Finch v Telstra Super

Finch v Telstra Super [2010] HCA 36

A key question addressed by the High Court was whether Karger v Paul [1984] VicRp 13; [1984] VR 161 applies to superannuation trusts

In a unanimous decision the High Court set aside the decision of the Court of Appeal. It held that the first condition to meet the TPI definition did not require Mr Finch to be continuously absent from “all active Work” for 6 months before leaving Telstra’s employment.

The Court of Appeal treated the decision of the Trustee as to whether Mr Finch was unlikely ever to engage in any gainful work for which he was for the time being reasonably qualified by education, training or experience as a discretionary decision.  Note the following statement by the Court of Appeal:

“The Court has power to set aside the discretionary decision of the Trustee if the relevant discretion was not exercised by the Trustee in good faith, upon real and genuine consideration and in accordance with the purpose for which the discretion was conferred.  However, the mere fact that a Trustee makes an error as to a fact or some other matter, or does not make all enquiries that may have been open to have been made, is not sufficient reason for the Court to set aside a determination that was made in good faith, upon real and genuine consideration, and for a proper purpose.”

In reaching this conclusion the Court of Appeal relied on Karger v Paul [1].  The High Court found that this was not correct and the determination by the Trustee did not involve the exercise of a discretion but was a determination to be made on a factual basis.  It required the Trustee to form two opinions:

    • whether a Member had ceased to be an employee; and
    •  whether the Member was unlikely ever to engage in gainful work.

Karger v Paul principles. The Court of Appeal treated the decision of the Trustee to form or not form an opinion under limb (b) of the definition of “Total and Permanent Invalidity” as a “discretionary decision”. The Court of Appeal said:

“The Court has power to set aside the discretionary decision of a trustee if the relevant discretion was not exercised by the trustee in good faith, upon real and genuine consideration, and in accordance with the purposes for which the discretion was conferred. However, the mere fact that a trustee makes an error as to a fact or some other matter or does not make all inquiries that may have been open to be made is not sufficient reason for the Court to set aside a determination that was made in good faith, upon real and genuine consideration, and for a proper purpose.”

The Court of Appeal cited the decision of McGarvie J in Karger v Paul. In that case a testatrix left all her property to her husband for life and conferred a power on the trustees “in their absolute and unfettered discretion and upon the request of my said husband to pay or transfer the whole or part of the capital of my said estate to” the husband. The will then created a remainder after the husband’s death in favour of the testatrix’s cousin. The cousin challenged a decision by the trustees to transfer all the capital to the husband. McGarvie J held that the case concerned a “discretionary decision”, and so did most of the well-known cases which McGarvie J discussed.

A discretionary decision? In Dwyer v Calco Timbers Pty Ltd [2008] HCA 13; (2008) 234 CLR 124 at 138-139the Court emphasised that while the term “discretion” is used in the description or characterisation of varied acts or omissions in the law, the term may be an inadequate description of an inquiry which requires the identification and evaluation of factual matters. The present is not a case involving a “discretion“. The Trustee had to consider whether to reach two opinions. One was whether a Member had ceased to be an Employee. That is scarcely a discretionary decision. It is no more discretionary than the decision of a judge in conventional litigation about whether a contract of employment has come to an end. The second opinion was whether the Member was unlikely ever to engage in “gainful Work”. In the forming of an opinion on that subject there are no doubt factors to be examined which are difficult to weigh, impressions to be formed, and judgments to be made, but the field is quite different from fields in which the competing claims of potential candidates for bounty are compared.

In forming those opinions there were factors to be examined and judgements to be made.  However, forming an opinion was not a matter of discretionary power but “an ingredient in the performance of the trust duty”.

The High Court also considered the public significance of superannuation and Government policy to encourage people to save to fund their own retirement and to make it compulsory for employers to contribute the superannuation guarantee contribution.

At paragraph 34 the High Court noted:

“[34] A further factor is the public significance of superannuation. The federal government has attempted to reduce outflows by reducing the dependence of retired persons on the old-age pension funded out of general revenue. The taxation concessions now provided pursuant to Pt 3-30of the Income Tax Assessment Act 1997 (Cth) are designed to encourage citizens to make provision for their retirement by investing in superannuation and to encourage their employers to create superannuation funds in their favour. The Parliament also has required employers to contribute a certain percentage of the employee’s salary for these purposes. Partly as a result, large amounts of assets are administered by the trustees of superannuation funds”.

