabilities.[106] If there is a deficiency, the Employer must, within two years of the date it specified in its notice, pay a sum equal in value to that deficiency.[107] Every three years after that, an Actuary must undertake the same exercise. If there should prove to be a deficiency, the Trustees shall seek to amend the Trust Deed in order to eliminate the deficiency but having regard to the requirements of the Regulations.
[104] Trust Deed, cl 41(a)(1) and (2); HB9:79
[105] Trust Deed, cl 41(a)(3); HB9:79-80
[106] Trust Deed, cl 41(b); HB9:80
[107] Trust Deed, cl 41(b)(2); HB9:80
Clause 16(b) of the Trust Deed provides that, if an investigation conducted under s 16(a) shows that there is a deficiency of assets, the Employer:
“… undertakes to make good the deficiency and for that purpose to make such further to make such further contributions at a time or times and in a manner as … [the Employer] in its absolute discretion thinks fit but so that the at all times the Plan shall be in credit … [the Employer] will pay to the Trustees at least an amount as is necessary to meet all current admitted claims.”[108]
[108] Trust Deed, cl 16(b); HB9:48
Clause 17(d)(1)(iii) provides that, subject to cl 17(d)(2), the Trustees may, with the agreement of the Employer and the Member or Beneficiary or a person who may become or has been such a person, “… vary the Contributions (including any lump sum) which are otherwise payable by or in respect of the person”. The qualification found in cl 17(d)(2) is that:
“No arrangement may be made pursuant to clause 17(d)(1) unless the Actuary certifies that the arrangement is equitable and not prejudicial to the interests of any other Member or Beneficiary in the Plan or … [the Employer] contributes such additional amounts or rates of Contribution (if any) as the Trustees shall determine after seeking advice of the Actuary.”
Clause 46 is concerned with the termination of the Plan. If the Employer is wound up, the investments in the Plan are to be valued and realised and, subject to the payment of all costs, charges and expenses, distributed among Members and others according to the provisions of cl 46. If a Beneficiary is in receipt of a pension or annuity, the Trustees must apply the amount to which the Beneficiary is entitled in the purchase of similar benefits by way of periodical payments. If the net proceeds are less than the aggregate value of the interests of the Members and Beneficiaries in the Plan upon its termination, the Employer must pay the difference to the Trustees.[109]
[109] Trust Deed, cl 46(d); HB9:84
Calculation of interest content of Benefit payments
Schedule O to the Trust Deed provides that:
“Where the calculation of a Benefit requires an amount of interest to be credited the interest shall be calculated in the manner described in this Schedule unless otherwise specified.”[110]
Interest is compounded with yearly rests.[111] Until 1 July 1984, the rate of interest was either fixed by an Item of the Schedule or according to defined reference points.[112] After that date and until 1 July 1997, it was again declared by reference to defined reference points. From 1 July 1998, the:
“… rate shall be declared to apply for the ensuing year, such rate being determined from time to time by the Trustees after considering the advice of the Actuary.”[113]
[110] Trust Deed, Schedule O; Item 1, HB9:195
[111] Trust Deed, Schedule O; Item 2, HB9:195
[112] Trust Deed, Schedule O; Items 3 and 4, HB9:195
[113] Trust Deed, Schedule O; Item 5, HB9:196
The manner in which the Trust Deed has dealt with interest has varied. In relation to Category S members, for example, it has provided that the Trustee may “credit or debit interest at a rate they consider appropriate” if the benefit is paid within one month of becoming payable or must do so if paid after that date.[114] “Interest” is not a term used in relation to Category T members. Instead, the Trustee is required to declare a “Plan Earning Rate” to be applied at the Distribution Date each year to the Contribution Accounts remaining in the Plan at that Date.[115] The Contribution Accounts comprise members’ contributions. The Trustee must decide whether the Plan Earning Rate is applied on daily balances, average balances or on some other basis.[116] In determining the rate, the Trustee must take into account the Plan’s earnings, including all income and realised or unrealised capital gain, realised and unrealised losses, any Plan reserves and the appropriateness of averaging earnings, losses and expenses over several distribution periods.[117] Notwithstanding this provision, the Plan Earning Rate could not be less than “… the rate which is 2% greater than the percentage increase in the AWOTE[[118]] Estimate for the Relevant Period and the rate nominated by the …” Employer.[119]
[114] Trust Deed, Schedule ZD; Item 14, HB9:242
[115] Category U also refers to a Plan Earning Rate rather than an interest rate and is similar to Category T: Trust Deed, Schedule SG; Items 13 and 14, HB9:208-209
[116] Trust Deed, Schedule ZG; Item 25(c), HB9:271
[117] Trust Deed, Schedule ZG; Item 25(d), HB9:271
[118] Average Weekly Ordinary Time Earnings
[119] Trust Deed, Schedule ZG; Item 25(e), HB9:272
THE TRUSTEE’S DIRECTORS
Initially, there were eight directors of the Trustee but, with effect from 1 January 2000, there were ten.[120] The applicants were directors of the Trustee at various times and in different categories. They, and other directors who are relevant in this case, and their categories and dates of appointment are:
[120] Trustee Report as at 30 June 2000; HB10:452
| Director | Date of appointment | Date of resignation (conclusion of term) | Category of director |
| VBN (Disqualified on 9 June 2005 and confirmed on 3 August 2005) | 12 January 2002 | 13 February 2004 | Employer representative |
| VBO (Disqualified on 5 August 2005 and confirmed on 7 October 2005) | 17 December 2001 | 2 October 2003 | Member representative |
| VBP (Disqualified on 9 August 2005 and confirmed on 7 October 2005) | (1) 26 July 1999 (2) 26 November 2001 | (1) 28 January 2001 | (1) Member representative (2) Member representative |
| VBQ (Disqualified on 9 August 2005 and confirmed on 7 October 2005) | (1) 3 July 2000 (2) 27 November 2001 | (1) 31 December 2000 (2) 11 August 2005 | (1) Observer/Member representative (2) Employer representative |
| VBR | 29 January 1998 | November 2002 | Member representative |
| Director who has not been disqualified (ND1) | 12 July 2001 | September 2002 | Employer representative |
| A previous Director who lodged a complaint (PD1) | 1992 | 11 January 2002 | Employer representative |
| VBV (Disqualified 5 July 2005 and confirmed on 2 September 2005) | 29 January 1996 | 30 June 2003 | Employer representative (Chairman) |
| VBW (Disqualified on 22 July 2005 and confirmed on 13 September 2005) | 20 September 2002 | (Disqualified by APRA on 22 July 2005 and confirmed on 13 September 2005) | Employer representative |
THE ACTUARY AND THE ADMINISTRATOR
At all material times, a firm we will describe as the Actuarial Firm was the actuary and administrator of the Plan. We will describe the member of staff allocated by the Actuarial Firm to advise the Trustee as the Plan Actuary. There were three actuaries over the relevant period. We will refer to them as Plan Actuary A, who held the position up to 1999, Plan Actuary B, who held it to September 2001 and Plan Actuary C, who held it from that time until the present.
