The Queensland Supreme Court in H.E.S.T. Australia Ltd v Attorney-General (Qld); Mercy Super Pty Ltd v Attorney-General (Qld) & Anor [2022] QSC 221 (the Mercy Super Case):
- has found that a successor fund transfer (SFT) is not an ‘appointment’ for the purposes of the prohibition against offering, giving, receiving or soliciting inducements for a substituted appointment of a trustee, and
- did not follow BT Funds Management Limited (ACN 002 916 458) as trustee for the Retirement Wrap Superannuation fund [2022] NSWSC 401 (the BTFM Case), a NSW Supreme Court case which we discussed earlier this year and gave reasons that may be used for a subsequent NSW Supreme Court case to also not follow the BTFM Case.
Legislation in New South Wales, Victoria, Queensland and Western Australia prohibits giving or receiving a benefit as an inducement or reward for the appointment of any person ‘to be entrusted with trust property’ or for the appointment of any person ‘as a trustee’ (the Offence Provisions). The Offence Provisions can be complied with by obtaining the consent of each beneficiary (which is usually not practical for a superannuation fund) or with the consent of the Supreme Court. A breach of the Offence Provisions without such consent is a criminal offence.
What does the Mercy Super Case mean for SFTs and changes of trustee?
This decision is important as although the Offence Provisions must always be considered for each SFT and change of trustee:
- SFTs in Victoria and Queensland: the hold up to SFTs caused by the BTFM Case and the potential cost and inconvenience of having to go to Court for approval of each SFT has been removed
- SFTs in Western Australia: the WA Offence Provision contains key common language to the Victorian and Queensland Offence Provisions so trustees can obtain comfort from the Mercy Super Case
- SFTs in New South Wales: although the NSW Offence Provision contains modernised wording that is different to the Offence Provisions in Victoria, Queensland and Western Australia, there are sound reasons why this provision should not apply to SFTs. In addition,– Kelly J in the Mercy Super Case called into question the precedential value of the BTFM Case. However, it may be that a further decision directly considers the application of the NSW Offence Provision, regard must still be had to the BTFM Case and consideration given to whether the NSW Offence Provision applies to an SFT, and
- Change of trustee: this position has not changed as a result of the Mercy Super Case. Careful consideration must continue to be given to the rights and payments provided to a retiring trustee to ensure that the Offence Provisions are not breached.
The Mercy Super Case
Background
Mercy Super Pty Ltd (the Mercy Super Trustee) is the trustee of Mercy Super (Mercy Super) and carries on business in Queensland. H.E.S.T. Australia Ltd (the HESTA Trustee) is the trustee of HESTA Superannuation Fund (HESTA) and is registered in Victoria. There is a proposed successor fund transfer of the members and assets from Mercy Super to HESTA.
In the transaction documents for the SFT, it was intended that the HESTA Trustee would provide certain promises to the Mercy Super Trustee, including indemnities, warranties and obligations to novate to the HESTA Trustee, agreements and life policies relating to Mercy Super.
Due to the BTFM Case, the HESTA Trustee and the Mercy Super Trustee both sought declaratory orders from the Queensland Supreme Court that an SFT is not an ‘appointment’ for the purpose of the Offence Provisions applying in Queensland and Victoria. Both trustees submitted that the BTFM Case should not be followed. The parties also sought, in the alternative, assent from the court in relation to the proposed SFT and promises in the transaction documents. The respondents to each of the applications were the Attorneys-General for Queensland and Victoria, and APRA also appeared as amicus curiae.
Court not obliged to follow the BTFM Case
The Court considered itself not obliged to follow the decision in the BTFM Case, on the following grounds:
- the BTFM Case does not explicitly consider the question of whether an SFT is an appointment — instead the judgment states that there “may” be a breach of the Offence Provisions, assumed that an SFT is an appointment for the purposes of the Offence Provisions and provides no reasoning for that assumption
- the BTFM Case proceedings did not have an opposing party or contradictor, and
- the decision was made in circumstances of urgency.
Principles about the meaning of “appointment”
The Court considered the meaning of the term “appointment”. Kelly J set out the following principles:
- the historical legislative purpose of the Offence Provisions was to prohibit a known practice of trustee companies giving a secret commission to an executor for appointment as a replacement trustee. A replacement or substituted trustee would assume office under the same trust as the first trustee, that trust being defined by existing terms applicable to the substitute
- while there is no statutory definition of “appointment”, “appointing” or “appointed” for the purposes of the Offence Provisions, the concept of “appointment” of a trustee is well known in trust law. Trust legislation has used the same terminology of “appointment” for around 200 years
- the process by which a person becomes a trustee of an express trust is usually described as by “appointment”. A person usually becomes a trustee either by being specifically appointed by the instrument creating the trust or by being appointed a new trustee pursuant to a power contained in the trust instrument or pursuant to a statutory power exercisable by some person or the court, and
- trust legislation has also provided for the transfer, conveyance, devolution and vesting of assets to occur as acts which are separate from the “appointment” of a trustee.
