The ASIC Case and “Best Interests”

Australian Securities and Investments Commission v Australian Property Custodian Holdings Limited (Receivers and Managers appointed) (in liquidation) (Controllers appointed) (No 3) [2013] FCA 1342

414. Second, it is settled that a deed is not made effective solely by it being signed or fixed with a seal. If it is not the intention of the relevant parties to be immediately bound by it then the deed is not then effective. In an often quoted dictum in Xenos v Wickham(1866) LR 2 HL 296 at 312, Blackburn J explained: …no particular technical form of words or acts is necessary to render an instrument the deed of the party sealing it. The mere affixing the seal does not render it a deed; but as soon as there are acts or words sufficient to show that it is intended by the party to be executed as his deed presently binding on him, it is sufficient. The most apt and expressive mode of indicating such an intention is to hand it over, saying: “I deliver this as my deed;” but any other words or acts that sufficiently shew that it was intended to be finally executed will do as well. 415. Encapsulating the principle in The Construction of Deeds (2nd ed Sweet and Maxwell Ltd 1946 p. 6) the learned author Sir Charles Odgers states: Any act of the party which shows he intended to deliver the deed as an instrument binding on him is enough. He must make it his deed and recognise it as presently binding on him.

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416. Where, as here, there is doubt as to the intention of the party making the deed, regard may be had to the surrounding circumstances in order to determine what the party’s intention was at the time of signing or sealing the document: Poole and Another v Neely and Others [1976] 1 NZLR 529 at 541; Monarch Petroleum NL v Citco Australia Petroleum Ltd [1986] WAR 310 at 356. This consideration may include conduct that occurred after the date the deed was purportedly made where, in the words of Buckly LJ, that conduct “throws a measure of retrospective light on the [party’s] intention…”: Kingtson and Another v Ambrian Investments Co Ltd [1973] 1 All ER 120 at 128. In the case of a deed that has been left undated, parol evidence is admissible to show when the deed was written and from what date it was intended to operate: Morrell v Studd and Millington [1913] 2 Ch 648 at 658.

457. Section 601FC(1)(c) provides that: In exercising its powers and carrying out its duties, the responsible entity of a registered scheme must: … (c) act in the best interests of the members and, if there is a conflict between the members’ interests and the interests of the responsible entity, give priority to the members’ interests. 458. Section 601FD(1)(c) imposes the same duty on the directors of an RE. It provides: An officer of the responsible entity of a registered scheme must: … (c) act in the best interests of the members and, if there is a conflict between the members’ interests and the interests of the responsible entity, give priority to the members’ interests.

Murphy J continued:

9.2.1 The meaning by reference to ss 601FC(1)(c) and 601FD(1)(c)

462. To understand the meaning of the expression I first look to the text of ss 601FC(1)(c) and 601FD(1)(c) in their context. The use of the superlative “best” in each of the provisions may be seen to require a comparison between different courses of action available to an RE, and the requirement to choose between them, including a choice between taking action and inaction. The word “best” may also be seen to set a requirement not only in relation to what must be done by an RE but also in relation to how it is done, thereby imposing standards of conduct on the RE. 463. It is difficult to discern the outer boundaries of the best interests duty from the text of the provisions alone. For example, the expression may be argued to indicate a requirement that the RE meet the “highest” standard rather than just a high standard. It may also be argued to set a requirement for the RE to obtain an objectively determined “best” outcome rather than requiring the best efforts of the RE. I am disinclined to such a view because such meanings may cause real difficulties for a trustee in performing his or her role. It is not clear to me how in many common circumstances the “highest” standard is to be determined let alone met, or how any requirement to achieve an objectively determined “best” outcome sits with the general law obligation on a trustee to act with care, competence and caution. The language of the statute alone does not make clear where the boundary lies and it is appropriate to consider the meaning of the term under general law.

9.2.2 The meaning under general law

464. There is a presumption that where words used in a statute have already acquired a legal meaning, unless the contrary intention clearly appears from the context, prima facie the legislature is taken to have intended to use them with that meaning: Attorney-General of NSW v Brewery Employees Union of NSW [1908] HCA 94; (1908) 6 CLR 469 at 531 per O’Connor J.

