TRUSTEES’ DUTIES

John Edstein Consulting lawyer

john.edstein@jveconsulting.com.au March, 20151

CONTENTS

• Introduction

• An “interest” in a trust and related concepts o “Interest” o Vested and contingent interests o Mere expectancy o Indefeasibility

• Indefeasible interests (tax)

• Present entitlement (tax)

• What is a trust?

• Key duties (general law) o Get in trust property o Know the terms of the trust o Obey strictly the terms of the trust o Duty of care o Duty to account o Duty not to fetter discretions o Duty to act impartially o Duty to pay the correct beneficiaries

• Discretions: the exercise of powers

• “Best interests” (superannuation)

• No conflict rule

• Duty of care (general law and superannuation) o General law

▪ The ordinary prudent person of business ▪ The professional trustee ▪ The “intense” duty ▪ Directors and others: accessorial liability

o SIS Act: Trustees/RSE licensees ▪ Statutory covenant: section 52(2)(b) ▪ Satisfying the duty of care

o SIS Act: Directors ▪ Statutory covenant: section 52A(2)(b)

1 Presented in the program “Trusts in a Commercial Context” for the University of New South Wales,

Faculty of Law, February 2015

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Introduction

This paper is a collection of excerpts from cases; text books; and papers that I have written. Apart from the excerpts from papers that I have written, in which some analysis of the relevant legal principles is provided, the description of the duties is taken directly from leading judgments and text books. The general flow of the paper can be gleaned from the Contents.

An “interest” in a trust and related concepts2

From a paper originally prepared by John Edstein in February 2009 and later published in the Taxation Institute of Australia Tax Specialist journal in February 2010. The paper is entitled: “The Nature of a Beneficiary’s Interest in a Superannuation Fund and Accrued Benefits”:

““Interest”

The concept of “interest” in a property law and equity law context is well removed from having a single meaning.

The difficulty was recognised by the High Court in 2005 in CPT Custodian v Commissioner of State Revenue3 where the Court quoted Viscount Radcliffe, sitting on the Privy Council, in Livingston v Commissioner of Stamp Duties4 as follows:

“the terminology of our legal system has not produced a sufficient variety of words to represent the various meanings which can be conveyed by the words ‘interest’ and ‘property’.”

Lord Wilberforce, sitting on the House of Lords, in Gartside v IRC (1968) 5, also referred to the above passage and the High Court in CPT quoted Lord Wilberforce. Lord Wilberforce said:

“It can be accepted that ‘interest’ is capable of a very wide and general meaning. But the wide spectrum that it covers makes it all the more necessary, if precise conclusions are to be founded upon its use, to place it in a setting: Viscount Radcliffe [in Livingston] shows how this word has to do duty in several quite different legal contexts to express rights of very different characters and that to transfer a meaning from one context to another may breed confusion.”

The terms “beneficiary” and “beneficial interest” are both defined in section 10 of the SIS Act and are considered in that “setting” later in the paper. Statutory definitions aside, a relevant “setting” is also the trust instrument which describes a person’s entitlement or “interest”. The nature of the “interest” in that setting can be construed according to general trust and property principles.

2 A related concept is that of the “absolute entitlement” of a person to an asset. The decision of the High

Court in CPT Custodian v Commissioner of State Revenue (2005) 224 CLR 98 has had a material impact on

conventional wisdom in relation to absolute entitlement. In an income tax context, the case was recently

considered by Kenny, J of the Federal Court in Taras Nominees Pty Limited v Commissioner of Taxation

[2014] FCA 1 3 (2005) 224 CLR 98. 4 [1965] AC 694. 5 [1968] AC 553.

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Vested and contingent interests

The general law has developed principles over many years for classifying the nature of a beneficiary’s interest (or lack of it) in a private trust. The range of “interests” could broadly be described as vested interests, with the further sub-classification being vested in possession and vested in interest, contingent “interests” and mere expectancies. Further, ordinarily in the context of vested interests, a question can arise as to whether the interest is “indefeasible” or “defeasible”.

The classification of an entitlement is fundamentally dependent on the terms of the trust instrument under which the entitlement exists and is governed. The distinctions can often be subtle and sometimes unclear. For example, the distinction between a contingent interest and an interest which is vested in interest but defeasible can be difficult to identify, particularly since they can both produce the same outcome - essentially the difference between something which is to be given in the future upon the occurrence of some event and something which is already given but for which the enjoyment is deferred and, prior to that enjoyment taking place, can be taken away. These matters are raised further below.

Despite these potential difficulties, as Hill, J said of the expression “vested and indefeasible” as contained in section 95A(2) of the Income Tax Assessment Act, 1936:

“The words ‘vested’ and ‘indefeasible’ in the context of trust law are technical words of limitation, which have a well understood meaning to property conveyancers.”6

In Megary and Wade, the Law of Real Property7, the authors describe the above concepts as follows:

“Any future interest may be either vested or contingent, a vested interest may be either ‘vested in interest’ or ‘vested in possession’. An interest is ‘vested in possession’ when it gives the right of present enjoyment; but of course it is not then a future interest. If it is vested in interest but not in possession (for which situation the term ‘vested’ is ordinarily used by itself) it is a future interest, since the right of enjoyment is postponed; yet it is also an already subsisting right in property vested in its owner; it is a present right to future enjoyment. By contrast with a vested interest, a contingent interest is one which will give no right at all unless and until some future event happens.”8

The authors give the following example:

“to A for life, remainder to B for life, remainder to C in fee simple if he survives B.”

They state that A’s life interest is vested in possession, A having the right vested with immediate enjoyment. B’s interest is vested in interest as even though B has a present, vested right, B’s enjoyment is postponed until A dies and C’s interest is contingent, as it is conditional upon C surviving B.

The authors state that an interest may be vested even though there is no certainty of it taking effect in possession at any time. B’s interest is also defeasible as B might

6 Dwight v FCT (1992) 107 ALR 407. 7 Harpum, C The Law of Real Property 6th edition, Thomson, 1999. 8 ibid; Chapter 7.

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die before A. Importantly however, in contrast to C’s gift, there is no condition on when B’s interest arises - ie it arises immediately; it is only the enjoyment of it which is deferred (and which might be defeated by B dying before A). C’s interest does not arise unless and until a particular event occurs.

The authors also acknowledge the subtleties associated with the term “future” in the context of estates which are vested in interest and contingent estates. They state:

“It is a reference to futurity of possession that vested and contingent [remainders] are classed as future interests. In one sense a vested remainder is an existing interest, and therefore not future. And in one sense, a contingent remainder is future, but not an interest: it is only a possibility that an interest may arise if some contingency happens.”

The law explaining these concepts was advanced in Australia during the 1990’s in a collection of cases all addressing the concept of “vested and indefeasible” as used in section 95A(2) of the Income Tax Assessment Act, 1936. Hence, for example and consistently with above, in Walsh Bay Developments Pty Limited v FCT9, Beaumont and Sackville, JJ (with whom Jenkinson, J agreed) in the Full Federal Court stated as follows:

“A vested interest is one where the holder has an “Immediate fixed right of present or future enjoyment”: Glenn & Ors v Federal Commissioner of Land Tax (1915) 20 CLR 490, at 496, per Griffith J. In relation to land, an estate is vested in possession where there is a right of present enjoyment, as where A has a life estate or fee simple estate in the land. An estate is vested in interest where there is a present right of future enjoyment. Thus where T holds in trust for A for life and then in trust for B in fee simple, B’s equitable fee simple estate is vested in interest during A’s lifetime. The estate will vest in possession on A’s death: Glenn & Ors v Commissioner, at 496, Dwight v FC of T, at 192.

An estate is contingent if the title of the holder depends upon the occurrence of an event which may or may not take place: E.H. Barr, Cheshire’s Modern Law of Real Property (11th ed 1972), 241. However, the mere fact that an estate will not fall into possession until the regular determination of a prior estate does not make the first estate contingent. As stated in C. Fearne, Contingent Remainders and Executory Devises (10th ed, 1844), vol. 1, 216:

‘It is not the uncertainty of ever taking effect in possession that makes a remainder contingent; for to that, every remainder for life … Is and must be liable; as the remainder-man may die … before the death of the tenant for life. The present capacity of taking effect in possession, if the possession were to become vacant, and not the certainty that the possession will become vacant before the estate limited in remainder determines, universally distinguishes a vested remainder from one that is contingent.’”

For these reasons it is said that before a beneficiary is entitled to a vested interest two things must occur:

“(a) his identity must be established;

9 95 ATC 4378.

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(b) his right to the interest (as distinguished from his right to possession) must not depend upon the occurrence of some event.”

(see Cheshire’s Modern Law of Real Property, 242.)10

Mere expectancy

In modern trust provisions, the concept of a “mere expectancy” is synonymous with the rights of the object of a trustee’s power of appointment under a so-called discretionary trust. Of course, the concept is not limited to the object of a power under a discretionary trust; the concept applies equally to the object of a power under any form of trust, including a superannuation trust, or other situations where a person can exercise a power of appointment in favour of another. The common example in many superannuation trusts is the position of dependants in respect of a death benefit where the ascertainment of their interest, if any, is determined by an exercise of power/discretion of the trustee.

