Administrative Appeals Tribunal Act 1975 ss 27, 28, 33, 34, 37, 39 and 43

Air Navigation Regulations 1947

Australian Prudential Regulation Authority Act 1998 ss 7, 8, 9, 11, 15, 16, 45, 46 and 47

Civil Aviation Act 1988

Corporate Law Economic Reform Program Act 1999

Corporations Act ss 179, 180, 189, 198D, 1317E, 1317G, 1317J and 1318

Customs (Prohibited Imports) Regulations 1956

Evidence Act 1995 s 4

Income Tax Assessment Act 1936 s 80A

Insurance Contracts Act 1984

Judiciary Act 1903 s 55ZF

Safety, Rehabilitation and Compensation Act 1988 s 62

Superannuation Industry (Supervision) Act 1993 ss 3, 10, 16, 19, 31, 34, 52, 55, 58, 59, 86, 93, 89, 93, 115, 120, 120A, 121, 126, 126A, 126B, 126D, 126E, 129, 130, 344 and 262A

Superannuation Industry Supervision Regulations rr. 1.03, 2.15, 2.22 to 2.25, 2.35, 2.36, 2.40, 2.41, 4.03, 4.04, 5.01, 5.01A, 5.03, 9.04, 9.06, 9.08, 9.09, 9.10, 9.15, 9.29, 9.30, 9.3 and 13.16

Trustee Act 1958 (Vic) s 28

Adler v Australian Securities and Investments Commission [2003] NSWCA 131; (2003) 179 FLR 1

Aerolink Air Services Pty Ltd v Civil Aviation Safety Authority [2003] AATA 1357

Alexandra Private Geriatric Hospital v Blewett (1984) 2 FCR 368; 56 ALR 265

Attorney-General v Breckler [1999] HCA 28; (1999) 197 CLR 83; 163 ALR 576

Austin v Austin [1906] HCA 5; (1906) 3 CLR 516

Australian Broadcasting Tribunal v Bond and Others [1990] HCA 33; (1990) 94 ALR 11

Australian Gaslight Co v Valuer-General: (1940) 40 SR (NSW) 126

Australian Securities and Investments Commission v Parker (2003) 21 ACLC 888, [2003] FCA 262

Australian Securities and Investments Commission v Pegasus [2002] NSWSC 310; (2002) 41 ACSR 561

Australian Securities Commission v AS Nominees Ltd & others [1995] FCA 1663; (1995) 62 FCR 504; 133 ALR 1

Australian Securities Commission v AS Nominees Ltd & others [1995] FCA 1663; (1995) 62 FCR 504

Australian Securities Commission v Donovan (1998) 28 ACSR 583

Australian Securities Commission v Gallagher (1993) 11 ACLC 286

Bartlett v Barclays Bank Co Ltd [1980] Ch 515

Blount Inc v Registrar of Trade Marks [1998] FCA 440; (1998) 83 FCR 50

Boland v Yates Property Corporation Pty Ltd [1999] HCA 64; (1999) 74 ALJR 209; 167 ALR 575

Bond v Barrow Haematite Steel Co [1902] 1 Ch 353

Bray v Ford [1896] AC 44

Burrows v Walls [1855] EngR 294; [1855] 5 De GM & G 233; 3 ER 859

Casarotto v Australian Postal Commission [1989] FCA 116; (1989) 86 ALR 399; 17 ALD 321

Centofanti v Eekimitor Pty Ltd [1995] SASC 4924; (1995) 65 SASR 31; 15 ACSR 629

Charlton v Baber [2003] NSWSC 745; (2003) 47 ACSR 31

CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384; 141 ALR 618

Civiti and Secretary, Tax Agents' Board of Victoria (1990) 90 ATC 2039

Clark v Ryan [1960] HCA 42; (1960) 103 CLR 486

Commissioner of Taxation v Murray [1990] FCA 69; (1990) 21 FCR 436; 92 ALR 671

Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115

Cooper Brookes (Wollongong) Pty Ltd v Commissioner of Taxation [1981] HCA 26; (1981) 147 CLR 297; 35 ALR 151

Cowan v Scargill [1985] 1 Ch D 270

Craig v Federal Commissioner of Taxation [1945] HCA 1; (1945) 70 CLR 441

Daniels v Anderson (1995) 37 NSWLR 438

Davies v Australian Securities Commission [1995] FCA 1496; (1995) 59 FCR 221; 131 ALR 295

Drake v Minister for Immigration and Ethnic Affairs (1979) 24 ALR 577; 2 ALD 60

Duke Group Ltd (in liq) v Pilmer (No 5) [2003] SASC 381; (2003) 87 SASR 325

Edge v Pensions Ombudsman [1998] Ch 512

Epeabaka v Minister for Immigration and Multicultural Affairs (1997) 150 ALR 397; 47 ALD 555

Esso Australia Ltd v Australian Petroleum Agents' & Distributors' Association [1999] 3 VR 642

Fearnley and Australian Fisheries Management Authority (2005) 87 ALD 159; 41 AAR 384; [2005] AATA 147

Federal Commissioner of Taxation v Linter Textiles Australia Ltd (in liq) [2005] HCA 20; (2005) 220 CLR 542; 215 ALR 1

Federal Commissioner of Taxation v Stone (2005) 215 ALR 61

Fouche v Superannuation Fund Board [1952] HCA 1; (1952) 88 CLR 609

Gold Ribbon (Accountants) P/L v Sheers and Ors [2005] QSC 198

Golosky and Anor v Golosky unreported, NSW Court of Appeal, 5 October 1993

Heydon and Ors v NRMA Ltd and Ors [2000] NSWCA 374

HG v The Queen [1999] HCA 2; (1999) 197 CLR 414; 160 ALR 554

HR Products Pty Ltd v Collector of Customs [1990] FCA 152; (1990) 20 ALD 340

Hughes and Vale Pty Ltd and Anor v State of New South Wales and Ors [No.2] [1955] HCA 28; (1955) 93 CLR 127

Hurley v BGH Nominees Pty Ltd (1982) 1 ACLC 387

In re Drexel Burnham Lambert UK Pension Plan [1995] 1 WLR 32

In re Whiteley; Whiteley v Learoyd (1886) 33 Ch D 347

In the matter of Estate of Hancock (dec); Porteous v Rinehart (as executor and trustee of the estate of Hancock) (1998) 19 WAR 495

Inland Revenue Commissioners v National Federation of Self Employed and Small Business Ltd [1981] UKHL 2; [1982] AC 617

K & S Lake City Freighters Pty Ltd v Gordon & Gotch Ltd [1985] HCA 48; (1985) 157 CLR 309

Karger v Paul [1984] VicRp 13; [1984] VR 161

Kelso v Forward [1995] FCA 1584; (1995) 60 FCR 39

King v Talbot 40 NY 76 (1869)

Kioa v West (1985) 59 CLR 550

Martin v Martin [1988] 1 NZLR 722

McDonald v Director-General of Social Security [1984] FCA 57; (1984) 1 FCR 354; 6 ALD 6

