Fraud on a Power

Members of Employer-Sponsored superannuation funds should always be vigilant that the Trustees of their fund have not executed a Deed of Variation or Resolution to amend the rules of their Fund for an ulterior motive.

Many Trustees have a hopeless conflict of interests and with large sums of money under their control amendments to the Rules can often been made to achieve an ulterior motive such as raiding the assets of the Fund.

A “fraud on a power” is a trust law doctrine whose purpose is to limit and control the exercise by trustees of the powers given to them (by general law or the instrument that created the powers). The doctrine applies to all trustee powers, including administrative powers, and describes the exercise of a trustee power for a purpose, or with an intention, which is outside the scope of the power being exercised.

The classic formulation is as follows:

“The term [fraud] in connection with frauds on a power does not necessarily denote any conduct on the part of the appointor amounting to fraud in the common law meaning of the term or any conduct which could properly be termed dishonest or immoral. It merely means that the power has been exercised for a purpose, or with an intention, beyond the scope of or not justified by the instrument creating the power.”

(Vatcher v Paull [1915] AC 372, at page 378.)

A fraud on a power is the improper use of a power for a collateral purpose.

In the Federal Court of Australia in Re Burton (1994) 126 ALR 557 it was stated:

“But perhaps the more important point is that the power to remove a trustee and to appoint a new trustee is neither a general power of appointment nor a power which may be executed in the interests of the appointor. The interest of the persons other than the appointor must be taken into account. The power is a trust or fiduciary power, being a power conferred by the deed of trust, and must be exercised accordingly, in the interest of the beneficiaries. A power, even though not a fiduciary power, must be exercised solely in furtherance of the purpose for which it was conferred.

In Duke of Portland v Topham (1864) 11 HLC 31;11 ER 1242 Lord Chancellor, Lord Westbury said (at 54;1251):

Without farther dwelling on the matter, in as much as your Lordships concur in my opinion, i think we must all feel that the settled principles of the law upon this subject must be upheld, namely that the done, the appointor under the power, shall, at the time of the exercise of that power, and for any purpose for which it is used, act with good faith and sincerity, and with an entire and single view to the real purpose and object of the power, and not for the purpose of accomplishing or carrying into effect any bye or sinister object (I mean sinister in the sense of its being beyond the purpose and intent of the power) which he may desire to effect in the exercise of the power

When the power is contained in a deed of trust, the donee of the power is even more constrained to act in the interests of the persons for whose benefit the power was conferred.

The law on fraud on a power was conveniently summarised by Santow J in Andco Nominess Pty Ltd v Lestato (1995) 17 ASCR 239 at 262:

“The formulation of fraud on a power generally can betaken from Duke of Portland v Topham (1864) 11 HLC 32 (11 ER 1242) as adopted by the High Court in Gilbert v Stanton (1905) 2 CLR 447; Cock v Smith (1909) 9 CLR 773; Redman v Permanent Trustee Co (1916) 22 CLR 84 at 93,94 and by the Federal Court in Dwyer v Ross (1992) 34 FCR 463. That formulation is as follows:

The appointor under the power, shall at the time of the exercise of that power, and for any purpose for which it is used, act with good faith and sincerity, and with the entire and single view to the real purpose and object of the power, and not for the purpose of accomplishing or carrying into effect any bye or sinister object (I mean sinister in the sense of going beyond the purpose and intent of the power) which he may desire to effect in the exercise of the power (11 ER 1242 at 1251).”

Any power of appointment conferred on a trustee must be used, as all powers conferred on a trustee must be, fairly and honestly for the purpose for which they are given and not for some ulterior purpose.

In Hillsdown Holdings plc v Pensions Ombudsman [1997] 1 All ER 862 the exercise of a power by a pension fund trustee was held to be a fraud on a power (or the improper use of a power for a collateral purpose). Hillsown plc participated in a pension scheme (the FMC scheme) which had accumulated an actuarial surplus of some £20 million. The scheme contained no power allowing the trustees to repay any surplus to employers participating in the scheme, and the scheme could not be amended to confer such a power. After an agreement had been negotiated between the Trustee of the FMC Fund and the Employer – Hillsdown plc to augment the benefits of the FMC pensioners and to transfer to the Employer  £11 million of the surplus, the Trustees exercised a power under the scheme to transfer the entire fund to another scheme (the HF scheme), the rules of which were changed to allow the surplus to be paid to Hillsdown. Knox J held that the Trustees of the FMC Fund exercise of the power, transferring the assets to the HF Scheme was a fraud on a power and hence invaild.