As Dal Pont and Chalmers put it:

“… [it is] an expectation or hope that the discretion will be exercised in his or her favour (per Lords Reid and Wilberforce in Gartside v Inland Revenue Commissioner [1968] AC 553). Discretionary beneficiaries have neither an ‘interest in possession’ … nor an immediate entitlement to income as it accrues … They have no interest in any legal or equitable estate … A discretionary beneficiary receives a vested interest only to the extent of the fund actually distributed to her or him (see Re Vestey’s Settlement [1951] 1 Ch 209 …, Queensland Trustees Ltd v Commissioner of Stamp Duties (Qld) (1952) 88 CLR 54).” 11

Indefeasibility

The CCH Macquarie Concise Dictionary of Modern Law defines “indefeasible” as:

“… not susceptible to defeat”.

Hill, J in Dwight said:

“An interest is said to be defeasible where it can be brought to an end and indefeasible where it can not. Thus, a beneficiary with an interest which is not contingent but which interest may be brought to an end by the exercise of a power of appointment would be said to have a vested but defeasible interest…”.

Hence, the necessary features of an indefeasible interest are that it is not capable of being defeated by some event or action by a relevant person such as a trustee’s exercise of power. An essential observation is that a dealing with the interest by the owner of it would not be defeating the interest, rather it would be an effectuation of it.12

10 95 ATC 4378 at pp 4388-4389. For an extensive and highly regarded analysis of these concepts in the

context of relevant tax provisions, see the paper by Karen Rooke: “How Fixed is Your Trust?” (2006)

21(3) Australian Tax Forum. 11 GE Dal Pont and DRC Chalmers, Equity and Trusts in Australia Third edition, Law Book Co, 2004. 12 See, for example, MSP Nominees Pty Limited v Commissioner of Stamps (1999) 198 CLR 494.

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The concept was also covered in Walsh Bay by Beaumont and Sackville, JJ as follows:

“The distinction between a vested but defeasible interest and an indefeasible interest is stated by Fearne (vol 2, 30) as follows:

‘A defeasible interest is an interest that is subject to be defeated by the operation of a subsequent or mixed condition.

An indefeasible interest, or an absolute interest as opposed to a defeasible interest, is one that is not subject to any condition.’

There is also a distinction between a contingent interest and a defeasible interest. The latter is a vested interest, which is liable to be divested by a supervening event. This distinction is not always easy to apply. For example, the rule of construction in Phipps v Ackers (1842) 9 CL & Fin 583; 8 ER 539, is that –

“where a settlor makes a gift to A if A fulfils in the future some conditions, and to B if A does not fulfil that condition, his intention is to make to A an immediate gift of the property including its income, of which, however, A is liable to be divested if and when the condition becomes impossible of fulfilment:” In re Kilpatrick’s Policies Trust [1966] Ch 730, at 764, per Diplock L.J.”13

Indefeasible interests

Income Tax Assessment Act, 1936, Schedule 2F:

Section 272-5:

“If, under a trust instrument, a beneficiary has a vested and indefeasible interest in a share of the income of the trust that derives from time to time, or of the capital of the trust, the beneficiary has a ‘fixed entitlement’ to that share of the income or capital”.

Section 272-65:

“A trust is a ‘fixed trust’ if persons have fixed entitlements to all of the income and capital of the trust”.

“In this case it is not necessary to ascertain all the rights of members; the Court is not concerned with members’ rights other than the right to a share of income or capital of the Wholesale Fund. It is only this right that must be vested and indefeasible for the trust to qualify as a fixed trust. The question therefore is could there be an amendment to the Constitution of the Wholesale Fund that terminated, invalidated or annulled the above right…“

It follows that the members could vote to terminate the present right to a share of income and capital. Although in some circumstances such an exercise of power might be subject to the implied limitations to which his Honour refers, there it no reason to believe that this would always be so. For that reason it must be concluded that the Wholesale Fund is not a fixed trust…”

13 95 ATC 4378 at 4388-4389.

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Per Stone, J in the Federal Court in Colonial First Investments Limited v Commissioner of Taxation14

Present entitlement

“The parties are agreed that the cases, see, in particular, Federal Commissioner of Taxation v. Whiting [1943] HCA 45; (1943) 68 CLR 199, at pp 215-216, 219-220; Taylor v Federal Commissioner of Taxation [1970] HCA 10; (1970) 119 CLR 444, at pp 450-452; establish that a beneficiary is “presently entitled” to a share of the income of a trust estate if but only if:

(a) the beneficiary has an interest in the income which is both vested in interest and vested in possession; and

(b) the beneficiary has a present legal right to demand and receive payment of the income, whether or not the precise entitlement can be ascertained before the end of the relevant year of income and whether or not the trustee has the funds available for immediate payment.”

Per the High Court unanimously in Harmer v Federal Commissioner of Taxation.15

What is a trust?

“There are four essential elements in every form of trust: the trustee, the trust property, the beneficiary or charitable purpose, and the personal obligation annexed to the trust property.

“ The Trustee

“First, there must be one or more trustees, individual or corporate, who together hold a legal or equitable interest in the trust property. There must be a person on whom there is an obligation to deal with the trust property in terms of the trust…In equity a trust will not be allowed to fail for want of a trustee…If necessary, the court will restrain a person in whom trust property is vested, provided that person is not a purchaser for value without notice, from dealing with the trust property otherwise than in accordance with the trust. It will then appoint a trustee and cause the trust property to be vested in the person.

“The Trust Property

“The second essential element is that there should be property capable of being held on trust.16 There must be certainty in identification of the property bound by the trust.17 In general, all property may be made the subject of a trust unless the policy of the law or statute forbids it…The interest of a beneficiary under a trust may itself be held on a ‘sub-trust’ for a third party, who will be a beneficiary under the sub-trust.18

“The Beneficiary

14 [2011] FCA 16 15 (1991) 173 CLR 264 at 267. 16 The Public Curator of Queensland v The Union Trustee Co of Australia Ltd (1922) 31 CLR at 74-5, per

Higgins, J; 28 ALR 438 at 441; Port of Brisbane Corporation v ANZ Securities Ltd [2003] 2 Qd R 661 at [29]. 17 Herdegen v FCT (1988) 84 ALR 271 at 277-80. 18 As in Hayim v Citibank NA [1987] AC 730 at 742-3

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“Thirdly, there must be a cestui que trust or beneficiary. The trustee may be one of the beneficiaries but not the sole beneficiary…A trust may be created without communication to the beneficiary19, although the beneficiary may disclaim20…there may be a valid trust in favour of a class of persons, the exact constitution of which is unknown at the time of creation of the trust. In the case of public or charitable trusts, there will be no individuals as beneficiaries. There, the beneficiary must be regarded as the charitable purpose to which the trust property is devoted…

“In the case of a non-charitable, or private, trust usually the beneficiaries will have an equitable proprietary interest in the trust assets. However, this is not always so…

“A Personal Obligation Annexed to the Property

“The fourth essential element is that the trustee must be under a personal obligation to deal with the trust property for the benefit of beneficiaries, an obligation giving correlative rights to the beneficiaries. The obligation must be annexed to the trust property…The obligation attaches to the trustee in personam, but it is also annexed to the property, so that the equitable interest resembles a right in rem.”

pp2-5, Heydon and Leeming, “Jacobs’ Law of Trusts in Australia”, seventh edition

“A trustee's function is to take the trusts as it finds them and to administer them as they stand. The trustee is not concerned to question the terms of the trust or seek to improve them.”21

Get in the trust property

“… Another facet of the duty to get in the trust property requires a trustee to take proceedings against a co-trustee, a former trustee or a stranger who is liable to redress a breach of trust or otherwise owes a present liability to the trust22, unless to do so would be futile due to the financial position of the person liable, …”

p617, Dal Pont and Chalmers, “Equity and Trusts in Australia”, third edition.

Know the terms of the trust

“The first duty of a trustee is to make himself thoroughly acquainted with the terms of the trust which he undertakes to carry out, and all documents, papers and deeds relating to or affecting the trust property as come into his possession and control.23

It is necessary that trustees should know precisely the nature and circumstances of the trust property.24 It would seem the merest truism to set out this as the first duty of a trustee; but the reports show very clearly that people constantly undertake the office of trustee and yet neglect to inform themselves sufficiently as to the duties they are to perform.”

p417, Meagher and Gummow, Jacobs’ Law of Trusts in Australia, sixth edition.