The Actuarial Firm agreed to provide “Administration Services” set out in Appendices A and B to the agreement in return for fees paid by the Trustee. The Administration Services included the provision of core administration services related to matters such as general advice on the impact of legislation and the preparation of financial records and reports, annual schedules of members’ benefits and contributions, reports on Plan membership and accounts and Compliance Certificates. They also included services generally described as “… [Employer] and Trustee Support Services”. These services include those necessary to track monthly member and Employer contributions, providing support and counselling on certain matters to members and the provision of secure storage facilities.[121] In addition, they include “Trustee Services”. Those services include the attendance at Trustee meetings and the provision of advice and support to the Trustee on issues such as investments and benefit reviews.[122] Additional services that were also available to the Trustee included specific advice on matters such as legislative changes and the evaluation of different Plan designs and their cost to the Employer. The Actuarial Firm also offered to design and produce forms and booklets for members and to design and produce advice to members. Actuarial services offered by the Actuarial Firm included triennial actuarial reviews, the determination of the annual net rate of return, an estimation of and recommendation regarding the interim net rate of return of the Plan for calculating benefits and the determination of any surplus and the formulation of recommendations regarding its distribution.[123]
THE CREDITING RATE DECISION
[121] Trust Deed, Appendix A, item 6
[122] Trust Deed, Appendix B, item 6
[123] Trust Deed, Appendix C, item 6
The crediting rate policy before 1 July 1998
On 18 May 1998, the then Plan Actuary from the Actuarial Firm, Plan Actuary A gave the Trustee a report entitled “… Employer Staff Superannuation Crediting Rate Review” (“1998 Crediting Rate Review”). An Appendix dated 27 November 1997 summarised the then current approach as comprising:
“… the following components:
·an interest rate reserve, which records the cumulative difference between the Plan’s earning rate and the Plan’s crediting rate over the past years. This is used to ensure that all investment returns are passed on to members over time.
·a minimum crediting rate, which is currently the crediting rate of the … Employer AD Fund.
·trustee discretion to smooth returns within the above constraints of maintaining a reasonable interest rate reserve position and crediting the minimum return.”[124]
[124] HB10:366
In the Appendices, Plan Actuary A went on to canvass issues with the current approach and advantages and disadvantages of alternative approaches being a modified version of the then current approach and a 5 or 3 Year Compound Average. Plan Actuary A recommended the 3 Year Compound Average and stated that it would be desirable to implement the approach as part of the interim crediting rate review due the following year.[125] The then current crediting rate approach had led to a period beginning in 1991/92 in which the Plan had credited less than the Plan earnings. This had been required to remove a large negative interest rate reserve that had arisen due to the high AD crediting rates of the 1980s and early 1990s. As a result of that policy, new members had been required to subsidise high crediting rates offered to previous generations of members. This had been compounded by the fact that 50% of members left the Employer’s service within three years of joining and 70% within five years. Any extended periods of smoothing would result in subsidies being offered across generations of members.[126]
[125] HB10:369
[126] HB10:367
A Chart attached to the Plan Actuary A’s report showed that the requirement to meet a minimum crediting rate had led to a significant difference between earning and crediting rates. A chart showed that, for the five years between 1988/89 to 1992/93, the Interest Rate Reserve was less than -5.0% and at or below approximately -10.0% in the years 1990/91 to 1992/93 and down to almost -15.0% in 1990/91. It was either at or only a little above -5.0% for the years 1993/94 and 1994/95. It was approximately 0% in 1995/96 and +3.85% for 1996/97.[127] To ensure that the members did not lose the 3.85% reserve, Plan Actuary A recommended that the 1997/98 Plan returns be increased by the reserve before being applied to the crediting rate formula.[128]
[127] HB10:371
[128] HB10:364
The 1998 Crediting Rate Review recommended that the Trustee’s crediting rate policy for the Plan for the financial year beginning 1 July 1998 should be:
“· Declare a crediting rate based on a 3 year compound average of Plan returns. Apply a minimum of the lesser of 50% net cash rates and 50% net 10 year bond yields.
·For the year ending 30 June 1998, the notional crediting rate reserve of 3.85% is used to increase the annual return to 30 June 1998 prior to applying the 3 year compound average.
·Determine an interim crediting rate from 1 July as an estimated 3 year compound average Plan return, using the current net cash rate (or net 10 year bond rate if lower) as an estimate of the Plan return for the coming year.
·Where the minium crediting rate is applied, the current year’s Plan return is notionally increased and the next year’s Plan return is reduced by the amount for the previous year’s increase.