465. There can be no question that the heritage of the best interests duty is equitable. In an often quoted dictum in Cowan v Scargill [1985] Ch 270 at 295 Sir Robert Megarry V-C said: The starting point is the duty of trustee to exercise their powers in the best interests of the present and future beneficiaries of the trust, holding the scales impartially between different classes of beneficiaries. This duty … is paramount. They must, of course, obey the law; but subject to that, they must put the interest of their beneficiaries first. When the purpose of the trust is to provide financial benefits for the beneficiaries…the best interests of the beneficiaries are normally their best financial interests. and later: Trustees must do the best they can for the benefit of their beneficiaries and not merely avoid harming them.

466. In a later article the Vice Chancellor said that his judgment showed no “bold novelty of approach”: Megarry, Sir Robert, Investing Pension Funds: The Mineworkers Case, Equity, Fiduciaries and Trusts (T G Youdan (ed), Carswell, 1989) at 149-159.

467. Megarry V-C’s dictum has been affirmed on numerous occasions, although sometimes expressed as a separate duty and other times linked to other well established duties: see Martin v The City of Edinburgh District Council [1989] PENS. L. R. 9;Harries and Others v The Church Commissioners for England and Another [1993] 1 WLR 1241 at 1248; Edge v Pensions Ombudsman [2000] Ch 602; The Registrar of the Accident Compensation Tribunal v Commissioner of Taxation of the Commonwealth of Australia [1993] HCA 1; (1993) 178 CLR 145 at 182; Knudsen v Kara Kar Holdings Pty Ltd [2000] NSWSC 715 (“Knudsen v Kara Kar”) at [57]. In ASEA Brown Boveri Superannuation Fund No 1 Pty Ltd v ASEA Brown Boveri Pty Ltd [1999] 1 VR 144 at [58] and [65] its relationship to the duty of loyalty was emphasised. In Gra-Ham v Perpetual Trustees (1989)1 WAR 65 at 92 Pigeon J linked the best interests duty to the duty imposed on trustees to act fairly and in good faith. In Knudsen v Kara Kar at [60] the duty was linked to the duty to act for a proper purpose.

468. Under general law the best interests duty is a reference to a trustee’s duty to give undivided loyalty to the beneficiaries, which includes the duty to act in the interest of the beneficiaries, to avoid any conflict between the interests of the trustee and the interest of the beneficiaries, and to adhere to the terms of the trust. These are well established principles of the law of trusts: see Keech v Sandford [1726] EWHC J76; (1726) 25 ER 223; Re Whitely (1886) 33 Ch D 347; Bray v Ford [1896] AC 44; Boardman v Phipps [ 1967] 2 AC 46 ; Target Holdings Ltd v Redferns [1996] 1 AC 421 at 43-4343; Raby v Ridehalgh [1855] EngR 311; (1855) 44 ER 41 at 43.

469. Numerous learned commentators have taken the view that Megarry V-C’s dictum was a reference to a combination of established trustee’s duties. Writing in 1995, before his appointment to this Court, JRF Lehane said: It seems reasonably clear from what follows that Sir Robert Megarry, in speaking of a duty to act in the best interests of beneficiaries, had in mind a combination of the established duties (a) to have regard, in exercising fiduciary powers, to the interests of the beneficiaries and not to extraneous considerations, and (b) to act with reasonable care and prudence. : Lehane JRF, “Delegation of Trustees’ Powers and Current Developments in Investment Funds Management” (1995) 7 Bond L Rev 36 at 38.

470. Writing extra-curially in 2007, Justice Stone described the best interests duty as no more than a description of the duty of undivided loyalty, requiring trustees to act in their beneficiaries’ interests and avoid conflicts of interest. Her Honour was unconvinced the word “best” had much if anything to add in that context, and considered that it may create confusion by inviting focus on the outcomes of a trustee’s decision rather than on the making of such a decision: Stone M, “The Superannuation Trustee: Are Fiduciary Obligations and Standards Appropriate?” (2006-2007) 1 J Eq 167 at 172.