19 Middleton v Pollock (1876) 2 Ch D 104 at 106; Rose v Rose (1986) 7 NSWLR 679 at 686 20 Glenn v FCT (1915) 20 CLR 490 at 497; 21 ALR 465 at 468; CPT Custodian Pty Ltd v Commissioner

of State Revenue (2005) 221 ALR 196 at [25]; 79 ALJR 1724 21 per Barrett, J in the NSW Court of Appeal in Re Dion Investments Pty Ltd [2014] NSWCA 367 at [94] 22 Longhurst v Waite [1920] SALR 407 at 428; Partridge v Equity Trustees Executors and Agency Co Ltd

(1947) 75 CLR 149 at 164; Re Atkinson (deceased) [1971] VR 612 at 616. 23 Hallows v Lloyd (1888) 39 Ch D 686 at 691. 24 Harvey v Olliver (1887) 57 LT 239 at 241.

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Even where a trustee has failed to appreciate the scope of their powers and so has breached the duty to know the terms of the trust, compensation in the form of damages is not automatic. The beneficiary must prove that the trustee’s breach caused them loss25.

Obey strictly the terms of the trust

“… As Mr Birrell put it,26 ‘The third duty of a trustee is to adhere to the terms of his trust in all things, great and small, important and seemingly unimportant. This is his very plainest duty; no trustee would ever deny it, or pretend to be ignorant of it, yet it is his hardest unless from the very beginning he makes up his mind to it, and then it is as easy as eating bread and butter.’

The rule that the trustee must strictly conform to and carry out the terms of the trust modifies all other rules because these other rules are applied subject to any provisions contained in the trust instrument itself.”

p419, Meagher and Gummow, Jacobs’ Law of Trusts in Australia, sixth edition.

The High Court in Youyang v Minter Ellison Morris Fletcher27 approved of Mr Birrell’s assessment of the rigour of the rule (though this rigour may be alleviated by statute).

Duty of care

The excerpts from cases below describe the duty of care as expressed from various cases. The principles are applicable to trusts at large and are not limited to any particular type of trust for beneficiaries. These cases are also referred to in the excerpt at the end of the paper which addresses not only the duty under the general law but also the duty/covenant for superannuation trustees effective from 1 July 2013 and the new duty/covenant for directors of corporate superannuation trustees.

“a trustee ought to conduct the business of the trust in the same manner that an ordinary prudent man of business would conduct his own, and that beyond that there is no liability or obligation on the trustee. In other words, a trustee is not bound because he is a trustee to conduct business in other than the ordinary and usual way in which similar business is conducted by mankind in transactions of their own. It never could be reasonable to make a trustee adopt further and better precautions than an ordinary prudent man of business would adopt, or to conduct the business in any other way. If it were otherwise, no one would be a trustee at all.”

per Jessel MR in Re Speight.28

p618, Dal Pont and Chalmers, “Equity and Trusts in Australia”, third edition.

“… Although the rule as stated by Jessel MR in Re Speight; Speight v Gaunt (1883) 22 Ch D 727 at 739 is that ‘a trustee ought to conduct the business of the trust in the same manner that an ordinary prudent man of business would conduct his own, and that beyond that there is no liability or obligation on the trustee’, and, although this may be taken as a precise and accurate statement of the law, it is to be remembered in applying the rule that consideration must be given to the fact that the business of the trustee is investing on behalf of others, some of whom are to enjoy the benefits of

25 Nestle v National Westminster Bank plc [1994] 1 All ER 118 26 Birrell, The Duties and Liabilities of Trustees, 1896, p22. 27Youyang Pty Ltd (as trustee of the Bill Hayward Discretionary Trust) v The persons listed in Schedule 1

trading as Minter Ellison Morris Fletcher and later as Minter Ellison (2003) 196 ALR 482 at [33] 28 (1883) 22 Ch D 727 at 739-740.

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the investment at some future time. That is to say, it is not just the ordinary prudence that a man might exercise in investing money for himself, for prudent business men frequently take risks which they consider in the circumstances quite reasonable as regards themselves, but which they might not consider reasonable were they dealing with the investment of savings set apart to provide for wife and children. It would not be prudent in a trustee to take such risks. The trustee must incur no risk of loss that can be avoided by ordinary care. He has to remember not only that he is investing to provide a present income for some of the beneficiaries, but also that he is investing as a means of preserving the capital moneys for the benefit of other beneficiaries who will take in the future. The prudence exercised by him in his investment will be weighed in the light of this fact and not merely by the prudence of a man making an immediate investment for himself. In other words, not only has a trustee to exercise the prudence of an ordinary business man in connection with his own business, but he has to exercise it with special reference to the subject matter. Just as a ‘prudent’ speculator on the Stock Exchange runs risks that would not be run by a wholesale merchant and the latter runs risks that a small retailer would not be justified in running, so an ordinary prudent business man sometimes runs risks in regard to his own affairs that a trustee must not run in dealing with the funds of the trust. The prudence is to be considered in relation to the special purpose for which the trust funds are entrusted to the trustee.”

per Lindley, LJ in Re Whiteley; Whiteley v Learoyd.29

p433-434, Meagher and Gummow, Jacobs’ Law of Trusts in Australia, sixth edition.

“A trust corporation holds itself out in its advertising literature as being above ordinary mortals. With specialist staff of trained trust officers and managers, with ready access to financial information and professional advice, dealing with and solving trust problems day after day, the trust corporation holds itself out, and rightly, as capable of providing an expertise which it would be unrealistic to expect and unjust to demand from the ordinary prudent man or woman who accepts, probably unpaid and sometimes reluctantly from a sense of family duty, the burdens of trusteeship.”

Per Brightman, J in Bartlett v Barclays Trust Co Ltd (No. 1).30

p618-619, Dal Pont and Chalmers, “Equity and Trusts in Australia”, third edition.

In Australian Securities Commission v AS Nominees Ltd and Others Finn J cited Brightman J’s statement with approval:

“[Brightman J’s] decision has been cited with apparent approval, though it was not in terms relied upon, by Gleeson CJ in Gill v Eagle Star Nominees Ltd, (SC(NSW) 22 September 1993, unreported) It is, in its own way, consistent with observations of the Privy Council in the Australian appeal, National Trustees Co of Australasia Ltd v General Finance Co of Australasia Ltd [1905] AC 373 at 381, when refusing to excuse a trust company from a breach of trust. There is an extensive United States case law affirming such a higher standard…

If it were in fact necessary for me so to do (which it is not), I would be prepared to apply to the trustee companies in these proceedings a standard of care higher than that of the ordinary prudent business person.”31

29 (1886) 33 Ch D 347 at 355. 30 [1980] Ch 515 at 534. 31 (1995) 133 ALR 1 at 14.

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Duty to account

“[T]he first and primary duty of every … trustee having money in his hands to be received and to be paid is, that an account of his receipts and payments should be kept, to be produced to those interested in the account when it is properly demanded.”

Per Windeyer, J Waterhouse v Waterhouse.32

p619, Dal Pont and Chalmers, “Equity and Trusts in Australia”, third edition.

Duty not to fetter discretions

“…. It follows that trustees must not bind themselves contractually to exercise a trust in a prescribed manner, to be decided by considerations other than their own conscientious judgment at the time, in respect of what is in the best interests of the beneficiaries.”

per Dal Pont and Chalmers, “Equity and Trusts in Australia”, third edition, citing appropriate authorities at p626.

Duty to act impartially

“…there are many circumstances in which a fiduciary has to exercise discretions. When he exercises them for beneficiaries who have similar rights, it is well settled that he must treat them all equally. Without an express power to discriminate in a particular case, he cannot act so as to favour some only or to burden others”.33

“Complementing the fiduciary’s duty to treat beneficiaries equally where they have similar rights is a duty to treat them fairly where their rights are dissimilar…This duty is a notoriously difficult one, and in many circumstances the law itself relieves a fiduciary of his difficulties by positively ordaining how fairness between beneficiaries is to be achieved. In the law of trusts, for example, the rules in Howe v Lord Dartmouth, and Re Earl of Chesterfield’s Trusts, have this as their object.”34

Query whether this proposition still stands as starkly as expressed by Professor Finn (who became Justice Finn of the Federal Court, now retired).

“Properly understood, the so-called duty to act impartially … is no more than the ordinary duty which the law imposes on a person who is entrusted with the exercise of a discretionary power: that he exercises the power for the purpose for which it is given, giving proper consideration to the matters which are relevant and excluding from consideration matters which are irrelevant.”

Per Chadwick, LJ in Thomas Edge & Ors v The Pensions Ombudsman & Anor.35

In Invensys Australia Superannuation Fund Pty Ltd v Austrac Investments Ltd and Others (2006) 15 VR 87, Byrne J confirmed the approach in Edge v Pensions Ombudsman. He considered a clause in a trust deed which allows amendments to be made to it and said at 62 and 63:

32 (1998) 46 NSWLR 449 at 494. 33 Finn, PD, Fiduciary Obligations, The Law Book Company Limited, 1977 at page 56. 34 See note 25 at page 59. 35 [1999] PLR 216 at p232.

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“It is well established that a power such as the power under cl 20 to amend the deed of trust is subject to general restrictions imposed by law. An example is that the trustee should exercise the power in good faith and that the trustee should act in a way which appears to it fair and equitable in the circumstances and in accordance with the purposes for which the power was conferred.