Millet J stated in Re Courage Group’s Pension Schemes v Imperial Brewing and Leisure Ltd [1987] 1 All ER   at 537:

“The next question is whether the plaintiff {the Fund Management Committee} are entitled if so minded, to join in executing the amending deeds. They may do so only if the proposed amendments are within the power to amend the trust deed and rules, and can be properly made. They must not infringe the provisos to the rule-amending power, particularly the express prohibition in all three schemes against altering the main purpose of the schemes, namely the provision of pensions on retirement, since it would be implicit anyway. It is trite law that a power can only be exercised for the purpose for which it is conferred, and not for any extraneous or ulterior purpose. The rule-amending power is conferred for the purpose of promoting the purpose of the scheme, not altering them”

Byrne J in the Victorian Supreme Court in Invensys Australia Superannuation Fund Lty Ltd v Austrac Investments [2006] VSC 112; [2006] 15 VR 87 at [62] stated:

“It is well established that a power such as a 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 {Air Jamaica Ltd v Charlton [1999] 1 WLR 1399 at 1411} and that the trustee should act in a way which appears to it fair and equitable in the circumstances {Edge v Pensions Ombudsman [2000] Ch 602 at 626} and in accordance with the purpose for which the power was conferred {Asea Brown Boveri Superannuation Fund No. 1 Pty Ltd v Asea Brown Boveri Pty Ltd [1999] 1 VR 144 at 157, [42] per Beach J following Karger v Paul [1984] VR 161 at 164 per McGarvie J}”.

Chadwick LJ the the Court of Appeal in Edge v Pensions Ombudsman  [2000] Ch 602, [2000] 3 WLR 79, [2000] ICR 748, [1999] Pens LR 215, [1999] EWCA Civ 2013, [1999] OPLR 179, [1999], 4 All ER 546 stated:

“The right to have the matter properly considered gives rise to the requirement that, if there is an actuarial surplus after providing for the estimated liabilities, the trustees must, in deciding whether or not to increase benefits (and, if so, which benefits), act in a way which appears to them fair and equitable in all the circumstances; and so leads to a reasonable expectation amongst beneficiaries that that is what will be done – see the observations of Sir Donald Nicholls, Vice-Chancellor, in Thrells Limited v Lomas [1993] 1 WLR 456, at page 468H-469B.

The obligation to consider, properly, the question whether to increase benefits (and, if so, which benefits) will usually require the trustees to consider (amongst other matters) the circumstances in which the surplus has arisen. In deciding what is fair and equitable in all the circumstances, the trustees may be expected to give weight to the claims of those whose contributions are, or will be, the effective source of the surplus. For example, in a pure “balance of costs” scheme, trustees may properly take the view that an actuarial surplus which has arisen through past overfunding ought to be reduced by allowing the employers a future “contributions holiday” – see the observations of Mr Justice Millett, in a different context, in In re Courage Group’s Pension Schemes [1987] 1 WLR 495, at page 515. In a case where the actuarial surplus arises from prospective overfunding by excessive contributions from members in the future, the trustees may properly decide that the fair and equitable course is to reduce those contributions; or to increase the benefits of those who will be making those future contributions. If, on the other hand, the surplus has arisen through overfunding which is plainly attributable to members’ past contributions the members who have made those contributions will have a strong claim to an increase in benefits. The circumstances in which is possible to say, with any degree of confidence, that the surplus is plainly attributable to members’ past contributions may be rare in practice – but those circumstances could arise, for example, where the employer has not been called on to contribute at all over the period during which the surplus has accrued”.

Section 117 of the Superannuation Industry (Supervision) Act 1993

Section 117 of the Superannuation Industry (Supervision) Act 1993 {effective 21 October 1992} places statutory constraints on the transfer of moneys from the Fund to the Employer-Sponsor.

Basic prohibition

s117 (3)  Except as provided by this section, a trustee of a standard employer-sponsored fundmust not pay an amount, or permit an amount to be paid, out of fund to a standard employer-sponsor.