471. The duty of undivided loyalty is the fundamental duty of a trustee requiring it to solely pursue the members’ interests, to eschew conflicts of interest between the members’ interests and its own, and in the event of a conflict of interests to put the members’ interests first.

472. The duty of undivided loyalty also requires a trustee to “perform and adhere to the terms of the trust”: Ford and Lee, Vol 1 at [9.250]. This must be so. It could not be in the best interests of the beneficiaries for a trust to be managed or administered other than in accordance with its terms. As RP Meagher and WM Gummow explain in Jacobs Law of Trusts in Australia: The rule that the trustee must strictly conform to and carry out the terms of the trust modifies all other rules because these other rules are applied subject to any provisions contained in the trust instrument itself. : RP Meagher and WM Gummow Jacobs’ Law of Trusts in Australia (6th ed, Butterworths, 1997) at [1704] (“Jacobs”).

473. In Scott and Ascher on Trusts the authors describe the trustee’s duty of undivided loyalty as “the most fundamental duty of a trustee”: Scott, Fratcher and Ascher, Scott and Ascher on Trusts, (5th ed, Wolters Kluwer Law & Business, 2007) at 1077 (“Scott and Ascher on Trusts”). The learned authors go on to note (at 1079) that: The duty of loyalty is, then, the fruit of the courts’ efforts to regulate the behaviour of trustees when their duties as trustees require them to act in ways that may or do conflict with their own personal interests. In a nutshell, the duty of loyalty ordinarily requires trustees to avoid all transactions that involve self-dealing, as well as those that involve or might create a conflict between the trustee’s fiduciary and personal interests.

474. The best interests duty is also linked to a trustee’s duty to pursue only the trust’s purposes. As Lord Nicholls explained: To decide whether a proposed course is in the best interest of the beneficiaries it is necessary to decide first what is the purpose of the trust, and what benefits were intended to be received by the beneficiaries. Thus to define the trustee’s obligation in terms of acting in the best interest of the beneficiaries is to do nothing more than formulate in different words, a trustee’s obligation to promote the purpose for which the trust was created. : Lord Nicholls of Birkenhead, “Trustees and their Broader Community: Where Duty, Morality and Ethics Converge” (1996) 70 ALJ 205 at 211.

475. In 2008 Professor G Thomas described the duty to act in the best interests of beneficiaries as a compendium of the individual specific and well recognised duties of a trustee, and as “foundational” duty that underpins or an “umbrella” duty that shelters, these specific duties. He wrote: So, by way of summary, what can one say about the ‘best interests duty’? … • The duty demands of the trustees their best efforts in pursuit of the best possible end, outcome or result. There are the two elements of best outcomes and best efforts, of ends and means (or standards) – although, in judging both effort and outcome, what matters is the reasonableness of the trustee’s judgement at the time and in the then prevailing circumstances, and not what turns out to be the better outcome in retrospect. • It is essentially an ‘umbrella’ duty – one which embraces a large number of individual, well-recognised duties. A breach of the ‘best interests duty’ in relation to a trust (or company), once particularised, necessarily involves breach of one or more of these individual duties. … • For most practical purposes, the duty is indeed short-hand for the combination of the duty to act for the ‘benefit’ of the beneficiaries and the ‘proper purpose’ rule, but it is not always so. A trustee’s duties to act in good faith, to pursue a proper purpose only and to avoid conflicts of interest are generally distinguished from the ‘best interests duty’. There is an additional element here. True, it is difficult to pin down; but it seems to involve not just the pursuit of the best possible authorised end or outcome (as the trustee rationally conceives the matter) for the trust as a whole but also the observance of proper procedures and processes in decision making. … :see Thomas, Professor GT, “The Duty of Trustees to Act in the “Best Interests” of their Beneficiaries” (2008) 2 J Eq 177 at 202-203; See also Donald MS, “‘Best’ interests?” (2008) 2 J Eq 245 at 248; Mendoza-Jones D, “Superannuation Trustees: Governance, Best Interests, Conflicts of Interest and the Proposed Reforms” (2012) 30 C&SLJ 297 at 301. 476. Ford and Lee describe it as a duty which “marshalls” the trustee’s duty of loyalty to the service of the economic well-being of the trust fund, and as a general duty that complements the more specific obligations to act honestly and to exercise care, diligence and skill. 9.2.3 The meaning in other materials

