In Australian Prudential Regulation Authority v Kelaher [2019] FCA 1521 Justice Jagot of the Federal Court decided that APRA failed to prove any of the contraventions of the Superannuation Industry (Supervision) Act 1993 (Cth) (the SIS Act) alleged against the IOOF companies and its directors and responsible officers. She decided there was no foundation for the making of any disqualification orders. Background.

APRA alleged that two entities within the IOOF Group of companies, IIML and Questor , and two of their directors, Mr Kelaher (the Managing Director) and Mr Venardos (the Chairman), contravened sections 52 and 52A of the SIS Act. APRA sought disqualification orders against the directors and three responsible officers of the entities, Chief Financial Officer David Coulter, Company Secretary Paul Vine, and General Counsel Gary Riordan .

Fundamentally Justice Jagot concluded that APRA had not presented reliable evidence of the particular factual circumstances said to give rise to the breaches of the statutory covenants. Nor did it produce expert evidence when arguing the failure to take reasonable care.

Nevertheless, the judgment makes a number of interesting comments about trust law, the duty of trustees, conflicts of interests and the nature of reserves:

The liability of trustees

• “APRA treats the trustee as an effective insurer against all loss when this is not the law. It gives no attention to the kind of evaluative and nuanced analysis that would be required to decide whether any particular conduct failed to measure up to the requisite standard of care. There is an evidentiary vacuum when it comes to the existing systems and procedures making it impossible to perform the kind of analysis that would be required for APRA to make good its claims.”
• “the absence in the minutes of a detailed record of discussion or consideration about matters before the board does not support the conclusion that such discussion or consideration did not occur.”
• “to the extent that the respondents’ defences depended on the proposition that IIML and Questor could never have been liable under s 55(3) and would have had a right of indemnity under the trust instruments for any such liability, I do not accept those defences. If my conclusion is incorrect then, as the respondents submitted, APRA’s case must fail. There is no allegation of dishonesty or an intentional or reckless failure to exercise the required degree of care, skill and diligence.”

Conflicts of interest

• “the no conflicts covenant is not about avoiding conflicts of interest. Conflicts of interest are inevitable. It is about managing conflicts of interest. And the conflicts which need to be managed are actual conflicts which have the capacity to significantly impact on the duty to act in the best interests of beneficiaries. Potential or theoretical conflicts of interest are not to the point. …
• APRA’s contentions about conflicts of interest remained at the level of theory. That is, as will become apparent, APRA has not established the necessary factual foundation to support the conclusion that any actual conflict of interest existed. Nor does it grapple with the fact that to be relevant under SP 521 the posited conflict must be capable of having a significant impact on the capacity of the responsible person to act in the best interests of beneficiaries. Nowhere does APRA attempt to confront this standard. Its case on the no conflicts covenant exists at a level of generality and theory which is inapt to make the case it apparently wants to make. “

Who owns reserves

• ” the notion that the reserves comprised “members’ money” was apt to mislead if used as an analytical tool. The interest of members in the funds is not the same as their interest in their individual accounts, a proposition which may be accepted. Members’ interest in the funds is as part of the reserve, a proposition which may also be accepted…
• The entire rationale for the [Operational Risk Financial Requirement] ORFR is to ensure that there is a fund available to pay compensation to members who suffer operational risk related loss, including in circumstances where that loss is the result of the actions of the trustee. The fund was not to protect members from having ultimately to pay the costs associated with an operational risk related loss, but rather to spread the burden of that loss so that it was borne by all members over time, rather than at the time the loss crystallised. As the passage quoted above makes clear, the Legislature envisaged that members would ultimately meet the costs of the operational risk related loss in any event, but saw benefit in spreading that loss over time so that it was borne by a wider membership pool. …it is misconceived and a complete mischaracterisation to describe the ORFR as “members’ money” … It is money in a dedicated fund, held in accordance with the provisions of the SIS Act, for the express purpose of paying compensation to members for losses arising from operational risk, including risks arising from the trustee’s conduct. Using that fund to compensate members in such circumstances does not involve compensating members with their own money in any relevant sense; rather, it is to use the fund for the very purpose for which it was created.
  There is no obligation on a trustee to itself replenish the ORFR fund to account for funds used to compensate members for losses arising from operational risks arising from the trustee’s conduct. …
  These examples demonstrate that where and how the ORFR fund is held does not affect the trustee’s rights, powers and obligations relating to how that fund is used. Other consequences may flow, such as how the ORFR is dealt with on a winding up of the superannuation entity or a change of trustee, but the ORFR can be used in the same manner and for the same purposes, regardless of whether it is held as capital of the trustee, a reserve of the trust or both.
  To describe an ORFR reserve in a superannuation trust as “members’ money” is a lawyer’s artifice. Other than on a winding up, an ORFR fund held as a reserve in a trust is no more “members’ money” than is an ORFR fund held on the trustee’s balance sheet.”