Superannuation Review 2010 – 'The business of being a trustee' articles

For your convenience, we have collected together the various Superannuation Update articles from 2010 on ‘The business of being a trustee’. These articles are up-to-date as at the date of initial publication.

February 2010
April 2010
June 2010
August 2010
October 2010
December 2010

A trustee of a superannuation fund must enter into a range of contractual arrangements for the management and operation of its superannuation fund.

Contractual negotiations inevitably lead to the question of whether to give or require an indemnity and what types of losses are covered.

Indemnities

Below we highlight some general considerations for trustees in the negotiation of indemnities:

• An indemnity for the other party’s breach of a contract is only useful when the common law rules on damages for breach of the contract are inadequate in the circumstances. Therefore, the trustee needs to be clear in its objectives in a contract negotiation. 
• The insurance position of the trustee as well as APRA’s outsourcing requirements should be considered. 
• The financial position and backing of the party providing the indemnity must also be considered as the indemnity will be worthless if the indemnifying entity fails.  
• All implications of a breach of contract should be considered when negotiating an indemnity. Implications other than financial implications should be considered, such as reputational risk and other business relationships. 
• If the trustee is providing the indemnity, it must be confirmed that the trustee has the power to give the indemnity under the trust deed. 
• A trustee of a superannuation fund must also consider the possible ramifications of providing an indemnity to another party from the perspective of the members of the fund; the assets of the fund should not be put at risk inappropriately. 
• The events which trigger an indemnity must be clearly defined. 
• Consideration should be given to the appropriate limits of an indemnity, such as whether fault is relevant, which types of loss should be covered and whether liability should be capped. 
• Any qualifications to an indemnity must also be carefully considered to ensure that the qualifications are consistent with the trustee’s objectives. 
• Remember that only the parties to the contract are bound by its terms.

Consequential loss

The concept of consequential loss has been the subject of recent judicial attention in Victoria but remains contentious. Consequential loss is an uncertain term as a matter of law. If an indemnity mentions this type of loss, we suggest that the term should be defined specifically in the contract.

The English view of the general meaning of damages for breach of contract was developed in Hadley v Baxendale (1894) 9 Ex 341. Essentially, the damages which an aggrieved party ought to receive in respect of a breach of contract are those which:

1. may fairly and reasonably be considered to arise naturally, that is, according to the usual course of things, from such breach of contract itself, or
2. may reasonably ‘be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it’.

English authority has generally regarded the second limb of this test as constituting ‘consequential loss’. There has been little Australian law on the meaning of consequential loss. However, the Hadley v Baxendale principles of damage had been upheld in a few cases; for example, Frank Davies Pty Ltd v Container Haulage Group Pty Ltd (1989) 98 FLR 289.

The Victorian Court of Appeal considered the meaning of ‘consequential loss’ in 2008. In Environmental Systems Pty Ltd v Peerless Holdings Pty Ltd [2008] VSCA 26, the Victorian Court of Appeal stated ‘…the true distinction is between “normal loss”, which is loss that every plaintiff in a like situation will suffer, and “consequential losses”, which are anything beyond the normal measure, such as profits lost or expenses incurred through breach’, and determined that:

[R]easonable business persons would naturally conceive of ‘consequential loss’ in contract as everything beyond the normal measure of damages, such as profits lost or expenses incurred through breach … it was not correct to construe ‘consequential loss’ as limited to the second rule in Hadley v Baxendale.

The question raised by the Peerless decision is how far the concept of consequential loss extends where a court is interpreting a contract which excludes or limits liability for consequential loss. The Victorian Court of Appeal specifically referred to profits lost or expenses incurred through breach and it remains unclear how courts will interpret this test in the future. Peerless is binding on lower courts in Victoria and persuasive in other Australian courts. There are many questions as to the practical implications of the Victorian Court of Appeal’s view of consequential loss which may remain unanswered until the High Court considers the concept.

The uncertainty of the meaning of ‘consequential loss’ reinforces the need for trustees who are entering into contracts to carefully think about their objectives when negotiating an indemnity and to be cautious regarding the terms of any indemnity obtained or provided.

April 2010 – The business of being a trustee – Indemnification of directors

Rickus case

There has been another chapter in the long running dispute between Mr John Rickus (the former chairman of the board of directors of the Trustee of the MTAA Industry Superannuation Fund) and Motor Trades Association of Australia Superannuation Fund Pty Ltd (the Trustee company itself). This time the focus of the Federal Court was on indemnification of Mr Rickus’s legal costs by the Trustee.

