31 March 2006
1 The triennial actuarial valuation of the Invensys Australia Superannuation Fund ("the Fund") as at 30 June 2002 showed that the Fund had a substantial surplus of assets over vested benefits. This surplus was of the order of $89.2M. The ratio of assets to vested benefits was 3.22. The audited financial statements of the Fund as at 30 June 2005 show a surplus of $93.6M and the ratio 2.56. The Trustee of the Fund has been advised by the Fund Actuary and by its lawyers that it should take steps to reduce the surplus to a size more appropriate to achieve the objects of the Fund and it has accepted this advice. It proposes to distribute some $85.8M of that surplus, $36M to members and $49.8M to the company, leaving a surplus of $7.8M and a ratio of 1.13. The Trustee approaches the Court seeking its advice as to legal aspects of this proposal and its implementation.
2 The history of the Fund and the background to the proposal is complicated. It is set out in a series of affidavits sworn by Stanley Graeme Belcher, the Acting Chairman of Directors of the Trustee, and by Craig Michael Tenace, its then Fund Secretary. The summary which follows is the briefest outline of such of those matters as appear to be most significant for my purposes.
THE FUND
3 As its name suggests, the Fund is a superannuation fund; it is a regulated superannuation fund within the meaning of s. 19 of the Superannuation Industry (Supervision) Act 1993 ("SIS Act").
4 The Fund was first established as a managed fund insurance policy by a proposal dated 15 December 1964 with the National Mutual Life Association of Australasia Ltd. It was held by Apex Belting Pty Ltd as an indefinitely continuing fund for the purpose of providing superannuation benefits for individuals specified within its terms. In general terms, these individuals were employees of Apex Belting and, perhaps, associated companies. In 1981 Apex Belting changed its name to BTR Properties Pty Ltd and transferred its business and employment contracts to another company within the BTR Group. Sometime in the 1980s, BTRA Nominees Pty Ltd became the proposer under the policy, acting as a corporate trustee and custodian for several Australian superannuation funds in the BTR Group.
5 In 1989 the Fund was converted into a superannuation trust and a Trust Deed dated 10 May 1989 was executed with BTRA Nominees as Trustee of the Fund. In order to satisfy the requirements of the SIS Act, the plaintiff was appointed in 1995 as Trustee. At this time the plaintiff was called BTR Nylex Superannuation Fund Pty Ltd. In September 1998 its name was changed to BTR Australia Superannuation Fund Pty Ltd. Finally, when, in February 1999, the UK parent, BTR plc, merged with Siebe plc it became known as Invensys plc. In due course, many of its Australian subsidiaries took on the name Invensys and, in June 2000, the plaintiff became Invensys Australia Superannuation Fund Pty Ltd.
6 By cl. 2 of the Trust Deed the Trustee holds the Fund[1] "upon the terms and conditions and subject to the trusts powers authorities and discretions contained in the Trust Deed". An object of the Fund was and is to pay benefits to the members of the Fund. A member is defined in cl. 1 as an employee who has been accepted by the Trustee as a member and who remains a member at the time of determination. Given the definitions of employee and employer in cl. 1, a person who is employed by any of a number of employers which participate in the Fund may become a member, subject to certain qualifications. A member continues to be a member until the Trustee's liability to pay benefits to them is discharged[2] or until transfer of the member to another superannuation fund.[3] For present purposes, this means that a person may remain a member notwithstanding that they are no longer an employee of a participating employer. The Trust Deed contemplates the payment of benefits calculated on different bases: by reference to the salary of the member, and by reference to the accumulated contributions of the member. Those members whose entitlement is calculated by reference to salary were referred to as Defined Benefit Members and those whose entitlement is calculated by reference to their contributions, as Accumulation Members. Some members are both Defined Benefit Members and Accumulation Members. There is also another small group of members whose entitlement is to receive a dollar amount described in the Trust Deed.
7 The position of the Fund is considerably complicated by reason of the fact that the BTR Nylex Group undertook in the 1980s and the 1990s a program of expansion and diversification. This involved the acquisition of a number of businesses and companies which brought into the BTR Nylex Group their employees and often their own superannuation funds. In certain cases, these employees joined the Fund and the assets of their superannuation funds were added to the assets of the Fund. In all, some 30 stand-alone funds came into the BTR Nylex Group and some 20 funds were transferred into the Fund.
8 In 1997 and 1998, BTR Nylex commenced a divestment program which involved selling off certain businesses and companies. This had the consequence of removing from the membership of the Fund those employees who ceased to be employed within the BTR Nylex Group as the companies or businesses which employed them were divested. A further consequence was that assets of the Fund were transferred out to the fund of the divested company or business or, perhaps, to that of a purchaser of the company or business, in order to protect the entitlements of those departing employees.
9 An incidental consequence of these programs of acquisition and divestment was that some of the incoming funds had surpluses of assets over vested entitlements. Upon divestment, the assets transferred out of the Fund with the departing members were of an amount sufficient to protect their entitlements under their own fund. This meant that the surplus which came with them into the Fund remained with the Fund. Until the year 1996-7 this surplus was not regarded as significant. In that year, however, the transfer of some members into the Fund, together with an unusually good investment return, meant that the net assets of the Fund increased from $170.4M to $293.3M in that year, laying the foundation for the present surplus in the Fund. The surplus in that year of $68.2M was seen by the Trustee as significant and from 1998 it increased following transfers in and out of the Fund until it reached $93.6M in 2005.
10 Members make contributions to the Fund by deduction from their salary of an agreed portion of salary. A participating employer is required by cl. 2 of the First Schedule of the Trust Deed to make contributions, expressed as a percentage of the salaries of all members or another amount, the amount of which contribution is that recommended by the Fund Actuary.
