The scope of a superannuation trustee’s obligations in dealing with and litigating member claims by Howard Insall SC

This article deals with a number of issues relating to the rights, obligations and remedies in superannuation trusts and focusses on issues related to member claims.

The topic is wide. I propose to approach the topic by first dealing with the sources of trustees’ obligations and the nature of members’ interests and remedies. I will then proceed to consider a number of issues arising in connection with member claims, underpayments, overpayments and remediation of loss. Lastly, I will deal with some issues concerning the rights and obligations of trustees in litigating and compromising claims.

Sources of obligations and nature of members’ rights and remedies

 When considering issues relating to member claims, the starting place is the source of the trustee’s obligations, the nature of the members’ rights and the remedies available.

In the present instance, I am concerned with members of Regulated Superannuation Funds, (hereafter “Superannuation Trusts”) ie superannuation trusts which are the subject of s 19 of the Superannuation Industry (Supervision) Act 1993 (“SIS Act”).

The rights and obligations of trustees and members of Superannuation Trusts are obviously impacted by the SIS legislation, in particular Part 6 of the SIS Act, which contains a suite of provisions which are fundamental to any consideration of this topic. Elucidating the effect of Part 6 and its interaction with general trust law is not straightforward. Yet trustees must grapple with these issues, particularly in the light of their fundamental duties, which, as Jacobs puts them, requires trustee “to become thoroughly acquainted with the terms of the trust and all documents, papers and deeds relating to or affecting the trust property”1 and to “adhere rigidly to the terms of the trust”2. Accordingly, a short analysis of the SIS Act provisions is appropriate. I will concentrate on Part 6 noting of course that the obligations of Trustees are impacted by many other provisions of the SIS Act, including the need to comply with operating standards prescribed under Part 3 and prudential standards prescribed by Part 3A.

 The following issues arise:

a.     What is involved in the requirement for a “trustee” under the SIS Act?

b.     Which general law obligations apply, prima facie, to superannuation trustees?

c.     When are the statutory covenants in s 52 of the SIS Act deemed to form part of the governing rules of Superannuation Trusts?

 d.     What are the general law and statutory remedies available to members?

 e.     To what extent does the SIS Act prevent trustees from expressly excluding general law trust obligations?

 f.      What is the nature of members’ interests in the fund?

 (a) Requirement for “trustee” under the SIS Act

 I can deal with the first issue shortly.

The SIS Act requires a Regulated Superannuation Fund to have a “trustee”. Section 19(1) and (2)  of the SIS Act provides as follows:

 “19. Regulated superannuation fund

Definition

(1)   A regulated superannuation fund is a superannuation fund in respect of which subsections (2) to (4) have been complied with.

 Fund must have a trustee

(2)   The superannuation fund must have a trustee.”

The SIS legislation contains no express prescription of the nature and type of office contemplated by the requirement for a “trustee” as referred to in s 19. Prima facie, it would seem that the SIS Act requires a Superannuation Trust to have a “trustee” in the usual sense, ie a trustee as defined under general trust law. Such a trustee will be subject to obligations under the general law, (except to the extent that these are legitimately excluded under the trust deed), the requirements of State trustee legislation and the supervisory jurisdiction of a court of equity. Jacobs3 identify the essential requirements of a trust in this sense – requirements which cannot be excluded by the trust instrument – as:

a.     There must be a person (the trustee) on whom there is an obligation to deal with the property in terms of the trust;

b.     There must be trust property (in the sense of property held and capable of being held subject to the trusts);

c.     There must be beneficiaries;

d.     The trustee must be under a personal obligation to deal with the trust property for the benefit of the beneficiaries.

The last requirement is important in terms of the nature of a beneficiary’s interest in the trust property. Jacobs says4:

“the trustee must be under a personal obligation to deal with the trust property for the benefit of the beneficiaries. It is an obligation which gives rise to correlative rights in the beneficiaries. The obligation must be annexed to the trust property. This is the equitable obligation proper. It arises from the very nature of a trust and from the origin of the trust in the separation of the common law and equitable jurisdictions in English legal history. The obligation attaches to the trustees in personam, but it is also annexed to the property so that the equitable interest resembles a right in rem. It is not sufficient that the trustee should be under a personal obligation to hold the property for the benefit of another, unless that obligation is annexed to the property. Conversely, it is not sufficient that an obligation should be annexed to property unless the trustee is under the personal obligation.” (emphasis added)

 In addition, there are certain irreducible core obligations of a trustee of a trust. In Armitage v Nurse5 Millet LJ stated, at 253-4, that the:

“The duty of the trustees to perform the trusts honestly and in good faith for the benefit of the beneficiaries is the minimum necessary to give substance to the trusts, but in my view it is sufficient”.

 In Crossman v Sheahan6 Ward JA (with whom Payne JA agreed) said, at [308]:

“In Armitage v Nurse, the minimum necessary to give substance to the trusts was said to be the duty of the trustee to perform the trusts honestly and in good faith (at 253–254). That, and the duty to adhere to the terms of the trust (see Youyang Pty Ltd v Minter Ellison Morris Fletcher [2003] HCA 15; (2003) 212 CLR 484 at [32]), can readily be accepted as falling within the ‘irreducible core of obligations’ of the trustee.”

Section 19 appeared in its current form in the original 1993 Act and appears to reflect the recommendations of the Australian Law Reform Commission Report into “Collective Investments: Superannuation” (“ALRC Report”). In para 2.18 of the Report the Review stated:

“All of the different types of superannuation schemes outlined above, including PSTs and ADFs, are structured as trusts or are established by or under an Act of a parliament. In much of the current debate surrounding the reform of superannuation it is assumed that the trust structure is the most appropriate for superannuation. The recommendations contained in chapter 3 onwards of this report are made on the assumption that the trust structure is retained for superannuation, but that the trustee will, in most cases, be incorporated.”

The Explanatory Memorandum for the SIS Bill stated (as to cl 19) that the clause set out the conditions which must be complied with in order for a fund to be a regulated superannuation fund for the purposes of the Act and continued:

“It provides that the Fund must have a trustee”.

It would appear to follow that it is mandatory, by virtue of s 19 of the SIS Act, for a Superannuation Trust to have a trustee in the normal sense of the word7.

“Trustee” is defined in s 10 of the SIS Act - a definition which has subsisted in the Act since its commencement - as follows:

“trustee, in relation to a fund, scheme or trust, means:

(a)   if there is a trustee (within the ordinary meaning of that expression) of the fund, scheme or trust—the trustee; or

(b)   in any other case—the person who manages the fund, scheme or trust.”

It may be suggested that this definition contemplates that it is not essential, in order to satisfy the requirements of s 19, for a Superannuation Trust to have a trustee within the ordinary meaning of that term, ie a trustee subject to the ordinary rights and duties of trusteeship in accordance with the general law. The definition appears to suggest that a Regulated Superannuation Fund may operate without a trustee in the ordinary sense of that expression and merely with “a person who manages the fund”, not being a trustee in the ordinary sense of the word. The definition seems to contemplate a person who manages the fund as legal and beneficial owner. If so, this would be highly significant as it may suggest that a Superannuation Trust could operate outside the general law of trusts.

 In Re Pleash8, it appears to have been contemplated that the extended definition of trustee applied to the requirement for a “trustee” under the SIS Act, so that a fund could be operated by a manager, not being a trustee in the ordinary sense of the word9.

The facts in Re Pleash were to the following effect. Suncoast Restoration Pty Ltd (“Suncoast”) was a trustee of a superannuation fund governed by the SIS Act. Its trust deed contained a provision that Suncoast would be automatically removed as trustee in the event of appointment of liquidators. In February 2012, liquidators were appointed with the effect that Suncoast ceased to be trustee of the fund. The liquidators failed to appreciate this and proceeded to liquidate the trust’s assets. By reason of Suncoast’s removal as trustee, neither Suncoast nor the liquidators, as officers of Suncoast, had the power to do so. In September 2019, the liquidators discovered the issue. They were concerned about their potential liability in selling trust assets without power and brought an application to be relieved from such liability under s 310 of the SIS Act.

In order to obtain relief, the liquidators had to establish that they were “superannuation officials” within s 310 of the SIS Act which, in turn, meant that they had to establish that they were officers of a “trustee” of a superannuation entity, being Suncoast. In other words, they had to show that, notwithstanding its automatic removal, Suncoast was a “trustee” within the SIS Act. In order to do so, they argued that the definition of “trustee” in s 10 applied to the meaning of the word “trustee” in this context. The liquidators advance two alternative arguments:

a.     that Suncoast was a trustee because, notwithstanding its removal it was the “person who [had] manage[d] the … trust” and thus fell within para (b) of the definition of “trustee” in s 10.

b.     Alternatively, Suncoast remained a “bare trustee” and a bare trustee was “a trustee (within the ordinary meaning of that expression)” within the definition of “trustee” in s 10.

The trial judge, Reeves J, rejected the first argument on the facts, ie on the basis that Suncoast had not in fact “managed” the trust as it had no active control of the trust. His Honour did not address the more fundamental question whether the definition in s 10 applied at all so that the requirement for a “trustee” in s 19 could be satisfied if there was no trustee in the ordinary sense of the term but merely a person who had managed the trust.

Reeves J accepted the second argument. He accepted that Suncoast was a bare trustee and held10 that the phrase “a trustee within the ordinary meaning of that expression” in s 10 would include a “bare” trustee.

Jacobs11 describes a “bare trustee” as

“a trustee who has no interest in the trust assets other than that existing by reason of the office of trustee and the holding of legal title, and who never has had active duties to perform or who has ceased to have those duties with the result that in either case the property awaits transfer to the beneficiaries or at their discretion”

Re Pleash involved a very particular situation and, in fairness, proceeded in circumstances where there was no true contradictor. But to the extent that the decision is authority for the proposition that a Superannuation Trust does not require a trustee in the ordinary sense of the word or that the requirement for a trustee could be satisfied where the trust has a bare trustee, it is, with respect, difficult to accept. One consequence of operating without a trustee in the ordinary sense of the word would be that a trustee of a Superannuation Trust would not be subject to the usual obligations of a trustee under the general law. This appears to be inconsistent with the contemplation of the SIS Act that a Superannuation Trust have beneficiaries12 and that beneficiaries have beneficial interests13.

Moreover, it seems unlikely that a Superannuation Trust could operate as required by the Act with a bare trustee. Apart from anything else, s 52 of the SIS Act explicitly requires that a fund’s “governing rules” contain extensive covenants of an active kind, including, for example, a covenant to formulate investment strategies14.

It is not clear whether any work is done by applying the extended definition of “trustee” to s 19. It is probable that the extended definition was not intended to apply to s 19 at all. Section 10 contains the usual caveat that definitions do not apply where a contrary intention appears and it seems that a contrary intention appears in the use of the term “trustee” in s 19, in the context of the provisions of the SIS Act as a whole.

So in the result, it seems tolerably clear that a regulated superannuation fund requires a trustee in the ordinary sense of the word and that prima facie, this would subject the trustee to the usual obligations of trustees under the general law, except to the extent that these obligations are legitimately excluded by the trust instrument.

 It is also notable that section 10 does not prescribe, as one of the requirements for the constitution of a regulated superannuation fund, that the fund have a “trust deed”. Under the general law, no deed is required in order to constitute an express trust. An express trust which is intended to operate as a Superannuation Trust must, inevitably, be in writing, due to the requirement of writing under the Statute of Frauds, but this does not require a deed15.

(b)  Which general law obligations apply, prima facie, to superannuation trustees?

If a Superannuation Trust requires a “trustee” in the ordinary sense of that word, the general law obligations of such trustee will, prima facie, apply. What are those obligations?

In SAS Trustee Corp v Cox, Campbell JA said, at [148]:

“As I have endeavoured to explain elsewhere, the duty of any particular trustee depends on what is involved in faithfully carrying out the office of being trustee of that particular trust (JC Campbell, “Should the ‘Rule in Hastings-Bass’ Be Followed in Australia? — Trustees’ Duties to Enquire and Trustees’ Mistakes” (2011) 34 Australian Bar Review 259 at 270–277). There may be a core of duties that would always, or nearly always, be involved in faithfully carrying out a trust, regardless of its individual peculiarities. Beyond that, any additional duties of a particular trustee come to be understood through considering the practical exigencies of the types of decision that that particular trustee has to make, in the particular social or business environment in which that trustee is operating. To those factual matters one applies the standards of faithful performance of those duties that are laid down in the trust instrument, and of faithfully attempting to achieve the objectives articulated in the trust instrument.”

Nevertheless, it is possible to identify key duties of trustees under the general law and these would include duties16:

a.     To become thoroughly acquainted with the terms of the trust;

b.     To get in the trust property and protect it;

c.     Not to impeach the validity of the trust instrument or the title of the beneficiary;

d.     To adhere strictly to and carry out the terms of the trust;

e.     To act impartially between the beneficiaries;

f.      To invest properly the trust funds;

g.     To keep and render proper accounts and give full information when required;

 h.     To exercise skill and care;

 i.      Not to delegate duties or powers;

 j.      To pay and transfer the trust property and its income to the right persons;

 k.     To act gratuitously;

 l.      Not to make a profit in a position of conflict;

 m.   Not to make a profit from use of position as trustee or an opportunity arising therefrom.

It is not usual to include, within the traditional categorisation of trustees’ duties, standalone duties to act honestly or to act in the best interests of beneficiaries. The ALRC Report did not identify such duties in their consideration of principal duties of trustees17. However, in performing trusts and exercising powers, trustees are clearly obliged to do so honestly and in the best interests of beneficiaries. Indeed, this is part and parcel of the core requirements of a trust, as described by Millet LJ in Armitage v Nurse18 at 253-4.

 (c) When are the statutory covenants in s 52 of the SIS Act deemed to form part of the governing rules of Superannuation Trusts?