…I am satisfied on the material before me that the trustee’s decision to amend the trust deed in the manner proposed was arrived at after a careful consideration of various competing interests and in good faith. I find that the trustee’s proposal is, in its view, fair and equitable in the circumstances and was arrived at in accordance with the purposes for which the power was conferred….The duty of the trustee is to make these hard decisions and the court will interfere with them only in limited cases. In the case of the present proposal, the process whereby the trustee reached its decision was not the subject of any criticism. The trustee had regard to all of the matters which it was required to have regard to and to none which it ought not to have had regard to. In particular, it dealt with the employers and the Invensys holding company at arm’s length and it was not suggested that the will of the trustee was overborne by the wishes of any of those parties. It consulted with the various classes of members and had regard to the interests of former members. In some cases it introduced modifications to its proposal to accommodate the contentions of those parties, but it made its own decisions.”

Duty to pay the correct beneficiaries

“Prior to the introduction of certain statutory provisions, which will shortly be considered, it was the absolute duty of the trustee to pay and transfer the trust property to the persons entitled thereto where such persons were the beneficiaries named in the trust instrument. The fact that the trustee made an honest mistake without negligence on his part was no excuse.

…

“Now, however, the Trustee Acts of the various States contain provisions which lighten the heavy burden which was thrown on the trustee by the above rules. These provisions give the following forms of relief:

(1) protection when paying under powers of attorney;

(2) protection when paying after advertisement for claims;

(3) protection upon distribution without reserving funds to meet claims for breach of covenants in leases held by the trustee;

(4) protection upon distribution without reserving funds to meet possible liability for calls on partly paid up shares;

(5) protection against claims which a trustee has challenged; and

(6) protection to the trustee where, though mistaken, he has acted honestly and reasonably and ought fairly to be excused.”

pp 448 and 449, Meagher and Gummow, Jacobs’ Law of Trusts in Australia, sixth edition.

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“Although the position is far from clear, it is suggested that the following principles apply:

(1) Where a trustee has overpaid a beneficiary as a result either of a mistake of law or of a mistake of fact, the trustee is entitled to recoup the payments out of other funds due or to become due to the beneficiary under the same trusts, whether capital or income.

(2) The trustee cannot so recoup, if the income of a beneficiary is subject to a restraint or anticipation.

(3) It makes no difference that the underpaid beneficiary in such circumstances is the trustee itself.

(4) When a trustee has mistakenly paid a beneficiary he may usually recover against that beneficiary by utilising the common law remedy of money had and received.

(5) Overpayments made in respect of one trust cannot be recouped out of payments due to the beneficiary from the same trustee under another trust.”

p453, Meagher and Gummow, Jacobs’ Law of Trusts in Australia, sixth edition.

Discretions: the exercise of powers

“It is an established general principle that unless trustees choose to give reasons for the exercise of a discretion, their exercise of the discretion can not be examined or reviewed by a court so long as they act in good faith and without an ulterior purpose: Re Beloved Wilkes’ Charity [1851] 3 Mac and G 440; 42 ER 330; Duke of Portland v Topham (1864) 11 HLC 31; 11 ER 1242. For reasons given above, I would add the further requirement, so obvious that it is often not mentioned, that they act upon real and genuine consideration. In the context, it was in that sense that Lord Truro LC used the expression “with a fair consideration” in Re Beloved Wilkes’ Charity, at (42 ER) p. 333. In the case of an absolute and unrestricted discretion such as the discretion in the present case, the general principle is given unqualified operation: Gisborne v Gisborne (1877) 2 App Cas 300, at p. 305, per Lord Cairns LC; Tabor v Brooks (1878) 10 Ch D 273; Craig v National Trustees Executors and Agency Company of Australia Ltd. [1920] VLR 569. The operation of the principle is discussed in Jacobs’ Law of Trusts in Australia, 4th ed., pp. 300-2”

Per McGarvie, J in the Supreme Court of Victoria in Karger v Paul36

“First, the context in which Karger v Paul principles grew up is one in which settlors donated assets on trusts and selected trustees to administer those trusts. Usually the beneficiaries were few. Usually the beneficiaries were volunteers. Without the protection given by Karger v Paul principles it might be difficult to attract people to hold the gratuitous office of trustee. In contrast, trustees of superannuation funds are typically corporations holding vast assets which they seek to administer in professional fashion under tight statutory regulation. The members are not volunteers or objects of bounty. Both employers and members contribute to the fund, sometimes pursuant to the contracts of employment, and, now, pursuant to statute law. Significant numbers of judges have therefore questioned the application of the Karger v Paul principles to superannuation funds. The applicant submitted that those

36 [1984] VR 161 at 165-166

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judges who had applied Karger v Paul principles in the superannuation trust area had been wrong to do so…

“Byrne J's reasoning is, however, reinforced by one qualification to Karger v Paul principles in the present context. There is no doubt that under Karger v Paul principles, particularly as they have been applied to superannuation funds, the decision of a trustee may be reviewable for want of "properly informed consideration"37. If the consideration is not properly informed, it is not genuine. The duty of trustees properly to inform themselves is more intense in superannuation trusts in the form of the Deed than in trusts of the Karger v Paul type…

“And failure to seek relevant information in order to resolve conflicting bodies of material, as here, is also a breach of duty. The Scheme is a strict trust. A beneficiary is entitled as of right to a benefit provided the beneficiary satisfies any necessary condition of the benefit. Whether or not it will be decided hereafter that, consistently with s 14 of the Complaints Act, the duty of a trustee in forming an opinion of the present type is a duty to form a fair and reasonable opinion, or even a duty to form a correct opinion, there is because of the importance of the opinion and its place in the Scheme a high duty on the Trustee to make inquiries for "information, evidence and advice" which the Trustee may consider relevant. The existence of that duty in a more intense form than exists under Karger v Paul principles in their standard application is further support for the correctness of Byrne J's decision.”

Per the High Court in Finch v Telstra Super Pty Ltd.38

“Best interests”

Section 52(2) of the Superannuation Industry (Supervision) Act, 1993:

“The covenants referred to in subsection (1) [ie deemed to be included in the governing rules] include the following covenants by each trustee of the entity:

(a)…;

(b)…;

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

“The covenant inserted into the Trust Deed appears to be an amalgam of two distinct obligations said to be imposed by law upon trustees of a superannuation fund. The first, which is sometimes referred to as the duty of loyalty39 or the duty of fidelity to the trust40, is that to act in the interests of the beneficiaries; that their interests are paramount and must certainly be placed ahead of the Trustee’s own interests. 41 Nor may the trustee have regard to considerations which are extraneous to the trust.42 The second is to pursue to the utmost with appropriate diligence and prudence the

37 Kerr v British Leyland (Staff) Trustees Ltd [2001] WTLR 1071 at 1079; Stannard v Fisons Pension

Trust Ltd [1992] IRLR 27 at 31. 38 [2010] HCA 36 39 Scott and Fratcher, The Law of Trusts, 4th Ed, vol IIA, p 311. 40 Halsbury's Laws of Australia, vol 27, Trusts, para 430-4160. 41 Scott and Fratcher, The Law of Trusts, 4th Ed, vol IIA, p 311. 42 Esso Australia Ltd v Australian Petroleum Agents’ & Distributors’ Association[1999] 3 VR 642 at 652

[39], per Hayne J. See JRF Lehane, “Delegation of Trustees’ Powers and Current Developments in

Investment Funds Management” (1995) 7 Bond LR 36.

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interests of the beneficiaries. This will commonly come into play where it is a question whether the trustee of a trust whose objective is to confer financial benefits on beneficiaries has sufficiently pursued these financial interests. And so, in Cowan v Scargill43, Megarry V-C said this:

“The starting point is the duty of trustees to exercise their powers in the best interests of the present and future beneficiaries of the trust, holding the scales impartially between different classes of beneficiaries”

and later,

“Trustees must do the best they can for the benefit of their beneficiaries and not merely avoid harming them.”44

It is not altogether clear whether paragraph (c) is intended as a codification of one or other or both of these principles. As will appear, it is not necessary that I unravel this”.

Per Byrne, J in Invensys Australia Superannuation Fund Pty Ltd v Austrac Investments Limited.45

“I think it is clear that Byrne J did not see s 52(2)(c) as being different to the general law.”

Per Rein, J in the Supreme Court of NSW in Manglicmot v Commonwealth Bank Officers Superannuation Corporation46

No conflict rule

“It is an inflexible rule of the court of equity that a person in a fiduciary position, such as the plaintiff’s, is not, unless otherwise expressly provided, entitled to make a profit; he is not allowed to put himself in a position where his interest and duty conflict. It does not appear to me that this rule is, as has been said, founded upon principles of morality. I regard it rather as based on the consideration that, human nature being what it is, there is danger, in such circumstances, of the person holding a fiduciary position being swayed by interest rather than by duty, and thus prejudicing those whom he was bound to protect. It has, therefore, been deemed expedient to lay down this positive rule.”