·Reconsider the crediting rate approach if there is likely to be either a significant change in the Plan’s demographics or the Plan’s benefit design (eg an introduction of accumulation only benefits and/or a move to member investment choice in the near future).”[129]
[129] HB10:362
The reduction of the Employer’s contributions
The Employer had asked Plan Actuary A to consider the scope of its contributions in light of the Plan’s then surplus position. Plan Actuary A responded to that request in a letter dated 13 July 1998 when it reported that, as at 31 March 1998, the Plan’s financial position had improved significantly since the previous actuarial review at 30 June 1996. The Plan’s investment earnings of 14.2% per annum had been significantly greater than its assumed earnings of 8.5%. The Vested Benefits Index (VBI) had improved i.e. the coverage of the fund value over the resignation/retrenchment benefits had improved. At the time, Plan Actuary A reported, the VBI was 151% indicating that the fund value exceeded all members’ resignation/retrenchment benefits by over 50%. He recommended that it was desirable that the measure should be at least 100%. In light of the defined benefit nature of the resignation benefits in the Plan, it also recommended that it was desirable to maintain a VBI above 115% to provide a buffer against poor short term investment experience. As to accrued benefits, the VBI gave an indication of the progress towards funding retirement benefits. “Given the membership profile of the Plan, this index should typically be at least around 90% to 95%.”[130]
[130] HB10:377
Plan Actuary A estimated that the Plan’s surplus was approximately $60 million at 31 March 1998. In light of that, Plan Actuary A stated that:
“… it is expected that the …[Employer] could cease all basic company contributions for a period of at least 3 years effective from 1 July 1998. Following this period … [the Employer] would be expected to recommence contributions at the long term rate.”[131]
[131] HB10:378
The crediting rate from 1 July 1998
In a newsletter dated August 1998 and addressed to the Plan’s Members, the Trustee advised that a new crediting rate method applied from 1 July 1998. It also advised that it had been used to determine the declared rate at the 1 July 1998 annual review. The Trustee described the change:
“These accumulations are credited with a rate determined by the Trustee on the advice of the Plan’s Actuary. The crediting rate in the past was determined by smoothing the Plan’s investment returns to avoid excessive fluctuations. This rate was subject to a minimum of the rate credited to … [the Employer’s] Capital Guaranteed policies.
Following the review of the Plan’s crediting rate strategy, the Trustee has adopted a more formalised approach to determining crediting rates. The rates applied to accumulations will continue to be smoothed. The Plan’s crediting rate will be based on average investment returns over the previous three years.
A minimum crediting rate will continue to apply. This will be based on the lesser of half of the net of tax cash rates and half the net tax 10 year bond yields.
If the minimum applies in any one year then that year’s return is notionally increased and the next year’s Plan return is reduced by the same amount.
The new method has been used to determine the declared rate at the 1 July 1998 annual review. This rate is the average of the Plan returns for the period 1 July 1995 to 30 June 1998. To compensate for past smoothing of crediting rates the Plan’s return for the year to 30 June 1998 has been increased by 3.85%.”[132]
[132] HB10:379_01
Under the heading of “Amendments to the Trust Deed”, Members were advised that, in the past, some accumulation benefits had been credited with interest determined using a different method from that used for the majority of accumulation benefits. The Trust Deed had been amended so that, with effect from 1 July 1998, all accumulation benefits would be credited with interest determined using the one method i.e. by the Trustee after considering the advice of the Actuary.[133]
[133] HB10:379_02
The triennial actuarial review for the period ended 30 June 1999
Plan Actuary B gave the Trustee its triennial actuarial review for the period ended 30 June 1999 in June 2000. It was dated 25 May 2000 (1999 Report). It gave the Trustee a supplementary report dated 28 June 2000 (1999 Supplementary Report). The main purpose of the reports was to evaluate the Plan’s financial position. It recommended the Employer’s level of contributions to the Plan and the extent to which the Plan’s assets were adequate in relation to the benefits payable from the Plan.
The 1999 Report noted that the “… key determinant of the cost of providing defined superannuation benefits relating to salary is the margin between investment returns and salary increases. This margin is effectively the ‘real net earning rate’ of the Plan.”[134] Over the three year review period, the margin had been 1% per annum. As this was less than the 1.5% that had been assumed, there had been a negative impact on the Plan’s financial position. The average interest “… rate credited over the period was 12.5% per annum, which was similar to the average net earning rate (including crediting rate reserve) of 12.3% per annum.”[135] Since the Trust Deed had been amended in August 1997, 80 Members had elected to leave their benefit in the Plan and so creating “significant future liability in the Plan”.[136] In assessing the adequacy of the Employer’s contributions, the 1999 Report made a number of assumptions. One was that future investment earnings would exceed salary increases by 1.5% for the following three years and thereafter by 3%. Another was that 75% of those leaving the Plan between the ages of 55 and 65 would take their Benefit in the form of a pension as would 75% of those who left their benefit in the Plan after 10 years’ service and took their benefit after reaching the age of 55 years.[137] The 1999 Report concluded that the Plan was in a satisfactory financial position as at 30 June 1999 but that it should be monitored on an annual basis to provide “… ongoing conformation of appropriate employer contributions.”[138] In the meantime, it recommended that the Employer recommence contributing to the Plan no later than 1 July 2001 at rates it specified in the report. Plan Actuary B considered that the Trustee’s Investment Policy Statement was suitable taking into account the nature and term of the Plan’s liabilities and the Plan’s then financial position.[139]
[134] HB10:385; [2.4.4]
[135] HB10:386; [2.4.5]
[136] HB10:395; [2.8.2]
[137] HB10:401; [3.2.1]
[138] [HB10:403; [4.1.1]
[139] Appendix C; HB10:409
Trustee’s annual report to Members for the year ended 30 June 2000
The Trustee explained in its annual report to Members dated September 2000 that the Plan was a defined benefit plan. That meant that, for most members, benefits were calculated as a multiple of salary and were not reliant on the investment returns achieved by the Fund. Only additional accumulation benefits, such as voluntary contributions, were subject to the Plan’s investment performance. It reiterated its crediting rate policy in relation to those accumulation benefits and began by noting that the rate credited to a Member’s accumulation benefits was determined after consultation with the Plan’s Actuary as specified in the Trust Deed. After referring to the smoothing policy, it noted that:
“Under the previous smoothing method a notional crediting rate reserve of 3.85% had been built up. Following the change in the smoothing method during the 1997/98 year, the Trustee determined that it would be appropriate to allocate that reserve over the next three years (i.e. the years ending 30 June 1998, 30 June 1999 and 30 June 2000).