11 Because the Fund has enjoyed a substantial surplus, participating employers have not, since August 1993, been required to make contributions. This was referred to before me as "a contributions holiday". This holiday is likely to continue until the surplus falls to a point where the Fund Actuary, having formed the opinion that the Fund assets are or are likely to be insufficient, recommends that the employers resume contributions pursuant to cl. 2 of the first schedule. The employers have not been the only beneficiaries of the surplus: the Fund itself has, since January 2002, borne the 15% contributions tax in respect of employer or salary sacrifice contributions for members and has also, in most situations, borne the employees' burden of the superannuation contributions surcharge tax.[4] Those members, too, who were Defined Benefit Members as at 1 July 2003 have received further benefits as from July 2002, but it is not necessary that I detail these.[5]
12 The assets in the Fund, therefore, represent the result of contributions by members, contributions by participating employers, investment returns on the Fund assets and other sums such as those generated by the acquisition and divestment of businesses and companies, as I have mentioned.
13 A further consequence of the introduction into the Fund of the superannuation funds of companies and businesses acquired during the BTR Nylex expansion program is that the rights of members of those funds who became members of the Fund had to be preserved. This has led by numerous variations to the Trust Deed and to the creation of some 35 different classes of members, which classes are identified by their origin and have differing rights under the Trust Deed. As will be seen, these class rights are protected by the imposition of various limits upon the power to vary the Trust Deed insofar as it affects those classes of members.
14 Finally, I make mention of the participating employers. The Trust Deed uses the expression "the Company". This is defined as the Principal Company, together with any company associated with it and any other company which has agreed to participate in the Fund and to make contributions in respect of any member. "Employer" is defined as employer which has adopted the plan or is admitted into the plan. Employment by one such employer is a pre-condition to membership in the Fund. As counsel for the Trustee put it in their outline, "The Fund exists to provide superannuation benefits to employees of participating current and former employer companies within the Invensys Group of companies". The Principal Company is identified in cl. 22C of the Trust Deed as Austrac Investments Ltd, the firstnamed defendant. This party is said by Mr Belcher to have been in 1998 a direct subsidiary of BTR Australia Ltd and the holding company for the retained companies of BTR Nylex Ltd which were not included in the disposals of the packing and building products group.
THE PROPOSAL
15 In mid-2003 the Invensys Group management formed the view that the surplus assets in the Fund should be distributed and they set in train investigations with a view to achieving this. On 16 July 2003, the solicitors for Austrac sent to the solicitors for the Trustee a proposal for the repatriation of the surplus. This was the subject of some discussion and, on 23 October 2003 Invensys Australia Ltd on behalf of Austrac submitted to the Trustee a proposal for its distribution. This proposal was not acceptable to the Trustee but it determined to prepare its own proposal to effect a distribution of the surplus. This involved the obtaining of legal, actuarial and tax advice and a consideration of these matters by the board as a part of the process of formulating its own proposal. The Trustee's proposal was also submitted to Invensys Australia Ltd which ultimately agreed to support it. This process and the evolvement and development of the Trustee's proposal is described in Mr Belcher's affidavit of 23 February 2005 and in the affidavit of Paul Bernard Curtis, a director of Austrac, sworn 29 April 2005.
16 The Trustee's proposal is to distribute the surplus in the manner indicated above: broadly speaking, by paying about $49.8M to Austrac Investments Limited and by the setting aside of about $36M which is to be dealt with in due course as part of the members' final entitlements as a bonus benefit equal to 70% of the members' entitlements at 30 June 2003. I should add that the proposal, in its detail, is somewhat more complicated than this. For example, it was necessary to set out with some particularity in the proposal the precise entitlement upon which the bonus benefit is to be calculated. Furthermore, the bonus benefit is to be by way of fully vested allocation in a surplus distribution account held by the Trustee in the name of the member which, together with interest, will be paid to the member upon entitlement to the basic benefit under the Trust Deed. There is too a cap of $200,000 upon the allocation to any member.
17 It is not necessary that I descend further into detail of the proposal except for one matter. In its formulation in late 2003 it was necessary to fix a cut-off date: that is, a date upon which those persons who were then members were entitled to an allocation of the surplus. Those persons who ceased to be members before that date would take no share. The proposal also speaks of the scheme date: that is, the date upon which the scheme contained in the proposal comes into effect. This date is defined in the proposal to be the last moment on Sunday 30 April 2006. Those persons who became members after the scheme date are, likewise, ineligible to take a share. The Fund Actuary recommended that the cut-off date be 30 June 2003. This date was selected for a number of reasons. First, it was about this time that some of the directors of the Trustee became aware of facts which led to the proposal and that the Trustee commenced formulating the proposal. Second, there were a number of members who had left the Fund on 30 June 2003, a significant number who had left between that date and October 2003 and a large number of members who, as employees of Global Transmissions Pty Ltd, were retrenched in that period. It was thought fair to include all of these departing members. Third, it was an administratively convenient date since 30 June 2003 was an annual review date for the Fund and a date as at which membership listings were readily available. Accordingly, the Trustee incorporated this cut-off date in its proposal.
18 Since an employee who left the employ of a participating employer remained a member until all entitlements were paid, this meant that even persons who were no longer employees on the cut-off date might share in the surplus where their entitlements had not been paid in full on the cut-off date.
19 Since the commencement of this proceeding there have been modifications to the proposal. One such modification was the introduction of a provision whereby the allocation was to carry interest from 1 July 2005. This, I was told, was because of delays in bringing the matter before the Court. The current proposal and the one which I am to consider is that which is exhibit SGB7 to the affidavit of Mr Belcher sworn on 30 March 2006. It is proposed that this be achieved by making a variation to the Trust Deed pursuant to cl. 20.
20 Clause 20 is in the following terms: