FEDERAL COURT OF AUSTRALIA

Asgard Capital Management Limited v Maher [2003] FCAFC 156

SUPERANNUATION – member’s benefit – payment of benefit by trustee to person other than member – whether payment by trustee in breach of Superannuation Industry (Supervision) Regulations 1994 – whether payment “in favour of” the member

WORDS AND PHRASES – “in favour of”

Superannuation (Resolution of Complaints) Act 1993 (Cth) ss14(2), 37(1)(a)

Superannuation Industry (Supervision) Act 1993 (Cth) ss 34,

Superannuation Industry (Supervision) Regulations 1994 regs 6.17(2), 6.17A, 6.18, 6.19, 6.19A, 6.20, 6.22, 13.12, 13.13

ASGARD CAPITAL MANAGEMENT LIMITED v BARRY RICHARD MAHER

N 1232 of 2002

RYAN, FINKELSTEIN & DOWNES JJ

25 JULY 2003

SYDNEY

On Appeal from a Single Judge of the Federal Court of Australia

THE COURT ORDERS THAT:

1.      The appeal be allowed.

2.      The orders of the trial judge made on 29 October 2002 be set aside.

3.      The decision of the Superannuation Complaints Tribunal dated 28 June 2002 be set aside. 

4.      The decision of the appellant made on 5 October 1999 and the subject of the appeal be affirmed.

5.      The respondent pay the appellant’s taxed costs of the appeal and of the hearing below.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

On Appeal from a Single Judge of the Federal Court of Australia

REASONS FOR JUDGMENT

THE COURT:

1                     This unfortunate case arises out of the dishonesty of a financial adviser.  The adviser stole $245,050.65 which his client, the respondent, had invested in a superannuation fund.  He also stole large sums from other people.  Not surprisingly, the adviser is unable to repay any of the money he embezzled.  The question that falls for decision on this appeal is who must bear the loss resulting from the theft of the $245,050.65?  Is it to be the respondent, who can ill afford the burden, or the appellant, the trustee of the superannuation fund where the money was placed. 

2                     The facts can be shortly stated.  The respondent was a beneficiary of the Asgard Independence Plan Superannuation fund which had been established to provide retirement benefits for its members.  The fund is comprised of a number of separate divisions.  The respondent was a beneficiary of Division 2 known as the Asgard Superannuation Account.  The trust deed provides that each division “shall be constituted a trust fund to be held under and in accordance with the terms and conditions of this Deed and the Rules” [cl 2.2.1].  The Rules are contained in schedules and the rules applicable to Division 2 are set out in Schedule 2.  According to the Schedule 2 Rules, a beneficiary must be paid an amount equal to the benefit to which he is entitled, as determined by the trustee in accordance with certain identified criteria.  The way in which the amount must be paid to the beneficiary is dealt with by standards prescribed under s 31 of the Superannuation Industry (Supervision) Act 1993 (Cth) (“the Supervision Act”).  Those standards are found in the Superannuation Industry (Supervision) Regulations 1994 (“the Supervision Regulations”).  Relevant to this appeal are regulations 6.17(2) and 6.22.  They provide: 

“6.17(2)          A member’s benefits in a fund:

(a)        may only be paid by;

(i)         being cashed in accordance with Division 6.3; or

(ii)        being rolled over or transferred in accordance with Division 6.4 or 6.4A; and

(b)        must not be paid except when, and to the extent, that the fund is required or permitted under this Part to pay them; and

(c)        must be paid when, and to the extent that, the fund is required under this Part to pay them.”

6.22(1)            Subject to regulation 6.22B, a member's benefits in a regulated superannuation fund must not be cashed in favour of a person other than the member or the member's legal personal representative unless:

(a)        the member has died; and

(b)        the conditions of subregulation (2) or (3) are satisfied.

      (2)             The conditions of this subregulation are satisfied if the benefits are cashed in favour of either or both of the following:

(a)        the member's legal personal representative;

(b)        one or more of the member's dependants.

     (3)              The conditions of this subregulation are satisfied if:

(a)        the trustee has not, after making reasonable enquiries, found either a legal personal representative, or a dependant, of the member; and

(b)        the person in whose favour benefits are cashed is an individual.”

Section 34 of the Supervision Act imposes an obligation upon the trustee of a superannuation fund to ensure that the standards are complied with.  Any intentional or reckless contravention of s 34 is an offence punishable by fine.  A contravention of s 34 does not, however, affect the validity of a transaction. 