…
An interim interest rate is applied to the accumulation benefits for members who leave during the year. This interim interest rate may be reviewed in light of investment experience and will be formally reviewed at 1 January 2001. …”[140]
[140] HB10:449
VBV’s letter to the Employer’s Plan representative
On 29 November 2000, VBV wrote to the Employer’s Plan Representative. VBV was then the Chairman of the Trustee’s Board of Directors. He referred to the Plan Actuary B’s review of the Plan as at 30 June 1999 and its recommendation that the Employer’s contribution holiday should come to an end by 30 June 2001. Plan Actuary B, he went on, had also calculated that the VBI would reduce to 102% over the period 2002 to 2004 although salary movements in the same period would also vary that effect either up or down. VBV noted that there had been considerable discussion among the directors on the implications of a VBI which was much closer to 100% than had historically been the case.[141] The issue concerning the Trustee was whether a VBI of less than 100% constituted a real or perceived risk to the Members. He attached Plan Actuary B’s paper advising on those implications and advised the Employer’s Plan representative that the paper showed that there were significant possibilities that a mismatch of asset value to vested benefit liability would occur. The VBI could be either greater or less than 100%. While the historical position had represented a very safe position for members, VBV recognised that the Employer might regard it as an inefficient use of capital. The Directors’ aim needed to be “… to find a sensible and prudent balance between the conflicting objectives of members and the employer.”[142]
[141] Historically, VBV wrote, the VBI had been between 115% and 130%; HB10:463.
[142] HB10:463
VBV observed that the vested benefits represented a major component of members’ wealth and that those members saw the adequate coverage of the liability as the Employer’s responsibility. The risk to members by a VBI less than 100% would only be crystallised if events occurred requiring the vested benefits to be paid at one time rather than progressively as in a normal ongoing business. VBV sought the Employer’s views on three options. The first two focused on ways to ensure that the vested benefits would be met if the Employer were sold or liquidated. The third focused on increased contribution rates from the Employer by either termination of the holiday or by a higher medium term rate from 30 June 2001.
Increasing numbers of Deferred Benefit Members
On 12 December 2000, Plan Actuary B wrote to the Trustee advising that the number of members leaving their benefits in the Plan on their leaving the Employer’s employment was increasing. This raised several issues of concern. The main issue was that of funding and the difficulty in assessing the number of Deferred Pension Benefit Members who would opt for a pension. Since that category of membership had been introduced, there had been a greater number of younger members leaving their benefits in the Plan on their being retrenched by the Employer than had been expected. The cost of funding the Plan’s benefits had not been calculated on that basis. Estimating the cost was difficult as the liability for those members was unknown. The problem was exacerbated by the linking of the lump sum accumulation to the current amount available as a lump sum to convert to a pension.[143]
[143] HB10:466
Plan Actuary B recommended that the value of the pension option be presented separately from the value of the lump sum option. The lump sum benefit would continue to increase at the Plan crediting rate but the income amount would be increased at a different rate. That different rate “… would be determined to control the financial ramifications of the pension option.”[144] Plan Actuary B advised that this would not breach either the Trust Deed or regulatory requirements. One reason for adopting the change was that the Employer faced a substantial cost if the then arrangement continued. In light of the fact that some members might argue that they had made decisions on the basis of the application of the conversion factors to the lump sum accumulated with interest, Plan Actuary B advised that clarifying material should be sent to members.
[144] HB10:466
As APRA submitted, the equal representation principles in s 89 of the SIS Act lead to a certain amount of potential for conflict. Whether that potential translates into a situation of actual conflict depends on the particular circumstances in which the director is placed. In Princess Ann of Hesse v Field and Ors,[851] Jacobs J referred to the general rule that those having duties of a fiduciary nature are not permitted to enter into engagements in which that director has, or can have, a personal interest conflicting with the interests of those whom they are bound to protect. His Honour continued:
“That the rule … is a rule of great force and importance cannot be gainsaid. However, it is likewise of importance to consider its precise limits. Firstly, it does not mean that under no circumstances whatsoever can a trustee act in a matter in which he has an interest or in which he has some other duty. … If a testator or settler wishes to impose on a trustee a duty which is inconsistent with the pre-existing interest or duty, the trustee is not thereby debarred from accepting the trust or from performing the duties which are imposed under it.
…
The trustees were not placed in a situation of conflict not by any act of their own but by the act of the testator in appointing them trustees in the particular circumstances.”[852]
[851] (1962) 80 WN (NSW) 66
[852] (1962) 80 WN (NSW) 66 at 73
This statement was adopted by White J of the Supreme Court of Western Australia in In the matter of Estate of Hancock (dec); Porteous v Rinehart (as executor and trustee of the estate of Hancock).[853] Mrs Porteous applied to the Supreme Court to remove Mrs Rinehart and another as trustees of all of the trusts created under the will of the late Mr Hancock and to replace them with others. Mrs Porteous was a beneficiary under the will Clause 15 of the will stated that the powers were conferred on the trustees notwithstanding that their interests might conflict with their duties as trustees. White J said that this clause could not be construed as permitting the trustees to prefer their own interests to their duties as executors and trustees or as ousting the court’s jurisdiction to remove them from office. The trustees’ position was that the estate was bankrupt and that the assets that would have formed the bulk of the estate belonged to Mrs Rinehart or to companies controlled by her. This was not, White J considered, a conflict of interest that Mr Hancock would have contemplated. There was no basis for thinking that he had contemplated that the company he had founded and controlled would later apply to have a sequestration order made against his estate. Even if he had, the conflict is so stark that the court should not countenance it. The identity of the trust assets was the subject of separate proceedings, however and the outcome was one with which the trustees had agreed to abide. The trust property would be safe in the meantime and White J refused Mrs Porteous’s application in the circumstances prevailing at the time.
