Superannuation funds typically merge by transferring members from one fund to the other fund on a “successor fund” basis (ie without the consent of the members). In these circumstances, the law requires that the trustees of the respective funds agree that the receiving fund will confer on each transferring member equivalent rights to the rights that the member had in the original fund in respect of the transferred benefits. This agreement is typically recorded in a written agreement known as a Successor Fund Transfer Deed (“SFT agreement”).
It is common for an SFT agreement to contain indemnities from the receiving trustee to the transferring trustee. The reason for this is straightforward. Prior to the merger, the transferring trustee is typically entitled to be indemnified out of fund assets for liabilities properly incurred as trustee. However, after a merger the transferring trustee remains exposed to such liabilities, but will no longer have the assets against which to enforce the indemnity.
An indemnity from the receiving trustee remedies the situation.
The NSW Supreme Court recently considered the provision of indemnities (and other “benefits”) in an SFT agreement, in the case of BT Funds Management (as Trustee for the Retirement Wrap Superannuation Fund).
At first glance, it appears that providing benefits (including indemnities) to a transferring trustee may breach legislative provisions in NSW, Victoria and WA. While the wording of the NSW and Victorian provisions differ (with WA mirroring Victoria), they were found to be equivalent in substance, in that each prohibit trustees from seeking or receiving benefits as an inducement or reward for appointing another as trustee without the consent of all members or the Supreme Court.
Specifically, the case considered s 249E Crimes Act 1900 (NSW).
The ‘equivalent’ provision in Victoria in s 180 Crimes Act 1958 (and s 535 Criminal Code Act Compilation Act 1913 (WA) in West Australia). Both are titled ‘Secret commission to trustee for substituted appointment.’
There are some material differences. The Victorian and WA provisions are concerned with ‘valuable consideration’ (rather than ‘benefit’) as an inducement or reward for the substituted appointment of a trustee ‘in [a trustee’s] stead or instead of [a trustee]’ (rather than ‘for the appointment of any person [as trustee]. It is unclear what, if any difference, this would make in practice.
In the relevant SFT agreement, BT Funds sought the agreement of a number of potential receiving trustees to:
Firstly, the court held that each of the above constituted a benefit that induces an appointment of a potential receiving trustee given BT Funds would take their provision (or lack thereof) into account in determining the appropriateness of a potential receiving trustee (ie in choosing the successor fund).
The judge ultimately consented to the orders sought by BT Funds on the basis that, while the benefits did provide an inducement to appoint a receiving trustee, it was in the best interest of members to obtain them.
It is unclear on what basis the court concluded that an agreement to transfer member benefits and fund assets from one fund to another, pursuant to powers contained in the respective trust deeds and in accordance with a statutorily recognised process, constitutes an appointment of the receiving trustee by the transferring trustee.
The NSW legislation states that a reference to an appointment includes joining in or assisting in the appointment of a trustee, but that doesn’t assist with determining what precisely constitutes an appointment. The Victorian and West Australian provisions, which mirror each other, don’t offer any further assistance.
The headings to the relevant provisions in the Victorian and WA legislation refer to ‘substituted appointment,’ with the provisions ostensibly restricting benefits for the appointment of a person by a trustee or another person 'in his stead or instead of him and any other person as trustee.’ It is difficult to see how the transfer of benefits and assets from one superannuation fund to another can constitute a substituted appointment or appointment ‘in [a trustee’s] stead’?
A receiving trustee already holds the position of trustee and is merely receiving members’ benefits (and fund assets) through the transfer. They are not appointed in the stead of the transferring trustee.
In our view, it is unlikely that the relevant provisions in the different jurisdictions referred to above apply to successor fund transfers. However, the existence of the NSW Supreme Court decision, which assumes that the provision in the legislation in NSW does apply, means that trustees should be aware of the issue when negotiating the terms of an SFT agreement, and consider obtaining legal advice specifically in relation to this issue.
This article was co-authored by Bailey Breen (Paralegal)
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