McMillan v McMillan [1891] VicLawRp 10; (1891) 17 VLR 33

Melbourne Steamship Co Ltd v Moorehead [1912] HCA 69; (1912) 15 CLR 333

Minister for Health v Thomson [1985] FCA 208; (1985) 98 FCR 213; 60 ALR 701

Minister for Immigration and Multicultural Affairs v Bhardwaj (2002) 209 CLR 597

Minister for Immigration and Multicultural Affairs v Wang (2003) 215 CLR 518; 196 ALR 385; 72 ALD 577

Minister for Immigration and Multicultural Affairs v Yusuf [2001] HCA 30; (2001) 206 CLR 323; 180 ALR 1; 62 ALD 225

Minister for Immigration and Multicultural and Indigenous Affairs v Watson [2005] FCAFC 181; (2005) 145 FCR 542

Minister for Immigration and Multicultural and Indigenous Affairs v SZAYW [2005] FCAFC 154

Mobil Oil Australia Pty Ltd v Federal Commissioner of Taxation [1963] HCA 41; (1963) 113 CLR 475

Murphy v R [1989] HCA 28; (1989) 167 CLR 94

Pepsi Seven-Up Bottlers v Commissioner of Taxation (1995) 62 FCR 289; 95 ATC 4746; 132 ALR 632

Percival v Wright [1902] 2 Ch 421

Permanent Building Society (in liq) v McGee (1993) 11 ACSR 260

Phipps v Boardman [1966] UKHL 2; [1967] 2 AC 46

Pikos Holdings (Northern Territory) Pty Ltd v Territory Homes Pty Ltd [1997] NTSC 30

Pochi v Minister for Immigration and Ethnic Affairs [1979] AATA 64; (1979) 36 FLR 482

Preuss and Australian Prudential Regulation Authority [2005] AATA 748

Prince Ernest Augustus of Hanover [1957] AC 436

Princess Ann of Hesse v Field and Ors (1962) 80 WN (NSW) 66

R v Bonython (1984) 38 SASR 45

R v J (1994) 75 A Crim R 522 (Vic CCA)

R v Toohey; Ex parte Meneling Station Pty Ltd [1982] HCA 69; (1982) 158 CLR 327; 44 ALR 63

Rana v Military Rehabilitation and Compensation Commission [2005] FCA 6

Rankine v Rankine [1998] QSC 48

Rathbone v Abel (1964) 38 ALJR 293

Re Becker and Minister for Immigration and Ethnic Affairs [1977] AATA 12; (1977) 1 ALD 158; 15 ALR 696

Re Beloved Wilkes' Charity [1851] EngR 375; (1851) 3 Mac & G 440; 42 ER 330

Re Charteris [1917] 2 Ch 379

Re Dowling and Secretary to Department of Health (1985) 8 ALD 171

Re HIH Insurance Ltd (in liq) & Australian Securities and Investments Commission v Adler [2002] NSWSC 483; [2002] 42 ACSR 80

Re Londonderry's Settlement [1964] EWCA Civ 6; [1965] Ch 918; [1964] 3 All ER 855

Re Payne and Comcare (1997) 48 ALD 733

Re Preston [1985] AC 385

Re Slater and Cox [1988] AATA 110; (1988) 15 ALD 20

Re Taylor and Department of Transport (1978) 1 ALD 312

Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134

Rich v Australian Securities and Investments Commission [2004] HCA 42; (2004) 209 ALR 271

Russell v Duke of Norfolk [1949] 1 All ER 109

Sargeant v National Westminster Bank Plc (1990) 61 P & CR 518

Scott v Handley [1999] FCA 404; (1999) 58 ALD 373

Secretary, Department of Social Security v Willee [1990] FCA 221; (1990) 96 ALR 211; 20 ALD 557

Shell Pensions Trust Ltd v Pell Rrischmann & Partners [1986] 2 All ER 911 (QBD)

Singer v Berghouse [1994] HCA 40; (1994) 181 CLR 201; 123 ALR 481; 68 ALJR 653

Smith v Langford [1840] EngR 478; (1844) 2 Beav 362; 48 ER 1221

Speight v Gaunt (1883) 9 App Cas 1

Stasos v Tax Agents' Board [1990] FCA 379; (1990) 21 ALD 437

Sullivan v Department of Transport (1978) 20 ALR 323

Tanti v Carlson [1948] VicLawRp 70; [1948] VLR 401

TCN Channel Nine Pty Ltd v Australian Mutual Provident Society [1982] FCA 169; (1982) 42 ALR 496

The Commonwealth v Muratore [1978] HCA 47; (1978) 141 CLR 296; 22 ALR 176

Theo v Secretary, Department of Family and Community Services [2006] FCA 279

Trade Practices Commission v Arnotts (No 5) (1990) 21 FCR 324; 92 ALR 527

Turner v Corney [1841] EngR 1192; (1841) 5 Beav 515

Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd [1998] HCA 38; (1992) 192 CLR 603; 154 ALR 361

Vision Super Pty Ltd v Poulter [2006] FCA 849

Vrisakis v Australian Securities Commission [1993] 9 WAR

Wacando v Commonwealth of Australia and State of Queensland [1981] HCA 60; (1981) 148 CLR 1; 37 ALR 317

Waimond Pty Ltd v Byrne (1989) 18 NSWLR 642

Water Administration Ministerial Corporation v Jones [2005] NSWCA 181; (2005) 139 LGERA 198 (NWSCA)

Webster v McIntosh [1980] FCA 128; (1980) 32 ALR 603

Whitten v Falkiner [1915] HCA 38; (1915) 20 CLR 118

Wilkinson v Clerical Administrative and Related Employees Superannuation Pty Ltd [1998] FCA 51; (1997) 79 FCR 469; 152 ALR 332

Wilson v Minister for Aboriginal and Torres Strait Islander Affairs [1996] HCA 18; (1996) 189 CLR 1

Woolworths Ltd v Kelly (1991) 22 NSWLR 189

Yager v R [1977] HCA 10; (1977) 13 ALR 247

DECISION AND REASONS FOR DECISION [2006] AATA 710

1. sets aside the decisions of the respondent dated:

(1) 3 August 2005 and confirming a decision of its delegate dated 9 June 2005 in respect of VBN;

(2) 7 October 2005 and confirming a decision of its delegate dated 5 August 2005 in respect of VBO;

(3) 7 October 2005 and confirming a decision of its delegate dated 9 August 2005 in respect of VBP;

(4) 7 October 2005 and confirming a decision of its delegate dated 9 August 2005 in respect of VBQ;

(5) 7 October 2005 and confirming a decision of its delegate dated 12 August 2005 in respect of VBR;

(6) 2 September 2005 and confirming a decision of its delegate dated 5 July 2005 in respect of VBV; and

(7) 13 September 2005 and confirming a decision of its delegate dated 22 July 2005 in respect of VBW.