[853] (1998) 19 WAR 495 at 513-514
Circumstances in which there has been held to have been no conflict between a trustee’s personal interest and responsibilities as a trustee have arisen in circumstances in which the executor made the appointment while clearly aware that a conflict would be inevitable. So, for example, when a victualler appointed a brewer and a spirit merchant as trustees of his estate and authorised them to carry on his business for the benefit of his beneficiaries, Lord Longdale MR said that he “… could not suppose that the testator, who had himself directed his business to be conducted by these defendants, expected they would be deprived of the usual fair profit[854] when they supplied beer and spirits to the business.
[854] Smith v Langford (1844) 2 Beav 362; 48 ER 1221 at 1222
In this case, it can be said that Parliament was certainly aware that there was a potential for conflict for directors between their duties as directors of a trustee and the interests of those by whom they were nominated. It is not a case in which Parliament expected that equal numbers would be nominated by members and the employer sponsor and they would then have no further regard to the interests of those nominating them. Although members’ representatives need not be officers of the Employer or Members of the Plan themselves, they are likely to be. Furthermore, as appears from the Treasurer’s Statement, Parliament saw that:
“A further safeguard to the protection of members’ interests is to rely on a well informed membership with the right to participate in managing the affairs of their fund. …”[855]
Equally, it is likely that the Employer will choose people from its own ranks as its representatives. Just as the members will want to safeguard their interests, so too will an employer sponsor. The management of the fund and the decisions taken by a trustee may have an impact on an employer’s liability under the trust deed. Consequently its interest will be quite pragmatic at one level. At another, it may extend to concern for its employees whose terms and conditions include access to an employer sponsored superannuation fund. It may feel that inadequate management of the trust may reflect poorly on its own management of its business affairs and consideration for the welfare of its employees.
[855] Treasurer’s Statement at 1
That there is a potential for conflict between the interests of the directors and their role is an integral part of the scheme established by the SIS Act. ND1 recognised it when she wondered in her email how to ascertain the Employer’s view when she was an Employer representative director. The potential for conflict by virtue of their appointment alone does not mean that there is a conflict of the sort that means that an individual director is in breach of a fiduciary duty. There must be something more that shows that there is in fact a conflict of duty between the interests of the directors of a trustee of a fund. This must be determined by reference to the circumstances and not by reference to a formula or recitation of principle. Do the circumstances show that a director was in a position in which that director’s interests or those of another for whom he or she had responsibility or to whom he or she owed a duty conflicted with the interests of the trustee?
Consideration: VBN and VBW
VBW was a Director of the Trustee during relevant events relating to the Employer Offer. APRA made careful and detailed submissions showing VBW’s involvement in the development of the Employer Offer and the related package of information showing his doing so as an officer of the Employer. On the basis of his evidence, we find that he was so involved. There is no suggestion that he was not.
APRA also submitted that VBW owed a fiduciary duty to the Trustee to take steps to prevent the Trustee from contravening its covenants owed to Members in relation to the Employer Offer. At the same time, he owed a duty to the Employer to ensure that the Employer Offer package was drawn in a manner that would lead to its being accepted by as many Members as possible. His involvement in the development of the Employer Offer compromised him as a Director of the Trustee. He was under positive duties to protect the interests of the Deferred Benefit Members by:
disclosing to the Trustee’s other Directors the substance of the Employer’s actuarial advice and the omission of any reference to the average actuarial advice in the Employer Offer package of information;
disclosing to the other Directors that:
(a)he was a member of the Employer Plan Superannuation Committee;
(b)had discussed the actuarial advice at meetings of that committee;
(c)was involved in the design, content and timing of the Employer Offer; and
(d)had an interest in, or duty to, the Employer in regard to the cost of the outcome of the Employer Offer to the Employer;
declining to act as a contact in relation to the Employer Offer documentation;
declining to participate in the Trustee’s consideration and formulation of the Employer Offer documentation; and
declining to vote on the resolution to approve the communication by the Trustee of the Employer Offer in the form proposed.
APRA also submitted that VBW had failed to manage his conflict of duty or to recognise that he needed to. When the CEO indicated in an email that the Employer, and not the Trustee, ran the Fund, VBW did not correct him even though he knew that this was not correct. He did not seek guidance from other Directors as to how to manage his conflict. In sending the Trustee’s draft documentation in relation to the offer to the CEO for him to “sign off” on it and to ensure he was comfortable with it, VBW was compromised in his role as a Director of the Trustee.
We will start with the relationship between VBW and the CEO. As APRA has submitted, we accept that the CEO’s email of 25 October 2002 speaks of the way the Employer “manages its superannuation plan” and to the Plan Executive’s managing the plan for the Employer and not for the Trustee even though he could advise the Trustee. If that was not clear, he also said “We have to get the message over that the employer runs this fund, not the Trustees.”[856] Clearly, this is not correct in law just as his statement that it is for the Employer to decide whether to make additional contributions is not necessarily correct. Whether the CEO would recognise this is not a matter on which we can make a finding as he was not called to give evidence. Taking the whole of his email, though, we also find that he does recognise that the Trustee has a separate role to play. He recognises that, if it does not like what the Employer does, it has various courses open to it. His email must also be read in the context of the Employer’s responsibilities to provide funding to the Plan. It wants its funds properly managed let alone Members’ contributions and investment returns managed and so the Plan properly managed. The Plan benefits its employees and the Trust Deed specifically provides for its active participation with regard to certain powers that are given to the Trustee e.g. those under cl 17(d).