Per Herschell, L J in Bray v Ford.47

No conflict rule as a “counsel of prudence”:

“There is a wide variety of formulations, of the general principle of equity requiring a person in a fiduciary relationship to account for personal benefit or gain. The doctrine is often expressed in the form that a person “is not allowed to put himself in a position where his interest and duty conflict” (Bray v Ford [1896] AC 44 at 51) or “may conflict” (Boardman v Phipps [1967] 2 AC 46 at 123) or that a person is

43 [1985] Ch 270 at 286-7 (a superannuation trust). 44 [1985] Ch 270 at 295. 45 [2006] VSC 112 46 [2010]NSWSC 363 47 [1895-99] All ER 1009 at p1011

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“not to allow a conflict to arise between duty and interest” (New Zealand Netherlands Society “Oranje” Inc v Kuys [1973] 1 WLR 1126 at 1129). As Sir Frederick Jordan pointed out however (see Chapters on Equity, 6th ed (Stephen), 1947, p 115, reproduced in Jordan: Select Legal Papers (1983), p 115), this, read literally, represents “rather a counsel of prudence than a rule of equity: indeed, even as an unqualified counsel of prudence, it may, in some circumstances, be inappropriate (see, eg Hordern v Hordern [1910] AC 465 at 475; Smith v Cock [1911] AC 317 at 325–6. The equitable principle governing the liability to account is concerned not so much with the mere existence of a conflict between personal interest and fiduciary duty as with the pursuit of personal interest by, for example, actually entering into a transaction or engagement “in which he has, or can have, a personal interest conflicting … with the interests of those whom he is bound to protect” (per Lord Cranworth LC, Aberdeen Railway Co v Blaikie Brothers (1854) 1 Macq 461 at 471) or the actual receipt of personal benefit or gain in circumstances where such conflict exists or has existed.”

Per Deane J in Chan v Zacharia48.

Duty of care (general law and superannuation)

The following is an extract from a paper prepared by John Edstein entitled “Managing Tax Affairs: the Duties of a Superannuation Trustee”. The paper was presented at the National Superannuation Conference of the Tax Institute of Australia, August 2013. It has since been published in the Superannuation Law Bulletin December 2013.

“Summary

Key propositions expressed in this paper include:

a. there exists under the general law, a standard of care for professional trustees that is higher than the standard of care for other trustees;

b. the precise definition of that standard is somewhat vague but does draw colour from descriptions stating that the duties of a professional trustee are beyond the capability of “ordinary mortals” and, arguably, might be more “intense” than the duty for a non-professional trustee;

c. the mark of a professional trustee includes “holding out” as a professional trustee, whether or not fees are charged. Most trustees of large superannuation funds probably hold themselves out as having professional skills, given that most superannuation trustees hold out that they can do as good a job or better than other superannuation trustees and those other superannuation trustees would commonly include professional trustees;

d. the general law rule of “accessorial liability” is capable of covering directors and other persons involved in a breach of trust by a trustee;

e. accordingly, there is the clear prospect that superannuation trustees and their directors have already been exposed to professional standards for many years and will continue to be so exposed under the general law;

f. the new professional standards for trustees and directors under the amendments to the SIS Act, applicable from 1 July 2013, overlap and complement the general law position and, importantly, also bring greater awareness of the professional

48 (1984) 53 ALR 417 at 433

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standard to all involved in superannuation: trustees and their service providers, fund beneficiaries and the regulators;

g. the new professional standard applies to all matters affecting the relevant superannuation fund, including tax matters;

h. the new professional standards for trustees and directors set down layered benchmarks against which care, skill and diligence can be adjudged. The benchmarks, under scrutiny, are quite intriguing and may well involve significant judicial analysis in the future;

i. the new prudential standards, particularly the charters and policies that superannuation trustees must have developed to comply with the standards, may well play a vital part in being able to prove or disprove that a trustee or a director of a trustee has discharged his/her/its standard of care…

Duty of care

In terms of risk management for a superannuation trustee and its directors , the risk of not discharging the trustee’s duty of care or the director’s duty of care would be, and should be, high in the list of priorities. If for no other reason, this is because a breach of any other duty or statutory obligation will potentially leave open the assertion that breaching that other duty or obligation occurred because of a lack of care and prudence and so a breach of the duty of care.

Further, from 1 July 2013, with the commencement of the main body of the Stronger Super reforms , the duties of care for a superannuation trustee and for its directors have been expressly stated as being a professional standard, a point to which I return in more detail.

As a preliminary point, it seems appropriate to observe that a breach of the duty of care by a trustee will not necessarily be a breach of the duty of care by a director or directors of the trustee. For example, the directors, with appropriate care and prudence, might have delegated certain decisions to a committee or other group within the trustee and that group, whilst charged with properly exercising the requisite duty of care, might have failed to do so. The prospect would be that the trustee would have breached the duty but not the directors. The converse is less likely to be the case: if the directors breach their duty of care, there would seem to be a greater prospect that the trustee would also have breached its duty of care.

3.1 General law

3.1.1 The ordinary prudent person of business

The time honoured expression of a trustee’s duty of care dates back to cases in the nineteenth century, one of which was the decision of the Court of Appeal in England in Re Speight where Jessell, MR stated as follows:

“a trustee ought to conduct the business of the trust in the same manner that an ordinary prudent man of business would conduct his own, and that beyond that there is no liability or obligation on the trustee. In other words, a trustee is not bound because he is a trustee to conduct business in other than the ordinary and usual way in which similar business is conducted by mankind in transactions of their own. It never could be reasonable to make a trustee adopt further and better precautions than an ordinary prudent man of business

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would adopt, or to conduct the business in any other way. If it were otherwise, no one would be a trustee at all.” 49

That expression has been quoted with approval in Australian courts, including in the High Court50 . The duty has often been applied to trustees in relation to their duty to invest. Even so, the duty under the general law extends beyond merely a trustee’s duty to invest. Further, for superannuation trustees and their directors, the duty/covenant under the SIS Act clearly extends to all matters touching the exercise of powers or discharge of duties by a trustee and its directors. Relevantly for this paper, “all matters” must include tax matters. These provisions are addressed further below.

Despite the expression of Jessell, MR being widely accepted as an accurate expression of the law, there have been glosses on the concept, one that followed in the House of Lords three years after the decision of Jessell, MR. In Re Whiteley; Whiteley v Learoyd, Lindley, LJ stated:

“… Although the rule as stated by Jessel MR in Re Speight; Speight v Gaunt (1883) 22 Ch D 727 at 739 is that ‘a trustee ought to conduct the business of the trust in the same manner that an ordinary prudent man of business would conduct his own, and that beyond that there is no liability or obligation on the trustee’, and, although this may be taken as a precise and accurate statement of the law, it is to be remembered in applying the rule that consideration must be given to the fact that the business of the trustee is investing on behalf of others, some of whom are to enjoy the benefits of the investment at some future time. That is to say, it is not just the ordinary prudence that a man might exercise in investing money for himself, for prudent business men frequently take risks which they consider in the circumstances quite reasonable as regards themselves, but which they might not consider reasonable were they dealing with the investment of savings set apart to provide for wife and children. It would not be prudent in a trustee to take such risks... The prudence is to be considered in relation to the special purpose for which the trust funds are entrusted to the trustee.” 51

Similarly, in the oft quoted decision of Cowan v Scargill, Sir Robert Megarry said:

“…the standard required of a trustee exercising his powers of investment is that he must: ‘take such care as an ordinary prudent man of business would take if he were minded to make an investment for the benefit of other people for whom he felt morally bound to provide.’ See Re Whiteley, Whiteley v Learoyd (1885) 3 Ch D 347 at 355 per Lindley, LJ…This requirement is not discharged by merely showing that the trustee has acted in good faith and with sincerity. Honesty and sincerity are not the same as prudence and reasonableness” 52

This gloss was reflected in the statutory formulation of the duty for superannuation trustees in section 52 of the SIS Act that remained law up to 30 June 2013: “…to exercise…the same degree of care, skill and diligence as an ordinary prudent person would exercise in dealing with property of another for whom the person felt morally bound to provide”.

3.1.2 The professional trustee

From 1 July 2013, the duty of care for superannuation trustees under the SIS Act is a higher ‘professional’ standard of care: see the next heading.

49 (1883) 22 Ch D 727 at 739-740 50 See, for example, Fouche v The Superannuation Board (1952) 88CLR 609 at 642. 51 (1886) 33 Ch D 347 at 355 52 [1984] 2 All ER 758 at page 769

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That there should be a higher standard of care for professional trustees was not a creation of the SIS Act; rather the general law had evolved to that conclusion and, in more recent years, State trustee legislation has expressed the requirement that, in relation to exercising a power of investment, “…if a trustee’s profession, business or employment is or includes acting as a trustee or investing money on behalf of other persons, [the trustee must] exercise the care, skill and diligence that a prudent person engaged in that profession, business or employment would exercise in managing the affairs of other persons…” 53

The similarity between that concept and what is now expressed in relevant sections of the SIS Act is noted later in this paper.