3                     This appeal has been conducted on the basis that the standards have been incorporated into the trust deed.  We are prepared to proceed on the basis that this assumption is well-founded, for it will not affect the outcome of the appeal.  For the record, however, the provision of the trust deed upon which this assumption is based (cl 1.7.2) only incorporates so much of the regulations “that [are] required from time to time to be included in [the] Deed”.  Regulations 6.17(2) and 6.22 establish a code of conduct to which a trustee must conform.  But it does not follow that those regulations must be included in the trust deed.  To the contrary, we incline to the view that they have not been incorporated.  They have effect because of the Supervision Act. 

4                     As at late 1999, the respondent’s investment in the fund was $280,000.  He instructed his financial adviser to deal with this investment in the following way:  $30,000 was to be credited to a joint bank account in the name of the respondent and his wife; $5,000 was to be applied to the purchase of shares in Coles Myer; the balance of $245,000, was to be transferred to a new investment with the trustee.  To enable the adviser to carry out this instruction, the respondent signed a blank payment request form (which covered three pages) directed to the trustee.  He gave the form to his adviser and left it to him to complete the form in the required manner.  It was this act which put the adviser in the position where he could misappropriate the money.  He completed the form so that the trustee was directed to pay the whole of the respondent’s entitlement into a bank account maintained by the adviser.  We set out the relevant part of the form (the symbol, words and figures written in manuscript are reproduced in bold):

As directed, the trustee deposited $280,000 into the nominated account.  The adviser then transferred $30,000 to his client’s bank account.  He also purchased $5,000 worth of Coles Myer shares on his client’s behalf.  He kept the rest of the money (together with $50.65 interest) for himself. 

5                     Following the discovery of the theft, the respondent lodged a complaint with the trustee alleging that by paying his superannuation entitlement to his adviser, the trustee had acted negligently or illegally.  He demanded that the trustee make good his loss.  The trustee rejected the complaint.  The respondent took his case to the Superannuation Complaints Tribunal.  The tribunal can hear a complaint that a decision made by a trustee “was unfair or unreasonable”: Superannuation (Resolution of Complaints) Act 1993 (Cth) s 14(2).  It was obviously assumed that a decision that a benefit could properly be paid to an account styled differently from the name of the member is a decision that could be reviewed by the tribunal.  This assumption is unlikely to be correct:  Attorney-General v Breckler (1999) 197 CLR 83, 104.  Nevertheless, because the jurisdiction of the tribunal has not been called into question, it is appropriate for us to assume that the decision was capable of review.  Pursuant to s 37(1)(a) of the Complaints Act, the tribunal has the powers, obligations and discretions of the trustee and, for that purpose, is authorised to reconsider any decision made by the trustee.  The tribunal determined to set aside the trustee’s decision “on the grounds that it was not fair and reasonable in its operation in relation to the [respondent] in the circumstances”.  In substituting its own decision for that of the trustee, the tribunal decided that the respondent should be paid a superannuation benefit of $245,050.46.  The trustee then brought an “appeal” on a question of law:  see s 46 of the Complaints Act.  The question of law that arose was the meaning of the phrase “must not be cashed in favour of a person other than the member” in reg 6.22(1).  The interpretation of reg 6.22(1) involves a question of law.  The judge who heard the appeal affirmed the decision of the tribunal.  He affirmed the tribunal’s decision because he was of opinion that “[t]he evident policy of s 62 of the [Superannuation] Act [which sets out the principal and ancillary purposes for which a superannuation fund is to be maintained] and [the Supervision] regulations 6.22 and 6.22B [which allows a member’s benefits to be cashed in favour of a person other than the member if expressly permitted by the appropriate Regulator] is in contrast to ensure that a superannuated person or his or her legal representatives in the event of death etc duly received their entitlements upon crystallisation, to the exclusion of any purported prior assignee thereof.  Beyond that degree of protection, the law practically speaking cannot legislate further …”.  Although he did not expressly say so, the judge must have construed the words “must not be cashed in favour of a person other than the member” as prohibiting the payment of a superannuation benefit by the trustee to a member by making that payment not directly to the member, but rather at the member’s direction or to the member’s authorised agent.  The question raised by this appeal is whether this is the correct construction of reg 6.22. 