The SFT did not involve an appointment
In light of the above, Kelly J found that:
- given the term “appointment” has an established meaning within the law of trusts, the term “appointment” in the Offence Provisions should be construed, as having been intended to convey the same meaning as that term has when used in the trust legislation in each respective jurisdiction
- that established meaning of “appointment… as trustee” is the placing or designation of a person in the office of trustee of the same trust
- the Offence Provisions should be read as having as their subject the designation of a person to office rather than the effect of a dealing with assets. The Offence Provisions are directed towards “appointment”, both “as trustee” and “instead of” (ie as a substitute of the original trustee)
- the transaction documents for the SFT did not rely on the power of appointment, and
- an SFT more closely resembles the ‘power of advancement’ under a trust as it involves the transfer of assets and members from one trust to a different trust – once transferred, the assets are not impressed with the first trust but with a new trust. The power of advancement is a trustee’s power to apply the assets of the trust (including into another trust) for the benefit of a beneficiary.
On this finding, Kelly J declared that an SFT is not a “substituted appointment” for the purposes of the Queensland and Victorian Offence Provisions and accordingly that consent is not required for a SFT and a benefit, or valuable consideration, is granted to the transferring trustee.
Meaning of valuable consideration
The trustees also made submissions in the alternative to their primary argument and sought directions or assent of the court to the promises in the transaction documents, which the court granted. In doing so, Kelly J concluded that the Queensland Supreme Court had jurisdiction to give directions to the HESTA Trustee (registered in Victoria) due to the operation of the uniform cross-vesting legislation.
In providing these directions, Kelly J did not analyse whether the promises were ‘valuable consideration’ under the Offence Provisions in Queensland and Victoria. However, by giving the directions it may be implied that Kelly J considered that they fell within the definition. This aspect of the Mercy Super Case is consistent with the BTFM Case.
Where does this leave SFTs in New South Wales?
Kelly J found that the BTFM Case did not explicitly consider the question of whether an SFT is an appointment (rather it assumed that it was). The reasons for judgment in the Mercy Super Case did not consider the NSW Offence Provision. The wording used in the NSW Offence Provisions differs from the other states: the Queensland, Victorian and Western Australian Offence Provisions concern appointment in another person’s ‘stead or instead of’ the transferring trustee and include ‘substituted appointment’ in their respective headings. The NSW Offence Provision (which was amended in 1987) does not adopt this language.
Despite this difference in language, as have we discussed, the Mercy Super Case focused its decision on the interpretation of the term ‘appointment’, not on the surrounding language of ‘stead or instead of’. ‘Appointment’ is common to all provisions, and courts in NSW may consider the Mercy Super Case persuasive.
Whilst not considered in the Mercy Super Case, it is worthwhile asking: are the Offence Provisions intended to capture appointments of trustees that are conducted in good faith, in the best interests of members and where there is no suggestion of inappropriate or corrupt practices? There is no indication in the BTFM Case judgment that consideration was given to the interpretation of the NSW Offence Provision in light of the repeated references to “corrupt” in the heading of the relevant Part or the long title of the Act that amended the NSW Offence Provision, all of which can be taken into account when interpreting the relevant section.
In the end, the Mercy Super Case provides reasons why a judge in a subsequent decision about the NSW Offence Provision may not follow the BTFM Case. However, until there is such a subsequent decision, regard must still be had to the BTFM Case where the NSW Offence Provision applies to an SFT.
Concluding thoughts
The Mercy Super Case decision has relieved much of the anxiety caused in the superannuation industry by the BTFM Case. Although some questions remain in relation to SFTs in New South Wales (and to a lesser extent, Western Australia), arguments are made in the Mercy Super Case why the Offence Provisions in those States should not be triggered by indemnities that are usually obtained by a transferring trustee in a SFT. However, a further judicial decision about those Offence Provisions and the related secret commissions provisions will bring certainty.
For a change of trustee, careful consideration must continue to be given to the rights and payments provided to a retiring trustee to ensure that the Offence Provisions are not breached.