So far as English and Australian courts are concerned, the first, clear expression of a higher standard of care applying to a professional trustee can probably be attributed to Brightman, J in Bartlett v Barclays Bank Trust Co Ltd where he stated as follows:

“Although I am not aware that the point has previously been considered, except briefly in Re Waterman’s Will Trusts, I am of the opinion that a higher duty of care is plainly due from someone like a trust corporation which carries on a specialised business of trust management. A trustee corporation holds itself out in its advertising as being above ordinary mortals…the trust corporation holds itself out, and rightly, as capable of providing an expertise which it would be unrealistic to expect and unjust to demand from the ordinary prudent man or woman who accepts, probably unpaid and sometimes reluctantly from a sense of family duty, the burdens of trusteeship. Just as, under the law of contract, a professional person possessed of a particular skill is liable for breach of contract if he neglects to use the skill and experience which he professes, so I think that a professional trustee is liable for breach of trust if loss is caused to the trust fund because it neglects to exercise the special care and skill which it professes to have.” 54

In an Australian context, in Australian Securities Commission v AS Nominees Limited55, Finn, J in the Federal Court noted that Gleeson, CJ (as he then was in the NSW Court of Appeal) in Gill v Eagle Star Nominees56 cited the decision of Brightman, J with apparent approval and noted that there is extensive United States case law affirming a higher standard. Finn, J also expressed that while it was unnecessary for him to so determine in the case before him, had he needed to, he would have been prepared to apply a higher standard of care to the trustees in question, being trustees who were charging fees for their services and holding themselves out as professional trustees.

For superannuation trustees, it might be considered that the relevance of the above decisions has been displaced by the professional standard of care now applicable to trustees and directors under the SIS Act. Even so, the cases do support or reinforce that:

a. the professional duty of care for a trustee is a “higher” duty than the ordinary prudent person test;

b. consistently with that, the job of a professional trustee is apparently not a job for “ordinary mortals”; and

c. the identifiers for a professional trustee under the general law are holding out as being a professional trustee or charging fees or both.

53 section 14A, Trustee Act 1925, NSW 54 (1980) Ch 515 at 534 55 [1995] FCA 1663 56 SC of New South Wales, 22 September, 1993

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As to this last point, it would be exceptional to suggest that trustees of retail superannuation funds do not hold themselves out as professional trustees and, further, they charge fees. It might be suggested that industry funds and corporate funds, being commonly funds that do not charge trustee fees, might not be subject to the professional standard. However, I would submit that both of those types of fund hold themselves out as being every bit as good as, or better than, trustees of retail funds. That being so, that would very arguably be sufficient to be a 'holding out' as a professional trustee. The discussion in Cuesuper Pty Ltd57 supports this conclusion.

3.1.3 The “intense” duty

As stated above, the professional standard of care is higher than the ordinary prudent person of business test. In the relatively recent decision of the High Court in Finch v Telstra Super Pty Ltd58 , the Court expressed views in relation to the duties of a superannuation trustee that were at least consistent with there being a higher standard upon superannuation trustees when compared to other trustees and, perhaps, added a further gloss to the concept.

The High Court responded to argument about whether the principles in Karger v Paul 59 apply to superannuation funds. The conclusion of the High Court as to how far Karger v Paul principles apply to superannuation funds is somewhat vague but, at least, is clear in endorsing for superannuation funds what Karger v Paul is popularly cited for in relation to trustee decision making: to act in good faith, on a real and genuine consideration and for a proper purpose.

In the context of the Telstra Superannuation Scheme, which was relevantly typical of any large superannuation fund, the High Court said that it was a “strict trust”, thus clearly endorsing the application of the law of trusts in every sense (and so consistently with many earlier cases, particularly English decisions).

Significantly, the High Court introduced an apparently new concept into the discussion, the scope of which is unclear:

“Whether or not it will be decided hereafter that, consistently with section 14 of the [Superannuation (Resolution of Complaints) Act, 1993], the duty of a trustee in forming an opinion of the present type is a duty to form a fair and reasonable opinion, or even a duty to form a correct opinion, there is because of the importance of the opinion and its place in the Scheme a high duty on the Trustee to make inquiries for information, evidence and advice which the Trustee may consider relevant. The existence of that duty in a more intense form than exists under the Karger v Paul principles in their standard application is further support for the correctness of Byrne, J’s decision.”60

The case addressed a decision as to whether the appellant was totally and permanently disabled (“TPD”). The case may well be limited to TPD cases or, at least, not be applicable to ordinary discretionary decisions, as the Court observed that the decision on whether the appellant was TPD and was not a mere discretionary decision. The comment by the High Court suggesting that the test may well be that the decision is “correct”, suggests that the decision in the circumstances of the case (i.e. a decision on TPD) was a factual judgement, quite distinct from a ‘mere discretionary decision’. Even so, the concept of a more intense duty will prompt discussion and judicial consideration in years to come.

57 [2009] NSWSC 981 58 [2010] 242 CLR 254 59 [1984] VR 161 60 See note 52 at paragraph 66

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3.1.4 Directors and others: accessorial liability

A celebrated case in Australia in relation to superannuation funds that addresses accessorial liability of directors, among other things, is the decision of Finn, J in ASC v AS Nominees Limited61 and others.

Among a range of issues considered by Finn, J, his honour addressed an argument from the ASC (the predecessor to the Australian Securities and Investment Commission) to the effect that directors of a corporate trustee owe direct fiduciary obligations to beneficiaries of the trust of which the corporate trustee is trustee: see Hurley v BGH Nominees Pty Limited62 . The argument was to the effect that if the corporate trustee necessarily owes fiduciary obligations to the beneficiaries and directors necessarily owe fiduciary obligations to the corporate trustee, then the circuit can effectively be completed so that the directors owe fiduciary obligations to the beneficiaries.

Finn, J declined to give a concluded view on the point as it was not necessary in the circumstances. However, it is clear from his judgement that he thought that the proposition was highly questionable. Further, apparently against the position now reached under the SIS Act in relation to directors having obligations directly owed to beneficiaries, his honour said:

“It is questionable, in my view, whether this heralded development in our law is a desirable or necessary one in the trust company context. To the extent that it is advanced as a means of protecting trust beneficiaries from misuse by directors either of their company’s trustee powers or of their own position vis-à-vis the trust property, it can be said that that protection can be afforded by other quite orthodox means and in a more extensive way.”63

Drawing on this last point, his honour then went on to express the principles of accessorial liability, the Barnes v Addy64 principle:

“Suffice it to say at this point, that the position now reached in the accessorial liability rule of Barnes v Addy is such as to render the directors of trust companies particularly and peculiarly vulnerable to suit by the trust beneficiaries for acts etc. which constitute breaches of trust or of fiduciary duty on their company’s part”.65

More particularly in relation to the rule, Finn, J stated:

“Legal decision and scholarly opinion in common law jurisdictions are converging in the view that at least what is known as the second (‘the knowing assistance’) limb of the rule in Barnes v Addy is a fault based form of accessorial liability…that liability can be formulated (conservatively) as one which exposes a third party to the full range of equitable remedy available against a trustee if that person knowingly or recklessly assists in or procures a breach of trust or of fiduciary duty by a trustee: see Consul Development Pty Ltd V DPC Estates Pty Ltd (1975) 132 CLR 373; see Royal Brunei Airlines Sdn Bhd v Tan (1995) 3 WLR 64”.66

Finally, of relevance to the immediate discussion is that Finn, J’s discussion of accessorial liability is clearly not limited to directors. Hence, it could conceivably include delegates of the board of directors or delegates of the trustee.

61 [1995] FCA 1663 62(1984) 10 ACLR 197 63 Note 55 at paragraph 78 64 (1874) LR 9 Ch App 244 65 Note 55 at paragraph 80 66 Note 55 at paragraph 82

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When one combines the above points with my earlier commentary as to the likelihood that, both before and after I July 2013, most trustees of large superannuation funds have probably for a long time held themselves out as being professional trustees and so subject to a higher standard of care, the following would seem to apply:

a. directors who knowingly or recklessly participate in a breach of the trustee’s duty of care would be exposed to accessorial liability;

b. other persons, e.g. delegates of the directors or of the trustee, who knowingly or recklessly participate in a breach of the trustee’s duty of care, would also be exposed to accessorial liability;

c. as the trustee’s duty of care would be measured against the professional standard, by extension that standard would also effectively apply to directors and delegates;

d. as a result, there is potential for a significant overlap between what directors can now be liable for in relation to a breach of the covenants in section 52A and what they could be liable for as accessories for a breach of duty by the trustee;

e. the section 52A covenants imposed on directors do not overlap with all duties of a trustee and so the accessorial liability has a potentially wider application than section 52A;

f. the restriction of the accessorial liability to knowing or reckless behaviour will help narrow the exposure of directors and relevant others from being accessorially liable because carelessness is not included. In contrast, it would seem likely that proven carelessness by a superannuation entity director, but not involving knowing and reckless behaviour, would be sufficient to ground an action for breach of the section 52A(2)(b) covenant by directors.

