REST resorts to Court on conflicts and director remuneration: Case note and discussion of Re REST [2013] NSWSC 1681

November, 2013

Overview

Each trustee is grappling with issues particular to their fund arising out of the implementation of the Stronger Super reforms.  Earlier this month, the trustee of the Retail Employees Superannuation Trust (REST) resolved one such problem relating to director remuneration with the assistance of the Court.

REST appeared to be having difficulty finding suitably qualified and experienced persons to act as directors because its trust deed did not expressly permit the Trustee or its directors to be remunerated. Solving the problem required the resolution of a conflict of existing directors’ duties and their interests, and a conflict with one of its sponsoring organisations.

The judgment in Re Retail Employees Superannuation Pty Ltd [2013] NSWSC 1681 (14 November 2013) describes an urgent application that was filed, heard and decided by the Duty Judge within three days.

This article summarises the case and discusses its broader implications for fund trustees and their directors. Director remuneration highlights the inherent conflict between trustee directors’ duties and interests. Trustees and directors need to review their governing rules, not only on remuneration but also as to how a trustee will meet the additional expenses and liabilities they are exposed to under Stronger Super.

Judicial advice is a valuable tool for trustees in managing risk and change in this challenging environment.

CASE NOTE

The trustee of REST applied for orders under the Trustee Act 1925 (NSW) (Trustee Act) that it ‘would be justified’ in amending the REST Trust Deed primarily to:

(a)       entitle the Trustee and its directors to be paid a fee; and

(b)       permit the appointment of independent directors.

The Trustee Act provides that a trustee may apply to the Court for an opinion, advice or direction on any question respecting the management or administration of the trust property, or respecting the interpretation of the trust instrument. It is known colloquially as ‘judicial advice’ and is provided for in Trustee Acts of each state and under the inherent jurisdiction of the Courts.

Relevant facts:

The Judge noted that:

(a)       there was no power under the REST Trust Deed for the Trustee to be remunerated out of the fund;

(b)       neither the directors nor the Trustee were being paid any remuneration;

(c)       the obligations of the Trustee and its directors have increased significantly since REST was established in 1987;

(d)       REST has grown significantly in size;

(e)       the Trustee and its directors spend significant time and effort performing their duties; and

(f)        based on recent experience, the Trustee was concerned that it would become increasingly difficult to attract suitable directors due to the significant time required to be devoted to the performance of their obligations.

The Trustee had notified APRA and its sponsoring organisations of the proposed amendment and the court application. One of the sponsoring organisations objected to the directors receiving any remuneration, on the basis that ‘for industry super funds, directors of a Trustee should continue to provide their services on a gratuitous basis.’

Darke J approved the amendment and payment of reasonable remuneration, observing at [4]:

The roles performed by, and the attendant responsibilities of, the directors are plainly considerable and call for a high level of diligence and expertise.

His Honour accepted the Trustee’s evidence that it was ‘generally accepted’ that directors of substantial trustees were entitled to remuneration and stated at [15]:

The obligations which are cast upon such directors are significant, and even burdensome, and it is reasonable to expect that directors of the requisite quality will require remuneration.

His Honour also referred to a similar application in Cuesuper Pty Ltd [2009] NSWSC 981 and stated:

In circumstances where the exercise by the trustee of its power of amendment pursuant  to . . .  the trust deed could give rise to questions of conflict between duties and personal interests, it is also sensible for the trustee to seek the direction of the Court pursuant to s 63 of the Act.

COMMENTARY

Why it was ‘sensible’ for REST to seek judicial advice

Most industry funds remunerate their directors and many made the necessary amendments to their trust deeds a number of years ago. REST may not have sought judicial advice but for the conflict with its sponsoring organisation. However, it was prudent to do so in any event particularly in light of statements by the Court when the then trustee of Cuesuper applied for similar advice in 2009.

In Cuesuper, the Court referred to an earlier case which stated that the trustee was unable to amend the deed to provide for trustee remuneration because of the conflict of interest. While it is not spelt out in Re REST the Courts have an inherent jurisdiction to approve trustee remuneration in the interests of ensuring proper administration of a trust.

Support for the proper remuneration of directors

In approving the amendments to the Cuesuper deed, the Court observed that a failure to pay remuneration in order to retain a professional and committed board would be ‘penny wise, pound foolish’.

While the Stronger Super reforms may well justify greater remuneration for directors, this line of judicial authority poses serious questions for boards to consider in any steps to increase their own remuneration. There is an inherent conflict of duty and interests in directors setting their own remuneration.

If trustees and directors do not properly attend to matters involving director remuneration, they may regret it when the remuneration disclosure laws come into effect in 2014 given the greater level of scrutiny that they will be subjected to.

Uses of judicial advice

This case is the first instance of a Court recognising the enhanced obligations of trustees and directors under the Stronger Super reforms, however trustees did not need the Court to tell them that the duties on directors are significant and burdensome.

Re REST is more relevant as a timely reminder of the availability of the Courts to provide judicial advice to trustees in a broad range of matters. It can be used to resolve conflicts of interest, authorise remuneration and approve the compromise of disputes or controversies. It can also be used to approve amendments to a trust deed that are either within power or beyond the power of amendment. It is also in keeping with a recent High Court decision that  it is proper for a trustee to seek ‘judicial advice’ before commencing or defending legal proceedings.

The reason why the Courts offer this service is twofold, to protect the trustee (and directors) and to protect the trust.

Judicial advice and risk management

Trustees are adapting to radical changes in superannuation in an environment that is increasingly high risk for trustees, directors, executives and staff. The Courts have long recognised the entitlement of trustees to the Court’s protection in facing such risks.  But how many trustees would have judicial advice in their Risk Management Strategy?

Trustees may focus their minds on risks from the members’ perspective but should not lose sight of risks to the Trustee, its directors, executives and staff. These are important factors in governance risk and that residual category in SPS 210, other risks that may have a material impact of a RSE licensee’s business operations.

Trustees and directors should not take any comfort from the Tranche 4 concession requiring a litigant to seek leave before suing directors under the new director covenants. In his recent article on the new conflicts obligations and director liabilities (linked here), Mark Bland explained how the principle encapsulated in an obscure latin phase (nunc pro tunc) would likely render it useless.

Judicial advice and governance

The Courts have long recognised the entitlement of trustees to the Court’s protection in facing such risks and also the Court’s assistance in dealing with limiting trust deeds.

In the wake of Re REST, other trustees may consider making an application to resolve difficult and / or contested issues that have arisen in the implementation of Stronger Super reforms.

Trustees may see judicial advice as a means of resolving conflicts or controversies associated with board composition, conflicts of duty and interests of directors. For example, trustees may find that they need to make new arrangements in order to ensure the Trustee does not have to resort to its directors’ pockets to pay an APRA infringement notice.

* * *

The judicial advice process is an exception to the rule of adversarial litigation. As the Re REST case indicates, it can be heard without any other parties, may involve an affidavit or two and can be heard swiftly by the court if prepared properly. Its value should not be discounted by trustees as a risk management and change management tool.

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