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8 Mar 11
Trustees' obligations in exercising discretion - Finch v Telstra Super Pty Ltd

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Superannuation Fund Trustees should take note of a recent decision by the High Court of Australia. In October 2010, the High Court handed down its decision in the case of Finch v Telstra Super Pty Ltd [2010] HCA 36. The decision has received significant attention as it has a number of implications for superannuation fund trustees exercising a discretion given to them under a fund’s trust deed. The case also gives guidance regarding the duties of a superannuation fund trustee under trust law, and their obligations to beneficiaries.

Facts

The applicant, Alan Michael Finch, became an employee of Telstra Corporation Ltd (Telstra) in October 1992. Prior to commencing employment with Telstra, Mr Finch had undergone surgery to change his gender from male to female.

Mr Finch was unhappy with the results of the surgery and developed a number of psychological problems. Eventually, Mr Finch reassumed a male personality and took sick leave from Telstra to undergo surgery to reverse the original gender change surgery. After this surgery, Mr Finch became ‘severely depressed, suffered from an adjustment disorder and was sensitive about his appearance’.

Mr Finch ceased employment with Telstra in January 1998. He subsequently worked for Foxtel from February 1999 to March 1999 and part-time for Qantas from November 1999 until May 2000, but was otherwise unemployed for at least the next 12 months.

As an employee of Telstra, Mr Finch was a member of the Telstra Superannuation Scheme (Fund), a fund regulated by a trust deed (Trust Deed) and for which Telstra Super Pty Ltd (Trustee) was the trustee.

On 19 May 2000, Mr Finch made an application for the payment of a total and permanent invalidity (TPI) benefit under the Trust Deed. A committee of the Trustee rejected his claim on 21 March 2002. Mr Finch then made an application for reassessment on 10 September 2002 which was rejected by the Trustee on 20 September 2003.

Mr Finch challenged both determinations in the Supreme Court of Victoria. In the first instance, the trial judge, Byrne J, set both decisions of the Trustee aside and remitted the matter to the Trustee. However, on appeal, the matter was decided in favour of the Trustee.

Mr Finch then appealed to the High Court.

Issues

The issue in dispute before the High Court was whether a TPI benefit was payable to Mr Finch in the circumstances and, in particular, the extent of the Trustee’s discretion in making the determination not to pay a TPI benefit. It was agreed by all parties that the rules which apply to a superannuation fund are those which are set out in the relevant trust deed.

The relevant clause of the Trust Deed provided that the definition of TPI to be satisfied by Mr Finch was comprised of two elements.

  • the first element required that Mr Finch:
    • be continuously absent from ‘all active work’ for a period of six months, and
    • participate in a rehabilitation programme (this was not in dispute)
  • the second element required that, in the opinion of the Trustee and after consideration of any information, evidence and advice provided by Telstra to the Trustee or any other information the Trustee may have considered relevant:
    • Mr Finch had ceased to be an employee, and
    • was unlikely to ever engage in gainful work again.

First limb

The Victorian Court of Appeal had held in favour of the Trustee under the first element. The Court of Appeal found that the requirement of a continual absence from work for six months must have been satisfied at the date when Mr Finch ceased working for Telstra and, furthermore, that the absence from work had to be an absence from working for Telstra.

It was not sufficient, in the Court of Appeal’s view, that there had been a continued absence from work for more than six months between the time Mr Finch had ceased employment with Telstra and the time the first application for a TPI payment was made to the Trustee.

However, the High Court disagreed with this view and held that, under the correct construction of the Trust Deed, the six months’ absence from work did not refer to six months’ absence from Telstra nor did it require the six months’ absence to have occurred by the date Mr Finch left Telstra.

It was sufficient that Mr Finch had been absent from work for a period of six months at the time of his first application to the Trustee in May 2000 and thus Mr Finch satisfied the first element.

Second limb

The issue under the second element was whether the Trustee had given ‘genuine consideration’, having regard to all the information available, to whether Mr Finch was likely to ever engage in gainful work again.

The trial judge, Byrne J, had held that the Trustee failed to make sufficient inquiries and give genuine consideration to whether Mr Finch was unlikely ever to engage in gainful work because the Trustee had:

  • made no inquiry about the last months of Mr Finch’s employment with Telstra
  • failed to determine the accuracy of work assessments carried out by Foxtel and Qantas, and
  • failed to inquire further about a conversation between Mr Finch and the CEO of the Trustee.

The Trustee had therefore failed in its duty of inquiry and Byrne J found in favour of Mr Finch. Byrne J was of the view that, in exercising the discretion given under the Trust Deed, the Trustee was under a duty to give sufficient consideration and make sufficient inquiries so as to discharge its trust law duties to the beneficiaries of the Fund (Mr Finch being one of them).

The Court of Appeal took the alternative view in finding that the decision under the second element was a ‘discretionary decision’ (rather than the exercise of a duty) of the Trustee. The Court of Appeal found the fact that the Trustee had made an error as to a fact, or did not make all inquiries that may be been open to be made, is not sufficient reason to set aside the determination which was made in good faith, upon real and genuine consideration, and for a proper purpose.

The High Court, however, rejected the Court of Appeal’s view and affirmed the view of Byrne J. The decision of whether Mr Finch, or any other member, will satisfy the definition of TPI was not a ‘discretionary decision’ of the Trustee but rather it was a decision to be made in the performance of the Trustee’s duties as trustee of the Fund.

Notwithstanding that the case concerned a particular member’s claim, the duty was owed by the Trustee to all beneficiaries of the Fund, not just Mr Finch.

Implications

While the decision in Finch v Telstra Super Pty Ltd applied to an industry superannuation fund, the implications arising from the decision are relevant to all superannuation funds, including self managed superannuation funds.

In summary, the key implications of the decision are as follows:

  • the rules of a superannuation fund are those set out in its trust deed
  • the issue is not whether the mere exercise of a discretion given under a trust deed is a breach of a trustee’s trust law duty to beneficiaries. Rather, the issue is whether, in exercising a discretion, the trustee has given sufficient consideration and made sufficient inquiries so as to discharge its trust law duties
  • the decision does not exclude or limit the ability of a trust deed to give a trustee discretionary powers (however wide), but rather confirms there is a duty on a trustee to make sufficient inquiries before exercising such discretions. Trustees should not simply rely upon a discretion given in a trust deed but should make genuine inquiries so as not to breach their trust law duties
  • the consideration of a TPI benefit does not constitute the exercise of a trustee’s discretion but instead forms part of the trustee’s overall duty to the members of the fund. A failure to conduct sufficient inquiries will be breach of the trustee’s duties to members, and
  • the courts impose higher standards on the trustee of a superannuation fund than on other trusts (for example, discretionary trusts) when examining whether the duties to beneficiaries have been discharged.

McCullough Robertson recommends all superannuation fund Managers bear in mind Finch v Telstra Super Pty Ltd and exercise caution in the consideration of matters where discretion appears to be more expedient than thorough investigation and inquiry.

For further information or enquiries please telephone 1800 353 425 or email adviserservices@mccullough.com.au.

 

Focus covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. Focus is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.

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