[856] HB12:1269
We accept that VBW did not correct the CEO but any person who has worked for or to another who has strong views and a strong sense of being correct will know that contradiction may not be the best way of dealing with the situation in the short term or the best way to achieve any necessary modification of those strongly held views in the longer term. Whether or not the CEO falls precisely into that category, it is clear that VBW had found his own way of communicating with the CEO. It is apparent from the following excerpt from an exchange between Mr Crennan and VBW:
“Well, you were a director of the trustee with the responsibilities that entailed. You had received a communication from him which you’ve agreed fundamentally mis-stated the relationship between the employer and the trustee. You had responsibilities to the trustee. You had responsibilities to the employer. Did it not occur to you that you should correct … [the CEO’s] view? --- These are sorts of emails that from my experience one gets from … [the CEO] that I don’t bother to respond. I deal with them differently.
You didn’t think that the views expressed in it were any - you thought they were just evanescent. That they were not - that they were the views of the moment that would blow away like soap bubbles? --- I don’t think … [CEO] really believed that the employer run the fund.”[857]
[857] Transcript at 444
VBW’s email dated 20 December 2002 to the CEO is, we find, an occasion on which VBW did find it necessary to express his position clearly to the CEO. He did so in a way that made his position as a trustee quite clear to the CEO even though he recognised that the Employer would have a different point of view. VBW clearly drew a distinction between his role as a Director of the Trustee and his role as an office holder in the Employer. As he said in his evidence, in the latter, he reported to the CEO[858] but we find on the whole of the evidence that in the former he did not.
[858] Transcript at 598
Based on the evidence of VBW and on the myriad of emails and correspondence relating to the development of the Employer Offer, we are satisfied that he was not only fully informed of it but also an integral part of it. His comments were taken into account and reflected in the documentation and, from a machinery and process point of view, he ensured that all proceeded as quickly as it could so that he did not have “lots of egg on … [his] face” with the CEO. He did, after all, hold a very senior position in the Employer. It was a position in which it is reasonable to expect that he would be involved in the development. After all, decisions affecting the Plan can have significant financial implications for the Employer.
The role of the Employer Plan Superannuation Committee was, we find on the basis of VBW’s evidence during cross-examination, to bring “… together the functions so that they could each maintain their responsibilities in a co-ordinated way.” [859] The Employer Offer was one of the issues that was co-ordinated through the committee. As a member of that committee, VBW made sure that the Employer’s interests were properly co-ordinated and protected in relation to superannuation issues.
[859] Transcript at 631
We find that it was not VBW’s practice to report to the Trustee’s Board of Directors each of the conversations that he had with the CEO but he said:
“It was my practise to inform the board of dialogue with the company regarding the offer and other matters that affected the fund and the issues that the fund was addressing. I couldn't say that that involved reporting every single conversation.”[860]
He could not recall what had been said at Board meetings about specific documents. At the same time, we have had regard to the evidence of VBN and of VBQ regarding VBW’s conduct at the meeting of the Trustee’s Board on 5 March 2003. It was, we are satisfied, a meeting in excess of four hours and one in which VBW was very open about what had been happening in his discussions with the CEO.
[860] Transcript at 596
On the basis of his own evidence, we accept that VBW did not accept that he should have declined to vote on the Circular Resolution.[861] We do not accept that he was in a situation of conflict as a result of his view. The authorities to which we were referred and to which we have referred illustrate that there is a general rule of equity that a person who has fiduciary duties is not allowed to enter into arrangements conflicting with those interests. They also show that whether there are conflicts is a question of fact in each case. Of some relevance, but not an entire answer to the question is the fact that VBW is an Employer representative. That position, and that of Member representative, are products of the SIS Act. VBW’s appointment to that position is a choice of the Employer just as those appointed as Members’ representatives are chosen by the Members.
[861] Transcript at 603
VBW, as we have found, openly discussed his discussions as an officer of the Employer in relation to the development of the Employer Offer. His position as an Employer representative was known and it is far more likely than not that his precise position or at least his relative seniority within the Employer was known to the other Directors. Also known to his fellow Directors was his involvement with the Employer in developing the offer. In fact, they had given him, VBN, VBV and the Plan Executive the task of doing so.
VBW, we find, did not directly give his fellow Directors information relating to the Employer Offer but he knew that they have been given the package of information that was to be sent to the Deferred Benefit Members. Certainly, this did not include information relating to the average actuarial cost of the pension benefits available to the Deferred Benefit Members or address their personal circumstances directly. For the reasons we have given earlier, we consider that provision of the average actuarial information was unnecessary. The package contained sufficient information on which the Directors could assess that the pension benefit was valuable and could assess the course that it should take. VBW did not withhold any relevant information or material that would properly inform their decision. The package of information had been reviewed by the Trustee’s own actuary and by its solicitor.
Although VBW had contributed to the shaping of the offer, when it came to its consideration, we find that he did not seek to influence the outcome of the Directors’ consideration. Indeed, VBQ’s recollection was of VBW’s emphasising that they had duties and responsibilities to the Plan and not to any interested parties. This finding is supported by the exchange during cross-examination between Mr Tracey and VBV:
“…Now, you say in paragraph 24 [of your affidavit] that you believed it was generally understood amongst the directors that … [VBW] would stand aside if the need arises as the result of any conflict. What was the foundation for that understanding? --- …
…
… --- That the trustees were aware of their responsibilities as trustees primarily to manage the deed - or the administration of the trust deed in the interests of members. That means that they have to bring their experience within … [the Employer] and the superannuation industry into the trustee role in a way that uses that experience but is directed towards the trustee’s responsibilities. And I think that was well understood amongst trustee directors and I believe that that would have applied to … [VBW]. The only thing that was significant about … [VBW] was that he was such a senior officer.[862]
[862] Transcript at 1155
Having regard to all of these matters, we are satisfied that VBW disclosed his interest and the nature of his interest as a result of his position with the Employer. Taken in the context of their appointments and their decisions to give him and others the task of dealing with the Employer, he did so in sufficient detail to reveal his position and to ensure that the Directors were fully informed of all the information that they needed to make a proper decision. We are satisfied that he was not in a position of conflict of interest.