The Australian Prudential Regulation Authority (APRA) decided that the Trustee of a superannuation fund (Trustee) had contravened the Superannuation Industry (Supervision) Act 1993 (SIS Act).[1] It went on to decide to disqualify seven of the nine people who had been directors of the Trustee at the time of one or more of the contraventions under s 120A(2). With regard to all seven of the directors, it did so under s 120A(2) on the basis that the nature or seriousness of the Trustee's contraventions provided grounds for their disqualification. We have decided that the Trustee had not contravened the SIS Act. That means that, with regard to all seven of the directors, there is no power to disqualify them under s 120A(2) and we have set aside each of APRA's decisions on that basis. That is an end of the matter so far as five of the seven directors, VBO, VBP, VBQ, VBR and VBV, are concerned. With regard to the remaining two, VBW and VBN, APRA also based its decisions on their not being fit and proper persons to be responsible officers of body corporate that is a trustee. We have decided that APRA's decisions on this basis should also be set aside. The effect of our setting aside all of APRA's decisions is that none of the applicants is a disqualified person within the meaning of the SIS Act.

2. On the view that we have taken of the case, there are two main issues in this case. The first relates to the Trustee. Has it contravened the covenants in s 52(2)(b), (c) and (g) of the SIS Act? This raises the following sub-issue:

· what is the scope of the covenants - are they restatements of the common law giving APRA, and so the Tribunal, no greater power to consider their breach than enjoyed by a court?

3. The second main issue relates to VBN and VBW. Should they be disqualified under s 120A(3). The sub-issues are:

· what is meant by the expression "fit and proper"?

· did VBN and VBW, or either of them, have a conflict of the duties they owed to the Employer and those they owed as Directors of the Trustee?

4. As well as the two main issues, there were also a number of what we would call satellite issues. These included:

· if APRA did not confine itself to the matters raised in its Statements of Facts and Contentions lodged on 3 October 1995 or in its opening, should it be permitted to raise new matters during the course of the hearing?

· did APRA act in accordance with the model litigant policy?

· if APRA did not, is it required to act in accordance with the model litigant policy and, if so, what are the consequences of its not doing so?

"... make provision for the prudent management of certain superannuation funds, approved deposit funds and pooled superannuation trusts and for their supervision by APRA, ASIC and the Commissioner of Taxation."[2]

Together, these entities are referred to as "superannuation entities"[3]. The foundation of the Commonwealth's power to regulate these matters lies in its powers with respect to corporations or pensions. Those funds and trusts that come within the terms of the SIS Act[4] and comply with it may be eligible for concessional taxation treatment.[5]

6. We are concerned only with a regulated superannuation fund. In summary, a "regulated superannuation fund" is a superannuation fund which has a trustee, is either a constitutional corporation[6] or has as its sole or primary purpose the provision of old-age pensions and has elected that the SIS Act apply in relation to the fund.[7] A "superannuation fund" means a fund that is either an indefinitely continuing fund and is a provident, benefit, superannuation or retirement fund or a public sector superannuation fund.[8] The Fund is also an employer-sponsored fund because it is a regulated superannuation fund and has at least one employer-sponsor[9] as well as a standard employer-sponsored fund.[10]

Equal representation of employer and member representatives

7. Part 9 of the SIS Act sets out rules about representation of employers and members in relation to the management and control of standard employer-sponsored funds.[11] As the Fund is not a public offer superannuation fund and has more than 49 members, it must comply with what are called the "basic equal representation rules."[12] Section 89(1) provides that a fund complies with the "basic equal representation rules" if:

(i) the fund has a group of 2 or more individual trustees;

(ii) the group of trustees consists of equal numbers of employer representatives and member representatives; or

(b) both:

• (i) the fund has a single corporate trustee;

• (ii) the board of the corporate trustee consists of equal numbers of employer-representatives and member representatives."

"... in relation to a group of trustees of a fund, a policy committee of a fund or the board of directors of a corporate trustee of a fund, means a member of the group, committee or board, as the case may be, nominated by:

(a) the employer or employers of the members of the fund; or

(b) an organisation representing the interests of that employer or those employers."[13]

"... in relation to a group of trustees of a fund, a policy committee of a fund or the board of directors of a corporate trustee of a fund, means a member of the group, committee or board, as the case may be, nominated by:

(a) the members of the fund; or

(b) a trade union, or other organisation, representing the interests of those members."[14]

Standards of operation of a regulated superannuation fund

8. Part 3 of the SIS Act provides a system of prescribed standards applicable to the operation of superannuation entities. In so far as a regulated superannuation fund is concerned, regulations may prescribe standards for their operation (prescribed standards).[15] Examples of the matters that may be prescribed are set out in s 31(2). These matters include the actuarial standards that will apply to funds,[16] the level of benefits that may be provided by funds and the levels of assets that a fund may hold,[17] the financial and actuarial reports to be prepared in relation to funds,[18] the disclosure of information to beneficiaries in funds[19] and the financial position of funds.[20] The trustee of a superannuation entity must ensure that the prescribed standards applicable to the operation of the entity are complied with at all times.[21] A trustee of a superannuation entity must ensure that the prescribed standards applicable to the entity are complied with.[22] A person who does not comply with that obligation, is guilty of an offence[23] but a contravention of the obligation does not affect the validity of the transaction.[24]

Prescribed standards in relation to accrued benefits

9. Regulation 13.16 of the Superannuation Industry Supervision Regulations (Regulations) provides that, subject to qualifications that are not relevant in this case:

"... a beneficiary's right or claim to accrued benefits, and the amount of those accrued benefits, must not be altered adversely to the beneficiary by amendment of the governing rules of by any other act carried out, or consented to, by the trustee of the fund."

Prescribed standards in relation to financial management

10. Part 9 of the Regulations is concerned with the financial management of funds. Regulation 9.08 requires an employer-sponsor, in respect of each year of income of the fund, to pay contributions to the fund in an amount "not less than the certified minimum contributions relating to the fund". The "certified minimum contributions" are defined in r 9.06 to mean "the minimum contributions certified, in accordance with subreg 9.10(1) or 9.18, in a funding and solvency certificate." An actuary must provide a funding and solvency certificate.[25] In addition to other matters required by the Regulations, the actuary must certify in that certificate the solvency of the fund[26] together with:

"...the minimum contributions reasonably expected by the actuary to be required in respect of any member or class of members to secure the solvency of the fund on the expiry date of the certificate ..."[27]

11. The "solvency of the fund" "...is to be read as a reference to the minimum benefit index of the fund being certified in accordance with this Division [9.3] as not less than 1."[28] A reference to a "technical insolvency of the fund" "... is to be read as a reference to the minimum benefit index of the fund not being able to be certified in accordance with this Division [9.3] as not less than 1."[29] The "minimum benefit index" (MBI) in relation to a defined benefit fund means the index calculated in accordance with r 9.15. The MBI is calculated by reference to the formula:

"NRV" means "... the net realisable value of the assets of the fund";

"BEF" means "... the value of the benefit entitlements of former members of the fund"; and

"FMRB" means the "funded minimum requisite benefit" and, in relation to a defined benefit fund, means "... the amount that is the sum of:

(a) the value of the pre-initial date component of the MRB multiplied by the adjusted minimum benefit index; and

(b) the value of the post-initial date component of the MRB"[30]

The "MRB" referred to in the definition of "FMRB" means "... the total amount of the minimum requisite benefits (including any amount that would be payable out of those benefits to the member's spouse or former spouse under a payment split) of all current members of the fund".[31]

Prescribed standards in relation to the disclosure of information to fund beneficiaries

12. At all relevant times, Divisions 2.3 to 2.7 of the Regulations set out the Trustees' obligations to provide information.[32] Among the prescribed standards that a trustee must meet are the requirements that it:

• provide new members and existing members all information that it reasonably believes those members would reasonably need for the purpose of understanding the main features of the relevant fund or plan, its management and financial condition and its investment performance;[33] and
• at the end of each reporting period, provide existing members with information such as the amount of their contributions, roll-overs and withdrawals during that period, the amount of any fees, charges and other expenses deducted and employer contributions and investment earnings allotted, the amount of members' withdrawal benefit at the start and end of the reporting period and the amount payable in the event of members' dying or being disabled.[34]

13. Division 2.5 of the Regulations as it then applied, was entitled "Information concerning significant events". Regulation 2.35 set out the general requirement that:

"The trustee of a fund must give information to a member concerning any event in relation to the fund that the trustee reasonably believes the member would reasonably be expected to be informed of."

Regulation 2.36 was entitled "Specific requirements" and provided:

"(1) If the governing rules of a fund are changed or, because of any other act carried out, or consented to, by the trustee, a change occurs in relation to a fund and the change is of a kind stated in subregulation (2), the trustee of the fund must give information concerning the change to each member affected by the change.

(a) have an adverse effect on a member's right or claim to accrued benefits or the amount of those benefits; or

(b) have an adverse effect on the benefits to which a member may become entitled; or

(c) have an adverse effect for the member on the circumstances in which those benefits would become payable; or

(d) have an adverse effect for the member on the manner in which those benefits would be worked out; or

(e) have an adverse effect on the security of the member's benefits."

The covenants in the governing rules of a superannuation entity

14. As a regulated superannuation fund, the Fund is a "superannuation entity".[35] The content of the governing rules of a superannuation entity are the subject of Part 6 of the SIS Act. Section 52(2) sets out a number of covenants. If the governing rules of a superannuation entity do not contain covenants to the same effect, its governing rules are taken to contain them.[36] Among the covenants set out in s 52(2) are:

(a) to act honestly in all matters concerning the entity;

(b) to exercise, in relation to all matters affecting the entity, the same degree of care, skill and diligence as an ordinary prudent person would exercise in dealing with property of another for whom the person felt morally bound to provide;

(c) to ensure that the trustee's duties and powers are performed and exercised in the best interests of the beneficiaries;

(g) if there are any reserves of the entity - to formulate and to give effect to a strategy for their prudential management, consistent with the entity's investment strategy and its capacity to discharge its liabilities (whether actual or contingent) as and when they fall due;

The regulations may prescribe a covenant to be included in the governing rules of a superannuation entity.[37] Without limiting their generality, the regulations may prescribe a covenant that elaborates, supplements or otherwise deals with any aspect of a matter to which a covenant in s 52(2) relates to a matter to which a provision of the SIS Act relates.[38]

"A covenant by a corporate trustee[[39]] of a superannuation entity that is to the effect of a covenant referred to in subsection (2), or to the effect of a covenant prescribed by regulations referred to in subsection (5), also operates as a covenant by each of the directors of the trustee to exercise a reasonable degree of care and diligence for the purposes of ensuring that the trustee carries out the first-mentioned covenant, and so operates as if the directors were parties to the governing rules."

The reference in this provision to "a reasonable degree of care and diligence" is:

"... a reference to the degree of care and diligence that a reasonable person in the position of director of the trustee would exercise in the trustee's circumstances."[40]

16. Although a person must not contravene a covenant,[41] contravention is not an offence and does not result in the invalidity of an inaction.[42] This does not mean that a person is without remedy after suffering loss or damage as a result of the conduct of a person in contravention of a covenant. Such a person may recover the amount of the loss or damage by action against any person involved in the contravention.[43] Defences to such an action are set out in ss 55(5) and (6).

17. Subject only to the qualifications in s 58(2) of the SIS Act, the governing rules of a superannuation entity such as the Fund "... must not permit the trustee to be subject, in the exercise of any of the trustee's powers under those rules, to direction by any other person."[44] To the extent that the governing rules of a superannuation fund provide otherwise, they are invalid.[45] The qualifications permit a direction to be given to a trustee by a court, the Regulator,[46] a direction payable by a beneficiary relating to benefits payable to that beneficiary and, in the case of an employer-sponsored fund, by an employer-sponsor in circumstances prescribed by the regulations.

18. Regulation 4.03(1) provides for an exception relevant to this case. It provides that the governing rules may allow an employer to give a direction to a trustee if, after the implementation of that direction, a defined benefit fund would not become technically insolvent as defined in r 9.06(3), the direction would not require the Trustee to breach a provision of the SIS Act, other than s 55, or the Regulations and if:

"(a) the contributions of the employer-sponsor to the fund include contributions that are not mandated employer contributions (within the meaning of Part 5) and the direction relates solely to either or both of the following:

(i) those non-mandated employer-contributions; or

(ii) benefits related to those non-mandated employer contributions; or

(b) whether or not paragraph (a) applies - the direction relates solely to one or more of the following:

(i) the admission of the new members to the fund; or

(ii) the category of members into which a new member or existing member is to be placed; or

(iii) allowing a person to become an employer-sponsor of the fund; or

(iv) the termination of the fund; or

(v) the appointment of a trustee to an entity that does not have a trustee."[47]

19. Generally speaking, the governing rules of a superannuation entity (other than a self-managed superannuation fund) may not permit anyone other than a trustee to exercise discretions under the Trust Deed.[48] Again, there are exceptions. One arises if the governing rules require the Trustee's consent to the exercise of the discretion. Others arise if:

"(i) the exercise of the discretion relates to the contributions that an employer-sponsor will, after the discretion is exercised, be required or permitted to pay to the fund; or

(ii) the exercise of the discretion relates solely to a decision to terminate the fund; or

(iii) the circumstances in which the discretion was exercised are covered by regulations made for the purposes of this subparagraph."[49]

Regulation 4.04 is made for the purposes of s 59(1)(b)(iii) and mirrors the qualifications set out in r 4.03 in relation to an employer's giving a trustee a direction.