 The most important provisions dealing with obligations of trustees in the SIS Act is found in Part 6 which makes provision, in s 52 and following for the incorporation of certain “covenants” into Superannuation Trusts’ governing rules. Section 55 makes provision for the consequences of breach of covenants in those governing rules.

 There can be no doubt that every trustee of a Superannuation Trust is subject to the s 52 covenants, either because covenants to that effect are contained in the governing rules of the fund or because, if not, they are taken to be contained in those governing rules. There can be no doubt that s 55 sets out consequences for breach of such covenants, whether contained in or taken to be contained in the governing rules. However, the precise manner in which these provisions apply is not crystal clear and this may affect the extent to which a trustee of a Trust may owe general law obligations and the consequences for breach of such obligations.

 The genesis of sections 52 and following was Section 9 of the ALRC Report.19 In that section, the Review set out what it regarded as the ordinary “fiduciary” duties of trustees under the general law. It recognised that ordinarily a trustee could not avoid these duties but may do so where the duties were expressly excluded under the trust deed. It made the following observation in para 9.10:

“9.10.... The Review considers it to be of great importance that the [trust deed] not permit derogation from the proper duties of trustees and that those duties ought to be clearly identified. This is especially important for those trustees who are unfamiliar with their duties. All employees will in future be required to be members of a superannuation scheme. As such, they require the full protection of the fiduciary duties imposed by equity upon superannuation scheme trustees, The presence in deeds of clauses that permit acts which would otherwise be prohibited by the general rules of equity are, however, commonplace.”

 In para 9.11, the Review made the following proposal:

 “Proposal to clarify minimum duties

Proposal

9.11. The Review is firmly of the view that it is inappropriate for the trust deed to contain clauses that allow a significant reduction of the duties imposed upon the responsible entity. It proposed in DP 50 that a minimum set of fiduciary responsibilities of the responsible entity be clearly identified and, where appropriate, included in legislation applying to superannuation schemes with a requirement that the deeds or other instruments constituting a superannuation scheme would not be able to derogate from these obligations.”

In para 9.16, the Review made it clear that in making this recommendation, it did not intend to codify or alter the underlying principles. In Recommendation 9.2, it stated:

“Recommendation 9.2: Basic fiduciary obligations of the responsible entity.

 1. The law should specify the following obligations as basic fiduciary obligations of a responsible entity that cannot be excluded or modified

·       to hold the property of the fund not for the use or benefit of itself or the members of the responsible entity, but for the use and benefit of the members of the fund, including non-contributing members.

·       to become familiar with and to observe the provisions of the deed or other instrument constituting the superannuation fund or ADF and to apply them fairly as between the members of the scheme

·       to act honestly in all matters concerning the fund or ADF

·       to avoid any conflict between the interests of the members and the interests of the responsible entity and, if such a conflict arises, to disclose it to the members.

·       to exercise its powers, and perform its duties, as responsible entity in the best interests of the members.

·       to act, in relation to all matters affecting the fund or ADF with the care, skill and diligence with which a person of ordinary prudence would act when dealing with property of another for whom he or she was morally bound to provide

·       to keep the money and other assets of the fund or ADF separate from the money and other assets of itself, of the members of its board of management and, in the case of an employer sponsored or industry superannuation fund, of any employer involved in the fund

·       to exercise a discretion or a power vested in the responsible entity, either by law or by the deed or other instrument constituting the scheme, only after proper consideration

·       if it invests the money, or deals with the other assets, of the fund or ADF — to seek advice from an appropriately qualified person before doing so; however, nothing prevents that person from being a member of the board of management of the responsible entity

·       not to delegate trustee responsibility in relation to a matter affecting the fund or ADF

·       not to profit from acting as responsible entity; this duty should not prevent an individual who is the responsible entity or a member of the board of management of a responsible entity from receiving reasonable remuneration for work done in that capacity

·       to monitor regularly the relationship between the realisable assets of the fund or ADF and its liabilities and prospective liabilities to members to ensure that the scheme is able to pay benefits to which members became entitled as they fall due

·       in determining whether to make a particular investment, to have regard to the whole of the circumstances of the fund or ADF including, but not limited to, the following:

 —its other investments.

 —its obligations, both existing and prospective

 —the nature of its membership

 —the desirability of diversifying investments to minimise risk

 ·       to allow a member access to any information or document in the possession or under the control of the responsible entity that relates to the fund or ADF, except a document the disclosure of which to the member who seeks it

 —would unreasonably disclose another person’s private affairs or

 —would disclose trade secrets or other information that has a commercial value that would be destroyed or lessened by the disclosure, and in relation to which the responsible entity is under a duty of confidence to another person not to disclose.”

It should be noted:

 a.     The obligations with which the Review was concerned were obligations imposed under the general law (described as “fiduciary” obligations – although it is debateable whether this was an accurate description of the identified obligations);

 b.     The Review considered that it was important that legislation identified certain basic fiduciary obligations and precluded trust deeds from derogating therefrom;

 c.     The Review did not recommend codification or alteration of the basic fiduciary obligations.

 The legislature proceeded to enact Part 6 the SIS Act including s 52 but did not do so in a way which entirely mirrored the approach by the Review. The means by which the legislature proceeded was, in effect, to deem the inclusion of a number of basic duties in governing rules of Superannuation Trusts in cases where such governing rules did not already contain duties to the same effect.

At the time of enactment, the key provisions of Part 6, relevantly to the present topic, were as follows:

 “PART 6 - PROVISIONS RELATING TO GOVERNING RULES OF SUPERANNUATION ENTITIES

51.    Object of Part

52.    Covenants to be included in governing rules

53. …

54. …

55. Consequences of contravention of covenant

56. …

57. …

58.    Trustee not to be subject to direction

59.    Exercise of discretion by person other than trustee

60.    Amendment of governing rules”

 In order to determine the circumstances in which s 52 operates to deem the inclusion of basic obligations in the governing rules, it is necessary to examine closely the relevant provisions. Part 6 commences with section 51 which provides as follows:

 “51 Object of Part

The object of this Part is to set out rules about the content of the governing rules of superannuation entities.” (emphasis added).

 The phrase “Governing rules” is defined in s 10 as:

“governing rules, in relation to a fund, scheme or trust, means:

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

 (b)   any unwritten rules;

 governing the establishment or operation of the fund, scheme or trust.”

Thus, the apparent object of the Part was, in essence, to set out rules about the content of the rules governing the establishment or operation of the fund Superannuation Trust, being

 a.     rules governing the establishment or operation of the trust in a trust instrument, other document or legislation; or

 b.     rules governing the establishment or operation of the trust contained in any unwritten rules.

“Unwritten rules” must, it is submitted, be taken to refer to or include general trust law obligations.

The critical provision is s 52(1) which provided:

“52 Covenants to be included in governing rules—registrable superannuation entities

Governing rules taken to contain covenants

(1) If the governing rules of a registrable superannuation entity do not contain covenants to the effect of the covenants set out in this section, those governing rules are taken to contain covenants to that effect.”

 In applying s 52 to the governing rules of a Fund, one is required to consider

a.     What are the “covenants” in the “rules” governing the operation of the Fund (as contained in either the trust deed, legislation or unwritten rules) and

 b.     whether those covenants are “to the effect” of the covenants set out in that section.

 “Covenant” within this context surely means a binding obligation rather than a formal covenant under seal. I say this because:

 a.     the apparent intention of the legislature in enacting s 52 was, at least in part, to identify what were thought to be existing general law obligations and prevent derogation therefrom. Such general law obligations, by definition, would be unwritten and would not be found in formal “covenants” under seal;

 b.     whilst s 19 of the SIS Act requires that a Regulated Superannuation Fund have a “trustee”, it does not require the fund to have a “trust deed” and it would be odd, absent such a requirement, to expect that the fund have formal covenants under seal in those circumstances;

 c.     s 52 seems to be concerned with whether or not the trust contains certain obligations which are binding on the trustee and this requirement is sufficiently fulfilled if there is a properly constituted trust pursuant to which a trustee becomes bound to carry out the general law obligations;

 d.     there seems to be no purpose in requiring covenants in the strict sense in this context;

 e.     a covenant under seal has a very specific effect (for example, giving rise to a specialty debt with a 12 year limitation period20) and there is no reason to think that the legislature intended that s 52 should have this effect, particularly where s 55 expressly provides a remedy for breach of the s 52 covenants with a 6 year limitation period;

 f.      the object of non-derogation would be achieved because (taking the covenant to act in best interests of beneficiaries in s 52(2)(c) as an example):

 i.     if a trustee was subject to the obligation under general law to act in the best interests of beneficiaries, the governing rules of the Trust would contain a covenant to the effect of the covenant in s 52(2)(c);

 ii.     Accordingly, s 52(2)(c) would not operate in relation to that trust to deem the inclusion of the s 52(2)(c) covenant in its governing rules;

 iii.     If, however, the trustee amended the trust deed to exclude the general law obligation to act in the best interests of beneficiaries (assuming this was possible), the governing rules would no longer contain a covenant to that effect so that s 52(2)(c) would immediately operate to deem the inclusion of the s 52(2)(c) covenant in the governing rules.

If the strict construction of covenant were to be adopted, the section would have a very straightforward but very different effect. The task of a trustee, in considering the application of s 52, would involve identifying whether the trust deed itself contained formal covenants to the effect of the provisions in s 52(2). It is probable that few trust deeds would contain such formal covenants so that s 52 would have the effect of deeming the incorporation of such covenants in the governing rules of most Superannuation Trusts.

 This strict approach would have a major impact on the remedies available against trustees. Section 55 creates a statutory cause of action for damages resulting from loss caused by a contravention of covenants contained in or taken to be contained in the governing rules. If the strict meaning of covenant was intended, s 55 would only give rise to a cause of action in relation to the s 52 covenants and any other obligations in the trust deed which happened to be undertaken in the form of a formal covenant.

 If, as I believe to be correct, the broader meaning of “covenant” applies, the application of s 52 is less straightforward because it involves considering, amongst other things, whether the unwritten rules in the governing rules (ie general trust law) contain covenants to the effect of those contained in s 52. By the same token, if the broader meaning was intended, s 55 would have a more far-reaching effect as it would create a statutory cause of action in respect of loss resulting from the breach of any obligation in the governing rules, including obligations under general trust law.

The other consideration in determining how s 52 operates is the meaning of “to the effect”. Before s 52 can operate to deem the inclusion of a s 52 covenant, it must be established that the governing rules of the fund contain covenants “to the effect” of the covenants set out in s 52. This raises a number of questions:

 a.     Does the phrase “to the effect” mean effectively identical or merely “to the same general effect”?

b.     Does the phrase “to the effect” direct attention solely at the terms of each covenant in s 52(2), or the broader effect of those covenants?

 As to the first question, in my view, the phrase “to the effect” was intended to mean effectively identical, in the sense that no meaningful consequence could flow from any difference between the covenants. In HEST Australia Ltd v Inkley21, Blue J appeared to accept that if express provisions equivalent to the statutory covenants were to be included in a trust deed, there was merit in retaining them in identical form so as to avoid any potential for the confusion inherent in having two similar but slightly different forms of obligation.

The proposed introduction of a new s 54B into the SIS Act (providing for criminal consequences for a breach of s 52 covenants) supports this construction. To impose criminal sanctions on breaches covenants “to the effect” of the s 52 covenants increases the need for precision in this regard. It is one thing to set out the express terms of required covenant and to impose criminal sanctions for breach. It is quite another to impose criminal sanctions in relation to any obligation which can be said to be “to the same general effect” of the s 52 covenant22.

One consequence of this view (ie the view that “to the effect” means “effectively identical”) will be that if a covenant in the governing rules of a Superannuation Trust is similar to a statutory covenant but not effectively identical, the trustee would be subject to two similar obligations. However, there appears to be no particular reason why this would create problems. There are many statutes which impose statutory obligations whilst preserving general law obligations. There is nothing in the SIS legislation which provides that a Fund cannot duplicate, in slightly different terms, the obligations under the s 52 covenants. In fact, s 350 of the Act provides:

“It is the intention of the Parliament that this Act is not to apply to the exclusion of a law of a State or Territory to the extent that that law is capable of operating concurrently with this Act.”

In Invensys Australia Superannuation Fund Pty Ltd v Austrac Investments Ltd23 at [106], Byrne J said:

“It is worth noting … that the insertion by s 52(2) of particular covenants into the trust deed does not affect the other obligations imposed upon trustees whether by the deed of trust or by the general principles of law except, perhaps, to the extent of some inconsistency.”

Indeed, the terms of sections 55A(2) and 60(3) suggest that even if a covenant in the governing rules were inconsistent with a s 52 covenant, both would apply. Both of those subsections expressly provide that if the governing rules of a fund are inconsistent with statutory provisions set out in earlier subsections, such statutory provisions prevail and the governing rules are invalid to the extent of any inconsistency. There are no equivalent provisions in relation to the s 52 covenants.

As to the second question, in my view, the phrase “to the effect” directs attention beyond the precise terms of each covenant in s 52(2). For example, the nature of the conflict covenant in s 52(2)(d) is amplified in s 52(4). A covenant in the governing rules would only satisfy the requirement of being “to the effect” of the conflict covenant in s 52(2)(d) if it had the effect as amplified by s 52(4).

In the light of all of the above, which s 52(2) covenants will be taken to be included in the governing rules of Superannuation Trusts?

This involves a comparison between each s 52 covenant on the one hand and both the terms of the trust deed or other written instrument and the obligations imposed by the general law on the other:

a.     If the Trust Deed or written rules governing the operation of the trust documents contain an express written covenant to the effect of a s 52 covenants, the section will not operate in relation to that covenant;

 b.     If Trust Deed or written rules do not contain an express written obligation to the effect of a s 52 covenant, it is necessary to consider general law obligations:

 i.     If general law obligations do not impose obligations to the same effect as that s 52 covenants, s 52 will operate so that the governing rules will be taken to include that s 52 covenant;

 ii.     If general law obligations do impose an obligation to the same effect as the s 52 covenant.

 Which of the s 52 covenants are to the same effect as general law obligations?

This is not an easy question. It will depend upon whether a court construes the formulation of the covenants in s 52 on the basis that they were intended to do nothing more than identify existing general law obligations or whether the court construes the covenants as a restatement of obligations, albeit obligations which have their origin in general law obligations.

 In Manglicmot v Commonwealth Bank Officers Superannuation Corporation Pty Ltd24 Giles JA considered the apparent legislative intention behind the enactment of s 52. After considering the relevant recommendations in the ALRC Report he continued (at [117]-[118]):

“[117] In the second reading speech for the Bill for the SIS Act the Parliamentary Secretary to the Treasurer, Mr Johns, relevantly said that the Bill “provides … for trustees and investment managers to be made subject to adequate legislative sanctions for the proper performance of their fiduciary responsibilities and increasing their accountability to their members; clear delineation of the basic duties and responsibilities of trustees”. He said that “the provisions of the current Occupational Superannuation Standards Act 1987 relating to prudential compliance standards have been taken up in order to consolidate superannuation industry prudential supervision arrangements”. Under the heading in Hansard, “Financial Implications”, he referred to providing “added protection to superannuation savings and to promote a more efficient superannuation industry”: Hansard, 27 May 1993, p 1101. In the course of later debate the Parliamentary Secretary made the statement extracted by Byrne J at [102]. In a larger extract, he said that:

‘… what we have done [in the Bill] is simply to transcribe already existing trust law that will govern the behaviour of these people and codify it and write it down. This is perhaps the first time an effort has been made to make nice and clear the way we expect these people to act the meaning of acting properly, carefully and prudently.’

[118] … It is difficult to gain assistance from the Parliamentary Secretary’s statements. Regard to the report, however, gives no encouragement to the covenants being more than statements of what were thought to be existing trust obligations, the point of the legislation being to prevent any derogation by the relevant trust instrument.”

 Giles JA did not draw any firm conclusion as to the intention of the legislature, beyond a possible intention of enacting what were thought to be existing trust obligations and preventing any derogation therefrom by means of amendment to the relevant trust instrument. However, surely some help can be gained from the Parliamentary Secretary’s statement that the legislature was purporting to “codify” the obligations so as to “make it nice and clear” how trustees were expected to act. It appears, at least, that in addition to incorporating what were thought to be existing obligations, the legislature intended to tailor obligations to the requirements of the superannuation industry (see in particular s 52(2)(f) and (g)). Certainly, the present form of s 52 (which has expanded significantly from its initial version and is about to expand further) does not support the view that the section is designed merely to embody existing trust obligations.

 In my view, the only covenants in s 52 which could clearly be said to be “to the effect” of general law obligations are those found in s 52(2)(c) and (e) to (f). Section 52(2)(a) and (b) may go beyond general law obligations. The other provisions in s 52(2), whilst often having some equivalence to general law obligations, are probably too specific and prescriptive to satisfy the requirements of similarity in s 52.

 Sections 52(2)(c) and (e) to (f) provide for covenants by the trustee:

 “(c) to perform the trustee’s duties and exercise the trustee’s powers in the best interests of the beneficiaries;

…

 (e)   to act fairly in dealing with classes of beneficiaries within the entity;

 (f)   to act fairly in dealing with beneficiaries within a class;

In my view, these provisions seem to be clearly equivalent to general law obligations25.

Section 52(2)(a) and (b) provide:

“(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 a prudent superannuation trustee would exercise in relation to an entity of which it is trustee and on behalf of the beneficiaries of which it makes investments;”

The covenant in s 52(2)(a) is expressed as a covenant “to act honestly in all matters concerning the entity”. There is no constraint on this obligation, for example by requiring that the relevant honest action be undertaken in the exercise of powers or in the performance of duties (cf s 52(2)(c)). There is scope to argue that the obligation of a superannuation trustee extends beyond actions in the exercise of powers and the performance of duties.

As regards s 52(2)(b), the covenant has changed from its original form (which was considered by Giles JA in Manglicmot to correspond with the general law26) and the new provision appears to impose a stricter duty than that imposed by the general law. Further, as with sub-paragraph (a), sub-paragraph (b) imposes the duty “in relation to all matters affecting the entity” - it is not explicitly restricted to actions carried out in exercise of powers or performance of duties.

Thus, I believe it can be said that unless a Superannuation Trust Deed specifically excludes obligations to the effect of the covenants in s 52(2)(c), (e) and (f), (and possibly those in s 52(2)(a) and (b)), the general law obligations to that effect will operate and there will be no occasion for s 52 to operate so as to deem such covenants to be included in the governing rules of Superannuation Trusts. In relation to the other covenants set out in s 52, in my view, covenants to that effect will be taken to be contained in Superannuation Trusts’ governing rules unless the trust deed expressly includes provisions in almost identical terms and to almost identical effect. These other covenants will operate, in a number of cases, alongside fairly similar general law obligations.

(d) What are the general law and statutory remedies available to members?

General law remedies

 General law remedies focus on breaches of trust. Breaches of trust vary in kind and remedies may vary depending upon the nature of the breach (a key distinction being between those breaches which are honest and those which are fraudulent).

As Millet LJ said in Armitage v Nurse27

“Breaches of trust are of many different kinds. A breach of trust may be deliberate or inadvertent; it may consist of an actual misappropriation or misapplication of the trust property or merely of an investment or other dealing which is outside the trustees’ powers; it may consist of a failure to carry out a positive obligation of the trustees or merely of a want of skill and care on their part in the management of the trust property; it may be injurious to the interests of the beneficiaries or be actually to their benefit. By consciously acting beyond their powers (as, for example, by making an investment which they know to be unauthorised) the trustees may deliberately commit a breach of trust; but if they do so in good faith and in the honest belief28 that they are acting in the interest of the beneficiaries their conduct is not fraudulent. So a deliberate breach of trust is not necessarily fraudulent.”

 Under the general law, the remedies of beneficiaries are equitable in nature (as opposed to the common law remedy of damages). In the case of breach of trust leading to loss, a beneficiary was entitled to relief in the nature of restoration of the trust funds and/or equitable compensation. In Maguire v Makaronis29, Brennan CJ, Gaudron, McHugh and Gummow JJ said30 (at p 469):

“The obligation of a defaulting trustee is essentially one of effecting restitution to the trust estate. In Target Holdings Ltd v Redferns, Lord Browne-Wilkinson said:

‘The equitable rules of compensation for breach of trust have been largely developed in relation to such traditional trusts, where the only way in which all the beneficiaries’ rights can be protected is to restore to the trust fund what ought to be there. In such a case the basic rule is that a trustee in breach of trust must restore or pay to the trust estate either the assets which have been lost to the estate by reason of the breach or compensation for such loss. Courts of equity did not award damages but, acting in personam, ordered the defaulting trustee to restore the trust estate.

…

If specific restitution of the trust property is not possible, then the liability of the trustee is to pay sufficient compensation to the trust estate to put it back to what it would have been had the breach not been committed … Even if the immediate cause of the loss is the dishonesty or failure of a third party, the trustee is liable to make good that loss to the trust estate if, but for the breach, such loss would not have occurred’.”

The specific nature of the remedy will depend upon the status of the beneficiary. In circumstances where the trust is continuing (which would apply as regards the interests of most beneficiaries in Superannuation Trusts), a particular beneficiary may have no right to individual compensation. Thus, Brennan CJ, Gaudron, McHugh and Gummow JJ continued in Maguire v Makaronis (at p 469):

“If the trust be still subsisting, the objective of an action to recover loss upon breach of trust is the restoration of the trust fund. The right of the beneficiaries is to have the trust fund reconstituted and duly administered, rather than to recover a specific sum for the sole use and benefit of any beneficiary. Indeed, no one particular beneficiary may have sustained a present and individual loss. This may be so if the trust is a discretionary trust or no interest vests, either in interest or possession, before the termination of a prior interest.”

In addition to these remedies, trustees will be accountable for gains or profits made in breach of their fiduciary duties not to act in a position of conflict and not to make a gain from their position as trustee or an opportunity obtained in that capacity.

There are a number of additional equitable remedies which are available in cases of breach of trust, including injunctions and the remedy of account.

Further, there are remedies against third parties who involve themselves in breaches of trust.

SIS Act remedies – action to recover amount of loss resulting from breach of covenants –

statutory injunctions

As to the s 52 covenants, section 55 provides a remedy as follows:

“55 Consequences of contravention of covenant

Covenants must be complied with

(1)   A person must not contravene a covenant contained, or taken to be contained, in the governing rules of a superannuation entity.

Breach of covenant not an offence and does not result in invalidity

(2)   A contravention of subsection (1) is not an offence and a contravention of that subsection does not result in the invalidity of a transaction.

Breach of covenant may result in action to recover loss or damage

(3)   Subject to subsection (4A), a person who suffers loss or damage as a result of conduct of another person that was engaged in in contravention of subsection (1) may recover the amount of the loss or damage by action against that other person or against any person involved in the contravention.

(4)   Unless an action under subsection (3) is of a kind dealt with in subsections (4A) to (4D), it may be begun at any time within 6 years after the day on which the cause of action arose.

Leave of court required where directors’ covenants contravened

(4A) If:

(a)   the person who is alleged to have contravened subsection (1) is or was a director of a corporate trustee of a registrable superannuation entity; and

(b)   it is alleged that the contravention is of a covenant that is contained, or taken to be contained, in the governing rules of the entity, and is:

(i)   a covenant of the kind mentioned in subsection 52A(2); or

(ii)   a covenant prescribed under section 54A that relates to the conduct of the director of a corporate trustee of a registrable superannuation entity;

an action under subsection (3) may be brought only with the leave of the court.

(4B) A person may, within 6 years after the day on which the cause of action arose, seek the leave of the court to bring such an action.

(4C) In deciding whether to grant an application for leave to bring such an action, the court must take into account whether:

(a)   the applicant is acting in good faith; and

(b)   there is a serious question to be tried.

(4D) The court may, in granting leave to bring such an action, specify a period within which the action may be brought.

Defences in actions to recover loss or damage

(5)   It is a defence to an action for loss or damage suffered by a person as a result of the making of an investment by or on behalf of a trustee of a superannuation entity if the defendant establishes that the defendant has complied with all of the covenants referred to in sections 52 to 53 and prescribed under section 54A, and all of the obligations referred to in sections 29VN and 29VO, that apply to the defendant in relation to each act, or failure to act, that resulted in the loss or damage.

(6)   It is a defence to an action for loss or damage suffered by a person as a result of the management of any reserves by a trustee of a superannuation entity if the defendant establishes that the defendant has complied with all of the covenants referred to in sections 52 to 53 and prescribed under section 54A, and all of the obligations referred to in sections 29VN and 29VO, that apply to the defendant in relation to each act, or failure to act, that resulted in the loss or damage.

(7)   Subsections (5) and (6) apply to an action for loss or damage, whether brought under subsection (3), section 29VP or otherwise.”

To summarise:

a.     Section 55(1) proscribes a contravention of a covenant “contained in” or “taken to be contained in” the governing rules of a Superannuation Trust.

i.     If the word “covenant” is construed broadly (as I suggest it should be), s 55 applies to the “contravention” of any of the obligations of a trustee of a Superannuation Trust which govern the establishment or operation of the trust, including trustee obligations under the general law and any other obligation contained in the trust deed or rules. Further, s 55 would also arguably apply to any “rules contained in … legislation … governing the establishment or operation of the … trust”, for example prudential standards31;

i. On the other hand, if “covenant” is construed in a limited way (as a formal covenant in a deed or perhaps an express promise in the trust deed or rules), s 55 will not apply to unwritten general law obligations;

b.     Section 55(2) provides that a contravention of s 55(1) is not an offence and does not result in the invalidity of a transaction:

i.     This might give rise to interesting questions concerning the effect, under general trust law, of a breach of general law obligations or a breach of the trust deed;

ii.     For example, trustee may have a power to amend the trust deed, subject to an obligation not to do so where an amendment would be to the detriment of a member. If the trustee purported to amend the deed in breach of such obligation, the amendment would be invalid in accordance with general trust law but section 55(1) might have the effect of overriding that result;

iii.     It may be suggested, in the circumstances, that the general law is not capable of acting concurrently with the SIS Act, as contemplated by s 350;

c.     Section 55(3) creates a statutory cause of action for loss as a result of conduct of another person that was engaged in in contravention of subsection (1).

i.     It is to be assumed that the loss which results from a contravention of subsection (1) will equate to loss which results from contravention of the covenant;

ii.     The cause of action has a 6 year limitation period. Assuming general law remedies continue to apply, it is conceivable that different limitation periods may operate in relation to remedies arising out of the same conduct. This may, again, raise questions about whether the general law is capable of acting concurrently with the SIS Act, as contemplated by s 350;

d.     Section 55(5) and (6) provide for statutory defences where all relevant statutory covenants and obligations have been complied with. By virtue of s 55(7), these defences apply to an action for loss or damage, whether brought under subsection (3) or otherwise. This is probably intended to refer to claims for equitable compensation under the general law. However, it is unlikely to apply to an obligation under the general law to restore the trust. Thus, where an action is for damages or compensation, the trustee will have a defence under section 55(5) and (6) but where the action is to restore the trust, there will be no such defence.