477. Further assistance as to the content of the best interests duty may be obtained from the report of the Australian Law Reform Commission and the Companies and Securities Advisory Committee Collective Investments – Other People’s Money: Report No 65 (1993) (“ALRC 65”). The Managed Investments Act which introduced Part 5C into the Act was the Commonwealth Government’s response to ALRC 65: see Explanatory Memorandum, Managed Investments Bill 1997 (Cth) (“the Explanatory Memorandum”) at [1.1].

478. Paragraph 10.8 of ALRC 65 states: Duty to act in the interests of investors. Investors in collective investment schemes rely heavily on the operator to act in their best interests. Nevertheless, there will often be a potential for conflict between their interests and those of the operator. This may arise over the fees and charges payable to the operator or the use of scheme property for dealings with parties related to the operator. DP 53 proposed that the law should impose on operators a duty to avoid conflicts of interest. A number of submissions argued that this proposal was neither realistic nor desirable. Conflicts of interest between scheme operators and investors are inevitable. The Review has concluded that the appropriate formulation of the test is that operators must prefer the interests of investors over their own interests where any conflicts arise. The Review recommends that the Corporations Law should impose an obligation on the operator of a collective investment scheme to exercise its powers and perform its duties as operator in the best interests of investors rather than in its own, or anyone else’s, interest, if that interest is not identical to the interests of the scheme investors. This duty should be complemented by specific rules for related party transactions. (Citations omitted and emphasis added.)

479. This indicates that the provisions are directed at requiring compliance by an RE with the duty of undivided loyalty. Because the members rely heavily on the RE, and because there is a potential for conflict between the RE’s personal interests and those of the members (particularly in relation to the fees the RE may charge), the RE is expressly required to prefer the members’ interests over its own. Consistently with the Commission’s recommendation, the statutory duty is expressed without qualification and it mirrors the general law position. 9.2.4 The meaning in a similar statutory provision

480. Some assistance in construing the provisions may also be obtained from the expression of an analogous duty in another statute. Section 52 of the Superannuation Industry (Supervision) Act 1993 (Cth) (“SIS Act”) uses the same formulation of words in a trust context. It provides: (1) If the governing rules of a registrable superannuation entity do not contain covenants to the effect of the covenants set out in this section, those governing rules are taken to contain covenants to that effect. General covenants (2) The covenants referred to in subsection (1) are the following covenants by each trustee of the entity: … (c) to perform the trustee’s duties and exercise the trustee’s powers in the best interests of the beneficiaries; (Emphasis added.) 481. The SIS Act was introduced following the publication of the Australian Law Reform Commission’s Collective Investments: Superannuation, Report No 59 (1992). Paragraph 9.22 describes the best interests duty as one of the essential duties of an RE and states: Ford & Lee describe this duty as the duty which ‘marshalls’ the trustee’s duty of loyalty to the service of the economic wellbeing of the trust fund and of the personal welfare of the beneficiaries. This is a general duty that complements the more specific obligations to act honestly and to exercise care, diligence and skill. Underlying s 52(2)(c) of the SIS Act is a general duty to give undivided loyalty to the service of the economic wellbeing of the members, complementing other more specific obligations.