In the 2008 judgment Motor Trades Association of Australia Superannuation Fund Pty Ltd v Rickus (No 3) [2008] FCA 1986, the Federal Court considered whether Mr Rickus as a director of the Trustee had an obligation to produce documents to the Trustee upon request. The context to the dispute between the Trustee and Mr Rickus was that, while a director, Mr Rickus had received a notice from APRA to produce certain documents as part of its investigation and he had complied with this notice. The documents included personal notes and correspondence. After unsuccessful attempts to obtain the documents from Mr Rickus, the Trustee commenced legal proceedings against Mr Rickus to require him to produce the same documents to the Trustee. The Federal Court decided that Mr Rickus:

• had a duty to provide to the Trustee copies of documents which the Trustee requested in order to allow the Trustee to respond to APRA’s investigation, and  
• this obligation arose because of a director’s duty to act in the best interests of the Trustee company.

Recently, the Full Federal Court considered this dispute again in the context of Mr Rickus’s claim for indemnification of his legal costs by the Trustee in Rickus v Motor Trades Association of Australia Superannuation Fund Pty Limited [2010] FCAFC 16.

This dispute arose when the Trustee commenced separate proceedings against Mr Rickus on 3 September 2007. The Trustee’s action made many claims including that Mr Rickus was required to produce to the Trustee the documents which he had provided to APRA pursuant to the notice. When the Trustee reduced the number of its claims, a hearing fixed for November 2007 was abandoned.

On 26 November 2007, Justice Flick ordered the Trustee to pay to Mr Rickus the taxed costs incurred by Mr Rickus in defending the Trustee’s proceedings on an indemnity basis up to 26 November 2007 (see Motor Trades Association of Australia Superannuation Fund Pty Limited v Rickus [2007] FCA 1878).

On 1 February 2008, Mr Rickus filed a cross-claim in the Trustee’s proceedings seeking indemnification by the Trustee for legal costs he incurred in defending the Trustee’s action.

On 28 July 2008, the court granted leave to the Trustee to discontinue its proceedings. However, Mr Rickus’s cross-claim remained unresolved.

On 24 December 2008 in Motor Trades Association of Australia Superannuation Fund Pty Limited v Rickus (No 3) [2008] FCA 1986, Justice Flick ordered that the cross-claim be dismissed with costs and that both parties bear their own costs from 27 November 2007. Mr Rickus appealed this decision and sought an order that the Trustee pay his costs on an indemnity basis in relation to the Trustee’s proceedings.

The Full Federal Court determined this appeal and held that the Deed of Indemnity given to Mr Rickus by the Trustee and the Trustee’s Constitution provided indemnity for Mr Rickus’s legal costs but would not have provided for indemnification for any liability owed by Mr Rickus to the Trustee. This was in part due to the restrictions on indemnification imposed by the Corporations Act:

• Indemnification for liability owed by a director to a company is prohibited by section 199A(2) of the Corporations Act, which provides:
  
  ‘A company or a related body corporate must not indemnify a person … against …a liability owed to the company or a related body corporate…This subsection does not apply to a liability for legal costs.’
  
• Indemnification for certain legal costs is prohibited by section 199A(3) of the Corporations Act, which provides:
  
  ‘A company … must not indemnify a person … against legal costs incurred in defending an action for a liability incurred as an officer …of the company if the costs are incurred:
  
  (a) in defending or resisting proceedings in which the person is found to have a liability for which they could not be indemnified under subsection (2) [see above]’.

The Full Federal Court held that indemnification of Mr Rickus’s legal costs was not precluded by Corporations Act section 199A(3)(a). While the primary judge held that Mr Rickus was under a duty to provide a copy of all the requested documents to the Trustee (and this obligation was a liability owed to the Trustee within the meaning of Corporations Act section 199A(2)(a)), these findings were not made in the Trustee’s proceedings as the Trustee’s proceedings were discontinued before such a finding was made. Rather these findings were made in consideration of Mr Rickus’s cross-claim. The court held:

‘Although it may have been the case that, had the Trustee pressed its proceedings to finality, the appellant would have been found liable to it as alleged, that is not how events unfolded and no finding of liability was ever made in the Trustee’s proceedings.’

It is worthwhile noting that the court in determining the cross-claim did not consider whether the primary judge was correct in his articulation of the duty owed by Mr Rickus to the Trustee.

On 22 April 2010, in Motor Trades Association of Australia Superannuation Fund Pty Ltd v Rickus (No 6) [2010] FCA 383, Justice Flick gave further direction on the application of the costs order whilst expressing the view that this ‘will, hopefully, be the last judgment required to finally dispose of the present proceeding’.