Standards for trustees, custodians and investment managers of superannuation entities

20. Standards for trustees, custodians and investment managers of superannuation entities is the subject of Part 15 of the SIS Act. In so far as it is relevant to this case, it does so by providing that a "... person must not intentionally be, or act as, a responsible officer of a body corporate that is a trustee of a superannuation entity if the person is, and knows that the person is, a disqualified person."[50] A disqualified person may not be an investment manager[51] or a custodian[52] of a superannuation entity or a responsible officer of a body corporate that holds such a position.

21. What is a "disqualified person"? The answer lies in ss 120 and 120A of the SIS Act. Only those provisions relating to individuals are relevant in this case. We will begin with s 120(1):

"(1) For the purposes of this Part, an individual is a disqualified person if:

(a) at any time (including a time before the commencement of this section):

(i) the individual was convicted of an offence against or arising out of a law of the Commonwealth, a State, a Territory or a foreign country, being an offence in respect of dishonest conduct; or

(ii) a civil penalty was made in relation to the person; or

(b) the person is an insolvent under administration; or

(c) the Regulator has disqualified the individual under section 120A.

22. Section 120A is also relevant. It provides for three ways in which the Regulator may disqualify an individual. The first is that it:

"... may disqualify an individual if satisfied that:

(a) the person has contravened this Act ... on one or more occasions ...; and

(b) the nature or seriousness of the contravention or contraventions, or the number of contraventions, provides grounds for disqualifying the individual."[53]

23. The second way in which the Regulator may disqualify an individual arises if the individual is a responsible officer of a trustee, investment manager or custodian. The Regulator may disqualify such an individual if:

(a) the body corporate has contravened this Act ... on one or more occasions (whether before or after the commencement of this section); and

(b) at the time of the contraventions, the individual was a responsible officer of the body corporate; and

(c) in respect of the contravention or contraventions that occurred while the individual was a responsible officer of the body corporate - the nature or seriousness of it or them, or the number of them, provides grounds for the disqualification of the individual."[54]

24. The third way is found in s 120A(3). It provides that:

"The Regulator may disqualify an individual if satisfied that the individual is otherwise not a fit and proper person to be a trustee, investment manager or custodian, or a responsible officer of a body corporate that is a trustee, investment manager or custodian."

25. The SIS Act provides for both revocation of the disqualification and waiver of the status of an individual as a disqualified person. Revocation is provided for in s 120A(5). The Regulator may revoke a disqualification either on application by the disqualified individual or on its own initiative. Waiver is provided for in s 126B. An individual may apply for waiver of the status of a disqualified person but only if disqualification has come about solely because of the operation of s 120(1)(a)(i) i.e. by having been convicted of an offence in respect of dishonest conduct within the meaning of s 120(1)(s)(i) and the offence did not involve serious dishonest misconduct.[55]

26. The SIS Act requires the Regulator to take certain matters into account in deciding whether or not to waive an individual's status as a disqualified person under s 126B. When the Regulator is APRA, the matters that it must take into account are set out in s 126D(1). That section provides:

"If APRA is satisfied, having regard to any of the following:

(a) the offence to which the application relates;

(b) the time that has passed since the applicant committed the offence;

(c) the applicant's age when the applicant committed the offence;

(d) the orders made by the court in relation to the offence;

(e) any other relevant matter;

that the applicant is highly unlikely to be a prudential risk to any superannuation entity, APRA must, by notice in writing given to the applicant, make a declaration waiving the applicant's status as a disqualified person for the purposes of this Part."

27. Section 126E deals with the effect of a person's applying for a declaration waiving his or her status as a disqualified person. Section 126E(1) applies if:

(b) the person is eligible to make application for a declaration waiving his or her status as a disqualified person; and

(c) the person makes application for such a declaration under subsection 126B(3) within the application period specified in that subsection;

"the person is treated, for the purposes of this Act, (other than the purpose of the application for the declaration) as not being, and as never having been, a disqualified person until that application is decided."[56]

28. If the Regulator decides to make a declaration in relation to a person meeting the description set out in ss 126E(1)(a), (b) and (c), the SIS Act applies as if the person had never been disqualified.[57] If the Regulator decides not to make a declaration, the person again becomes a disqualified person from the date of the decision.[58]

29. If the person is a disqualified person, who is eligible to make an application for a declaration waiving his or her status as a disqualified person, and makes an application for waiver under s 126B(4), the person continues to be a disqualified person for the purposes of the SIS Act pending the decision.[59] If the Regulator decides to make a declaration waiving the person's status as a disqualified person, the person is treated for the purposes of the SIS Act as if the person had never been a disqualified person.[60]

30. Part 16 of the SIS Act sets out special rules about actuaries and auditors of superannuation entities. It imposes obligations on them in relation to a superannuation entity's compliance with the Act or Regulations and with its solvency.

31. Section 130 of the SIS Act is concerned with solvency. It provides that it is to apply to a person in relation to a superannuation entity if:

"(a) the person forms the opinion that the financial position of the entity may be, or may be about to become, unsatisfactory; and

(b) the person formed the opinion in the course of, or in connection with, the performance by the person of actuarial or audit functions under this Act or the regulations in relation to the entity."

32. The person must tell the trustee about that opinion unless informed that the trustee has been told about the matter by another person in writing or otherwise.[61] That person may tell the Regulator about the matter.[62] If the person tells the trustee of the matter but not the Regulator, that person must ask the trustee to provide a written report about any action that the trustee has taken, or proposes to take, to deal with the matter. The trustee must do so within the time specified by the person. If the person has asked for a report and the trustee has either not given it or the person is dissatisfied with the trustee's action or proposed action or with the trustee's inaction, "... the person must give the Regulator a written report about the matter as soon as practicable ..." either after the expiry of the deadline for the receipt of the report or the person becomes dissatisfied with the trustee's action or inaction.[63]

33. The financial position of an entity is taken to be unsatisfactory if, and only if, it is treated as such under the Regulations.[64] Regulation 9.04 provides that, for the purposes of s 130 and r 9.31(3):

"...the financial position of an entity is treated as unsatisfactory if, in the opinion of a person performing an actuarial or audit function in relation to that entity:

(a) in the case of an entity that is a defined benefit fund - the value of the assets of the fund is inadequate to cover the value of liabilities of the fund in respect of benefits vested in the members of the fund;

It was agreed among the parties that the test determining whether the financial position is unsatisfactory is often referred to as the "Vested Benefits Index" or "VBI".