The operation of s 55 and its interaction with general law remedies has yet to be dealt with in any detail by the courts. There is clearly scope for argument about whether the section is capable of operating concurrently with the general law. However, in my view, it is unlikely that s 55 was intended to create a new code dealing with compensation of beneficiaries of Superannuation Trusts. Section 55(7) itself suggests that it was not.

I should also note that there are additional statutory remedies available under the SIS Act. Thus, where a person has engaged or proposes to engage in conduct that constituted or would constitute a contravention of the SIS Act, s 315 permits the Court (which includes the Federal Court or a State Supreme Court) to grant an injunction restraining that person from engaging in that conduct and requiring that person to do any act or thing. The Court may also order that person to pay damages either in addition or in substitution for the grant of the injunction.

(e)  To what extent does the SIS Act prevent trustees from expressly excluding general law trust obligations?

I identified, at the outset of this paper, the requirement of s 19 of the SIS Act that a Superannuation Trust must have a “trustee” in the ordinary sense of the word and the four essential conditions of a trust which this requirement must entail. In addition to these essential requirements, I identified the essential obligations of trustees which cannot be excluded by the trust deed, namely the duty of the trustee to perform the trusts honestly and in good faith and the duty to adhere to the terms of the trust (see ASIC v Drake (No 2)32, Armitage v Nurse33 and Crossman v Sheahan34).

Prima facie it would be possible for a trust deed to exclude any other general law obligations. This would be the position unless any other provisions of the SIS legislation proscribe such exclusion35.

In enacting s 52, the legislature departed, in certain respects, from the formulation of the basic duties identified in the ALRC Report. Significantly, s 52 as originally framed did not include certain basic duties of trustees or fundamental fiduciary duties, which were identified in the ALRC Report, in particular:

a.     The duty to become familiar with the terms of the trust;

b.     The duty to observe the provisions of the trust;

c.     The duty of the trustee not to be in a position of conflict;

d.     The duty of the trustee not to profit from its position.

Since that time, s 52 has been amended and the section now contains a provision dealing with conflict.

Further, s 52 does not, in terms, include some key trustee obligations under the general law referred to above, including the duty to get in the trust property and protect it.

Thus, it can be seen that the legislature

a.     Required a Superannuation Trust to have a trustee (which must be taken to require the four essentials and the irreducible core obligations);

b.     expressly articulated in s 52 those duties which could not be excluded from the governing rules of Superannuation Trusts (which did not include a number of non- core ordinary duties of trustees).

In my view, it follows that it would be open to a fund to exclude all such non-core duties.

Having regard to this underlying obligation and the broad reach of the s 52 covenants, the ability of funds to exclude the usual obligations of trustees in any meaningful way is probably more apparent than real.

(f)  The nature of Members’ interests

It follows from the above analysis that the SIS Act requires Regulated Superannuation Funds to have a trustee and to operate as a trust. All trusts, save for purpose trusts, must have beneficiaries. As already stated above, the SIS Act proceeds on the basis that superannuation fund trustees must have beneficiaries36.

Superannuation Trust deeds often contain provisions to the following effect:

a.     The Trustees hold the assets of the fund on trust for beneficiaries in accordance with the provisions of the deed;

b.     the beneficial interest in the trust property is unitised, ie divided into units;

c.     The Trustee must establish an account for each Member within the Fund;

d.    When a contribution to the fund is made by or on behalf of a member, the Trustee will be required to allocate a certain number of units to the Member’s account based upon an “application price”. The “application price” will usually be calculated by dividing the value of the assets in the Fund (or a particular investment option) by the number of units in the Fund (or investment option);

e.     When a member’s benefits are cashed, or fees paid, units are cancelled at the “withdrawal price” which is the price calculated by dividing the value of the assets (or investment option) by the number of units in the Fund (or investment option) minus an allowance for the costs likely to be incurred if an appropriate asset were sold;

f.      No unit confers any legal or beneficial interest in any asset in the fund;

g.     The trustee must keep a record of all transactions on the Member’s Account including the allocation of units to that account when contributions are made and the cancellation of units when fees or taxes are paid and when the benefit is cashed;

h.     When the Member is entitled to be paid his or her benefit, the Trustee must pay the account balance on the day;

i.      When the entire benefit is paid, the units are cancelled and the Member ceases to be a member of the fund;

j.      If a Member dies, before receiving his or her benefits, the benefits which would otherwise be payable to the member are paid to dependants in accordance with the rules of the trust and the SIS Act.

Dealing with this kind of trust, in Re HIH Superannuation Pty Ltd37 Barrett J (as he then was) said, at [29]:

“Leaving aside any impact of statute, the most anyone has by way of legal claim, pending crystallisation of an entitlement to receive benefits, is a claim to have the Fund properly administered in accordance with the rules and other applicable provisions. The extent of any individual's benefits depends entirely on the provisions of the rules and may bear no direct or clear relationship to the individual's contributions or those made by his or her employers that are referable to him or her. Each individual, by contributions, obtains a right in relation to the Fund as a whole, being a right the quantum of which is measured according to the rules. The right does not inhere in the Fund in the form of an interest in any separately identifiable property.”

It is not clear whether Barrett J intended, by this statement, to suggest that a member did not have a beneficial interest in the fund. This question of the nature of a superannuation fund member’s interest has been the subject of extensive debate38. In Finch v Tesltra Super Ltd39 the High Court considered the interest of a beneficiary under a superannuation trust and said (at 30):

“The trustee was trustee of a trust. It had a duty to distribute to those who fell within the definition of ‘Total and Permanent Invalidity’ and a duty not to distribute to those who did not. That affected its role in relation to the forming of its opinion under limb (b). Forming that opinion was not a matter of discretionary power to think one thing or the other; it was an ingredient in the performance of a trust duty. That duty was owed to the members, including the applicant. The applicant was not the object of a discretionary power of appointment. He was 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.”

In the final sentence, the Court appeared to be expressing a view as to the nature of the member’s interest prior to the occurrence of the contingency40.

In Retail Employees Superannuation Pty Ltd v Pain41, Blue J said (at [5]):

“[A member of a superannuation trust] has a beneficial interest in the trust and in any separate fund in the trust, albeit not in any individual asset of the trust”.

The SIS Act defines “beneficiary” as follows:

“beneficiary, in relation to a fund, scheme or trust, means a person (whether described in the governing rules as a member, a depositor or otherwise) who has a beneficial interest in the fund, scheme or trust and includes, in relation to a superannuation fund, a member of the fund despite the express references in this Act to members of such funds.”

In Hepples v FCT42 Gummow J said (at page 100):

“Section 160A uses the expression “means … and includes” rather than simply “means”, or “includes”. As a general proposition, the use of the expression “means and includes” indicates an exhaustive explanation of the meaning which for the purposes of the statute must be attached to the term the subject of the definition, and conveys both the idea of enlargement and exclusion: Dilworth v Commissioner of Stamps [1899] AC 99 at 105-6; YZ Finance Co Pty Ltd v Cummings (1964) 109 CLR 395 at 398–9, 401–2, 405. But, in a given context, the draftsman may have used “include” not so much to extend the ordinary meaning of the defined term as to specify as falling within the definition that which might otherwise have been in doubt: Lillyman v Pinkerton (No 2) (1982) 71 FLR 135 at 138.”

In my view, the usual meaning of “means … and includes” applies. In other words, “beneficiaries” under the Act are the persons who have a beneficial interest in the fund, including members. Further, the SIS Act contemplates that members of a superannuation fund will have a “beneficial interest” in the fund. Thus s 29T provides:

“29T Authority to offer a MySuper product

(1) APRA must authorise an RSE licensee to offer a class of beneficial interest in a regulated superannuation fund as a MySuper product if, …” (emphasis added).

If a MySuper product were to be offered which did not entitle members to a “beneficial interest”, the MySuper product could not be a “class of beneficial interest”.

Section 99B also suggests that the SIS Act contemplates that interests issued to members will be beneficial interests. That section provides:

“99B No entry fees

(1)   The trustee, or the trustees, of a regulated superannuation fund or an approved deposit fund must not charge entry fees.

(2)   An entry fee is a fee, other than a buy-sell spread, that relates, directly or indirectly, to the issuing of a beneficial interest in a superannuation entity to a person who is not already a member of the entity.” (emphasis added)

Summary

 A summary of the rights and obligations of trustees and members of Superannuation Trusts is as follows:

a.      The trustee must be a trustee of a trust in the ordinary sense of the word;

b.     Thus, a superannuation trust must satisfy the four essential requirements for the constitution of a trust and the trustee of the trust must owe the irreducible core obligations being the duty to adhere to the terms of the trust and to perform those trusts honestly and in good faith;

c.     Subject to other provisions of the SIS Act, such a trustee would prima facie be subject to all of the usual rights and obligations under the general law;

d.     The word “covenant” in s 52 refers to an obligation in the governing rules of the trust which binds the trustee, whether such obligation arises under the trust deed, legislation or the general law;

e.     The governing rules will only contain a covenant “to the effect” of a s 52 covenant where they contain an obligation which is effectively identical to the covenants in s 52;

f.      The only covenants which are clearly to the same effect as general law obligations are the covenants in 52(2)(c) and (e) to (f). Thus, general law obligations to that effect are obligations “contained” in the governing rules of all Superannuation Trusts, unless expressly excluded by the trust deed;

g.     All the other covenants in s 52(2) are taken to be contained in the governing rules of Superannuation Trusts unless the trust deed contains provisions which are effectively identical to those covenants;

h.     All general law obligations other than the irreducible core obligations of a trustee may be excluded by the terms of a trust deed;

i.      The statutory remedy under s 55 is available in relation to any obligation contained or taken to be contained in the governing rules of a Superannuation Trust (including s 52 covenants, general law obligations and any other obligation imposed by the governing rules of the fund);

j.      It appears that s 55 does not constitute a code for remedies for breach of obligations in governing rules and that general law remedies co-exist with s 55. However, there are areas where it may be said that general law remedies are not capable of operating concurrently with s 55, for example in relation to limitation periods and available defences.

Member Claims

As indicated at the outset, member claims will arise in a wide variety of circumstances which may throw up a very wide range of possible consequences for a trustee. Trust deeds may contain particular provisions which affect the position. Thus, it is impossible to deal with this topic in an exhaustive way or to lay down many hard and fast rules. Nevertheless, I will consider a range of possible scenarios and the issues which may arise for trustees.

Accounting errors

Accounting or valuation errors may occur in the administration of a Superannuation Trust. These may occur without having any effect on the trust property per se. Thus, for example, the trustee may have properly dealt with and invested all contributions and the entirety of the trust fund, but an error in accounting or valuation may result in incorrect accounts and incorrect members’ account balances. Of themselves, such errors would not constitute a breach of trust (in the sense of a dealing with trust property inconsistently with the trusts) or a loss to beneficiaries.

It is conceivable that an accounting or valuation error may involve a breach of the s 52(2)(b) covenant (failure to exercise care skill and diligence in relation to all matters affecting the entity) but in order for this to give rise to a claim against the trustee under s 55, a member would have to show that loss was suffered as a result of the breach. It is possible that Members may suffer consequential losses as a result of accounting errors, particularly if the errors have been major and longstanding errors. If the errors had masked very poor performance by the fund, to the extent that Members were misled into retaining their account with the Fund, rather than switching to a higher performing fund, it may be possible to mount an action against the trustee under s 55 or alternatively for misleading and deceptive conduct under the Australian Consumer Law (subject to satisfying the requirements of that Law). Members may encounter problems with limitation periods in bringing a claim under s 55 in respect of such a loss, in view of the six year limitation period.

Upon discovery of the error, the trustee would, of course, be obliged to correct the error. Such an obligation would be implicit in s 52(2)(b) (care skill and diligence), s 52(2)(a) (covenant to act honestly in all matters concerning the entity) and the general law obligation to account. To persist in presenting incorrect accounts upon becoming aware of the error would breach such obligations.

If the correction were to result in a reduction of the dollar figure in a member’s balance, this would not constitute a loss, per se. (I leave out of consideration claims for nervous shock). An account balance is not, per se, property and, unless the trust deed contained very unusual provisions, the member would not be entitled to an equitable interest in funds representing the dollar figure in the account balance.

Errors resulting in the overstatement or understatement of the value of the fund and the level of account balances would not involve any payment away of trust funds or diminution of the trust funds and therefore, no causes of action to restore the estate or provide equitable compensation would accrue to members.

Underpayments or overpayments

A more problematic area is where an accounting error has resulted in underpayment or overpayment of benefits. Underpayment or overpayment may, of course, occur for any number of other reasons.

The obligations of the trustee may be affected by the terms of the trust deed but prima facie, the payment by the trustee from the trust fund of the amount of an account balance which either understates or overstates the member’s true balance would amount to a breach of trust. To paraphrase the High Court in Finch v Tesltra Super Ltd, the trustee has a duty to distribute the correct amount of benefit in accordance with the trust deed to those who satisfy the conditions for payment and a duty not to distribute to those who did not.

Underpayments

As to underpayment, where a trustee fails to pay a member the correct amount to which the member is entitled, the trustee will breach its fundamental duty to carry out the terms of the trust under the general law. As discussed above, whilst this was a provision recommended by the ALRC, it was not included as a section 52 covenant. However, it is an obligation which is part of the irreducible core content of trusteeship so that insofar as the SIS Act requires a superannuation fund to have a “trustee”, the obligation cannot be excluded. The obligation is, in any event, inherent in a number of the obligations in s 52.

