Super case highlights the benefits of judicial advice

A recent court case highlights the benefits of seeking judicial advice to resolve difficult or contested issues arising from reforms to the superannuation system.

These changes will require disclosure of directors’ remuneration, but Mark Bland, a partner at law firm Mills Oakley, says: “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.”

The court case involved the Retail Employees Superannuation Trust (REST), Australia's largest super fund by membership, with over 1.8 million members.

Bland says REST appeared to be having difficulty finding suitably qualified and experienced people 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,” he says.

In November, REST filed an urgent application that was heard and decided by the duty judge within three days.

According to Bland, the law 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. This is known colloquially as “judicial advice” and is provided for in trustee acts of each state and under the inherent jurisdiction of the courts.

“Judicial advice is a valuable tool for trustees in managing risk and change in this challenging environment,” he says.

“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 Australian Prudential Regulation
Authority infringement notice.

“The judicial advice process is an exception to the rule of adversarial litigation. As the 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.”

In this case, REST’s trustee argued that it “would be justified” in amending its trust deed in order to allow its trustee and directors to be paid a fee and to permit it appointing independent directors.

The judge noted that:

• There was no power under the REST Trust deed for the trustee to be remunerated out of the fund.
• Neither the directors nor the trustee were being paid any remuneration.
• The obligations of the trustee and its directors have increased significantly since REST was established in 1987.
• REST has grown significantly in size.
• The Trustee and its directors spend significant time and effort performing their duties.
• 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.

However, one of REST’s 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”.

Justice Darke approved the amendment and payment of reasonable remuneration, observing that the roles performed by, and the attendant responsibilities of, the directors are plainly considerable and call for a high level of diligence and expertise.

The judge accepted the trustee’s evidence that it was “generally accepted” that directors of substantial trustees were entitled to remuneration. 

Bland observes: “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.”