Corporations Act

Directors of trustee companies typically rely on indemnification from many sources, including the superannuation fund’s trust deed, the trustee company’s constitution, deeds of indemnity and insurance policies. While Mr Rickus was successful, this recent decision emphasises that indemnification of a director is not available in certain instances. These instances include:

• A company cannot indemnify a director for liability, other than legal costs, where the liability is owed to the company or a related body corporate, a liability for a civil penalty order under the Corporations Act or a liability which arises from conduct involving a lack of good faith. 
• A company cannot indemnify a director against legal costs incurred:
• in defending or resisting proceedings in which the director is found to have a liability for which they could not be indemnified under section 199A(2) of the Corporations Act 
• in defending or resisting criminal proceedings where the director is found guilty
• in defending or resisting proceedings brought by ASIC or a liquidator for a court order if the grounds for making the order are found by the court to have been established (note this does not include an ASIC investigation before the commencement of proceedings for a court order), or
• in connection with proceedings for relief for the director under the Corporations Act in which the court denies the relief.
• Indemnification from the assets of a superannuation fund are prohibited where the director has acted dishonestly, the director has intentionally or recklessly failed to exercise the degree of care, skill and diligence that the director is required to exercise or the liability is a monetary penalty under a civil penalty order under the Superannuation Industry (Supervision) Act 1993 (Cth).
• Insurance policies will generally exclude cover in certain circumstances, including dishonesty and fines or penalties.

The various Rickus cases also emphasise the importance for trustee companies to ensure that there are adequate arrangements for the retention of board papers and supporting documentation. Unless the company directs, board papers remain the property of the individual director once they leave the board room. Directors also have certain rights under the Corporations Act to access board papers and these rights may be entrenched in a Deed of Access.

June 2010 – The business of being a trustee – The latest in judicial thoughts

A recent New South Wales Supreme Court decision, Manglicmot v Commonwealth Bank Officers Superannuation Corporation [2010] NSWSC 363¹ (Manglicmot), has considered the duties of a trustee of a superannuation fund in relation to a change in the fund’s insurance policy. The decision by Justice Rein helps to clarify a number of issues relevant to trustees of superannuation funds, including:

• the duties trustees owe to members when changing death and total and permanent disablement (TPD) policies 
• whether there is a test of ‘reasonableness’ applied by the court when determining if a decision by a trustee can be reviewed by the court 
• whether the giving of reasons by a trustee for a decision affects the test applied by the court in determining whether that decision can be reviewed  
• whether the section 52 covenants within the Superannuation Industry (Supervision) Act 1993 (SIS Act) significantly alter the general law duties owed by trustees, and 
• the meaning of ‘best interests’ within section 52(c) of the SIS Act.

Facts

The Plaintiff’s TPD claim

The plaintiff, Roy Manglicmot (Plaintiff), was a member of the Officers’ Superannuation Fund (Fund) and employed as a bank teller by the Commonwealth Bank of Australia (Bank). The Plaintiff commenced employment with the Bank in 1998 and in 2000 suffered various injuries which resulted in him moving from full time employment to part time employment of a maximum 15 hours work per week in November 2002 (two years after the initial injuries). Thereafter the Plaintiff continued to work in a part-time capacity at the Bank up until August 2003, when he accepted a redundancy package offered by the Bank.

After accepting redundancy the Plaintiff filed a TPD claim with the trustee of the Fund, Commonwealth Bank Officers Superannuation Corporation (Trustee). The Trustee referred the claim to its insurer, CommInsure Pty Ltd (CommInsure), which determined (and gave reasons for its determination) that the Plaintiff did not meet the definition of TPD set out in the relevant policy (the CommInsure policy).

The Trustee’s decision to change insurance policies

In the lead up to 30 June 2003, the provider of total and permanent disablement insurance to the Fund, Hannover Life Re of Australasia Ltd (Hannover), informed the Trustee that its policy (Hannover policy) would not be renewed upon its 30 June 2003 expiration unless the Trustee agreed to a 130% increase in premiums, with no guarantee of premiums for the future.

Subsequently, the Trustee invited CommInsure to provide a quote. CommInsure offered the Trustee an insurance policy on terms that ‘will either match or better’ the terms of the Hannover policy for a premium increase of 80%, guaranteed for three years. The Trustee accepted CommInsure’s offer and the CommInsure policy commenced on 1 July 2003.

Late in 2003 the Trustee conducted its own internal review, and requested its solicitors to conduct a review, to identify any gaps in cover between the CommInsure and Hannover policies. No difference between the TPD definitions in the policies was identified.

The Plaintiff’s claim

The Plaintiff, whilst not agreeing with the reasons given by CommInsure for rejecting his claim, accepted that he was not eligible for a TPD benefit because he did not meet the following definition of TPD under the CommInsure policy because he was able to work on a part time basis:

(b) [the member] has been absent from all employment for 6 consecutive months from the date of disablement and… will not ever be able to resume any occupation, whether or not for reward

The term ‘occupation’ was defined in the CommInsure policy as ‘an occupation that the person can perform on a full time or part time basis…’

However, the Plaintiff claimed that he would have met the following definition of TPD (and therefore been eligible for a TPD benefit of $120,000) under the Hannover policy because it did not restrict the Plaintiff from working on a part-time basis:

(b) having been absent from work through injury or illness for an initial period of six (6) consecutive months and… unable ever to engage in or work for reward in any occupation or work which he or she is reasonably capable of performing by reason of education, training or experience.