Given our previous findings, we are not satisfied that VBW is not a fit and proper person to be a trustee, investment manager or custodian, or a responsible officer of a body corporate that is a trustee, investment manager or custodian within the meaning of s 120A(3) of the SIS Act. We set aside that aspect of APRA’s decision. That restores VBW to his previous position as a person who is not a disqualified person under the SIS Act.
Consideration: VBN
In relation to VBN, APRA has submitted that he was, under s 52(8) of the SIS Act, under his own covenant to exercise a reasonable degree of care and diligence for the purpose of ensuring that the Trustee carried out its covenants. VBN held senior appointments in the Employer. As such, he owed the Employer a duty to promote its best interests. APRA submitted that VBN’s two duties were in conflict in relation to the Employer Offer because the Employer’s interests were served by casting the offer in terms maximising the chances of its being accepted but the Trustee’s duties required disclosure of information and other steps.
In summary, APRA relied on several matters:
·VBN had read a copy of a draft legal advice prepared by FSS to the Employer dated 14 January 2002. The written submissions state that the draft “… referred to the prospect that directors of the Trustee appointed by the Employer, who had positions in which they became privy to strategic issues involving the Plan, may be in a position of conflict of interest and conflict of duty.[863] [864]
[863] APRA’s Submissions at [G.2.42]
[864] HB11-674_08 and Transcript at 649-651
·VBN (and VBQ) had received a copy of a communication by ND1 dated 3 July 2002 noting that there had never been a process for Employer Members to be advised of the Employer’s view. She also raised concerns about balancing the statutory requirements of the SIS Act and of being an Employer Representative. She sought guidance on how to achieve the balance. There is no evidence that VBN took any initiative to adopt this suggestion.
·VBN was a founding member of the Employer Plan Steering Committee and was present at the meeting of 31 October 2002 when Actuary E’s draft advice dated 30 October 2002 and referring to the actuarial values of Members’ pension options was discussed.
VBN did not adequately disclose to the Board, the nature and detail of the role he had played and work he had undertaken on behalf of the Employer. He did not state that he held senior positions with the Employer and made no disclosure of work that he had done, for example, on behalf of the Employer.
·VBN did not disclose to the Board the nature and detail of the role and work he undertook for the Employer Plan Superannuation Committee or even the existence of that committee.
VBN did not record the existence of his conflict, or perceived conflict, in any minutes of the Board or in the Circular Resolution he signed. He did not initiate any discussion with his fellow Directors regarding whether he should vote on the resolution. There was no discussion regarding whether he should vote on the resolution.
VBN did not disclose to the Board the availability of the actuarial valuations of the Members’ pension options or the comments by Actuary D or Actuary E in relation to whether a prudent person would accept the Employer Offer.
The Board’s agreement to allow VBN to remain for the discussion of the Employer Offer at its meeting of 16 September 2002 and to have any continuing involvement in it let alone to sign the Circular Resolution was not given on the basis of its being fully informed.
VBN’s involvement in the development of the Employer Offer on behalf of the Employer compromised him as a Director of the Trustee so that he was under a positive duty to protect the interests of the Deferred Benefit Members by:
(a)disclosing to the other Directors:
the substance of the Employer’s actuarial advice and the absence of information known to him relating to the average actuarial valuation in the package of information regarding the Employer Offer; and
disclosing to the other Directors that he was a member of the Employer Plan Superannuation Committee, involved in the design, content and timing of the Employer Offer and had an interest or duty to the Employer in regard to the cost of the outcome of the Employer Offer to the Employer.
(b)declining to act as a contact in relation to the Employer Offer documentation;
(c)declining to participate in the Trustee’s consideration and formulation of the Employer Offer documentation; and
(d)declining to vote on the resolution to approve the communication by the Trustee of the Employer Offer in the form proposed.
VBN’s position is different from that of VBW but only in that, unlike VBW, he offered to absent himself from the discussions of one of the Trustee’s Board meetings on the basis of his involvement in the development of materials that it was about to consider. He did not disclose his official positions with the Employer. On the basis of his evidence in cross-examination by Mr Ginnane SC, we find that VBN did not disclose his official position with the Employer when he completed a document headed “Conflicts of Interests” on 17 December 2001 for the Plan’s company secretary.[865] The Plan’s company secretary had told him that he did not need to disclose it. Initially, he had seen the position for conflict and had thought to disclose his position with the Employer. After what he described as a “lively discussion”[866] with the Plan’s secretary, VBN had allowed himself to be persuaded that it was not relevant.
[865] Transcript at 825-826 and HB17:2741
[866] Transcript at 827
We find that he did disclose to the Board his involvement in the development of the documents relating to the Employer Offer at some indeterminate time but before the Board considered that offer. His offer was not accepted. In this regard, VBN’s evidence was supported by that of VBV.[867] We also find that it was well understood that all of the Directors, including VBN, would bring their experience in the employ of the Employer and otherwise to their positions with the Trustee. It was understood that some held senior positions and that they would bring that experience with them.
[867] Exhibit VBVA at [23] and see also Transcript at 1151-1155
In some instances, VBN’s limited disclosure might have left him open to challenge on the basis that he had a conflict of interests. We do not consider that it does so in this. Where was it that his interests were in conflict? His discussions in the Employer Plan Superannuation Committee and their outcome were reflected in the Employer Offer that was disclosed to the Trustee. The cost of its offer to the Employer was irrelevant to the Trustee. The extent to which it hoped to limit its future liability by Deferred Benefit Members’ accepting the offer was irrelevant to the Trustee in deciding its position. It must have been patently clear to it that the Employer wanted to limit its liability and that it was prepared to pay a price to do that. At the same time, it would have been clear that it would want to limit the price that it paid. The position of the Deferred Benefit Members who remained was assured by the Trustee’s obtaining an undertaking from the Employer that it would ensure that the benefits of those Members who did not accept the offer would be fully funded and so protected. As we have found, the Trustee’s Board had all of the information that they needed in order to make a decision about what it should do about the Employer’s Offer. VBN was not in possession of any information that it did not have but that it should have known or that could have assisted it with its deliberations. There is no evidence that satisfies us that he influenced, or attempted to influence, the course of the Board’s deliberations.