Exception–special procedures followed

(5)  An amount may be paid out of a standard employer-sponsored fund to a standard employer-sponsor if the following requirements are fulfilled:

(a)  apart from this section, the governing rules would require or permit the amount to be paid to the employer-sponsor;

Section 117 has additional requirements such as obtaining the approval of the Fund Actuary and notifying the Members of the Fund of the proposed payment of moneys to the employer-sponsor.

In  Invensys Australia Superannuation Fund Lty Ltd v Austrac Investments [2006] VSC 112; [2006] 15 VR 87 the Trustee sought directions from the Supreme Court of Victoria as to whether the Trustee was able to amend the rules of the Fund to allow around $50 million of the Fund Surplus to be paid to the employer-sponsor whilst distribution $36 million to current members and selected former members, leaving a residual surplus of $7.8 million.

Byrne J held that it was not unlawful for the Trustee under the Rules of the Fund to make payment to an employer provided the requirements of Section 117 of the Superannuation Industry (Supervision) Act 1993 are satisfied.

Important: The members of the Fund were represented in the court and did not object to the proposed amendment to the Rules of the Fund and the payment of part of the surplus to the employer-sponsor.

 

The person who confers the authority to dispose of property is called the “donor” or “settlor” of the power.

The person who exercises this authority is the “donee” of the power. The persons to whom the property is disposed are the “objects” of the power.

The donee’s basic duty is to exercise the power bona fida and for no purpose other than on within the intention of the donor. “Fraud” in the context of “fraud on a power”  occurs when the power has been exercised for a purpose, or with an intention, beyond the scope or not justified by the instrument creating the power {Vatcher v Paull [1915] AC 372}.

As explained by Lord Parker in the leading case of Vatcher v Paull [1915] AC 372 at 378:

“The term fraud in connection with frauds on a power does not necessarily denote any conduct on the part of the appointor (donee) amounting to fraud in the common law meaning of the term or any conduct which could be properly termed dishonest or immoral. It merely means that the power has been exercised for a purpose, or with an intention, beyond the scope of or not justified by the instrument creating the power. Perhaps the most common instance of this is where the exercise is due to some bargin between the appointor and the appointee, whereby the appointor, or some other person not an object of the power, is to derive a benefit. But such a bargain is not essential. It is enough that the apponitor’s purpose and intention is to secure a benefit for himself, or some other person not an object of the power. In such a case the appointment is invalid, unless the court can clearly distinquish between the quantum of the benefit bona fide intended to be conferred on the appointee (objects)  and the quantum of benefit intended to be derived by the appointor (donee)  or to be conferred on a stranger”.

If the fraud on a power is a “clandestine excessive execution because it is regular on its face but in reality is undertaken for a purpose not within the donor’s mandate” it is void {Kain v Hutton [2008] NZSC 61; [2008] 3 NZLR 589 at [47] per Tippling JA}

An exercise of a power will be fraudulent, and thus void, when the intention or purpose of the donee is to benefit him or herself or a stranger is a dominant or primary one, that is, an actuating purpose without which the appointment would not have been made {Redman v Permanent Trustee Co of New South Wales Ltd [1916] HCA 47; (1916) 22 CLR 84}.

The donee of a special power of appointment must exercise the power bona fide ab dfor the end designed { Aleyn v Belcher (1758) 1 Eden 132} and not for any purpose which is foreign to the power { Re Cohen, Brookes v Cohen [1911] 1 Ch 37}.

If the power is exercised not bona fide, but for a purpose beyond the scope of the instrument creating the power, or not justified by it, the appointment is said to be a fraud on a power, and equity holds it bad { Vatcher v Paull [1915] AC 372 at 378}.

In some cases an appointment which cannot stand as a whole may be severable and held good in part. Where there is a genuine appointment to an object of the power, coupled with an attempt to subject the appointment to conditions or trusts in favour of persons who are not objects, then the appointment stands, free from the conditions or trusts.

An appointment to objects intended by the appointer (donee)  to benefit non-objects is void in whole unless it can be cut down by severing the invalid excess. {Hooke v Robson [1962] NSWR 606, Re Holland [1914] 2 Ch 595 at 601}}

The Power of Amendment

The power of amendment is the equivalent in superannuation funds of the overriding powers of appointment which are generally inserted in all private Trusts whose provision include some for of discretionary trust.