34. Regulation 9.31(3) requires an actuary to make a statement regarding a fund's financial position when making an actuarial report in accordance with r 9.31. An actuary must provide such a report when requested by a trustee of a defined benefit fund and the trustee must request it in relation to each investigation under r 9.29.[65] In the case of a defined benefit fund in operation on 30 June 1994, the trustee must require an actuarial investigation to be made in relation to the fund on a date not more than three years after the previous investigation.[66]

35. Compliance is the subject of s 129. The section applies to a person in relation to a superannuation entity if:

"(a) the person forms the opinion that it is likely that a contravention of this Act or the regulations may have occurred, may be occurring, or may occur, in relation to the entity; and

(b) the person formed the opinion in the course of, or in connection with, the performance by the person of actuarial or audit functions under this Act or the regulations in relation to that entity."[67]

The section has no application if the person has an honest belief that the opinion is not relevant to the performance of actuarial or audit functions under the Act or Regulations.[68]

36. If the section applies, the person must tell the trustee about the matter in writing[69] unless informed that the trustee has been told about the matter by another person in writing or otherwise.[70] That person may tell the Regulator about the matter.[71] If the person tells the trustee of the matter but not the Regulator, that person must ask the trustee to provide a written report about any action that the trustee has taken, or proposes to take, to deal with the matter. The trustee must do so within the time specified by the person.[72] If the person has asked for a report and the trustee has either not given it or the person is dissatisfied with the trustee's action or proposed action or with the trustee's inaction, "... the person must give the Regulator a written report about the matter as soon as practicable ..." either after the expiry of the deadline for the receipt of the report or the person becomes dissatisfied with the trustee's action or inaction.[73]

37. On or about 6 May 1947, a superannuation plan was established by a trust deed (Trust Deed)[74] for the benefit of employees of a particular employer (Employer) and its employees and those of its related companies (Employees) (the Plan). It was vested in trustees, who held it subject to the trusts, powers, authorities and discretions contained in the Trust Deed and any Rules.[75] Initially, the Trustee comprised natural persons but it was amended to comply with the SIS Act's requirement that a regulated superannuation fund have a constitutional corporation as its trustee if its sole or primary purpose is other than the provision of old-age pensions.[76]

38. Under the Trustee's Articles of Association (Articles), it must have no fewer than four directors.[77] During the financial years ending 30 June 2002 and 2003, the Trustee had eight directors. Consistently with ss 89(1)(b)(ii) and 93(4) of the SIS Act, the Articles provide that the Trustee's Board of Directors must consist of:

(b) nominated as member representatives in accordance with Superannuation Law."[78]

The Chairman of the Directors must be appointed by the Employer's Board of Directors.[79]

39. In so far as the directors appointed by the Employer are concerned, they may be removed by the Employer and a replacement appointed by the Employer's giving written notice to the company that is the Trustee.[80] A member representative is removed by following the procedure for that member's appointment.[81] That procedure is set out in the Election Rules established by the Trustee and providing for the eligibility of candidates, their nomination, election and term of office.

40. The Trustee's powers are set out in cl 5 of the Trust Deed and, before specifying certain powers, begin with the general statement that:

"The Trustee may do anything it considers appropriate to administer the Plan and complying with the Applicable Requirements ...".[82]

In so far as its discretions are concerned, the Trustee and any of its officers "may exercise individually or jointly a power or discretion even though that person has another interest in the result of the exercise."[83] In addition, it is "... completely unrestricted in the exercise of its powers and discretions."[84]

41 The Trustee may appoint a person to provide services in connection with the administration of the Plan. It may also obtain advice or opinion of any person, including a lawyer, broker, accountant, actuary or medical practitioner and act on that advice or opinion without being responsible for any loss occasioned by so acting.[85]

42. Until it was closed on 1 April 2001, the Trustee was required by the Trust Deed to invite every Employee to become a Member of the Plan.[86] The Members are entitled to the benefits provided under the Plan but those benefits vary according to the category to which the Member belongs. The allocation is determined by reference to matters such as the date on which an Employee became a Member together with certain personal attributes such as whether they are females, their age and whether they are or were members of other funds.[87] With the exception of the category of Accumulated Members added in 2001, the benefits were defined (Defined Benefits). A Member's contributions to the Plan are specified in cll 11 to 11B of the Trust Deed according to the date on which they became members of the Plan.

43. The benefits payable to most members are defined by reference to the category to which they are allocated and are set out in Schedules to the Trust Deed.[88] In the main, these consist of pension benefits, lump sum benefits or a combination of the two (the Benefit) calculated according to formulae set out in the relevant Schedule. Some of the formulae include a component based on the contributions made by the member concerned. Others do not but have regard to such matters as age and years of membership in the Plan. Members entitled to such benefits are known as "Defined Benefit Members" and are decreasing in number given that membership of the Plan has closed.

44. Since the Trust Deed was amended on 25 August 1997, there has been a further category of Member; the Deferred Benefit category.[89] An existing Member of the Plan, who has been a member for at least ten years, is entitled to belong to this category on leaving the Employer's employment. A "Benefit" means any sum paid or payable to a beneficiary under the Trust Deed.[90] Rather than being paid the Benefit under the relevant category of membership under the Plan, such a member may leave that Benefit in the Plan. That is to say, Deferred Benefit Members may leave in the Plan all or part of any Benefit they would otherwise have taken from the Plan on their leaving the Employer's employment. Deferred Benefit Members may request payment of all or part of the Benefit and the Trustee must pay the requested amount.[91] The amount of Benefit remaining unpaid accrues interest until the Trustee pays the Benefit to the Deferred Members at their request. From that time, it "... shall accrue with interest at a rate determined from time to time by the Trustees after considering the advice of the Actuary from the date on which the Member leaves the Service to the date of payment."[92]

45. If any part of the Benefit or accrued interest remains in the Plan when the Member attains the age of 55 years, that Member is entitled to an early retirement pension.[93] The amount of that pension is calculated by reference to the Schedule to the Trust Deed dealing with the category of membership to which the Member belonged immediately before leaving the Employer's employment.[94]

46. After the amendment of the Trust Deed on 25 August 1997, the Trustee wrote to those Members with more than ten years' service enclosing an information paper entitled "... Staff Superannuation Plan: Early Retirement Pension Option" and a benefit payments instruction form. An example of a letter sent to such Members and dated 2001 advised that:

"You may leave all or part of your Leaving Service Benefit in the Plan where it will accumulate with interest from the date you leave service, at a rate determined by the Trustee."[95]

The Member's options were, subject to preservation requirements, to take the Benefit at any time as a lump sum or, after the age of 55 years, as an Early Retirement Pension. The letter advised that, if the Member wanted to leave the Benefit, or part of it, in the Plan, that Member would have to advise of the amount on the Benefit Payment Instructions form. If the Member did not do that, the automatic roll-over conditions would apply and the Early Retirement Pension Option would no longer be available.