482. In Invensys Australia Superannuation Fund Pty Ltd v Austrac Investments Ltd and Others (2006) 15 VR 87 at [107] Byrne J considered the best interests duty in an earlier version of s 52(2)(c) of the SIS Act. His Honour described the duty as: … an amalgam of two distinct obligations said to be imposed by law upon trustees of a superannuation fund. The first, which is sometimes referred to as the duty of loyalty or the duty of fidelity to the trust, is that to act in the interests of the beneficiaries; that their interests are paramount and must certainly be placed ahead of the trustee’s own interests. Nor may the trustee have regard to considerations which are extraneous to the trust. The second is to pursue to the utmost with appropriate diligence and prudence the interests of the beneficiaries. (Citations omitted.) Byrne J treated the best interests duty as a combination of well-established more specific duties and did not suggest that it extended beyond any duty arising under general law. I respectfully agree with his Honour’s approach.

483. In Manglicmot v Commonwealth Bank Officers Superannuation Corporation Pty Ltd [2011] NSWCA 204; (2011) 282 ALR 167 at [121] in dealing with s 52(2)(c) of the SIS Act the New South Wales Court of Appeal per Giles JA, with whom Young and Whealey JJA agreed at [164]-[165], concluded that s 52(2)(c) did not materially extend the general law duty to act in the best interests of members. Jacobs Law of Trust in Australia also provides that s 52(2)(c) of the SIS Act corresponds with the general law: JD Heydon and MJ Leeming Jacobs’ Law of Trusts in Australia (7th ed, Butterworths, 2006), [2922]. 9.2.5 Conclusion

484. I conclude that the imposition of a duty to act in the best interests of the members in ss 601FC(1)(c) and 601FD(1)(c) does not extend its content beyond previously understood general law boundaries. I see the best interest duty as foundational and operating in combination with other duties. It encompasses the fundamental duty of undivided loyalty which in the present case required APCHL and the Directors to use their best efforts to pursue solely the members’ interests, to act honestly and to exercise care, competence and prudence in doing so, and to eschew any conflict of interests between the members’ interests and its own. If any conflict of interests arose they were required to prefer the interests of the members to APCHL’s own interests. The duty also required APCHL to adhere to the terms of the Constitution. 9.3 Is the enquiry subjective or objective

485. ASIC contended, and I accept, that the enquiry as to whether APCHL and the Directors have acted in the best interests of the members is an objective one.

486. In Hillsdown Holdings Plc v Pensions Ombudsman [1997] 1 All ER 862 (“Hillsdown Holdings”) Knox J accepted that the trustee had acted “perfectly honestly” in what it thought was the best interests of the members. His Honour disregarded this subjective evidence of best intention because he was satisfied that the trustee had intrinsically breached the trust and damaged the interests of members. I respectfully agree with his Honour’s approach.

487. In considering s 52(2)(c) of the SIS Act (and former reg 7.12.15(f)(i) of the Corporations Regulations on which s 52(2)(c) was based) Lehane concluded that a requirement to act in members’ best interests was not an obligation to act in a way which the trustee honestly considered to be in their interests, but an obligation to act in what are objectively their interests: Lehane at 37. The same view is taken by other commentators: see Donald at 253-4; Stone at 180; Mendoza-Jones at 301.

488. I do not though wish to be seen as accepting the proposition that to act in the members’ best interests a trustee must actually achieve the best outcome. A trustee is not required to be prescient: Re Chapman [1896] 2 Ch 763 at 778; De Bruyne v Equitable Life Assurance Society of the US [1990] USCA7 1116; 920 F.2d 457 (7th Cir. 1990) at 465; Nestle v National Westminster Bank Plc [1994] 1 WLR 1260 at 1282. 9.4 The test for breach of s 601FC(1)(c)

489. ASIC submitted, and I accept, that the test under the first limb of s 601FC(1)(c) for determining whether the passage of the Lodgement Resolution was in the best interests of the members is to ask: Was APCHL as RE of the Trust acting with undivided loyalty solely in the interests of the members?

490. ASIC also submitted, and I accept, that the test for determining whether APCHL satisfied the second limb of s 601FC(1)(c) is to ask: Was there a conflict between the interests of APCHL in being paid the additional fees and the interests of the members in paying only the existing fees? If so, has APCHL as RE of the Trust preferred the interests of the members to its own interests?