6                     Regulation 6.22 must be construed in its setting.  It is one of a number of regulations in Pt 6, which part, according to its heading, is concerned with “Payment standards”.  Division 6.2, a subdivision of Pt 6, deals with the payment of benefits.  Clause 6.17 is headed “Restriction on payment”.  Clause 6.17(2) has already been set out.  Clause 6.17A is concerned with the payment of benefits on death.  Clauses 6.17A(2) and (4) should be noted.  They provide:

“(2)     For subsection 59(1A) of the Act, the governing rules of a fund may permit a member of the fund to require the trustee to provide any benefits in respect of the member, on or after the death of the member, to the legal personal representative or a dependant of the member if the trustee gives to the member information under subregulation (3).

(3)       …

(4)       Subject to regulation 6.17B, if the governing rules of a fund permit a member of the fund to require the trustee to provide any benefits in accordance with subregulation (2), the trustee must pay a benefit in respect of the member, on or after the death of the member, to the person or persons mentioned in a notice given to the trustee by the member if:

(a)        the person, or each of the persons, mentioned in the notice is the legal personal representative or a dependant of the member; and

(b)        the proportion of the benefit that will be paid to that person, or to each of those persons, is certain or readily ascertainable from the notice; and

(c)        the notice is in accordance with subregulation (6); and

(d)        the notice is in effect.”

Division 6.3 is headed “Cashing of Benefits”.  Regulations 6.18, 6.19 and 6.20, which are found in Div 6.3, respectively provide that a preserved benefit, a restricted non-preserved benefit and an unrestricted non-preserved benefit may be cashed.  The form in which these benefits may be cashed is in a lump sum or two or more lump sums, a pension or two or more pensions or the purchase of an annuity or two or more annuities.  Before a beneficiary has satisfied the conditions which will entitle him to cash in his benefit he may nevertheless apply to have his benefit released.  The circumstances in which a benefit may be released are set out in reg 6.19A.  They include the following:  the benefit is required to pay for medical treatment; to enable the beneficiary to make a payment on a loan to prevent foreclosure of a mortgage or power of sale over the beneficiary’s principal place of residence; to make modifications to the beneficiary’s principal place of residence to accommodate any special needs of the beneficiary or a dependant; to pay for expenses associated with the beneficiary’s palliative care in the case of impending death; or to pay for expenses associated with a dependent’s palliative care, death, funeral or burial.  It is also necessary to have regard to the operating standards that deal with the assignment of benefits.  The relevant regulations are regs 13.12 and 13.13.  According to these regulations, the trustees of a fund must not “recognise, or in any way encourage or sanction” an assignment of or charge over a superannuation interest.

7                     In addition to the regulatory context, the relevant background against which the meaning of reg 6.22 must be determined includes the general right of a beneficiary of a trust to deal with his entitlements because, on the construction which the respondent urges, that right will be interfered with.  When the time fixed by the terms of a trust for the distribution of trust property has arrived, it is the duty of the trustee to convey title to or distribute (that is give possession of) the trust property to the beneficiary.  Instead of taking the title himself, the beneficiary may require the trustee to convey or distribute the trust property to a third party.  The reason why the beneficiary has the right to give such a direction is surely obvious and probably need not be stated.  Nevertheless, so that there is no doubt about it, the reason is that the beneficiary is in substance the owner of the property and can deal with it as he likes:  Wilson v Wilson (1950) 51 SR (NSW) 91, 94;  Stephenson v Barclays Bank Trust Co Ltd [1975] 1 WLR 882, 889.

8                     The regulations certainly do modify the right which a beneficiary normally has to deal with his interest in a trust.  While there is no attempt to restrict the beneficiary’s right to deal with his interest, his power of direction is, in a sense, restricted because of the imposition of an obligation upon the trustee not to “recognise” an assignment of, or charge over, the beneficiary’s interest.  Accordingly, while there may have been an assignment or charge, the trustee must nevertheless cash (that is, pay) the benefit in favour of the member and not the assignee or a chargee.  As we have sought to demonstrate, this change is brought about by regs 13.12 and 13.13 and not, as the trial judge said, by reg 6.22.  Whatever be the policy behind reg 6.22, it is not, as the judge said, to ensure that “a superannuated person or his or her legal representatives in the event of death etc duly received their entitlements upon crystallisation, to the exclusion of any purported prior assignee thereof.”  We think the judge fell into error because his attention was not drawn to regs 13.12 and 13.13, which appear in a set of regulations that take up 293 pages.