3.2 SIS Act: Trustees/RSE licensees

3.2.1 Statutory covenant: section 52(2)(b)

Section 52(2)(b) of the SIS Act has been amended with effect from 1 July 2013. Recall that section 52 sets down express covenants that were taken to be contained in the governing rules of an RSE and given by trustees of superannuation entities. The covenant in relation to a trustee’s care, skill and diligence is now expressed in section 52(2)(b) as follows:

“to exercise, in relation to all matters affecting the [RSE], 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 other important piece of this provision is the definition of “superannuation trustee” in section 52(3) as follows:

“In paragraph (2)(b), a superannuation trustee is a person whose profession, business or employment is or includes acting as a trustee of a superannuation entity and investing money on behalf of beneficiaries of the superannuation entity.”

The two paragraphs set up a layered and quite intriguing web of benchmarks to set the standard of care for a superannuation trustee.

In addition, section 52(2)(b) is clear in its message that the standard of care applies to “all matters” affecting the fund/RSE and so, includes relevantly for this paper, the tax affairs of

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a superannuation entity. Hence, despite the later reference to investing, which is also repeated in the definition of “superannuation trustee”, the expressed duty is not limited to investing but pertains to all matters or activities of a trustee as trustee.

The various benchmarks to assess the care, skill and diligence of a trustee can be divided as follows:

a. a test of prudence;

b. that prudence must be measured by reference to the behaviour of a (professional) “superannuation trustee”;

c. that behaviour must relate to “an entity” of which the superannuation trustee is a trustee;

d. the superannuation trustee must make investments for beneficiaries of that entity.

It is readily conceivable that courts will, in due course, spend considerable time analysing these words.

Taking the items at (c) and (d) first, the concept seems rather odd. In particular, the paragraph addresses the standard of behaviour of a particular trustee in relation to a particular fund (“actual entity”). That the standard of behaviour must be measured by reference to a prudent superannuation trustee (as defined) is readily comprehensible. However, the circumstances in which the behaviour of the prudent superannuation trustee must be considered are those of a generic entity (“reference entity”), not the circumstances of the actual entity under consideration. There would seem to be logic in testing what a prudent superannuation trustee would do in the circumstances of the actual entity but the paragraph does not say that.

Further, the paragraph also does not describe the entity of which the superannuation trustee is trustee as being a superannuation entity; it is just an “entity”, with the added descriptor being an entity on behalf of the beneficiaries of which it makes investments. “Entity” is defined in section 10 as being any of an individual, a body corporate, a partnership, a trust. Accordingly, the definition is not limited to a “superannuation entity”. Given that, by the terms of section 52(2)(b), the “entity” is one of which the “prudent superannuation trustee” is trustee, the entity would need to be a “trust”. Hence, the reference entity of the prudent superannuation trustee does not need to be a superannuation entity.

Section 52(3) must be overlaid on section 52(2)(b). Most obviously, it introduces the concept that a superannuation trustee is a professional (i.e. “profession, business or employment”). Their profession must at least include being a trustee of a superannuation entity and investing of behalf of the beneficiaries of that entity. Perhaps importantly, the profession, business or employment need only include being a professional superannuation trustee, not being limited to being a professional superannuation trustee. That this is so would seem to reinforce the prospect that the reference entity or entities in section 52(2)(b) need not be a superannuation entity but may be other forms of trust.

No doubt, in practice, when the standard of care of a superannuation trustee is being challenged, the process would include the behaviour of a generic superannuation trustee and a generic superannuation entity. However, the section would apparently permit also introducing comparisons with the behaviour of a trustee of a generic trust, not necessarily superannuation based.

Both paragraphs refer to “investing”. A question remains as to what those references add in meaning.

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In my view, the plain meaning is that the profession of the reference person must not only be or include that of a trustee of a superannuation entity but also must be investing monies for beneficiaries of that entity.

Does it mean that the reference person’s profession must be that of an investment manager? I do not think so. The concept of investing is necessarily linked with the concept of trusteeship and, in my view, the words do not permit a disjunctive application of the control words “profession, business or employment”.

That leaves open a question of whether the references to investing and to the professional concept somehow impose a standard of care upon superannuation trustees which is the same as applies to persons whose profession, business or employment is that of investing. Again, I think not.

First, as already stated, the investment concept is necessarily linked to the trusteeship. The standard of care applicable to a professional investment manager would be controlled by the common law duty of care and the laws of negligence. The standard of care expressed in the section 52 covenant, whilst a deemed covenant in superannuation trust instruments, is likely to be construed by the courts as connected with the standard of care of a trustee under trust law, quite a separate concept from common law concepts of negligence. By analogy, the courts construed the covenant in section 52(2)(c) as it was up to 1 July 2013, the best interests covenant, by reference to a trustee’s duty of care and the fiduciary duty of loyalty. There was no consideration of how the covenants might be construed in a common law context67 .

Secondly, the EM states that the new provision “brings [the requirement of care, skill and diligence] into line with the existing State and Territory trustee legislation applying to professional trustees”. For example, section 14A of the Trustee Act 1925 (NSW), connects a professional standard of care to a professional trustee in relation to investing and not otherwise.

In truth, it may well be that the limitation in State and Territory legislation to the standard of care in relation to investments is what underpinned the reference to investment in section 52(2)(b) and the definition of “superannuation trustee”. Even so, the State legislation as above is clearly limited to care in relation to investments, while section 52(2)(b) is equally clear in its coverage of “all matters”. These differences produce the tortured analysis that must follow and may well be the subject of court consideration in years to come.

Thirdly, a trustee has a duty to invest68. However, that general duty is subject to the trust instrument, any relevant statutes and Court direction. Hence, it is possible to have professional trustees who do not have a duty to invest e.g. a professional trustee holding assets on a bare trust or a custodian. That being so, the references to investing in section 52(2)(c) and section 52(3) remove the prospect that the standard of care might be referable to a professional trustee in those circumstances.

The result is, in my view, that courts will construe the covenant and the definition, in the context of a trustee’s duty of care in relation to investing, in a similar way to what the courts have been doing for many years. The reference to a professional standard will pick up the relatively recent development through the courts in England and Australia of imposing a higher standard of care on professional trustees. Further, and as stated, the

67 See Invensys Australia Superannuation Fund Pty Ltd v Austrac Investments Ltd [2006] VSC 112 and

Manglicmot v Commonwealth Bank Officers Superannuation Corporation [2010] NSWSC 363 per Rein, J at

first instance and on appeal at [2011] NSWCA 204 68 See Heydon and Leeming, Jacobs’ Law of Trusts in Australia, 7th edition, chapter 18

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duty of care will not be limited to investing but applies to “all matters affecting the entity”. Having said that, as trustees have a duty to invest and, for superannuation trustees, that is referable to a professional standard, there is a prospect that courts will look for comparisons with what professional investment managers do, and consider the extent to which standards that apply to professional investment managers might be imported into the principles that form part of the standard duty or covenant of care of a superannuation trustee.

In summary:

a. the standard of care, skill and diligence applies to all matters affecting the entity; it is not limited to investments and the exercise of investment powers;

b. the actual circumstances must be compared with what a professional trustee would do in apparently comparable circumstances in relation to an entity of which the professional trustee is trustee; not what a professional trustee would do in the actual circumstances;

c. the comparison includes being to a professional superannuation trustee in relation to a superannuation entity. It can also include a comparison to a professional superannuation trustee in relation to its trusteeship of another trust, which is not a superannuation fund;

d. the express words do not require the trustee to discharge the standard of care of a professional investment manager. Rather, it is the standard of care of a professional trustee who invests on behalf of beneficiaries;

e. comparisons with professional trustees who are bare trustees or custodians would be inadequate;

f. while the standard of care of a professional investment manager is not the same standard of care applicable to a superannuation trustee, it would be open to the courts when developing principles in relation to the standard of care of a professional trustee when investing, to look for comparisons with the standard of care of a professional investment manager.

If those are the applicable principles, there remains the point as to how does one know or establish what a professional trustee would do or how a professional trustee would behave in particular circumstances. More pointedly, if one was looking to prove or disprove that a superannuation trustee breached section 52(2)(b), what evidence would one look to?

3.2.2 Satisfying the duty of care

As stated above, the conduct that is the reference point is that of a professional superannuation trustee investing on behalf of beneficiaries. That is a benchmark. Lawyers will seek to prove a failure to meet the benchmark or, in defence, that the benchmark was met.

The simple means of doing that would be to adduce evidence from professional superannuation trustees as to what they would have done in comparable circumstances. Based on the analysis above, the standard is primarily that of professional superannuation trustees; not other professional trustees such as recognised trustees under state legislation69 or responsible entities of registered managed investment schemes.