The High Court concluded:

“As the public significance of superannuation and the close attention paid to it through statutory regulation support the conclusion that the decisions of superannuation trustees are not likely to be largely immunised from judicial control without clear contrary language in the relevant trust documents.  Decisions like those which the Trustee made in this case are not discretionary decisions in the sense used in Karger v Paul.”

Even though TPI decisions are not discretionary, superannuation fund trustees are still required to make some discretionary decisions (e.g. distribution of death benefits).  The High Court considered whether the traditional limitations in Karger v Paul apply to those decisions of superannuation fund trustees that are discretionary.

The High Court stated that different criteria apply to the operation of a superannuation fund from those that would apply to discretionary decisions made by a Trustee under a non superannuation trust.  This is because of the differences in the trusts, including the fact that employer sponsored superannuation is part of an employee’s remuneration and membership in the Employer’s superannuation fund may be compulsory.

It is therefore something that an employee receives in return for their work and their contributions and should be regarded as “deferred pay”.  The High Court rejected the Trustee’s argument that the TPI benefit involved in part an element of bounty on this basis and instead saw superannuation as the method of attracting labour.

The High Court disagreed with the Court of Appeal’s position on Byrne J’s reasoning and supported Byrne J’s conclusion that the Trustee failed to decide the matter in good faith and by giving genuine consideration to it.

Byrne J in his judgment said the Trustee:

“viewed the question as, in effect, a contest between the opinions of the doctors and the actual observed experience of [the Applicant] in the work place with Telstra and thereafter.  The difficulty which I have with the determinations is that [the Trustee] appeared to be very ready to accept the evidence as to the Claimant’s work experience without any or very much enquiry as to its true nature and to reject the very strong evidence of the doctors to the contrary.”

While not suggesting that the Trustee acted in bad faith, Byrne J held that the Trustee had failed to give the matter genuine consideration having failed to pursue sufficient enquiries, and that there had been a want of good faith.  This lead to the submission by the Trustee to the High Court that Byrne J had misunderstood the Karger v Paul test concerning “good faith and genuine consideration”.  This reflects the view taken by some superannuation fund trustees that they are not required to make reasonable and relevant enquires, but that it is the duty of claimants to prove their case.  The High Court did not accept that Byrne J had misunderstood the Karger v Paul test, and accepted Byrne J’s view that the Trustee had failed in its duty to make enquiries in three ways:

 

Mr Finch had argued that the High Court should hold that the principles stated in Karger v Paul do not apply to superannuation trusts, at least in relation to substantial matters like claims for TPI benefits.  This was on the basis that those principles are too narrow and too difficult to satisfy concerning superannuation trusts, and do not adequately protect the interests of beneficiaries in having the decisions of trustees properly controlled.

Therefore, it was argued that the decision of a superannuation fund trustee should be set aside if it were not “fair and reasonable” in the same way that the Superannuation Complaints Tribunal is able to deal with Trustee decisions.

The High Court held that it was not necessary to evaluate the merits as to how far the Karger v Paul principles applied, or whether other principles should be adopted.  This was because the case could be resolved by accepting Byrne J’s reasoning in favour of Mr Finch as being sound, and the Court of Appeal’s criticism of that judgment being unsuccessful.  The High Court stated:

“To offer answers to wider questions which might arise in disputes different from the present where it is not necessary to do so would have an unsettling effect on the law which may not be beneficial.”

Therefore the High Court did not take advantage of the opportunity to determine this matter which has been the subject of so many cases.  However, it did qualify the Karger v Paul principles as they apply to superannuation funds by stating that superannuation fund trustees making a discretionary decision are subject to a higher duty to inform themselves than other trustees.  If the consideration is not properly informed, it will not be genuine.

The High Court states that the duty of Trustees to properly inform themselves is more intense in superannuation trusts than in trusts of the Karger v Paul type (i.e. discretionary trusts).  This was based on the importance to beneficiaries of superannuation trusts who are entitled to benefits to have those benefits paid.  In the case of Mr Finch the High Court recognised that his claim for a TPI benefit was to support him for the rest of his life.  It was dependent upon the Trustee forming an opinion about the likelihood that he would ever be able to engage in gainful work again and was not a mere discretionary decision.