9                     The question in issue seems to come down to this.  Does reg 6.22 impose an obligation upon the trustee to ignore a direction given by a beneficiary to pay an accrued benefit (that is a benefit in which the beneficiary has an absolute interest) to the beneficiary’s authorised agent or to any other person nominated by the beneficiary?  It would, to say the least, be a most inconvenient result if this were the proper construction of reg 6.22.  Take, for example, the following situation which, in one form or another, is often likely to occur.  A beneficiary has purchased a property.  He instructs his solicitor to attend settlement to hand over the purchase price in exchange for the title deeds.  The beneficiary wishes to fund the purchase (in whole or in part) out of his superannuation benefit.  He directs the trustee to pay the benefit to his solicitor so that the solicitor can attend the settlement.  According to the respondent’s construction of reg 6.22, if the trustee carries out this instruction it would be in breach of trust.  All the trustee is permitted to do is to pay the benefit to the beneficiary and leave it to the beneficiary to arrange for payment to his solicitor. 

10                  Try as we might, we cannot discern from reg 6.22 an intention that the trustee should not act on the beneficiary’s instructions and pay the benefit to his solicitor.  If the trustee were to make that payment, the trustee would, in our view, be cashing the member’s benefit “in favour of” the beneficiary.  Likewise, if the trustee were to pay the benefit to an agent who was specifically authorised to receive the benefit on the member’s behalf.  That payment would be a payment made “in favour of” the member.  The respondent’s contention that the phrase “must not be cashed in favour of a person other than the member” means that a benefit must not be paid to any person other than the beneficiary personally, in effect, amounts to a redrafting of reg 6.22 and not to the proper construction of it.

11                  Were the respondent’s contention to be accepted, the burden cast upon trustees to be satisfied that payment was being made to the member personally would be very high.  The result would be great inconvenience for beneficiaries as they would face ever tighter controls by trustees to ensure that payments at the request of beneficiaries would free them from further claims.  Take the present case in which the trustee was presented with a payment request form signed by the member asking for payment “to my bank account as detailed.”  The account was named as “KBA Financial Services”.  It is easy to imagine situations in which an account, though not in the member’s name, could still be the member’s account.  If the position is unclear, should the trustee refuse to pay?  If not, what evidence must the trustee obtain to ensure that the account is the account of the member?

12                  The conclusion to which we have come is, moreover, consistent with the established meaning of the phrase “in favour of” as it applies to the law of bills of exchange - the area of law upon which the terminology of the superannuation legislation draws.  In Meyer & Co. v Decroix, Verley et cie [1891] AC 521 the House of Lords held that the words “in favour of Mr. L. Delobbel Flipo only” did not qualify a general acceptance of a negotiable bill.  Lord Herschell said (at pp. 528, 529):

“The words ‘in favour of,’ when used in relation to a bill of exchange, do not ordinarily mean that it is payable only to the person in whose favour it is said to be drawn; the words are equally applied when the bill is made payable to his order.  The words ‘In favour of,’ therefore, are properly paraphrased by ‘payable to, or to the order of’ ...”

See also Melsom v Vanpress Pty Ltd (1990) 3 WAR 39, 42 - 43).

13                  The purpose of reg 6.22 is to restrict the categories of persons to whom a benefit may be paid to three:  (1) the beneficiary; and if the beneficiary has died, (2) the beneficiary’s legal personal representative; or (3) the beneficiary’s dependants.  For this reason, the trustee must ignore arrangements such as the assignment of a benefit or the fact that a benefit is held on trust for a third party.  In other words, the trustee is only required to deal with a limited class of persons, the members of which are readily identifiable.  The regulation therefore is one which simplifies the manner in which the trustee deals with the trust property.  It is not designed to provide the protection identified by the judge.  Indeed, neither reg 6.22 nor, if it be relevant, any other regulation (including regs 13.12 and 13.13) provides that type of protection.  For example, reg 6.22 does not prevent the beneficiary from assigning his interest in the fund, declaring himself to be the trustee of his interest, or dealing with his interest in any other way.  It is certainly not designed to prevent a beneficiary from giving a direction to his trustee regarding the manner in which the beneficiary’s interest is to be paid. 

14                  It follows in our opinion that the appeal should be allowed, the orders made by the judge set aside, the decision of the tribunal set aside and the decision of the trustee affirmed.  The appellant should have its costs of the appeal and its costs of the application below.

Associate:

Dated:              25 July 2003