Claim under the general law

In Asgard Capital Management Ltd v Maher43 the Full Court of the Federal Court said (in connection with a Superannuation Fund governed by the SIS legislation):

“When the time fixed by the terms of a trust for the distribution of trust property has arrived, it is the duty of the trustee to convey title to or distribute (that is give possession of) the trust property to the beneficiary. Instead of taking the title himself, the beneficiary may require the trustee to convey or distribute the trust property to a third party. The reason why the beneficiary has the right to give such a direction is surely obvious and probably need not be stated. Nevertheless, so that there is no doubt about it, the reason is that the beneficiary is in substance the owner of the property and can deal with it as he likes: Wilson v Wilson (1950) 51 SR (NSW) 91, 94; Stephenson v Barclays Bank Trust Co Ltd [1975] 1 WLR 882, 889. (emphasis added)

A trustee holds the property of the fund on trust for the members in accordance with the terms of the trust. Whatever the nature of a member’s interest prior to the time the trustee becomes obliged to cash his or her benefits, as from that time, if the trustee improperly retains funds to which the member is entitled, it is submitted that the trustee holds the assets of the fund, to the extent of the underpayment, on trust for the member either pursuant to the express trust or on a constructive trust.

The key general law causes of action available to the member in those circumstances will be:

a.     A claim, in the nature of a claim in rem, to the trust funds improperly retained

b.     A claim for equitable compensation.

In some instances, the trustee would be able to account for the claims out of the trust funds still held. However, the position would not be straightforward because, inevitably, after making the erroneous underpayment, the trustee will have treated the remaining assets as being held on trust for the remaining members. The trustee may have dealt with the assets in a way which has resulted in a loss.

For example, assume in 2006, an error is made in the valuation of major assets in the fund, as a result of which, the value of units in the fund is understated. As a result, the value of each member’s account is understated. Over the period 2006 to 2009, the trustee pays departing members the incorrect and understated balance in their accounts. The effect of this error is, in truth, that on each departure, the trustee will have retained assets which are payable to (and “effectively owned by”) such departing member. In truth, the trustee would have no right or power to deal with those assets as part of the fund or for the benefit of remaining members. Inevitably however, it is likely that the trustee would do so.

Assume that in December 2009, at the height of the GFC, the error is discovered. The Trustee would be obliged to account to the underpaid members for the amounts to which they were entitled in 2006 and (absent any special provisions in the trust deed) would not be entitled to reduce the payment on the basis that the value of the fund had actually fallen by reason of the GFC.

The limitation periods applicable to any cause of action accruing in respect of a cause of action based upon the underpayment are prescribed in each State’s Limitation Act and a complete analysis of the relevant provision is beyond the scope of this paper. There are variations between States.

In essence,

a.     Beneficiaries’ causes of action do not accrue until the interests becomes a present interest or interest in possession44;

b.     in Victoria, Queensland, South Australia and Tasmania, there is no limitation period in relation to a claim of fraud or a fraudulent breach of trust to which the trustee was party or privy or in relation to a claim to recover trust property or the proceeds thereof still retained by the trustee or previously received by the trustee and converted to his use. Otherwise, the limitation period for an action by a beneficiary to recover trust property or for breach of trust is six years45;

c.     In New South Wales, and the ACT, an action on for fraud or a fraudulent breach of trust or an action to recover trust property, or property into which trust property can be traced, against a trustee or against any other person is not maintainable by a beneficiary under the trust or by a person claiming through a beneficiary under the trust if brought after the expiration of a limitation period of twelve years running from the date on which the plaintiff or a person through whom the plaintiff claims first discovers or may with reasonable diligence discover the facts giving rise to the cause of action and that the cause of action has accrued46.

Thus, assuming an underpaid member could make a claim to recover trust property, such a claim could be made at any time in Victoria, Queensland, South Australia or Tasmania and, in New South Wales and the ACT, within twelve years of discovering the underpayment or twelve years after the member could, with reasonable diligence, have discovered the underpayment47.

If the claim by the underpaid member takes the form of a claim for equitable compensation for breach of trust, and no fraud is involved, a six year limitation period would apply.

There may be scope for additional complications to arise in the above scenario, giving rise to further causes of action. If, for example, upon discovering the error in the accounts, the trustee were to correct the accounts, but decide to ignore the impact on departed members and attribute the increase in value to the then members and thereafter, to cash benefits to existing members on that basis, this would involve an overpayment to such existing members and a diversion of property held by the trustee either on express or constructive trust for the previously departed members.

To make matters worse, the trustee may have difficulty in recovering the overpayment made to the recipient members because the payment would not have been made by mistake.

Not only would such a diversion amount to a breach of trust by the trustee, it may well amount to a dishonest breach of trust. Dealing with trust property in a way which is inconsistent with trust obligations may well be dishonest notwithstanding a subjective belief that it is not wrongful: MacLeod v R48. This has consequences in terms of remedies available against the trustee. For example, compound interest at frequent rests (eg monthly) and at a high rate of interest may be awarded in case of dishonest breaches of trust. Any right of indemnity from the trust assets may be lost.

Further, any third parties, such as directors or officers of the trustee, who participate with knowledge in such a diversion would be liable to account for the funds as constructive trustees under the first limb of Barnes v Addy49. Gageler J recently summarised the applicable principle (as regards breaches of fiduciary duties – but the same principle applies to breaches of trust) in Ancient Order of Foresters in Victoria Friendly Society Limited v Lifeplan Australia Friendly Society Limited 50 as follows:

“Knowing participation by a non-fiduciary in a dishonest and fraudulent breach of fiduciary duty is conduct which is regarded in equity as itself unconscionable and as attracting equitable remedies against the knowing participant of the same kind as those available against the errant fiduciary. Knowing participation in a dishonest and fraudulent breach of fiduciary duty includes knowingly assisting the fiduciary in the execution of a “dishonest and fraudulent design” on the part of the fiduciary to engage in the conduct that is in breach of fiduciary duty. The requisite element of dishonesty and fraud on the part of the fiduciary is met where the conduct which constitutes the breach transgresses ordinary standards of honest behaviour.

Correspondingly, the requisite element of knowledge on the part of the participant is met where the participant has knowledge of circumstances which would indicate the fact of the dishonesty on the part of the fiduciary to an honest and reasonable person.”

Claims under the SIS Act

In addition to the general law remedies, the underpaid member may have a claim for compensation under s 55 of the SIS Act (either on the basis that the underpayment was a breach of a relevant s 52 covenant or on the basis that the general law obligation to perform

the trusts is a “covenant” contained in the trust deed).

 
In order to maintain such an action, the member would have to show:

a.     That he or she has suffered loss or damage as a result of conduct of the trustee in contravention of s 55(1), (ie contravention by the trustee of its obligation not to contravene a covenant contained in or taken to be contained in the governing rules);

b.     That the cause of action arose less than six years prior to commencement of action.

 As to the first requirement, there might be a real question whether an

underpayment would constitute “loss or damage” for the purposes of s 55. The true position in most instances would be that the underpayment represents a failure by the trustee to account to the member for its entitlement and the member does not thereby lose his or her equitable interest in the fund to the extent of the underpayment. Nevertheless, it would always be prudent for a member to make a claim under s 55 in the alternative to the claim for equitable relief against the possibility that a different view is taken about the effect of underpayment.

If loss were suffered, the member would be required to commence action under s 55 within six years.

Overpayments

Similar circumstances to those described above could lead a trustee to make an overpayment to a member. An overpayment will, ex hypothesi, involve the trustee taking trust funds which are not payable to a member (but which are held for the benefit of other members) and paying such funds to the member.

There may be circumstances where the member realises that there has been an overpayment. In these circumstances, it is likely that the member will be required to repay. Apart from anything else, a member with knowledge that he or she has been overpaid from trust funds will hold the amount of the overpayment as a constructive trustee, under the first limb in Barnes v Addy51.

Even where the member does not have notice of receipt of trust moneys, the trustee may have a right to claim repayment. The traditional view was that an overpayment to a beneficiary was not recoverable except from any interest which the member retained in the trust: Downes v Bullock52. It is not clear whether this principle must now be read subject to the entitlement of a trustee to recover payments as money had and received being payments made by mistake of fact or law pursuant to the principles Davids Securities Pty Ltd v Commonwealth Bank of Australia53.

In Permanent Trustee Co Ltd v Bernera Holdings Pty Ltd54 Young CJ in Eq referred to the issue without deciding it but said:

“It may be that the present rule is that the trustee will not recover against an innocent beneficiary, that is one who received the overpayment without notice of his or her lack of entitlement: see Reid v Deane [1906] VLR 138; (1906) 12 ALR

46 and cf Davies v National Trustees Executors & Agency Co of Australia [1912] VLR

397”

Notwithstanding this view, there seems to be no reason why the broad principles in Davids Securities would not apply to beneficiaries of a trust as they do to all other recipients of moneys paid under a mistake of fact or law. Those principles and, in particular, the principles governing the defences to a claim based upon mistake, were elaborated in Australian Financial Services and Leasing Pty Ltd v Hills Industries Ltd55. Whilst the case did not deal with a mistaken payment by a trustee to a beneficiary, the decision shows that the principles dealing with mistaken payments are perfectly adequate to deal with that situation.

The case involved a financier who made payments to suppliers of goods who were trade creditors of a customer of the payer. The payer was induced to make these payments by the fraud of the customer. At the customer’s request, the recipients applied the payments to the discharge of the customer’s debts. When the payer discovered the fraud and demanded repayment, the recipients resisted the claim on the basis that they had changed their position on the faith of the payments. Between the receipt of the payments and the payer’s demand on the recipients for repayment more than 6 months elapsed, during which time each recipient treated the debts previously owed by the customer as repaid, ceased to pursue repayment of those debts from the customer and continued to trade with it. The payer also continued to trade with the customer. The customer itself continued to trade with other businesses. At para [36], the plurality (Hayne, Crennan, Kiefel, Bell and Keane JJ) said:

“[36] The recipients’ reliance upon the actions which they took, consequent upon the receipt of the moneys mistakenly paid by the payer, as making out a defence of change of position, directs attention to the question whether they would suffer a detriment if they were required to repay. The payer’s principal contention was that a conclusion on this question could not be reached by reference only to abandonment of the opportunity to recover the debts owed by the customer and the mere entry into further transactions. It was necessary to value what had been lost in order to determine whether a recipient was “worse off” in economic terms and this had not been done.”

 This approach was rejected. At [84] to [89] their Honours continued:

“[84] … under Australian law, a mathematical assessment of enduring economic benefit does not determine the availability of restitutionary remedies. The equitable doctrine which protects expectations, with which the notion of “detriment” is associated, is not concerned with loss caused by a wrong or a breach of promise. As Deane J observed in Verwayen,“[e]quity has never adopted the approach that relief should be framed on the basis that the only relevant detriment … is that which is

compensable by an award of monetary damages”. The equitable doctrine concerning detriment is concerned with the consequences that would enure to the disadvantage of a person who has been induced to change his or her position if the state of affairs so brought about were to be altered by the reversal of the assumption on which the change of position occurred. On this view, the injustice which precludes such a result lies in the disadvantage which would result to the recipient if the payer were to be permitted to recover payments as mistakenly made where they have been applied by the recipient.

[85]   This view accords with the understanding of detrimental reliance sufficient to ground an estoppel, as explained in Grundt v Great Boulder Pty Gold Mines Ltd by Dixon J. The fundamental purpose of an estoppel is to provide protection against the detriment which would flow from a party’s change of position if the assumption which led to it were deserted.

[86]   While it may be accepted that estoppel affords a level of protection to expectations different from that afforded by the change of position defence, and estoppel is also concerned with the manner in which expectations are created, both estoppel and the defence are grounded in that body of equitable doctrine that prevents the unconscientious assertion of what are said to be legal rights.

…

[88]   Detriment has not been considered to be a narrow or technical concept in connection with estoppel. So long as it is substantial, it need not consist of expenditure of money or other quantifiable financial detriment, as Robert Walker LJ observed in Gillett v Holt. His Lordship went on to say that the requirement of

detriment must be approached as “part of a broad inquiry as to whether repudiation of an assurance is or is not unconscionable in all the circumstances”. In the context of mistaken payments, the question is whether it would be unconscionable for a recipient who has changed its position on the faith of the receipt to be required to repay.

[89]   Campbell is an example of a case where the continuance of an assumed state of affairs in business over a period of time and the disruption which would be caused if one or more payments were to be corrected were held to be determinative. Griffith CJ held that it would be inequitable to require repayment from the defendant, which had, over a long time, received mistaken payments on a regular basis and took them into account in estimating and directing annual profits. His Honour dismissed the plaintiff’s action for money had and received.”

Thus, in any action by a trustee against an overpaid member for moneys had and received, a member who has received overpayment would be entitled to defend a claim for repayment by the trustee either on the basis of the defence of change of position or estoppel. In both cases, “detriment” lies at the heart of the defence and “detriment” is not regarded as a narrow or technical concept. Disruption arising from the continuance of an assumed state of affairs over a long period of time may be sufficient.

A number of scenarios can be envisaged in connection with the overpayment of superannuation benefits where there has been a longstanding overstatement in the member’s account balance. A member may undertake expenditure or make gifts of a type which would have been reckless if the member had been aware of the true balance. A member may reorganise his or her affairs in a tax-effective way resulting in transactions which cannot practically be reversed. One can imagine that in this type of scenario, a defence of change of position or estoppel would be made out.

Ironically, the careful member who retains the entirety of the overpayment in a bank account and continues with a modest lifestyle may be unable to resist a claim by the trustee.

Any action by the trustee for money had and received would be statute-barred after 6 years56. However, provisions extending the limitation period may apply. For example, in New South Wales, s 56 of the Limitation Act (1969) provides:

“(1) Subject to subsection (3), where there is a cause of action for relief from the consequences of a mistake, the time which elapses after a limitation period fixed by or under this Act for the cause of action commences to run and before the date on which a person having (either solely or with other persons) the cause of action first discovers, or may with reasonable diligence discover, the mistake does not count in the reckoning of the limitation period for an action on the cause of action by the person or by a person claiming through the person.

(2)   Subsection (1) has effect whether the limitation period for the cause of action would, but for this section, expire before or after the date mentioned in that subsection.