69 See, for example, companies listed in Schedule 3 of the Trustee Companies Act 1964, NSW and Schedule 2 of

the Trustee Companies Act 1984, Victoria.

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That said, the law in relation to the standard of care of a professional superannuation trustee might still be developed by taking into account the standard of care of professional trustees generally. Further, the analysis above suggests that there is room to consider the behaviour of professional trustees as trustees of non-superannuation entities, albeit that they must also be a superannuation trustee. The cases on the duties of a trustee have universal features applicable to all trustees. In the context of a professional trustee, it is readily conceivable that the behaviour of a professional superannuation trustee would include the behaviour of any professional trustee. Hence, to that extent, in relation to applying the covenants, using professional trustees, who are not superannuation trustees, as benchmarks in appropriate circumstances may have a place.

1 July 2013 was the key commencement date for the Stronger Super regime. Included in that regime is the power conferred on the lead regulator, the Australian Prudential Regulation Authority (“APRA”), to promulgate prudential standards. APRA has promulgated thirteen standards thus far including:

a. governance;

b. fit and proper;

c. risk management;

d. investment governance;

e. fit and proper;

f. operational financial risk; and

g. business continuity.

The standards are principles based and could be said to largely address the behaviour of superannuation trustees that reflect and support the discharge by trustees of their duties. Expressed another way, in many respects the standards provide transparency as to how trustees in their particular circumstances can and must behave in order to discharge their duties. For example, the governance standard sets down a range of matters that a trustee must do or have in the governance of its fund: in essence, good transparent governance arrangements, most of which must be documented in relevant charters and policies.

Prior to 1 July 2013, having charters and policies and otherwise documenting behaviour would have been consistent with a trustee’s duties under the general law and under the SIS Act as it then was. However, the absence of those ‘granular’ documents would not necessarily have been decisive of a breach of the duty of care or other duty.

Now all superannuation trustees must have those documented charters and policies and they must conform to the requirements of the standards. The standards have been prepared by APRA. It would be a bold argument to suggest that APRA does not understand and apply through the prudential standards, the attributes of a professional superannuation trustee.

The charters and policies of superannuation trustees must set, across a wide range of subject matters, the way that they will conform with the prudential standards and behave in relation to matters affecting the entity of which they are trustee. Accordingly, those charters and policies set benchmarks for the trustee (and its directors, see below). Seen in this way, the following observations logically follow as to when a superannuation trustee might be shown to have breached its duty of care:

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a. if the trustee’s charters and policies do not conform to the prudential standards;

b. if the trustee’s charters and policies are not clear, concise and logical and so not capable of being reasonably understood and applied by those people who must consider them;

c. consistently with the last point, if each charter and policy is not internally consistent or not consistent with each other charter and policy of the trustee;

d. if there is a policy that applies to a particular set of circumstances and the trustee does not consider the policy and possibly if the trustee does not follow the policy, depending on the policy and the circumstances;

e. if the charters and policies do not conform to a standard displayed in the charters and policies of other superannuation trustees.

The upshot of the above is that charters and policies should not be viewed as documents that had to be prepared to meet a regulatory requirement and deadline and now, that having been done, they can be consigned to the ‘bottom drawer’ and a superannuation trustee’s conduct can ‘return to normal’. On the contrary, the policies are extremely important documents, and trustees and their directors who fail to maintain their policies to a professional standard or who fail to consider their policies or both will do so at their peril.

Finally, it should be observed that the charters and policies that a superannuation trustee must have under the prudential standards do not cover all possible behaviour of a superannuation trustee. Hence, proving or disproving a breach of the duty of care in those circumstances may not be as easy where the trustee does not have a relevant charter or policy. Even so, trustees should be wary of operating to a lesser standard of governance in those other circumstances, particularly if the circumstances are part of the trustee’s day to day “business operations”70 e.g. a complaints handling policy. The approach underpinning the standards (i.e. of documenting policies and behaviour in given circumstances) could itself be effectively an overarching benchmark, particularly if other superannuation trustees have charters or policies in the relevant circumstances.

3.3 SIS Act: Directors

In this section, I focus primarily on the new duty of care for directors of superannuation trustees, called “superannuation entity directors”71 . I do not address other sources of liability that might exist for a director, most obviously the Corporations Act but not limited to the Corporations Act.

3.3.1 Statutory covenant: section 52A(2)(b)

Section 52A states, in similar terms to section 52 for trustees, that the governing rules are taken to include covenants by each director of a corporate trustee as set out in section 52A(2) including in section 52A(2)(b) as follows:

“to exercise, in relation to all matters affecting the entity, the same degree of care, skill and diligence as a prudent superannuation entity director would exercise in relation to an

70 See note 2 to SPS 220: “an RSE licensee’s business operations includes all activities of as an RSE licensee

(including the activities of each RSE of which it is the licensee), and all other activities of the RSE licensee to the

extent that they are relevant to, or may impact on, its activities as an RSE licensee”. 71 See section 29V0(3): “A superannuation entity director is a person whose profession, business or employment

is or includes acting as director of a corporate trustee of a superannuation entity and investing money on behalf

of beneficiaries of the superannuation entity”.

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entity where he or she is a director of the trustee of the entity and that trustee makes investments on behalf of the entity’s beneficiaries”.

The paragraph is relevantly consistent with the language of section 52(2)(b) and so the comments generally in relation to that section are apposite here.

The definition of “superannuation entity director” in section 29VO(3) is similarly consistent with the definition of “superannuation trustee” in section 52(3): see footnote 28.

Importantly, but appropriately, the requisite standard of care of a trustee is measured against a prudent superannuation trustee, being a professional trustee, while the requisite standard of care of a superannuation entity director is measured against a prudent superannuation entity director, being a professional director. The attributes and performance of a prudent, professional corporate trustee are likely to be different to the attributes and performance of a prudent, professional superannuation entity director. APRA acknowledges this in SPS 510 where it states at paragraph 11:

“The Board must ensure that the directors and the senior management of the RSE licensee, collectively, have the full range of skills needed for the effective and prudent operation of the RSE licensee’s business operations, and that each director has skills that allow them to make an effective contribution to Board deliberations and processes. This includes the requirement for directors, collectively, to have the necessary skills, knowledge and experience to understand the risks of the RSE licensee’s business operations, including its legal and prudential obligations, and to ensure that the RSE licensee’s business operations are managed in an appropriate way taking into account these risks. This does not preclude the Board from supplementing its skills and knowledge by engaging external consultants and experts.”

The corporate attributes must be measured on a collective basis. Individual attributes necessarily must look to the individual and there are clear links with SPS 520, the fit and proper standard.

For reasons expressed earlier in the paper, I have already concluded that the concept of investing, as expressed in both sections 52(2)(b) and 52(3), applies conjunctively and so the test is not one of a professional investment manager, albeit it is one of a professional trustee who has a duty to invest.

Similar conjunctive wording is used in section 52A(2)(b) and the definition in section 29VO(3). However, in the case of directors, the comparable conclusion is significantly more important as to conclude otherwise would be to conclude that all superannuation entity directors must each exercise the care, skill and diligence of a professional investor/investment manager. That would be an odd outcome.

The EM confirms this point:

“The required standard of care, skill and diligence is an objective standard. Care and diligence go to the way in which the director applies himself or herself to their functions. The level of skill required does not necessarily require particular qualifications, and new directors will not be expected to have the level of skill and knowledge of an experienced director immediately. It is not intended that each director will have the same skills but rather that each understand the business of the trustee and its regulatory framework and be in a position to contribute to meetings of the trustee. APRA will provide further guidance on these matters.”72

72 Paragraph 1.133 of the EM to the Superannuation Legislation Amendment (Trustee Obligations and Prudential

Standards) Bill 2012

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APRA has provided that guidance through the standard and, to some extent, the prudential practice guides.

Despite the comments in the EM and by APRA, the reference to investing in the section 29VO definition may demand a gloss.

It would be within ordinary expectations that the collective skills that a superannuation entity board might consider it requires could include knowledge, skills or experience in relation to: strategy and competitors; legal/regulatory and possibly tax matters; political insights; insights about key stakeholders; product knowledge and service delivery; marketing; outsourcing management; investments; risk and compliance; human resources; and financial matters. Not everyone will have all skills and hence APRA’s reference to collective skills. Notably, investment expertise is one of many. Even so, it is the only one of many that is expressly referred to in section 52A(2)(b) and section 29VO(3).

This observation is made more perplexing through the section 29VO definition describing the person as acting as a director “and investing money on behalf of beneficiaries”. This is in contrast to the language in section 52A(2)(b) where it is clear that it is the trustee, not the director, who makes the investments.

With all this, caution would suggest that all directors should have a base level of skills in relation to investments. Precisely what that level of skills should be would depend on the fund. One could speculate that it should at least be of a level that the director can recognise when he or she needs professional investment advice and can understand and assess professional investment advice when given to him or her. The director would not need to be an expert on investments and investing to have this level of skills.”