It required an assessment of the information and evidence and professional advice the Trustee considered relevant, combined with a duty on that Trustee to make that assessment.  Failure by the Trustee to seek relevant information to resolve conflicting material as occurred in this case was viewed by the High Court as not only constituting a breach of duty but also being reviewable as a lack of genuine consideration under the Karger v Paul principles.

The High Court determined that there was a high duty on the Trustee to make enquiries for information, evidence and advice it considered relevant and that the existence of that duty is in a more intense form than that which existed under the Karger v Paul principles and supports that Byrne J’s decision was the correct outcome.

At Paragraph 59 the High Court found:

[59] 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 judges who had applied Karger v Paul principles in the superannuation trust area had been wrong to do so.

At Paragraph 66 the High Court affirmed:

“It is extremely important to the beneficiaries of superannuation trusts that where they are entitled to benefits, those benefits be paid”

“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”.

Beneficial Interest

The Court confirmed that Mr Finch did have a beneficial interest in the Fund.  There have been alternative views  that members of superannuation funds have no more than a mere expectation.  This statement by the High Court shows that the Court considers that the Fund was not a discretionary trust, as potential beneficiaries of discretionary trusts do not have a beneficial interest in the fund.

At paragraph 30 the High Court ruled:

“[30] The applicant was not the object of a discretionary power of appointment. He was the beneficiary of a trust, and although the precise form and quantum of his beneficial interest was contingent on particular events, he did have a beneficial interest.

Under the common law, a person with a beneficial interest in a fund is entitled to certain information that is not available to potential beneficiaries of discretionary trusts. {Note: The statutory provisions of Section 1017C of the Corporations Act 2001 and Regulation 7.9.45 of the Corporations Regulations 2001 follow the High Court ruling}

Then at paragraph 33 the High Court stated:

“[33] Another aspect of the factual context is that the Deed is dealing with the superannuation of employees. For some people, superannuation is their greatest asset apart from their houses; for others it is even more valuable. Different criteria might be thought to apply to the operation of a superannuation fund from those which apply to discretionary decisions made by a trustee holding a power of appointment under a non-superannuation trust. Employer superannuation is part of the remuneration of employees. Membership of the employee superannuation fund may be compulsory. Superannuation, unsurprisingly, is a matter of trade union interest. The question of superannuation entitlements may form the subject of an industrial dispute within the meaning of s 51(xxxv) of the Constitution {Re Amalgamated Metal Workers Union; Ex parte Shell Co of Australia Ltd [1992] HCA 38; (1992) 174 CLR 345 at 356;[20]}. Superannuation is not a matter of mere bounty, or potential enjoyment of another’s benefaction. It is something for which, in large measure, employees have exchanged value – their work and their contributions. It is “deferred pay” {Air Jamaica Ltd v Charlton [1999] 1 WLR 1399 at 1407}. These are propositions which are not falsified by arguments advanced by the Trustee to the effect that the Death and Total and Permanent Invalidity benefits under the Deed involve in part an element of bounty. Superannuation is a method of attracting labour {Re Manufacturing Grocers’ Employees Federation of Australia; Ex parte Australian Chamber of Manufactures [1986] HCA 23; (1986) 160 CLR 341}. The legitimate expectations which beneficiaries of superannuation funds have that decisions about benefit will be soundly taken are thus high. So is the general public importance of them being sound.”

Then at paragraph 35 the High Court stated:

“[35]  Because of the potentially lengthy time periods over which superannuation savings are accumulated, it was natural, and it is now in many instances mandatory, for a trust mechanism to be employed. These funds have increasingly come under detailed statutory regulation. The government considers that the taxation advantages of superannuation should not be enjoyed unless superannuation funds are operating efficiently and lawfully. For that reason it has, by procuring the enactment of the Superannuation Industry (Supervision) Act 1993  and regulations made under it, imposed quite rigorous regulatory standards”.

Many trustees currently adopt the approach that it is the responsibility of the member to establish his or her case and undertake little inquiry themselves.  However, Finch v Telstra Super, effectively imposes on the trustee a duty to conduct a reasonable level of investigation and analysis.

This case also confirms the need for Procedural Fairness (Natural Justice) in ensuring that Members are made aware of evidence that is adverse to them and are given an opportunity to respond to that evidence.

The approach of the High Court on the review issue imposes that higher duty on all superannuation fund trustees, irrespective of their deed.

The High Court ruling should put Trustees on notice that they are required to ensure that their claims procedures are sufficiently robust to meet their duty to give properly informed consideration to members’ claims.

 

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