(3)   Where property is, after a transaction in which a mistake is made, purchased for valuable consideration by a person who does not, at the time of the purchase, know or have reason to believe that the mistake has been made, subsection (1) does not apply to a limitation period for a cause of action for relief from the consequences of the mistake against the purchaser or a person claiming through the purchaser.”

Accordingly, the limitation period may extend well beyond six years. However, the longer the overpayment remained undiscovered, the more likely a member would be able to establish a defence based upon change of position or estoppel.

Losses to the fund in the course of administration

Losses to the trust assets may occur in the course of the administration of the fund due to defalcations, wrongful payments, wrongful investments and the like.

 As to defalcations, in Foskett v McKeown, Lord Millett said:

“The simplest case is where a trustee wrongfully misappropriates trust property and uses it exclusively to acquire other property for his own benefit. In such a case the beneficiary is entitled at his option either to assert his beneficial ownership of the proceeds or to bring a personal claim against the trustee for breach of trust and enforce an equitable lien or charge on the proceeds to secure restoration of the trust fund. He will normally exercise the option in the way most advantageous to himself. If the traceable proceeds have increased in value and are worth more than the original asset, he will assert his beneficial ownership and obtain the profit for himself. There is nothing unfair in this. The trustee cannot be permitted to keep any profit resulting from his misappropriation for himself, and his donees cannot obtain a better title than their donor. If the traceable proceeds are worth less than the original asset, it does not usually matter how the beneficiary exercises his option. He will take the whole of the proceeds on either basis. This is why it is not possible to identify the basis on which the claim succeeded in some of the cases.”

As to wrongful payments or investments, in Youyang Pty Ltd v Minter Ellison57, the High Court quoted, with apparent approval, the following passage from Lord Brown-

Wilkinson’s judgment in Target v Redferns58

“A trustee who wrongly pays away trust money, like a trustee who makes an unauthorised investment, commits a breach of trust and comes under an immediate duty to remedy such breach. If immediate proceedings are brought, the court will make an immediate order requiring restoration to the trust fund of the assets wrongly distributed or, in the case of an unauthorised investment, will order the sale of the unauthorised investment and the payment of compensation for any loss suffered.”

These are obligations which members of a superannuation fund could enforce by action. Even if it can be said that prior to crystallisation of benefits, a member’s interest does not equate to a proprietary interest in the fund, at the very least a member has the right to have the Fund properly administered in accordance with the rules and other applicable provisions (see Re HIH Superannuation Pty Ltd59).

However, any action by present members of a fund seeking restoration of trust property would only be possible, as a matter of reality, when members become aware of the loss. A loss may be undiscovered for many years and well beyond the normal six year limitation period for bringing an action for breach of trust. However, as the interest of members of a Superannuation Trust do not fall into possession until payment of the benefit is due, the limitation period would not commence running until that point had reached. On this basis, it is possible that members could bring claims arising from breaches of trust which have occurred many years before.

In addition to the general law remedies, members would also have the ability to bring claims under s 55. It is probable that a payment away of trust property or wrongful investment causing loss can be said to cause loss to members, notwithstanding that their interests have not fallen into possession. If loss is suffered by members at the date of payment away or wrongful investment, the six year limitation period would commence running. In this case, as in the case of underpayments, the s 55 remedy is likely to be less effective than the general law remedies.

The operation of the defences in s 55(5) and (6) may also reduce the effectiveness of the statutory remedy, as compared to general law remedies. Those subsections provide that it is a defence to an action for loss or damage suffered by a person as a result of the making of an investment by a trustee or as a result of the management of any reserves by a trustee if the defendant establishes that the defendant has complied with all of the covenants referred to in sections 52 and 53 and certain other provisions applicable to that person. Subsection (7) effectively provides that those provisions apply to an action for loss or damage, whether brought under s 55 or otherwise. It may be arguable that a claim for equitable compensation against a trustee amounts to “an action for loss or damage” under subsection (7). However, it cannot really be said that an order that the trustee restore the trust funds is an action for loss or damage. Thus, the fact that the trustee has complied with all relevant provisions referred to in subsections (5) and (6) would not assist the trustee in such proceedings.

Insurance – what should a trustee do if insurance does not respond

A superannuation trustee will invariably have the benefit of professional indemnity insurance to cover liability for claims such as member claims60. In most cases, the insurance could be expected to respond to member claims.

However, circumstances could arise where insurance may be inadequate or may not respond. The size of a claim may exceed the available level of cover. The policy may not provide cover in relation to a particular type of claim. The insurer may be able to reduce its liability to nil on the basis of a non-fraudulent misrepresentation or non-disclosure under s 28(3) of the Insurance Contracts Act 1984 (Cth). Issues of dishonesty may arise. Policies often exclude cover for dishonesty and an insurer may avoid the policy for fraudulent non- disclosure or misrepresentation under s 28(2) of the Insurance Contracts Act.

Ultimately, if insurance does not respond, the trustee may be able to indemnify itself out of the assets of the fund. Under the general law, subject to the “clear accounts

rules”61, a trustee is entitled to an indemnity for all costs and expenses properly incurred in performance of the trustee's duties.

Section 56 impacts this position. That section provides:

“56 Indemnification of trustee from assets of entity

(1)   Subject to subsections (2) and (2A), a provision in the governing rules of a superannuation entity is void if:

(a)   it purports to preclude a trustee of the entity from being indemnified out of the assets of the entity in respect of any liability incurred while acting as trustee of the entity; or

(b)   it limits the amount of such an indemnity.

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

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

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

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

(b)   liability for a monetary penalty under a civil penalty order; or

(c)   the payment of any amount payable under an infringement notice; or

(d)   liability for the costs of undertaking a course of education in compliance with an education direction; or

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

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

(a)   to indemnify itself out of the assets of the entity for any amount expended out of capital of the trustee managed and maintained by the trustee to cover the operational risk of the entity; or

(b)   to indemnify itself out of any assets of the entity that do not form part of a reserve maintained for the purpose of covering the operational risk relating to the entity, any amount that relates to that risk, without first exhausting the reserve and any other financial resources managed and maintained by the trustee to cover the risk.

(3)   Nothing in the governing rules of a superannuation entity prohibits a trustee of the entity from seeking advice from any person in respect of any matter relating to performance of the duties or the exercise of the powers of a trustee. A provision in the

governing rules that purports to preclude a trustee of the entity from being indemnified out of assets of the entity in respect of the cost of obtaining such advice, or to limit the amount of such an indemnity, is void.”

In many funds, the ability to indemnify will be determined by the operation of s 56(2A), ie the provision dealing with indemnification from operational risk reserves62.

Leaving that question to one side, what effect does s 56 have on the rights of the trustee to an indemnity under the general law? As the Honourable J C Campbell QC has observed63, the reference to “governing rules” in s 56(1) would include the unwritten rules embodied in general trust law. On that basis, the general law rule which would otherwise entitle a superannuation trustee to indemnify itself only for liabilities properly incurred in performance of the trustee's duties may be void because it could be said that it “purports to preclude a trustee of the entity from being indemnified out of the assets of the entity in respect of any liability incurred while acting as trustee of the entity.”

On this basis, the section would also have the effect of avoiding any express right of indemnification in the trust deed which purported to deal with the trustee’s right of indemnity in a way which is more limited than contemplated by s 56(1).

A more benign view of the effect of s 56 is that it would only avoid an entitlement to an indemnity insofar as it positively prevents the trustee from being indemnified out of the assets of the entity in respect of any liability incurred while acting as trustee.

The Honourable Kevin Lindgren QC has expressed the view that64:

“Both subs (1) and subs (2) of s 56 are directed to making void provisions of a certain kind in the governing rules. Once those subsections have done their work, apparently the general law proprietary right of indemnity remains, subject to the constraints, discussed above, that the general law imposes. Moreover, the Trustee Act provision is left to operate.”

That reflects the benign view, but it is difficult to see how s 56 operates effectively in this event. If a trust deed contained a provision to the following effect:

“The trustee may not be indemnified out of the assets of the trust in respect of liabilities incurred while acting as trustee except where those liabilities were

properly incurred” such provision would surely be avoided by s 56.

Yet if a trust deed provided:

“The trustee may be indemnified out of the assets of the trust in respect of liabilities incurred while acting as trustee where those liabilities were properly incurred” on the benign view, that clause would survive.

 The Honourable J C Campbell QC has expressed the view that:

“… s 56 should be read as requiring that trustees of superannuation funds have a right of indemnity for all liabilities they incur while purporting or trying to act as trustee, even if those liabilities were incurred in breach of trust, provided only that the liabilities are not of the kind identified in s 56(2)”65.

However, in the context where the SIS Act expressly deems quite a number of provisions to be incorporated into the governing rules of the fund (most importantly, the s 52 covenants), it would seem odd that s 56 could be construed to have that effect in the absence of any similar deeming provision.

Moreover, s 56 (which contains no express prescriptive or permissive provision for the inclusion of a right of indemnity in the governing rules) should be compared with s 57 (dealing with directors’ indemnities) which at least contains a permissive provision for a right of indemnity.

If the draconian view of s 56 is correct, then unless a Superannuation Trust contains an express provision for indemnity in its trust deed or rules in a form which is consistent with s 56, a trustee of a superannuation fund will have no entitlement to be indemnified out of the assets of the trust for any liabilities incurred.

Applying these observations to the question of indemnity for member claims, if the trust deed contains an express right of indemnity consistent with s 56, then a trustee faced with a claim which is not covered by insurance may indemnify itself out of the assets of the trust in relation to such claim. As already noted, such right will subject to the requirements as to indemnification out of operational risk reserves under s 56(2A) of the SIS Act66. Further, no indemnity will be possible where the liability of the trustee is liability for a breach of trust of the type referred to in s 56(2) (including breaches where the trustee fails to act honestly in a matter concerning the entity or intentionally or recklessly fails to exercise a requisite degree of care and diligence).

If the trust deed does not contain an express right of indemnity consistent with s 56, then it is possible that the trustee has no right of indemnity at all, notwithstanding the existence of the right at general law and, possibly, an express, but inconsistent right of indemnity in the trust deed.

If insurance does not respond and a trustee is unable to indemnify itself out of an operational risk reserve or the assets of the funds, the trustee will be liable to bear the claim personally.

Issues for the trustee in litigating or compromising claims

Discovery of breach and duty to inform

A practical issue for members is that in the normal course of events, they will have no means of knowing about any defalcation, wrongful payment or wrongful investment by the trustee. This is particularly problematic where the wrongful act results from fraudulent conduct on the part of the trustee. On occasions, a fraud by a trustee or to which a trustee is privy may simply remain undiscovered, in which case there is nothing that can be done. Some consolation arises from the fact that where such a fraud is discovered, the generous limitation periods referred to above will apply.

Where a trustee becomes aware of a defalcation, wrongful payment or wrongful investment, is the trustee under any obligation to inform the members of the breach?

There is English authority, commencing with the decision of Arden LJ (as her Ladyship then was) in Item Software (UK) Ltd v Fassihi67 and recently applied in Iranian Offshore Engineering and Construction Co v Dean Investment Holdings SA68 and Keystone Healthcare Ltd v Parr69. In the latter decision, Davies J said, at [147] and [148]:

“147. The next step is to consider the circumstances in which and the reasons why Mr Parr was under a duty to disclose the Payroll Frauds. It is clear that a director who steals money from the company which he serves breaches his core fiduciary duty of loyalty by dealing with company property as his own. It is also clear in my judgment that a director who fails to disclose his dishonest self-dealing and who fails to account to the company for the money which he has stolen from the company also breaches his fiduciary duty of loyalty in those further respects. As Arden LJ said in Fassihi at [41], the obligation to disclose misconduct is not a separate and independent duty but part of the fundamental fiduciary duty of loyalty. She explained at [63 - 68] the policy reasons for holding this to be the case, particularly that the company is entitled to have this essential information in order to make proper decision-making.

148. In the context of this there are two obvious reasons why Keystone would have wished to have this information: (1) first, to enable Keystone to take steps to prevent it from happening again, which would include considering the termination of Mr Parr’s appointment and that of Mr Reynard; (2) second, to enable Keystone to take steps to recover what had been stolen from it and to compel Mr Parr to disgorge benefits obtained from his disloyalty.”

In P & V Industries Pty Ltd v Porto70, Hollingworth J struck out a pleading to the effect that a director of a company breached his fiduciary and statutory duties by failing to disclose his past wrongdoing and declined to follow Item Software, on the basis that fiduciary duties as recognised in Australia were only proscriptive and imposed no positive duty to disclose wrongdoing (citing Breen v Williams and Pilmer v Duke Group Ltd).

Breen v Williams and Pilmer v Duke Group Ltd were authority for the proposition that equity does not impose upon fiduciaries a positive duty to act in the best interests of the principal. This is a different question from the nature of the content of such a positive duty where the law imposes such a duty.

Nevertheless, there is no decision in Australia of which I am aware where a trustee has been held to be liable to disclose its own wrongdoing and the courts have shown marked reluctance to impose duties on trustees to inform beyond their established obligation to account, see for example Segelov v Ernst & Young Services Pty Ltd71. In that decision the New South Wales Court of Appeal held that the trustee of a superannuation fund owed no general duty to inform a beneficiary of its entitlement under a trust and, further, that even if there was such a duty, this would not form part of the core obligations to perform the trusts honestly and in good faith for the beneficiaries, so that it could be excluded by the trust deed.