Consequently, the Plaintiff sued the Trustee on the basis that:

• the inclusion of the words ‘part time’ in the definition of TPD in the CommInsure policy ‘significantly reduced the scope of cover’ previously offered under the Hannover policy 
• the Trustee’s failure to obtain cover equal to or better than the Hannover policy was a breach of its duty to ‘act in the best interests of members’, and 
• the breach caused the Plaintiff to suffer loss of $120,000 (the amount that would have been payable under the Hannover policy).

Whether giving reasons for a decision affects the test to be applied in determining whether a trustee’s discretion is reviewable by the court

It was not disputed that the Trustee had the power to exercise its discretion to determine to enter into the CommInsure policy. The question at issue was whether the Trustee’s discretion was one that could be reviewed by the court. In deciding on this issue the court considered whether the Trustee’s decision to give reasons for the exercise of its discretion affected the test to be applied by the court in determining whether the exercise of discretion was reviewable.

Justice Rein accepted the test for reviewing a trustee’s discretion set out in Jacobs Law of Trusts (citing In re Beloved Wilkes’s Charity (1851) 3 Mac & G 440 at 488) which held that a court can only review a trustee’s exercise of a discretion where the trustee has acted:

• with an indirect motive 
• without honesty of intention 
• without fair or real genuine consideration of the exercise of discretion, or 
• for an improper purpose.

In considering whether the giving of reasons affected this test, Justice Rein referred to a wide range of authority before determining that ‘the principles on which the Court must proceed are the same whether reasons are given or not’ and that giving reasons does not alter the test for whether a discretion exercised by a trustee is reviewable by the court. Justice Rein then went on to clarify that there was no test of ‘reasonableness’ imported into the court’s determination, regardless of whether a trustee gives reasons for a decision or not.

Although Justice Rein found that giving reasons for the exercise of a discretion does not change the relevant test, his honour did state that the court can have regard to any reasons given to aid in its determination of whether the requirements in the test had been breached. Giving reasons may, therefore, make it easier ‘to determine whether a breach had occurred’.

Justice Rein stated that in this case there was no evidence ‘to indicate that the trustee’s decision was not exercised in good faith, or that it was not exercised upon a fair or real and genuine consideration, or that it was not exercised for the purposes for which the power was conferred’. Therefore, it was held that the Trustee’s decision to enter into the CommInsure policy was not a decision reviewable by the court.

Factors for a trustee to consider when determining to change insurance policies

Although Justice Rein determined that the Trustee’s decision was not reviewable by the court, he went on to consider whether there would have been a breach by the Trustee if the decision was open to review. His Honour stated that, in making its decision, the Trustee ‘was bound not only to have regard to the benefits provided by any particular policy, but also to the premiums payable, which came out of the Fund’. His Honour took into account the fact that the CommInsure policy provided premiums at least 20% better than the Hannover policy (including a three-year guarantee of those premiums), that CommInsure provided a commitment to match the terms of the Hannover policy and that the Trustee sought legal advice as to whether there was any gap in cover between the policies, before finding that there would be no breach by the Trustee even if the decision was reviewable under law.

SIS

The Plaintiff claimed that the covenants incorporated into the Fund’s trust deed under section 52 of the SIS Act (to the extent that those covenants were not already incorporated into the trust deed) had substantially altered the obligations owed by the Trustee under the general law. However this argument was rejected by Justice Rein: 

I do not accept that s 52 imposes a higher standard on a trustee than the general law.

With respect to the section 52(2)(c) SIS Act (and general law) duty ‘to ensure that the trustee’s duties and powers are performed and exercised in the best interests of the beneficiaries’, Justice Rein held that:

I do not accept that the trustee is made liable for any outcome which turns out to be unbeneficial to members, even if the original decision which led to that outcome was taken with the best interests of all members in mind. Another way of describing this approach is to say that s 52(2) is concerned with  process, not outcome.

Consequently, because the Plaintiff had failed to establish a breach of duties owed by the Trustee under general law (and therefore the section 52 SIS Act covenants), the Plaintiff’s case was rejected.

Causation

Finally, Justice Rein considered whether the Plaintiff would have been able to claim a benefit under the CommInsure policy if it had incorporated the wording of the Hannover deed (ie, not specified ‘part time’ in the definition of TPD), and therefore whether (if the Trustee had in fact breached its duties owed to the Plaintiff by entering into the CommInsure policy) the Trustee’s decision caused the alleged loss suffered.

Due to the finding that the Plaintiff was otherwise ineligible for a TPD benefit under the CommInsure policy even if it had incorporated the Hannover policy wording (see below), Justice Rein did not make a determination of whether the words ‘full time’ would be read into the Hannover policy TPD definition (and thereby permitting TPD claims where a member was able to engage in work on a part-time basis). His Honour stated that although there was a ‘prospect’ that the words would be read into the policy, it was ‘arguable’ that they should not. In other words, although his Honour did not rule out the possibility that ‘full time’ could be read into the TPD definition, he indicated that it was perhaps unlikely. On that basis, the definitions in the two policies were probably not as significant as the Plaintiff alleged.

Finally, Justice Rein considered the requirement in the TPD definition of the CommInsure policy that a member ‘has been absent from employment for 6 consecutive months from the date of disablement’. The term ‘date of disablement’ is defined in the CommInsure policy as the later of:

• the date on which the sickness or injury that was the principle [sic] cause of the member’s disablement commenced or occurred, and 
• the date the member ceased all work.

His Honour found that the Plaintiff had not been absent for any consecutive period of six months prior to his departure in August 2003 and, therefore, would have been ineligible for cover under the CommInsure policy even if the Hannover policy wording was incorporated into that policy. Interestingly, his Honour did not clarify the ‘date of disablement’ in his judgment nor consider the effect of reading ‘full time’ into the definition of ‘date of disablement’ in the CommInsure policy (ie, such that the requirement was that a member ‘has been absent from all [full time] employment for 6 consecutive months from (the date the member ceased all [full time] work)’).

Implications for trustees

Manglicmot highlights a number of relevant factors for trustees to take account of:

• First, Manglicmot serves as precedent that ‘best interests’ is a ‘process’ rather than ‘outcome’ orientated duty on trustees. This means that provided a trustee has undertaken a sound process in exercising a discretion, and none of the limbs of the test for a court to review a trustee’s discretion have been breached, the trustee’s exercise of discretion will not be reviewable by a court. This is an important clarification of the questions raised by the decisions in Re VBN and Australian Prudential Regulation Authority (2006) 92 ALD 259 and Invensys Australia Superannuation Fund Pty Ltd v Austrac Investment Ltd (2006) 15 VR 87.
  
  Further, and importantly, it also clarifies that there is no separate test of ‘reasonableness’ which will be applied by a court in determining whether an exercise of trustee discretion should be reviewed. This again emphasises that trustees should focus on ensuring they undertake a sound ‘process’ in exercising any discretion rather than focusing on possible outcomes achieved.
• This decision is a judicial confirmation that the SIS Act covenants do not expand on general law trustee duties. This is a welcome and important message for trustees to bear in mind when exercising their discretions as it means that the section 52 ‘best interests’ covenant does not impose a duty on a superannuation trustee to achieve the best outcome for members.
• With respect to changes in insurers for death and TPD benefits, Manglicmot demonstrates that the process undertaken in exercising a discretion to change policies should include a detailed examination of differences between the policies and involve weighing up savings or costs associated with the change with any differences in scope of the cover provided.
  
  Further, care should be taken by trustees and insurers to ensure that the terms of insurance are precisely worded.
• Finally, whilst Manglicmot is precedent for the fact that giving reasons in the exercise of a discretion does not change the relevant test for whether the exercise of discretion is subject to judicial review, the case also serves as a reminder that giving reasons can make it easier for a court to establish that the test for judicial review has been met. Therefore, trustees should remain cautious in recording and providing reasons in relation to the exercise of any discretion.

Class actions

The recent spate of corporate collapses of managed investment schemes and other investment vehicles has sparked the commencement of class actions against trustees of investment schemes, together with other involved parties including directors, related entities providing finance to investors and financial advisers.

The class actions generally involve allegations of breaches of various duties introduced as part of the FSR reforms, including allegations of:

• misleading and deceptive conduct in the provision of financial services (including advice) 
• the making of implied representations regarding the sufficiency of fees and viability of investments, and 
• defective product disclosure statements.

These class actions have necessarily focused the spotlight on the nature of trustee duties, both statutory and equitable, together with the duties imposed on financial advisers at common law, in equity and by statute.

Such litigation also indicates an increased awareness by lawyers, litigation funders and the public generally of the duties owed to people in the investment context, especially in relation to disclosure, together with an increased appetite for aggrieved parties to bring group proceedings to redress alleged breaches.

This legal climate highlights the importance of proactively considering disclosure obligations on an ongoing basis.

Finch v Telstra Super Pty Ltd – application for special leave to appeal to the High Court

This case arose from the trustee’s rejection of Mr Finch’s total and permanent invalidity (TPI) claim. In February this year, we reported² that Mr Finch was seeking special leave to appeal to the High Court following the Court of Appeal finding for the trustee.

Mr Finch’s application for special leave was heard in April. Justices Gummow and Crennan referred his application for leave to an enlarged bench for argument as if on appeal. It is possible that there will be argument regarding whether the test applicable to the review of the exercise of trustee discretion should be harmonised with the test applied by the Superannuation Complaints Tribunal.

The High Court will hear the application for special leave in September.

Cooper Review – trustees to give reasons for decisions

Trustee obligations in relation to decision making have been brought into sharp focus by the recently published Final Report of the Cooper Review into superannuation.

The Cooper Review has recommended the amendment of section 101 of the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act) to require trustees to provide a member with reasons for its decision in relation to a member’s formal complaint.

The Cooper Review does not describe the precise nature of any required statement of reasons. It is possible that any amendment to the SIS Act will borrow from the regime applicable to administrative decision makers pursuant to the Administrative Decisions (Judicial Review) Act 1977 (Cth). An amendment of this nature would impose on trustees the significant requirement to set out the particulars of their findings on material questions of fact together with references to the evidence or other material on which those factual findings were based, so as to give an aggrieved member an opportunity to determine whether the trustee’s decision was properly reached.

Finch v Telstra Super Pty Ltd [2010] HCA 36

Background

As reported in our Super Update August 2010,³ this case arose from the rejection by Telstra Super Pty Ltd (Trustee) of Mr Finch’s claim for a total and permanent invalidity (TPI) benefit from the Telstra Superannuation Scheme (which was a ‘self insured’ benefit).

The matter was first heard by Byrne J in the Supreme Court, in which Mr Finch was successful, then the Trustee appealed to the Court of Appeal and won. Mr Finch then applied for special leave to appeal the decision of the Court of Appeal to the High Court, which application was referred to an enlarged bench of five for hearing as if on appeal on 2 September 2010.⁴ The special leave application as well as the substance of the appeal were then heard by the enlarged bench at the same time.

One of Mr Finch’s arguments for special leave to appeal was that the principles set out in the case of Karger v Paul [1984] VR 161 should not be applied to decisions of superannuation fund trustees because of the special nature of superannuation funds. That is, he argued that the standard of review should not be set too high because otherwise it is difficult for members of superannuation funds to challenge trustee decisions. The argument was that the High Court should redesign the test so that a court can review a trustee’s decision if it is unfair or unreasonable (like the SCT review test). This argument was not put at trial or in the Court of Appeal.

The High Court’s decision was delivered on 20 October 2010, Finch v Telstra Super Pty Ltd.⁵ The High Court granted special leave to appeal and found for Mr Finch, remitting the matter back to the Trustee for reconsideration. The orders of the Court of Appeal were set aside, effectively restoring the orders made by Byrne J of the Supreme Court at first instance. The decision is significant in terms of the court ‘raising the bar’ for trustee decision-making. Although the law was not changed as significantly as counsel for Mr Finch had argued it should be, there is a qualification to be placed on the old Karger v Paul test which will have practical ramifications for trustees.

High Court’s decision

The principal issue concerned the duty of a trustee to give genuine consideration in the exercise of its powers. The High Court found that the Trustee had not satisfied this test in the particular (and complex) circumstances of this case.

Six month aspect of TPI definition

Under the relevant division of the Telstra Superannuation Scheme trust deed, a member was entitled to a TPI benefit if the member ceased employment because of TPI. Relevantly, the TPI definition had 2 limbs:

‘Total and Permanent Invalidity’ means, in relation to a Member, disablement as a result of which –

1. unless otherwise agreed between the Trustee and the Principal Employer from time to time either generally or in any particular case, the Member has been continuously absent from all active Work for a period of at least six months…; and 
2. in the opinion of the Trustee after consideration of any information, evidence and advice provided to the Trustee by the Employer and any other information, evidence and advice the Trustee may consider relevant, the Member has ceased to be an Employee and is unlikely ever to engage in any gainful Work for which the Member is for the time being reasonably qualified by education, training or experience.

Mr Finch contended that the requirement in ‘limb (a)’ regarding the six month absence was satisfied because he was absent from all work for over 6 months by the time the Trustee made its decision (whereas the Trustee contended that the absence had to have been before ceasing employment with Telstra, the Principal Employer, which requirement he did not satisfy).

The High Court found for Mr Finch, and held that limb (a) of the definition did not require Mr Finch to be continuously absent from work for 6 months before leaving Telstra’s employment. His absences from work after he left Telstra’s employment enabled him to satisfy that part of limb (a).

Discretion

On the question regarding the nature of a trustee’s decision concerning a member’s claim for a disablement benefit, the Court of Appeal had treated the decision of the Trustee to form or not form an opinion under limb (b) of the definition of TPI as a discretionary decision.

However, the High Court found that the present case was not one involving a discretion. In forming an opinion on whether the member was unlikely ever to engage in gainful work, the High Court held that –

there are no doubt factors to be examined which are difficult to weigh, impressions to be formed, and judgments to be made, but the field is quite different from fields in which the competing claims of potential candidates for bounty are compared. [paragraph 29]

Accordingly, the Trustee had a ‘duty’ to distribute to those who fell within the TPI definition, and forming that opinion was an ingredient in the performance of a trust duty and not a matter of discretionary power. The High Court found that Mr Finch ‘was not the object of a discretionary power of appointment’, he was instead:

the beneficiary of a trust, and although the precise form and quantum of his beneficial interest was contingent on particular events, he did have a beneficial interest. [paragraph 30]

In supporting this conclusion, the High Court then made some comments about various factual aspects of this case. One of these was the nature of this trust as a superannuation fund. The High Court held:

Different criteria might be thought to apply to the operation of a superannuation fund from those which apply to discretionary decisions made by a trustee holding a power of appointment under a non-superannuation trust. … Superannuation is not a matter of mere bounty, or potential enjoyment of another’s benefaction. It is something for which, in large measure, employees have exchanged value… The legitimate expectations which beneficiaries of superannuation funds have that decisions about benefit [sic] will be soundly taken are thus high. [paragraph 33]

Thus the public significance of superannuation and the close attention paid to it through statutory regulation support the conclusion that the decisions of superannuation trustees are not likely to be largely immunised from judicial control without clear contrary language in the relevant trust document. Decisions like those which the Trustee made in this case are not discretionary decisions in the sense used in Karger v Paul. [paragraph 36]

Duty of inquiry

In the Supreme Court, Byrne J found that the Trustee had failed in some respects to give Mr Finch’s claim ‘genuine’ consideration in that the Trustee had failed to pursue specific factual inquiries. The High Court examined the findings of Byrne J regarding the Trustee’s failure to make inquiries in three respects regarding the last months of Mr Finch’s employment with Telstra, whether his periods of employment with Foxtel and Qantas were really failed attempts at rehabilitation and Mr Finch’s views on whether he had made the ‘real job’ statement and, if so, what he had meant by it. The High Court upheld Byrne J’s opinion that the Trustee did not comply with ‘a duty of inquiry’.

Status of Karger v Paul

Throughout much of the judgment, the principles developed in the case of Karger v Paul were mentioned. The traditional formulation of these principles is that a court will be able to set aside the discretionary decision of a trustee if the relevant discretion was not exercised by the trustee in good faith, upon real and genuine consideration or in accordance with the purposes for which the discretion was conferred. Conversely, if the trustee satisfies these conditions, then its decision is not generally reviewable by a court.

Although the High Court did not negate the applicability of these principles, it did query their applicability to superannuation trustees. In doing this, it left open the possibility that a different view could be taken in a subsequent case. However, in this particular case it was implicit in the High Court’s judgment that Karger v Paul was still relevant, but not without qualification.

The qualification relates to the ‘real and genuine consideration’ principle. The High Court found that:

the decision of a trustee may be reviewable for want of ‘properly informed consideration’. If the consideration is not properly informed, it is not genuine. The duty of trustees properly to inform themselves is more intense in superannuation trusts. [paragraph 66]

Further, the High Court found that ‘failure to seek relevant information in order to resolve conflicting bodies of material, as here, is … a breach of duty’ [paragraph 66].

This more ‘intense’ duty to properly inform itself was expressed in terms of a ‘high duty on the Trustee to make inquiries for “information, evidence and advice” which the Trustee may consider relevant’ to forming an opinion about the likelihood that he would ever engage in gainful work [paragraph 66]. The primary rationale for this intensified duty is because of the unique context of superannuation trusts, including that each beneficiary ‘is entitled as of right to a benefit provided the beneficiary satisfies any necessary condition of the benefit’ [paragraph 66].

Another very interesting point is that the High Court left open the question whether the duty of a superannuation trustee at general law may be aligned with other statutory obligations and, accordingly, whether the duty of a superannuation trustee in forming an opinion might in future be found to be ‘a duty to form a fair and reasonable opinion, or even a duty to … form a correct opinion’ [paragraph 66].

It is true that these propositions are consistent with a general trend in case law to place superannuation trustee duties at a higher level than for trustees of discretionary trusts. This case continues, and in fact escalates, that trend by virtue of the authority conferred by the High Court and the suggestions that the duty could evolve to even higher levels.

Remitting to trustee

The court confirmed that remitting the matter back to the trustee is the usual course a court should follow in the absence of bad faith or except in a case where it is only possible for any decision-maker to reach one conclusion on the materials. That is, despite Mr Finch’s submission that the Trustee could not fairly and objectively assess his claim on its merits given the history of events, the court found that it would only be appropriate not to remit the matter to the Trustee ‘if it were to be concluded that the Trustee was incapable of approaching the task of forming its opinion satisfactorily’ [paragraph 67]. In this case, the court found that that conclusion should not be drawn, and also went further to say that ‘it cannot be said that a conclusion in [Mr Finch’s] favour on limb (b) [of the TPI definition] is the only possible conclusion’ [paragraph 68]. 

Conclusion

In short, when assessing a member’s disablement benefit claim, a superannuation fund trustee must ‘properly inform’ itself, must ‘seek relevant information in order to resolve conflicting bodies of material’ and must be mindful of its ‘high duty … to make inquiries’. In this way, the duty to give real and genuine consideration to disablement benefit claims has now been intensified. Trustees must ensure that they understand these duties, and be satisfied that their processes for seeking out information in relation to disablement claims are sufficiently robust. If not, a member will now find it easier to allege that a trustee failed to give their claim genuine consideration.

Under traditional trust law, one of the duties of a trustee is to act personally. This means that:

• the powers, authorities and discretions of the trustee must be exercised by the trustee personally, and 
• the trustee is responsible and liable for the performance of the trust and cannot seek to discharge itself by placing the obligation on another person.