Given our previous findings, we are not satisfied that VBN is not a fit and proper person to be a trustee, investment manager or custodian, or a responsible officer of a body corporate that is a trustee, investment manager or custodian within the meaning of s 120A(3) of the SIS Act. We set aside that aspect of APRA’s decision. That restores VBN to his previous position as a person who is not a disqualified person under the SIS Act.
DECISION
For the reasons we have given, we:
1.set aside the decisions of the respondent dated:
(1)3 August 2005 and confirming a decision of its delegate dated 9 June 2005 in respect of VBN;
(2)7 October 2005 and confirming a decision of its delegate dated 5 August 2005 in respect of VBO;
(3)7 October 2005 and confirming a decision of its delegate dated 9 August 2005 in respect of VBP;
(4)7 October 2005 and confirming a decision of its delegate dated 9 August 2005 in respect of VBQ;
(5)7 October 2005 and confirming a decision of its delegate dated 12 August 2005 in respect of VBR;
(6)2 September 2005 and confirming a decision of its delegate dated 5 July 2005 in respect of VBV; and
(7)13 September 2005 and confirming a decision of its delegate dated 22 July 2005 in respect of VBW.
I certify that the five hundred and sixty-nine preceding paragraphs are a true copy of the reasons for the decision herein of Deputy President S A Forgie and
Mr B H Pascoe, Senior Member
Signed: ..(Sgd. J. Rathjen)...................................
Jayne Rathjen Associate
Dates of Hearing 21 November 2005 to 25 November 2005, 28 November 2005, 30 November 2005,
1 December 2005 to 2 December 2005,
5 December 2005 to 9 December 2005,
12 December 2005 to 15 December 2005,
19 December 2005 to 22 December 2005,
24 January 2006 to 25 January 2006,
31 January 2006, 2 February 2006 to
3 February 2006, 6 February 2006 to
8 February 2006
Date of Decision 25 July 2006
Counsel for VBN Mr J Santamaria QC with Mr A. Pound
and Mr S McLeishSolicitor for VBN Corrs Chambers Westgarth
Counsel for VBV Mr C Scerri QC with Mr S Sharpley
Solicitor for VBV Arnold Bloch Leibler
Counsel for VBW Mr J Sackar QC with Mr M Moshinsky
Solicitor for VBW Allens Arthur Robinson
Counsel for VBO, VBP, VBQ
and VBRMr P Murdoch QC with Mr S Senathirajah
Solicitor for VBO VBP, VBQ,
and VBRPhillips Fox
Counsel for the respondent Mr R Tracey QC with Mr S Hibble and
Mr S RubensteinMr M Crennan SC with Ms C Mavroudis
Mr T Ginnane SC with Mr C Archibald
Solicitor for the respondent Australian Prudential Regulation Authority
Counsel for VBT, party joined Mr P Collinson SC with Mr P Crutchfield
Solicitor for VBT, party joined Freehills
LEGEND
VBN =Trevor Duncan Lloyd
VBO =Keat Seng Chew
VBP =Jason William Brown
VBQ =Craig Robert Dainton
VBR =Howard Wayne Coleman
VBV =Melvyn Keith Ward
VBW =Andrew Richard Penn
ND1 =Jane Lovell Perry
C1 =Mark Philip Delaney
C2 =Ross Andrew Wilson
C3 =Stephen Douglas Spiller
C4 =Neil Roderick Whiteside
C5 =Frank Allan Catlin
MS1 =Andrea Piaia
MS2 =Laurence Dalton
MS3 =Kate Maartensz
MS4 =Kim Webber
Plan Actuary A = Kristain Fok
Plan Actuary B = John Smith
Plan Actuary C = Paul Shallue
Actuary D = Paul Francis (Employer’s consultant actuary from Towers Perrin)
Actuary E = Steven John Schubert (a second Employer’s consultant actuary from Towers Perrin)
CEO =Les Owen
Plan Executive = Cyril Twomey
Accumulation Category = AXA Select
Actuarial Firm = NSP Buck Pty Ltd
EC1 =Michael Baker
Employer Plan
Superannuation Committee = AXA’s Superannuation Plan Steering Committee
Employer’s Plan
Representative = Richard Veale
FS = Mallesons Stephen Jaques
FSS = Christopher Martin Beeny
PD1 = Colin Royce Grenfell
TS = Bruce Akiva Goldman
TSF = Deacons Lawyers
Tribunal by the SRC Act, s67(8): see Birmingham Citizens Permanent Building Society v Caunt (1962) 1 Ch 883 at 894.” Comcare v Labathas ((1995) No. ACTG35 of 1994, [22] per Finn J)
“Where an express trust has been effectively constituted and under its terms the trustee is obliged to manage a trust business, the trustee is required both to observe the terms of the trust, and in doing so, to exercise the same care as an ordinary, prudent person of business would exercise in the conduct of that business were it his or her own.”
“… There are some statements in the authorities that suggest that there must be ambiguity in the provision under consideration before the purpose of the statute, or reference to extrinsic material, becomes relevant. However, the current position is not so constrained. Rather, it requires that purpose and context be considered at the outset, when construing any statutory provision.”
“Where an express trust has been effectively constituted and under its terms the trustee is obliged to manage a trust business, the trustee is required both to observe the terms of the trust, and in doing so, to exercise the same care as an ordinary, prudent person of business would exercise in the conduct of that business were it his or her own.”
395 at 405 per Malcolm CJ
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