"The amount you decide to leave in the Plan will accumulate with interest from the date you leave service. The interest rate credited will be the Plan's crediting rate as determined by the Trustee. This rate is determined by smoothing the Plan's investment return to avoid major fluctuations from year to year. Details of the Trustee's Investment and Interest Crediting policies are set out in the Trustee's Report to Members each year."[96]

48. After 1 April 2001, those who became employees of the Employer became members of a new category under the Plan provided they applied and were accepted by the Trustee.[97] They are known as Accumulation Members. Existing members of the Plan, whom the Employer invited on or after 1 July 2001 to become an Accumulation Member and who applied to do so and whom the Trustee accepted, also became Accumulation Members. That category did not provide defined benefits but, in general terms, provided for the payment of a benefit equal to the particular Member's Accumulated Credit in the Plan on resignation or retirement.[98] An Accumulation Member may contribute any amount or at any rate as agreed with the Employer and the Employer contributes in respect of an Accumulation Member in respect of an amount or at a rate it determines and agrees with the Member.[99]

"... contribute to the Plan by paying to the Trustees in respect of the Members such sums as ... [the Employer] from time to time determines on the recommendation of the Actuary in order to provide the Benefits set out pursuant to the provisions of this Trust Deed."[100]

50. Every three years and for so long as the Employer continues to make contributions, the Trustees are required to cause the actuary to make an actuarial investigation and a valuation of the Plan.[101] The Actuary's report must "... include the amount (if any) of surplus or deficit in the Plan at the time of the investigation and all other matters required by the Applicable Requirements to be included."[102] Should the investigation show that there is a deficiency in the Plan's assets, then, subject to cl 41 of the Trust Deed, the Employer:

"... undertakes to make good the deficiency and for that purpose to make such further contributions at a time or times and in a manner as ... [the Employer] in its absolute discretion thinks fit but so that at all times the Plan shall be in credit ... [the Employer] will pay to the Trustees at least an amount as is necessary to meet all admitted claims."[103]

51. Clause 41 is concerned with the cessation of contributions by the Employer. If the Employer gives a written notice to the Trustees of its intention to cease making contributions from a certain date and does so cease, no person may become a Member of the Plan and no Member may make any further Contributions.[104] Provision is made for the payment of Benefits.[105] The Trustees must instruct the Actuary to investigate and value the assets and liabilities of the Plan and report whether the assets are sufficient to discharge or provide for the liabilities.[106] If there is a deficiency, the Employer must, within two years of the date it specified in its notice, pay a sum equal in value to that deficiency.[107] Every three years after that, an Actuary must undertake the same exercise. If there should prove to be a deficiency, the Trustees shall seek to amend the Trust Deed in order to eliminate the deficiency but having regard to the requirements of the Regulations.

52. Clause 16(b) of the Trust Deed provides that, if an investigation conducted under s 16(a) shows that there is a deficiency of assets, the Employer:

"... undertakes to make good the deficiency and for that purpose to make such further to make such further contributions at a time or times and in a manner as ... [the Employer] in its absolute discretion thinks fit but so that the at all times the Plan shall be in credit ... [the Employer] will pay to the Trustees at least an amount as is necessary to meet all current admitted claims."[108]

53. Clause 17(d)(1)(iii) provides that, subject to cl 17(d)(2), the Trustees may, with the agreement of the Employer and the Member or Beneficiary or a person who may become or has been such a person, "... vary the Contributions (including any lump sum) which are otherwise payable by or in respect of the person". The qualification found in cl 17(d)(2) is that:

"No arrangement may be made pursuant to clause 17(d)(1) unless the Actuary certifies that the arrangement is equitable and not prejudicial to the interests of any other Member or Beneficiary in the Plan or ... [the Employer] contributes such additional amounts or rates of Contribution (if any) as the Trustees shall determine after seeking advice of the Actuary."

54. Clause 46 is concerned with the termination of the Plan. If the Employer is wound up, the investments in the Plan are to be valued and realised and, subject to the payment of all costs, charges and expenses, distributed among Members and others according to the provisions of cl 46. If a Beneficiary is in receipt of a pension or annuity, the Trustees must apply the amount to which the Beneficiary is entitled in the purchase of similar benefits by way of periodical payments. If the net proceeds are less than the aggregate value of the interests of the Members and Beneficiaries in the Plan upon its termination, the Employer must pay the difference to the Trustees.[109]

Calculation of interest content of Benefit payments

"Where the calculation of a Benefit requires an amount of interest to be credited the interest shall be calculated in the manner described in this Schedule unless otherwise specified."[110]

Interest is compounded with yearly rests.[111] Until 1 July 1984, the rate of interest was either fixed by an Item of the Schedule or according to defined reference points.[112] After that date and until 1 July 1997, it was again declared by reference to defined reference points. From 1 July 1998, the:

"... rate shall be declared to apply for the ensuing year, such rate being determined from time to time by the Trustees after considering the advice of the Actuary."[113]

56. The manner in which the Trust Deed has dealt with interest has varied. In relation to Category S members, for example, it has provided that the Trustee may "credit or debit interest at a rate they consider appropriate" if the benefit is paid within one month of becoming payable or must do so if paid after that date.[114] "Interest" is not a term used in relation to Category T members. Instead, the Trustee is required to declare a "Plan Earning Rate" to be applied at the Distribution Date each year to the Contribution Accounts remaining in the Plan at that Date.[115] The Contribution Accounts comprise members' contributions. The Trustee must decide whether the Plan Earning Rate is applied on daily balances, average balances or on some other basis.[116] In determining the rate, the Trustee must take into account the Plan's earnings, including all income and realised or unrealised capital gain, realised and unrealised losses, any Plan reserves and the appropriateness of averaging earnings, losses and expenses over several distribution periods.[117] Notwithstanding this provision, the Plan Earning Rate could not be less than "... the rate which is 2% greater than the percentage increase in the AWOTE[[118]] Estimate for the Relevant Period and the rate nominated by the ..." Employer.[119]

57. Initially, there were eight directors of the Trustee but, with effect from 1 January 2000, there were ten.[120] The applicants were directors of the Trustee at various times and in different categories. They, and other directors who are relevant in this case, and their categories and dates of appointment are:

(Disqualified on 9 June 2005 and confirmed on 3 August 2005)

(Disqualified on 5 August 2005 and confirmed on 7 October 2005)

(Disqualified on 9 August 2005 and confirmed on 7 October 2005)

(Disqualified on 9 August 2005 and confirmed on 7 October 2005)

(Disqualified 5 July 2005 and confirmed on 2 September 2005)

(Disqualified on 22 July 2005 and confirmed on 13 September 2005)

(Disqualified by APRA on 22 July 2005 and confirmed on 13 September 2005)

58. At all material times, a firm we will describe as the Actuarial Firm was the actuary and administrator of the Plan. We will describe the member of staff allocated by the Actuarial Firm to advise the Trustee as the Plan Actuary. There were three actuaries over the relevant period. We will refer to them as Plan Actuary A, who held the position up to 1999, Plan Actuary B, who held it to September 2001 and Plan Actuary C, who held it from that time until the present.