As we know, however, trustees are not experts in every aspect of a trust’s operation, especially superannuation trusts which often affect thousands of persons and have complex accounting and investment structures.

How can the obligation to act personally be observed when trustees cannot always be ‘hands on’ and do not have the professional knowledge to make the required decisions?

Delegates and agents

Under the general law it is recognised that it is often impracticable and undesirable for trustees to perform every act in the conduct of the trust themselves. It is more important that the trust be operated properly than that the trustee perform every action related to the trust.

However, under the general law, there is a distinction between:

• mere ‘ministerial’ (eg, administrative) acts for which the trustee may engage an agent (subject to exercising the requisite standard of care), and 
• acts relating to the execution of the trust or exercise of the trustee’s powers and discretions which cannot be given to another (ie, delegated) without some express power under a trust deed or statute.

Whether a person is (as a matter of law) an agent or a delegate depends on whether the person has the ability to make decisions which relate to the execution of the trust or the exercise of the trustee’s powers and discretions. An agent, in general, carries out only administrative functions. In contrast, a delegate is able to exercise the trustee’s powers and discretions which have been properly delegated. It is usually said that an agent is ‘appointed’ and a power is ‘delegated’.

Some entities, such as an administrator, may act as an agent in certain capacities and as a delegate in other capacities. Often the terms ‘agent’ and ‘delegate’ are used interchangeably but they are not synonymous and each word has different implications legally.

Statute allows agents to be appointed

The Trustee Acts of most states and territories recognise that a trustee might be compelled to use agents in the performance of its duties. (For example, refer to section 28 of the Trustee Act 1958 (Vic).) Unless the governing rules of the fund expressly prohibit the use of agents, this statute would enable a trustee to appoint an agent.

Further, section 52(3) of the Superannuation Industry Supervision Act 1993 (Cth) (SIS Act) states that the covenant in section 52(2)(e) (prohibiting a trustee from doing anything that would prevent the trustee from properly performing or exercising its functions and powers) should not be taken to preclude the trustee from engaging or authorising persons (eg, agents) to do acts or things on behalf of the trustee.

Governing rules must allow delegation

Where a trust is created by a trust deed, the powers of a trustee are derived primarily from that trust deed. In that circumstance, the general law and statute have a residual function (ie they ‘fill in’ any gaps in the trust deed); they are not a source of power in themselves.

A trustee does not have the power to appoint a delegate under general law and cannot do so unless the trust deed expressly allows. A trustee who appoints a delegate without the authority of the trust deed will generally have breached its duty to act personally.

Under a valid delegation, the delegate has, within the scope of the delegation, the same powers, authorities, discretions and responsibilities as if he or she were the trustee. Generally, an effective decision of a delegate is taken to be a decision of the trustee. However, ultimate accountability to beneficiaries rests with the trustee (rather than its delegates).

We do not think that section 52(3) of the SIS Act (mentioned above) enables trustees to make delegations; rather, the governing rules of the fund must still allow delegations to occur.

Ratification

Proper selection and supervision of a trustee’s delegates and agents are essential. A trustee will be liable if it is not diligent in monitoring its delegates’ and agents’ performance and activities. If a trustee ensures that its delegations are properly in place and are valid, it will not be necessary for the trustee to ‘ratify’ the delegate’s decision.

‘Ratification’ is the trustee’s retrospective approval of an act where the agent or delegate lacked the authority to bind the trustee whether because of a defective delegation or appointment or because the delegate or agent acted outside their authority.

When preparing minutes of meetings, the recording secretary needs to be mindful of what ‘ratification’ means as a matter of law and use it appropriately as the term highlights the fact that the act of the agent or delegate is not valid for some reason.

Practical tips

A trustee should keep the following points in mind with respect to agents and delegates:

1. An agent and a delegate are not the same thing. 
2. The authority being delegated (eg, in an instrument of delegation) must accurately reflect the relevant power or duty in the fund’s governing rules.
3. Ensure that the delegate is properly exercising the delegated power or duty through proper training and supervisory measures such as regular reporting and compliance checks.
4. Ratification is not required unless the agent or delegate has acted improperly, eg, has acted outside the authority given to them by the trustee.

Endnotes

1. Manglicmot v Commonwealth Bank Officers Superannuation Corporation [2010] NSWSC 363
2. Freehills article, ‘Superannuation Update February 2010: General update: Telstra Super Pty Ltd v Finch [2009] VSCA 318 (Supreme Court of Victoria, Court of Appeal, 23 December 2009)’  
3. Superannuation Update August 2010 
4. Finch v Telstra Super Pty Ltd [2010] HCATrans 224 (2 September 2010)  
5. Finch v Telstra Super Pty Ltd [2010] HCA 36 (20 October 2010) 

More information

For information regarding possible implications for your business, contact a member of the Superannuation team.