Like overriding powers of appointment, a power of amendment is not necessarily vested in the trustees; it is frequently vested in the employer, although the trustee’s consent to its exercise may nevertheless be necessary.

If no power of amendment is included in the interim deed, it may still be possible to include one in the definitive deed (Re Imperial Foods Ltd. Pension Scheme [1986] 2 All ER 802). In default the Trustee can apply to the court for rectification {Re Butlin’s Settlement Trusts [1976] Ch 251} or variation of the Trust Deed.

It is also possible for a superannuation or pension trust to become amended as a result of a contract entered into between the employer and some of its employees, under which those employees agree to accept lower superannuation benefits than those to which they are entitled under the provisions of their Trust Deed.

The Employer or the Trustee may estop themselves from denying that the employees or members of the fund are entitled to higher benefits than those to which they are entitled under the provisions of their superannuation trust as a result of making announcements and the issuing of booklets to members in which those higher benefits are set out {Icurus (Hertford) v Discoll [1990] PLR 1; ITN v Ward [1997] PLR 131}.

Where an express power of amendment is utilised, like a power of appointment, has to be exercised in the manner envisaged by its terms and in particular when the consent of the employer is necessary it must be obtained in the prescribed way.

The employer must always act in accordance with Lord Brown-Wilkinson’s Implied duty of good faith and the trustees must exercise their own discretion rather than simply following the suggestions of the employer.

Both the Employer and the trustees must use the power of amendment for the purpose for which it was conferred; in the absence of contrary indication, this is to promote the purpose of the scheme, whether those purposes are expressly sated in the trust deed or not. {Re Courage Group Pension Schemes [1987] 1 WLR 495}.

There are also statutory requirements under the Superannuation Industry (Supervision) Act 1993 and the Superannuation Industry (Supervision) Regulations 1994 such as Regulation 13.16 that also apply to the amendment to the rules of a Government Regulated Superannuation Fund.

Typically a Trust Deed will require either:

  • (i) a certification requirement, or
  • (ii) a consent requirement

before the Trust Deed can be amended.

The certification requirement is satisfied id the Fund Actuary has first certified to the trustees that the proposed amendment would not adversely affect the entitlements or accrued rights acquired by the members before the power of amendment is exercised.

The consent requirement is satisfied if the members have consented in writing and an minimum acceptance level as prescribed in the Trust Deed or under SIS Regulation 13.16 is satisfied.

An amendment can be successfully challenged if its terms fail to comply with any restrictions written into the power of amendment by the Trust Deed (or statutory requirements)

In Thrells Lt (1974) Pension Scheme v Lomas [1992] 149 it was held that unless a power of amendment is specifically included in the provisions of the trust deed governing the winding up of the Fund, that power cannot be exercised after the winding up has commenced, although this is apparently possible during the period of any notice given by the employer to the trustees to wind up the scheme {Municipal Mutual v Harrop [1998] PLR 149}.

A provision permitting retrospective amendments is valid, in the absence of any such provision, an amendment would be unlikely to be permitted to have retrospective effect unless the effect was entirely uncontroversial, such as to enable retrospective compliance with some new statutory requirement {An amendment retrospectively taking away vesting rights was disallowed in Municipal Mutual v Harrop [1998] PLR 149}.

A provision permitting the amendment of the power of amendment itself is valid, although an increase in the restriction on that power could not be justified since the Trustees would thereby be fettering their own discretion. The removal of existing restrictions would not be easy to justify unless they are purely formal.

The House of Lords had to consider the matter of construction of a power of amendment in National Grid Co. V Mayes [2001] 1 WLR 864.

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

The Trust Deed may contain powers of variation. These powers can not be used for a foreign purpose {Kearns v Hill (1990) 21 NSWLR 107; Cachia v Westpac Financial Services Ltd (2000)  170 ALR 65 at [68]-[76].

