A success for successor fund transfers – court finds that secret commission offence provisions do not apply

A welcome clarification of the law 10 min read

A recent decision in the Queensland Supreme Court should provide confidence to superannuation funds seeking to engage in successor fund transfers (SFTs) that they will not need to obtain the prior assent of the court or members before proceeding with the transaction, at least where Queensland and Victorian laws apply.

The decision of Justice Kelly in H.E.S.T Australia Ltd v Attorney-General (Qld); Mercy Super Pty Ltd v Attorney-General (Qld) [2022] QSC 221 (the decision) found that secret commission offence provisions in section 442F of Schedule 1 to the Criminal Code Act 1899 (Qld) and section 180 of the Crimes Act 1958 (Vic) (Offence Provisions) did not apply to a proposed SFT between the Mercy Super Trustee (Mercy Super) and the HESTA Trustee (HESTA), meaning the Trustees did not need the court's assent to proceed with the SFT.

Relevantly, the court found that the Offence Provisions were not engaged by the proposed SFT because the transaction did not involve the necessary 'appointment' of a trustee as contemplated by the Offence Provisions. Rather, the SFT involved only a transfer of members and assets from one trust (the transferring fund) to another trust (the successor fund) and did not designate the successor trustee to the office of the transferring fund or to a new office.

Key takeaways 

• The Queensland Supreme Court found that secret commission offence provisions in Queensland and Victoria are not engaged in the context of SFTs regulated under the Superannuation Industry (Supervision) Regulations 1994 (Cth), because SFTs do not involve the appointment of a new trustee. Rather, an SFT involves only a transfer of members and assets, and therefore, there is no 'appointment' of a trustee which would cause the offence provisions to be enlivened.
• The decision provides much-needed clarification for superannuation funds seeking to engage in SFTs. Although individual circumstances may vary (and trustees using alternate merger structures such as a trustee replacement may need to continue to grapple with the offence provisions), funds can take comfort that they will not be required to obtain prior assent from the court or from members to proceed with a typically structured SFT.
• That said, trustees should be aware that the decision did not consider the position under similar secret commission offence provisions in Western Australia and New South Wales. While there are good reasons to believe that the same approach should apply in both Western Australia and New South Wales, there is still a degree of uncertainty in relation to the position in New South Wales given the BTFM decision technically continues to represent the current position of the law in that state, and that the equivalent provision in the Crimes Act 1900 (NSW) uses slightly different language in respect of the critical words around 'appointment' upon which Justice Kelly's reasons were based.

Background: a state of industry uncertainty

Ever since the recent New South Wales Supreme Court decision of Justice Ball in BT Funds Management Limited as trustee for the Retirement Wrap Superannuation Fund [2022] NSWSC 401 (BTFM decision), there has been a level of uncertainty in the superannuation industry as to whether engaging in SFTs where indemnities or other promises are granted as part of the transaction may contravene statutory 'secret commission' offence provisions¹, which prohibit the receipt or solicitation of a benefit as an inducement or reward for an appointment of trustees absent having obtained the prior assent of the court or all members of the fund.

In the BTFM decision, Justice Ball made orders assenting to the plaintiff (BT Funds Management Limited as trustee for the Retirement Wrap Superannuation Fund) entering into an SFT involving another fund:

• paying all or part of the plaintiff's costs of the transaction;
• compensating members for any losses they suffer as a consequence of the transfer; and
• indemnifying the plaintiff in respect of claims against it, in respect of which it would otherwise be entitled to be indemnified out of the assets of the transferring fund.

Justice Ball's order was made on the basis that if the court's assent was not given, the transferring fund's conduct may have amounted to a breach of the secret commission offence provision in s249E of the Crimes Act 1900 (NSW) (as well as the equivalent Offence Provisions from Victoria and Queensland and a cognate provision from Western Australia) as the provisions did not require 'proof of "corrupt" conduct' and were 'broad enough to catch the payments or benefits in contemplation'.² However, His Honour did not go as far as to determine that s249E did in fact apply to the SFT in question—assent was given in lieu of a determination on that issue. In his judgment, his Honour noted that there had not been any decided cases considering the relevant offence provisions and that there had been no other instance where parties had approached the court for assent to proceed with an SFT despite the prevalence of SFTs in the industry.

In response to the BTFM decision, Mercy Super and HESTA commenced separate proceedings in the Queensland Supreme Court seeking declarations from the court that the proposed SFT transferring Mercy Super's members and assets to HESTA was not a 'substituted appointment' of a trustee for the purposes of the Offence Provisions.

In the alternative, the Trustees sought the court's assent under the Offence Provisions to permit HESTA to offer certain promises and benefits to Mercy Super on the basis that they were made in the best interests of the funds' members (similar to the relief granted in the BTFM decision). These included promises on the part of HESTA to:

• indemnify Mercy Super and each former, present and future director, officer or delegate of Mercy Super with respect to certain liabilities;
• agree to the novation of certain contracts and policies;
• represent and warrant its status, authority, capacity, and legal and regulatory compliance; and
• conduct negotiations on an exclusive basis for a certain period (the Promises).

The Attorneys-General of Queensland and Victoria were joined as respondents to each proceeding, and the Australian Prudential Regulation Authority (APRA) was given leave to appear and be heard in each proceeding to assist the court.

Decision

Declaration that the Offence Provisions did not apply to the proposed SFT

In the decision, the Justice Kelly agreed with the Trustees' submissions (which were endorsed by APRA and the Attorney-General of Queensland) and made a declaration that the Offence Provisions were not engaged by the proposed SFT because the transaction did not involve the requisite 'appointment' of a trustee as contemplated by the criminal legislation.

Section 442F of Schedule 1 to the Queensland Criminal Code (which is in substantially similar terms as s180 of the Victorian Crimes Act) provides that:

Any person who offers or gives any valuable consideration to a trustee, or any trustee who receives or solicits any valuable consideration for himself or herself or for any other person, without the assent of the persons beneficially entitled to the estate or of a judge of the Supreme Court, as an inducement or reward for appointing or having appointed, or for joining or having joined with another in appointing, or for authorising or having authorised, or for joining or having joined with another in authorising, any person to be appointed in the person’s stead or instead of the person and any other person as trustee, commits a crime. (Emphasis added).

Under the proposed SFT between Mercy Super and HESTA, it was not proposed that the successor fund trustee (in this case, HESTA):

• be appointed to the office of the transferor trustee, or to a new office;
• be conferred any new power or appointed any new trust;
• do any more than to continue in the office it had already had prior to the SFT; and
• take any responsibility for the closure of the transferor trust after the completion of the SFT.

Justice Kelly held that the Offence Provisions do not apply to the situation where, as usually occurs in SFTs, assets and members are transferred from one trust to another and where different terms of the trust (ie those of the successor fund) will apply to those transferred members and assets.

In making this finding, Justice Kelly referred to:

• the historical purpose of the Offence Provisions as being targeted at a known practice of trustee companies giving secret commissions to an executor for appointment as a replacement trustee where the terms of the trust remained the same;
• the established and natural meaning of 'appointment' as the placing or designation of a person in the office of trustee, rather than as the effect of a dealing with assets; and
• APRA's submissions that a declaration directed to the effect sought by the Trustees would serve the public interest by both providing clarification to other trustees that SFTs are unlikely to contravene the Offence Provisions, and avoiding unnecessary court applications and costs with respect to SFTs.

In relation to the BTFM decision, His Honour observed that it was not clear why Justice Ball used the language of 'appointing' in referring to BT 'contemplating appointing another trustee', and that 'that language may have reflected submissions made, or the evidence relied upon, in BTFM’. In any event, Justice Kelly considered that the language appeared in the BTFM decision 'as an assumption rather than as a reasoned conclusion'. Accordingly, Justice Kelly said that:

I do not read BTFM as containing a ratio decidendi directed to the principal question before me. Further, as the decision was made on an ex parte application without a contradictor and in apparent circumstances of urgency, I have decided that I am not obliged, and I am not minded, to follow BTFM in dealing with the applicants’ primary argument.³

Assent to the Promises being offered under the Offence Provisions

In the alternative to the declaration that the Offence Provisions did not apply to the SFT, the Trustees sought the court's directions or assent to solicit and receive the Promises on the basis that the Promises would be made in the best interests of the respective Trustee funds' members. This relief was similar to that which was granted to the plaintiff in the BTFM decision.

Despite finding for the Trustees on their primary case, Justice Kelly made a supplementary order that the Trustees' were justified to solicit and receive the Promises on the basis that no reason had been suggested to doubt the Trustees' decision as to the suitability and beneficial nature of the SFT and the Promises to the funds' members.

Position in Western Australia and News South Wales

Justice Kelly's judgment was limited to consideration of the secret commission offence provisions in Queensland and Victoria. His Honour was not asked to, and did not, consider the position in relation to similar provisions in Western Australia and New South Wales. The implications for the decision in each of those jurisdictions is considered briefly below.

Western Australia

The equivalent offence provision in s535 of the Criminal Code Act Compilation Act 1913 (WA) is drafted in substantially similar terms to the Offence Provisions. Accordingly, trustees can take significant comfort that Justice Kelly's reasoning would apply equally to the offence provision in Western Australia and that an SFT would not involve a relevant 'appointment' under the Criminal Code Act Compilation Act 1913.

New South Wales

The position with respect SFTs in New South Wales remains unsettled. The BTFM decision is still good authority so far as the NSW provision is concerned.

It is also relevant to note that the language in s249E of the Crimes Act 1900 (NSW) differs to the language employed in the Offence Provisions, including the critical language around 'appointment' upon which Justice Kelly's reasons were based. In particular, whereas the Queensland and Victorian provisions refer to a person being 'appointed in the person's stead', the NSW provision applies to 'any appointment of a person entrusted with property', which is arguably of broader application than the Queensland and Victorian equivalents.

While we would suggest that the alternate language used in the Crimes Act 1900 (NSW) creates a difference without consequence for the purposes of determining SFTs involving a relevant 'appointment' under the NSW provisions, without further clarity, trustees will need to be conscious that the position in NSW remains slightly less clear than in the other jurisdictions.

Implications

The position with respect SFTs in New South Wales remains unsettled. The BTFM decision is still good authority so far as the NSW provision is concerned.

It is also relevant to note that the language in s249E of the Crimes Act 1900 (NSW) differs to the language employed in the Offence Provisions, including the critical language around 'appointment' upon which Justice Kelly's reasons were based. In particular, whereas the Queensland and Victorian provisions refer to a person being 'appointed in the person's stead', the NSW provision applies to 'any appointment of a person entrusted with property', which is arguably of broader application than the Queensland and Victorian equivalents.

While we would suggest that the alternate language used in the Crimes Act 1900 (NSW) creates a difference without consequence for the purposes of determining SFTs involving a relevant 'appointment' under the NSW provisions, without further clarity, trustees will need to be conscious that the position in NSW remains slightly less clear than in the other jurisdictions.

Allens acted for HESTA Trustee in the proceedings.