This may be one area where the statutory obligation under s 52(2)(a) expands the obligations of trustees under the general law. The obligation in that paragraph is to act honestly “in all matters concerning the entity”. As indicated above, the broad terms of this provision arguably go beyond the general law obligation and if the legislature’s intention was to reformulate basic obligations for superannuation trustees (rather than simply identify existing general law obligations) there would be no reason to construe the obligation narrowly. If so, where a trustee were to become aware of a breach of trust (particularly a major breach with extensive ramifications for members), would non-disclosure of this matter be consistent with “acting honestly in all matters concerning the entity”. Members would probably say that they were vitally interested in such information.

As with all difficult questions, there are countervailing considerations. If a trustee has breached its trust, (and will be liable to restore the trust or compensate members) what purpose is served by requiring a trustee to disclose the breach to members? What if the circumstances are not clear? What if disclosure were to lead to collateral damage to the members (because, for example, members may leave in large numbers with detrimental effect on the value of the trust).

For the moment, it may be arguable that s 52(2)(a) obliges trustees of Superannuation Funds to disclose breaches of trust. However the better view regarding the general law is that there is no such obligation in Australia. However, the dynamics in this area are changing and a duty to disclose may well be recognised in time.

Litigating or compromising - Need for judicial advice

Where a trustee is faced with a member claim, the trustee will have to assess the claim and either pay it, litigate or seek to compromise. Inevitably, claims arise in a wide set of circumstances. Claims will range from claims based upon red-blooded fraud to claims of a more benign and technical nature relating to the management and administration of the fund. A recent claim has been made against a superannuation trustee for breach of trust for not having a climate change policy of a particular nature72. Ultimately, it is a matter for the trustee to determine the appropriate response but this will obviously be informed by proper legal advice.

In addition, trustees may approach the court for advice. In all States, trustees have the right to seek judicial advice in relation to the management and administration of trust property and in relation to the interpretation of the trust instrument73. Thus, section 63 of the Trustee Act 1925 (NSW) provides for the jurisdiction.

“63 Advice

(1) A trustee may apply to the Court for an opinion advice or direction on any question respecting the management or administration of the trust property, or respecting the interpretation of the trust instrument.”

The operation of the provision (and its inter-State equivalents) is dominated by the leading authority: Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar The Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand74.

In the Macedonian Church case, the plurality in the High Court summarised the essence of the provision at [74], stating: “Section 63 operates as ‘an exception to the Court's ordinary function of deciding disputes between competing litigants’; it affords a facility for giving ‘private advice’. It is private advice because its function is to give personal protection to the trustee”.

 That protection arises expressly under because of s 63(2) which provides:

“(2) If the trustee acts in accordance with the opinion advice or direction, the trustee shall be deemed, so far as regards the trustee’s own responsibility, to have discharged the trustee’s duty as trustee in the subject matter of the application, provided that the trustee has not been guilty of any fraud or wilful concealment or misrepresentation in obtaining the opinion advice or direction.”

Of central relevance to the topic under discussion, the plurality said:

“A necessary consequence of the provisions of s 63 of the Act is that a trustee who is sued should take no step in defence of the suit without first obtaining judicial advice about whether it is proper to defend the proceedings

 What does this mean for superannuation trustees? Some analysis of the Macedonian Church case is necessary, in order to answer the question.

The application in the Macedonian Church case, related to main proceedings involving a dispute relating to the St Petka Parish of the Church in Rockdale. The first plaintiff was His Eminence Petar, the Diocesan Bishop of the Macedonian Orthodox Diocese of Australia and New Zealand and the second plaintiff was the Very Reverend Father Mitko Mitrev, a former priest of the St Petka Parish. The defendants included the executive committee of the Macedonian Orthodox Community Church St Petka Incorporated, which held property under a Deed of Trust for the purposes of the Macedonian Orthodox Church and the eighth defendant (Mr Naum Despotoski) who was alleged to be acting unlawfully as parish priest of the St Petka Parish in place of the second plaintiff, who, it was alleged, had been wrongly dismissed by the Association.

It was alleged that the Association had contravened the doctrine and law of the Macedonian Orthodox Church in dismissing the second plaintiff, appointing other persons in his place, making changes to the building used as the parish church and in other ways. It was alleged that the Association has breached its trust in various respects, and ought to be removed as trustee.

The Defendants sought judicial advice in relation to the proceedings and obtained orders under s 63 from Justice Palmer that:

“1. The Association would be justified in defending the Main Proceedings on the

issue of the terms of the trust declared by Hamilton J on 7 February 2007 and

2. The Association be entitled to have recourse to certain trust property other than the Church Land, for the purpose of paying its reasonable costs of defending the Main Proceedings as follows:

(a) $78,666.01 for the period from 9 July 2004 to 9 February 2007;

(b)  up to $216,295.00 for future costs."

The Court of Appeal overturned this decision. It appears that it did not do so on the basis that Justice Palmer exceeded jurisdiction, but rather on the basis that his discretion miscarried. Ipp JA (with whom the other judges largely agreed) held, in essence, that

a.     Palmer J erred in failing "expressly" to address the following facts: that the Association was not disinterestedly seeking advice as to whether it should follow one course of conduct or another, but asked the Court to support its views as to religious doctrine and organisation over those of the plaintiffs; that while it was concerned to discover the true terms of the trust, its principal motivation for this concern was to prove it had not breached the terms of the trust and should not be removed as trustee; and that it was generally inappropriate to give judicial advice in adversarial proceedings;

b.     Palmer J erred in failing "expressly" to conduct a "balancing exercise" in which the potential benefits to the trust of authorising the Association to defend the Main Proceedings using trust property and of affording it protection under s 63 "should have been weighed" against "the potential disadvantages that, should the Association be unsuccessful, costs would be lost and [the plaintiffs] would seek to recover their costs from the trust.

 The High Court unanimously overturned the decision of the Court of Appeal.

 The key section of the judgment commences at paragraph [54] in the judgment of the plurality, where eight “general points” are made about s 63 to the following effect:

a.     First - Implications not to be read in. "It is quite inappropriate to read provisions conferring jurisdiction or granting powers to a court by making implications or imposing limitations which are not found in the express words".

b.     Secondly, no implied limitations on power to give advice. The plurality stated that there were no express words in s 63, and no implications from the express words which were used in s 63, that automatically precluded the court from giving the advice which the Association sought. They stated that there was nothing in s 63 which limited its application to "non-adversarial" proceedings, or proceedings other than those in which the trustee was being sued for breach of trust, or proceedings other than those in which one remedy sought was the removal of a trustee from office.

In the judgment of the plurality, only one jurisdictional bar to s 63 relief existed: “the applicant must point to the existence of a question respecting the management or administration of the trust property or a question respecting the interpretation of the trust instrument”.

c.     Thirdly no implied limitations on discretionary factors. The High Court stated that there were no express words in s 63, and no implications from the express words which are used in s 63, which made some discretionary factors always more significant or controlling than others. In particular, they indicated that s 63 did not provide that “the adversarial nature of the proceedings about which the advice is sought, the tendency of the advice to foreclose an issue in those proceedings, or the fact that the trustees seeking the advice are being sued for breach of trust are of special significance”. The discretion was confined only by the subject-matter, scope and purpose of the legislation.

The plurality did note, however, that it may be the case that the court would properly decline judicial advice if, for example, a contested construction suit, constituted by the disputing parties and resolved by a judge acting on evidence, appeared to be more apt to the resolution of a question concerning the interpretation of the trust instrument.

d.     Fourthly, summary character of s 63 procedure. The plurality noted that a fourth noteworthy aspect of s 63 procedure was its "summary" character. The plurality indicated that this pointed towards a wider rather than a narrower use of s 63, so as to assist the court's administration of trusts by orders less extreme than a general administration order.

e.     Fifthly, private and personal advice. The plurality noted that a fifth matter, closely related to the fourth, was the matter (referred to at the outset to this discussion) that s 63 “operated as ‘an exception to the Court's ordinary function of deciding

disputes between competing litigants’; it affords a facility for giving ‘private advice’

It is private advice because its function is to give personal protection to the trustee.”

The plurality noted that it was an error on the part of the Court of Appeal to treat the plaintiffs as being in a position of parity with the Association in the judicial advice proceedings. They stated “It was an error which may have led the Court of Appeal to treat the plaintiffs as being adversaries of the Association in those proceedings (as distinct from the Main Proceedings) and hence to conclude that in proceedings of the present kind judicial advice should generally not be given.”

f.      Sixthly Role of context in applying s 63. Sixthly, the application of s 63 will tend to vary with the type of trust involved.

The High Court contrasted the position of “a non-charitable private trust involving a conflict between beneficiaries, or between beneficiaries alleging a breach of trust out of which a trustee has profited and that trustee, and where the defendants in those proceedings have a personal capacity to fund the defence” on the one hand and a trust “for a charitable purpose” on the other. In the former, it may not be appropriate to provide advice, but in the latter it may be appropriate where none of the contestants in the litigation about the trust is suing or defending in order to augment, defend or seek the restoration of personal assets, and where a crucial question is the precise terms of the purpose for which the trust exists.

g. Seventhly, relationship of s 63 to rights of indemnity. The High Court noted

“Provision is made for a trustee to obtain judicial advice about the prosecution or defence of litigation in recognition of both the fact that the office of trustee is ordinarily a gratuitous office and the fact that a trustee is entitled to an indemnity for all costs and expenses properly incurred in performance of the trustee's duties. Obtaining judicial advice resolves doubt about whether it is proper for a trustee to incur the costs and expenses of prosecuting or defending litigation. No less importantly, however, resolving those doubts means that the interests of the trust will be protected; the interests of the trust will not be subordinated to the trustee's fear of

personal liability for costs.”

They went on to state that it was not right to see a trustee's application for judicial advice about whether to sue or defend proceedings as directed only to the personal protection of the trustee. Proceedings for judicial advice had another and no less important purpose of protecting the interests of the trust.

The plurality concluded this point with an important warning:

“A necessary consequence of the provisions of s 63 of the Act is that a trustee who is sued should take no step in defence of the suit without first obtaining judicial advice about whether it is proper to defend the proceedings. In deciding that question a judge must determine whether, on the material then available, it would be proper for the trustee to defend the proceedings. But deciding whether it would be proper for a trustee to defend proceedings instituted about the trust is radically different from deciding the issues that are to be agitated in the principal proceeding. The two steps are not to be elided. In particular, the judicial advice proceedings are not to be treated as a trial of the issues that are to be agitated in the

principal proceedings.”

h.     Eighthly, the Court of Appeal's general principles. Finally, the High Court noted that the statement of certain “general principles” in the Court of Appeal judgment “should not be regarded as expressing the governing law in Australian courts”.

The Plurality concluded that these eight points suggest that the merits of any particular decision made under s 63 must depend on the particular circumstances of the case in which the decision was made. Their Honours went on to give consideration to the circumstances of the case and overturned the decision of the Court of Appeal, reinstating the orders of Palmer J.

As already stated, the key aspect of the decision, of relevance to the topic under

consideration, is the High Court’s rejection of the notion that applications should be limited to non-adversarial matters and its very strong statement that “A trustee who is sued should take no step in defence of the suit without first obtaining judicial advice about whether it is proper to defend the proceedings.” Does this mean that a superannuation trustee faced with adversarial litigation must always seek judicial advice?

The answer, in my view, is no.

The High Court’s statement must be taken in the context in which it was made. As indicated above, it was made in the context of a discussion about the relationship between the right to seek advice and the trustee’s indemnity. As already discussed, under the general law, a trustee is entitled to an indemnity for all costs and expenses properly incurred in performance of the trustee's duties. The High Court recognised that a trustee faced with a claim may be in doubt about whether it is proper for the trustee to incur the costs and expenses of prosecuting or defending litigation and that an application for judicial advice would resolve doubt about that matter.

But, as already discussed, in the case of superannuation trustees, the general law position relating to indemnities has been altered by s 56 of the SIS Act. Thus, if a Superannuation Trust has an express right of indemnity under the trust deed consistent with the requirements of s 56, the trustee will be entitled to an indemnity for all liabilities it incurs while purporting to act as trustee, even if those liabilities were incurred in breach of trust, provided only that the liabilities are not of the kind identified in s 56(2)75.

Such liabilities would, in my view, cover legal expenses and other costs incurred in defending proceedings, even proceedings for breach of trust. Thus the trustee will not be in a position of doubt regarding its entitlement to an indemnity.

  On that basis, the consideration which drove the High Court’s admonition to trustees to seek judicial advice before taking any step in defending proceedings does not apply to Superannuation Trustees. This appears to have been accepted by Sackar J in Re Bideena Pty Ltd (atf the Bideena Pty Ltd Superannuation Fund)76.

If a Superannuation Trust deed contains no express provision entitling the trustee to an indemnity there may be a need to seek judicial advice. This will depend upon the effect of s 56 on the general law right of indemnity. If s 56 has the effect of avoiding the general law right, then there will be no right of indemnity and no reason to seek judicial advice, from this perspective. If s 56 can coexist with the general law right of indemnity, then the admonition in the Macedonian Church case applies.

Further, there is, in any event, a body of first instance decisions in New South Wales which accept that even outside the superannuation field, it is not necessary for a trustee to seek judicial advice when defending proceedings.

In Re Perpetual Investment Management Ltd77 Robb J said (at [54]-[55]):

“[54] The plurality [in Macedonian Church] also recognised at [106] that there may be factors that justify a decision not to grant judicial advice, but to let the matter be examined in conventional litigation.

[55] If it is true that there are cases when advice under s 63 should not be given to a trustee in respect of the trustee’s position in litigation, it must follow that there are cases when a trustee is not required to seek judicial advice before it takes a step in defence of a suit against it.”

Whilst it may not be necessary for a superannuation trustee to seek judicial advice, is it nevertheless open to the trustee to seek such advice.

In my view there is nothing in the terms of the SIS Act or the terms of s 63 and equivalents which would have the effect of precluding a superannuation trustee from seeking advice. Indeed s 56(3) supports the contrary view.