In  Curwen v Vanbreck [2009] VSCA 284 the Court of Appeal stated at [38]:

“The expression ‘fraud on a power’ is used in recognition of an equitable limitation on the power conferred by the trust instrument. It arises where the power is exercised for a purpose, or with an intention which extends beyond the scope of the terms of the trust {Vatcher v Paull [1915] AC 372, 378} so as to be a ‘purpose foreign to the power’ {Commonwealth v The Colonial Combing, Spinning and Weaving Company Ltd [1922] HCA 62; (1922) 31 CLR 421, 471 (Higgins J)}.

The Appeal Court stated at [39]:

“A purpose which accomplishes or carries into effect an object which is beyond the purpose and intent of the power invalidates it. The appellant submitted that where it is an actuating purpose the appointer will not have exercised the power ‘with an entire and single view to the real purpose and object of the power.{ Duke of Portland v Topham [1864] EngR 339; (1864) 11 HL Cas 32, 54; [1864] EngR 339; 11 ER 1242, 1251 (Westbury LC).} The appellants’ submission finds support in the legal text ‘Trusts and Powers’, the author suggesting that the improper purpose need not satisfy any special test of substantiality or the like {Trusts and Powers, David Maclean, Law Book Company Ltd, (1989) 118–119}.”

The High Court of Australia in Commonwealth v The Colonial Combing, Spinning and weaving Co stated:

“If a trustee or other person entrusted with such a power were to exercise it in such a fashion, the Courts would not hesitate to treat such a bargain as an abuse of the power what is called a “fraud on the power.” An executor having power to dispose of a church preferment cannot bargain for an advantage to himself (Richardson v. Chapman [1760] EngR 694; (1760) 7 Bro. Parl. Cas., 318.); a municipal corporation, trustee for a school, cannot grant a lease containing a covenant that the lessee shall grind his corn at the corporation mill (Attorney-General v. Stamford (1747) 2 Swans., app., 591.); trustees for a school cannot lease to one of the trustees (Attorney-General v. Dixie (1805(13 Ves. 519); governors of a school cannot lease to one of the governors (Attorney-General v. Earl of Clarendon (1810) 17 Ves. 491) ); a parent with a power to appoint among children cannot bargain with a child for purchase of a share appointed (Cuninghame v. Anstruther (1872) L.R. 2 H.L. (Sc.), 223.); a parent with such a power cannot appoint money to a daughter to meet his burial expenses (Hay v. Watkins(1843) 3 Dr. & War., 339. ); a tenant for life having statutory power to lease cannot lease to a trustee for himself (Boyce v. Edbrooke (1903) 1 Ch., 836.).

The same principle applies to all discretionary powers, such as consents. As Farwell puts it (Farwell on Powers, 3rd ed., p. 463): “Trustees must exercise any discretionary power they may have (e.g., to consent) bona fide for the benefit of the persons for whom they are trustees” (Eland v. Baker[60] ; and see Strange v. Smith[61] ; Clarke v. Parker[62] ; Mesgrett v. Mesgrett[63] ). Most of these cases relate to trustees; but the principle is not confined to trusts. In the recent case of Vatcher v. Paull (1915) AC 372at p. 378.ord Parker of Waddington, in the Privy Council, explained the position:

“The term fraud in connection with frauds on a power does not necessarily denote any conduct on the part of the appointor amounting to fraud in the common law meaning of the term or any conduct which could be properly termed dishonest or immoral. It merely means that the power has been exercised for a purpose, or with an intention, beyond the scope of or not justified by the instrument creating the power. Perhaps the most common instance of this is where the exercise is due to some bargain between the appointor and appointee, whereby the appointor, or some other person not an object of the power, is to derive a benefit. But such a bargain is not essential. It is enough that the appointor’s purpose and intention is to secure a benefit for himself, or some other person not an object of the power. In such a case the appointment is invalid.”

In commenting on these words Farwell L.J. says (Farwell on Powers, 3rd ed., p. 458):””It will be observed that the essential notion is disposition beyond the scope of the power, not breach of trust by the donee, though it is not unusual to speak of the donee of a limited power as being in a fiduciary position. His position is referable to the terms, express and implied, of the instrument creating the power and the implied obligation not to appoint for an ulterior purpose, and is not in truth founded, like the position of a trustee, upon a state of conscience imputed to him by Courts of equity. But there is a strong analogy between the obligation imposed on a donee by the terms of the instrument creating the power and that imposed upon a trustee by the terms of the instrument creating the trust.”

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>