Thus, even if a trustee can be confident that it will be entitled to be indemnified out of the assets of the trust in relation to the costs of defending a claim, it may nonetheless seek to have the court’s advice on the propriety of defending the proceedings.

In Morris v Smoel78 the Victorian Court of Appeal identified the propriety of the action as being the focus of the advice. It stated that it is no part of the Court’s function to pass judgment on whether what the trustees propose to do is wise or unwise. Rather, the question for the Court is whether there was power to do what is proposed and, assuming that there was power, whether it is “improper” for the trustee to exercise the power which it possessed.

It may well be said, in view of the very real complexities facing superannuation trustees in terms of their rights and obligations under the SIS legislation, that they would often be justified in seeking advice.

In Re Australian Pipeline Ltd79 Barrett J noted that s 63 does not cover an application by a trustee for advice in respect of a past breach of trust arising from a completed course of conduct80. His Honour emphasised that the jurisdiction is restricted to questions respecting

the “management or administration of the trust property”, or respecting “the interpretation

of the trust instrument”. He said (at [24]):

“[24] The case before me is not of that kind. The trustee’s concern, upon the present application, is with the question of potential exposure of the trustee personally because of past acts and a completed course of conduct of the trustee.

Determination of the question whether the Federal Court proceedings should or should not be defended by APL will not contribute to any particular outcome related to the management or administration of the assets of the trust. The question now confronting APL is how it should deal with an allegation of past misconduct which, if established, will entail personal liability for breach of trust or statutory wrongdoing. The trust property of which APL has stewardship will in no way be protected or enhanced by defence of the claim. If the beneficiaries, as plaintiffs in the Federal Court, are fully successful, the trust property will be seen to have been dealt with in the past in an impermissible way and the trustee will be brought to account accordingly. If the beneficiaries, as plaintiffs, are unsuccessful, the trust property will be seen not to have been misapplied by the trustee in the past. Either way, the result, so far as the trust estate is concerned, will do no more than reveal an historical position. The only consequence of an immediate kind having future implications will be as to the liability of the trustee (or the absence of liability)81”. 

 It is possible that member claims against superannuation trustees may fall into this class of case, although, as the High Court noted in the Macedonian Church case, (at [110]):

“In understanding that passage, it must be remembered that Barrett J had earlier said in his reasons that a trustee could properly seek judicial advice relating to

defending legal proceedings ‘if the legal proceedings are themselves concerned with the management or administration of the trust property or the interpretation of the trust instrument’ …”

Thus, it is necessary to pay close attention to the nature of the proceedings before making the application.

Powers to Compromise

Superannuation Trustees may have powers to compromise claims either under the express terms of the trust deed or pursuant to statutory powers in the various State Trustee Acts82.

It has been held in Re Irismay Holdings Pty Ltd83 and in Perpetual Trustees Australia Ltd v Wallace84 that the statutory power extends to the power to compromise claims made by beneficiaries against the trustee for breach of trust.

The statutory power to compromise is construed widely but there must be a claim of some sort. It is not necessary to show that there is pending litigation85 or that the claim would have succeeded86 but in order to exercise the power, it would be necessary to demonstrate some difficulty about the claim which justified compromise87 or practical justification such as the potential for the costs of litigation to outweigh any potential benefits.

In Re Irismay Holdings Pty Ltd88 Lee J stated (at 176):

“the compromise [must be] entered into bona fide and for the benefit of the trust as a whole, an expression which no doubt encompasses the notion that

the compromise is reached for the genuine purpose of settling the dispute and not merely as an expedient means of achieving some ulterior or extraneous agenda:… In other words the mere fact that a dispute has arisen and an agreement has been entered into is not enough; the agreement must relate to the resolution of the dispute before it can come within the power”.

It is open to the trustee to apply for judicial advice in relation to a compromise under s 63 and its equivalents89 and this course is probably desirable where any potential conflict may exist.

It is difficult to generalise about considerations in compromising systemic issues or class actions. However, it is likely that in the case of numerous potential claims arising from systemic problems, or in the case of class actions, an application to court would be appropriate90.

Conclusion

Member claims may raise very difficult questions for trustees of Superannuation Funds. The extent to which and the way in which the SIS Act operates alongside principles of general law is not clear and this may have a significant impact on the liabilities of trustees. It is probably inevitable that these questions will lead to litigation in the future.

Howard K. Insall SC © March 2019

1) Heydon and Leeming “Jacobs’ Law of Trusts” 8th Edn para [17-01] citing Hallows v Lloyd (1888) 39 Ch D 686 at 691.

2) Op cit para [17-04] citing A-G v Downing (1767) Wilm 1 at 23; 97 ER 1 at 9.

3) Op cit paras [1-05] to [1-10].

4) Op cit para [1-10] a passage which, in an earlier form, was approved in DKLR Holding Co (No 2) Pty Ltd v Cmsr of Stamp Duties [1980] 1 NSWLR 510 at 518.

5) [1998] Ch 241. Spread Trustee Co Ltd v Hutcheson [2012] 2 AC 194 at [52].

6) (2016) 115 ACSR 130; [2016] NSWCA 200

7) See Finch v Telstra Super (2010) 242 CLR 254 at [35]: “Because of the potentially lengthy time periods over which superannuation savings are accumulated, it was natural, and it is now in many instances mandatory, for a trust mechanism to be employed.”

8) (2013) 211 FCR 203; [2013] FCA 355.

9) Ibid at [44], [45] and [49].

10) Ibid at [52], [53].

11) Heydon and Leeming “Jacobs’ Law of Trusts in Australia” 8th Edn at [3-15] citing the decision of Gummow J in Herdegen v FCT (1988) 84 ALR 271 at 281-2.

12) See for example the requirement in s 52(2)(c) that the trustee must perform its duties and exercise its powers in the best interests of “beneficiaries”.

13) See for example s 29T and 99B of the SIS Act.

14) SIS Act s 52(6)(a).

15) See for example s 23C of the Conveyancing Act 1919 (NSW) and cf s 23B(1).

16) See Heydon and Leeming “Jacobs’ Law of Trusts” 8th Edn paras [17-01] to [17-35]

17 )ALRC Report para 9.9. At para 9.20, the Report appeared to suggest that the duty was implicit in the office of trustee but that it was of such importance that it should be included in legislation. At para 9.22 the Report described the duty to act in the best interests of members as a “general duty” which complemented the more specific obligations to act honestly and to exercise care diligence and skill.

18) [1998] Ch 241.

19) The history of the legislation is discussed in detail in Invensys Australia Superannuation Fund Pty Ltd v Austrac Investments Ltd (2006) 15 VR 87; [2016] VSC 112 at [102]ff and Manglicmot v Commonwealth Bank Officers Superannuation Corporation Pty Ltd [2011] NSWCA204; (2011) 282 ALR 167 at [103]ff.

20) A covenant under seal in a trust deed will give rise to a specialty debt: Richardson v Jenkins (1853) 1 Drew 477; 61 ER 534.

21) [2018] SASC 127 at [95] to [105].

22) This problem would not arise if the narrow meaning of “covenant” was intended.

23) (2006) 15 VR 87; [2016] VSC 112.

24) [2011] NSWCA 204; (2011) 282 ALR 167.

25) In Manglicmot at [121], Giles JA appeared to accept that there was no material difference between the duty in s 52(2)(c) and the general law duty to act in the best interests of beneficiaries. This view appears to have been approved in Commonwealth Bank Officers Superannuation Corporation Pty Ltd & Anor v Beck & Anor (2016) 334 ALR 692; [2016] NSWCA 218 at [136].

26) See Manglicmot at [120], but the scope of the phrase “in relation to all matters affecting the entity” was not discussed.

27) [1998] Ch 241 at 251.

28) Note however the distinction between the English and Australian approaches to dishonesty as referred to in MacLeod v R (2003) 214 CLR 230 at [37]

29) (1997) 188 CLR 449.

30) References and footnotes omitted.

31) Cf Asgard Capital Management Ltd v Maher (2003) 131 FCR 196; [2003] FCAFC 156 at [3] and s 34(2) and (3).

32) (2016) 340 ALR 75 at [345].

33) [1998] Ch 241 at 253-4.

34) (2016) 115 ACSR 130; [2016] NSWCA 200 at [308].

35) Cf Wellington Capital Ltd v ASIC (2014) 254 CLR 288 at [12].

36) See for example the requirement in s 52(2)(c) that the trustee must perform its duties and exercise its powers in the best interests of beneficiaries.

37) [2003] NSWSC 65.

38 See for example John V Edstein “Superannuation Funds: a beneficiary’s interest and accrued benefit” The Tax Specialist Vol 13 No 3 p 123; Stanley Drummond: “SIS Act obligations to beneficiaries” (2010) 4 Journal of Equity 140. And see also, more generally, Darrell Barnett “The nature of a beneficiary’s interest in the assets of an express trust” (2004) 10 Australian Property Law Journal p 1.

39) (2010) 242 CLR 254.

40) Cf Caboche v Ramsay (1993) 119 ALR 215 at p 230 per Gummow J.

41) (2016) 115 ACSR 1.

42) (1990) 94 ALR 81

43) (2003) 131 FCR 196; [2003] FCAFC 156 at [7].

44) See eg, Limitation Act 1969 (NSW) s 49; Limitation of Actions Act 1958 (Vic) s 21(2); Limitation of Actions Act 1974 (Qld) s 27(2); Limitation Act 1974 (Tas) s 24.

45) Limitation of Actions Act 1958 (Vic) s 21; Limitation of Actions Act 1936 (SA) ss 31 and 32; Limitation of Actions Act 1974 (Qld) s 27; Limitation Act 1974 s 24.

46) Limitation Act 1969 (NSW) s 47(1).

47) Sze Tu v Lowe (2014) 89 NSWLR 317 at [389]

48) (2003) 214 CLR 230 at [37] – [49]

49) (1874) LR 9 Ch App 244. See also Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373; Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 at [159]ff.

50) [2018] HCA 43 at [71].

51) (1874) LR 9 Ch App 244. See also Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373; Farah

Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 at [111]-[112].

52) (1858) 25 Beav 54; 53 ER 556.

53) (1992) 175 CLR 353. See Burns v Leda Holdings Pty Ltd [1988] 1 Qd R 214 at 227 where Dowsett J appeared to accept that a trustee could recover where moneys were paid under a mistake of fact but not law (the decision being prior to the decision of the High Court in David’s Securities).

54) (2004) 182 FLR 431 at [71].

55) (2014) 253 CLR 560.

56) See for example Limitation Act 1969 (NSW) s 14(1)(a).

57) (2003) 212 CLR 484 at [35]

58) [1996] AC 421 at 437

59) [2003] NSWSC 65.

60) For a detailed examination of the interrelationship between the requirements for insurance and the trustee’s right of indemnity, see Hon JC Campbell QC FAAL “Some aspects of the civil liability arising from breach of duty by a

superannuation trustee” (2017) 44 Australian Bar Review 24 at p 54ff.

61) See Allison Silink “Trustee exoneration from trust assets — Out on a limb? The tension between creditor expectations

and the ‘clear accounts’ rule” (2018) 12 J Eq 58.

62) Hon JC Campbell QC FAAL “Some aspects of the civil liability arising from breach of duty by a superannuation trustee”

(2017) 44 Australian Bar Review 24 at p 46ff

63) Op cit at p 36.

64) Hon Kevin Lindgren QC “A superannuation fund trustee’s right of indemnity” (2010) 4 J Eq 85.

65) Hon JC Campbell QC FAAL “Some aspects of the civil liability arising from breach of duty by a superannuation trustee”

(2017) 44 Australian Bar Review 24 at p 40.

66) Op cit at p 46ff

67) [2005] BCLC 91; [2004] EWCA Civ 1244.

68) [2019] EWHC 472 at [144]

69) [2018] EWHC 1509. And see also reference to the principle with apparent approval in the Court of Appeal decisions of Cavenagh v William Evans Ltd [2012] EWCA Civ 697 at [19] and Helmet Integrated Systems Ltd v Tunnard [2006] EWHC Civ 1735 at [41].

70) (2006) 14 VR 1. See also Hodgson v Amcor (2012) 264 FLR 1.

71) (2015) 89 NSWLR 431.

72) McVeigh v Retail Employees Superannuation Pty Ltd [2019] FCA 14.

73) See the various State Trustee Acts and, in Victoria, Supreme Court (General Civil Procedure) Rules 2015, Order 54.02, see for example Re Olrey Pty Ltd [2016] VSC 18.

74) (2008) 237 CLR 66

75) Op cit p 40.

76) (2016) 334 ALR 146 at [32] to [37].

77) [2014] NSWSC 784

78) [2013] VSCA 11 at [25]

79) (2006) 60 ACSR 625

80) But compare Northey v Juul [2014] NSWSC 464 at [107] per Slattery J.

81) The High Court appears to have accepted the correctness of this approach in the Macedonian Church case at [110].

82) See eg Trustee Act 1925 (NSW) s 49(1); Trustee Act 1958 (Vic) s 19(1); Trusts Act (Qld) s 44; Trustee Act 1936 (SA) s 28(2);

Trustees Act 1962 (WA) s 42; Trustee Act 1898 (Tas) s 24(2).

83) [1996] 1 Qd R 172 at 32-3.

84) [2007] FCA 527 at [40].

85) Cf the power to compromise in a scheme of arrangement: Sneath v Valley Gold Limited [1893] 1 Ch 477 at 494.

86) Re Ridsdel [1947] 1 Ch 597 at 603.

87) Cf: Sneath v Valley Gold Limited [1893] 1 Ch 477 at 494.

88) [1996] 1 Qd R 172 at 32-3.

89) See for example Ireland v Retallack [2012] NSWSC 1179.

90) See for example Re Centro Retail Australia Ltd (2012) 35 VR 512.