59. The Actuarial Firm agreed to provide "Administration Services" set out in Appendices A and B to the agreement in return for fees paid by the Trustee. The Administration Services included the provision of core administration services related to matters such as general advice on the impact of legislation and the preparation of financial records and reports, annual schedules of members' benefits and contributions, reports on Plan membership and accounts and Compliance Certificates. They also included services generally described as "... [Employer] and Trustee Support Services". These services include those necessary to track monthly member and Employer contributions, providing support and counselling on certain matters to members and the provision of secure storage facilities.[121] In addition, they include "Trustee Services". Those services include the attendance at Trustee meetings and the provision of advice and support to the Trustee on issues such as investments and benefit reviews.[122] Additional services that were also available to the Trustee included specific advice on matters such as legislative changes and the evaluation of different Plan designs and their cost to the Employer. The Actuarial Firm also offered to design and produce forms and booklets for members and to design and produce advice to members. Actuarial services offered by the Actuarial Firm included triennial actuarial reviews, the determination of the annual net rate of return, an estimation of and recommendation regarding the interim net rate of return of the Plan for calculating benefits and the determination of any surplus and the formulation of recommendations regarding its distribution.[123]

60. On 18 May 1998, the then Plan Actuary from the Actuarial Firm, Plan Actuary A gave the Trustee a report entitled "... Employer Staff Superannuation Crediting Rate Review" ("1998 Crediting Rate Review"). An Appendix dated 27 November 1997 summarised the then current approach as comprising:

· an interest rate reserve, which records the cumulative difference between the Plan's earning rate and the Plan's crediting rate over the past years. This is used to ensure that all investment returns are passed on to members over time.

· a minimum crediting rate, which is currently the crediting rate of the ... Employer AD Fund.

· trustee discretion to smooth returns within the above constraints of maintaining a reasonable interest rate reserve position and crediting the minimum return."[124]

61. In the Appendices, Plan Actuary A went on to canvass issues with the current approach and advantages and disadvantages of alternative approaches being a modified version of the then current approach and a 5 or 3 Year Compound Average. Plan Actuary A recommended the 3 Year Compound Average and stated that it would be desirable to implement the approach as part of the interim crediting rate review due the following year.[125] The then current crediting rate approach had led to a period beginning in 1991/92 in which the Plan had credited less than the Plan earnings. This had been required to remove a large negative interest rate reserve that had arisen due to the high AD crediting rates of the 1980s and early 1990s. As a result of that policy, new members had been required to subsidise high crediting rates offered to previous generations of members. This had been compounded by the fact that 50% of members left the Employer's service within three years of joining and 70% within five years. Any extended periods of smoothing would result in subsidies being offered across generations of members.[126]

62. A Chart attached to the Plan Actuary A's report showed that the requirement to meet a minimum crediting rate had led to a significant difference between earning and crediting rates. A chart showed that, for the five years between 1988/89 to 1992/93, the Interest Rate Reserve was less than -5.0% and at or below approximately -10.0% in the years 1990/91 to 1992/93 and down to almost -15.0% in 1990/91. It was either at or only a little above -5.0% for the years 1993/94 and 1994/95. It was approximately 0% in 1995/96 and +3.85% for 1996/97.[127] To ensure that the members did not lose the 3.85% reserve, Plan Actuary A recommended that the 1997/98 Plan returns be increased by the reserve before being applied to the crediting rate formula.[128]

63. The 1998 Crediting Rate Review recommended that the Trustee's crediting rate policy for the Plan for the financial year beginning 1 July 1998 should be:

"· Declare a crediting rate based on a 3 year compound average of Plan returns. Apply a minimum of the lesser of 50% net cash rates and 50% net 10 year bond yields.

· For the year ending 30 June 1998, the notional crediting rate reserve of 3.85% is used to increase the annual return to 30 June 1998 prior to applying the 3 year compound average.

· Determine an interim crediting rate from 1 July as an estimated 3 year compound average Plan return, using the current net cash rate (or net 10 year bond rate if lower) as an estimate of the Plan return for the coming year.

· Where the minium crediting rate is applied, the current year's Plan return is notionally increased and the next year's Plan return is reduced by the amount for the previous year's increase.

· Reconsider the crediting rate approach if there is likely to be either a significant change in the Plan's demographics or the Plan's benefit design (eg an introduction of accumulation only benefits and/or a move to member investment choice in the near future)."[129]

The reduction of the Employer's contributions

64. The Employer had asked Plan Actuary A to consider the scope of its contributions in light of the Plan's then surplus position. Plan Actuary A responded to that request in a letter dated 13 July 1998 when it reported that, as at 31 March 1998, the Plan's financial position had improved significantly since the previous actuarial review at 30 June 1996. The Plan's investment earnings of 14.2% per annum had been significantly greater than its assumed earnings of 8.5%. The Vested Benefits Index (VBI) had improved i.e. the coverage of the fund value over the resignation/retrenchment benefits had improved. At the time, Plan Actuary A reported, the VBI was 151% indicating that the fund value exceeded all members' resignation/retrenchment benefits by over 50%. He recommended that it was desirable that the measure should be at least 100%. In light of the defined benefit nature of the resignation benefits in the Plan, it also recommended that it was desirable to maintain a VBI above 115% to provide a buffer against poor short term investment experience. As to accrued benefits, the VBI gave an indication of the progress towards funding retirement benefits. "Given the membership profile of the Plan, this index should typically be at least around 90% to 95%."[130]

65. Plan Actuary A estimated that the Plan's surplus was approximately $60 million at 31 March 1998. In light of that, Plan Actuary A stated that:

"... it is expected that the ...[Employer] could cease all basic company contributions for a period of at least 3 years effective from 1 July 1998. Following this period ... [the Employer] would be expected to recommence contributions at the long term rate."[131]

66. In a newsletter dated August 1998 and addressed to the Plan's Members, the Trustee advised that a new crediting rate method applied from 1 July 1998. It also advised that it had been used to determine the declared rate at the 1 July 1998 annual review. The Trustee described the change:

"These accumulations are credited with a rate determined by the Trustee on the advice of the Plan's Actuary. The crediting rate in the past was determined by smoothing the Plan's investment returns to avoid excessive fluctuations. This rate was subject to a minimum of the rate credited to ... [the Employer's] Capital Guaranteed policies.

Following the review of the Plan's crediting rate strategy, the Trustee has adopted a more formalised approach to determining crediting rates. The rates applied to accumulations will continue to be smoothed. The Plan's crediting rate will be based on average investment returns over the previous three years.

A minimum crediting rate will continue to apply. This will be based on the lesser of half of the net of tax cash rates and half the net tax 10 year bond yields.

If the minimum applies in any one year then that year's return is notionally increased and the next year's Plan return is reduced by the same amount.

The new method has been used to determine the declared rate at the 1 July 1998 annual review. This rate is the average of the Plan returns for the period 1 July 1995 to 30 June 1998. To compensate for past smoothing of crediting rates the Plan's return for the year to 30 June 1998 has been increased by 3.85%."[132]

67. Under the heading of "Amendments to the Trust Deed", Members were advised that, in the past, some accumulation benefits had been credited with interest determined using a different method from that used for the majority of accumulation benefits. The Trust Deed had been amended so that, with effect from 1 July 1998, all accumulation benefits would be credited with interest determined using the one method i.e. by the Trustee after considering the advice of the Actuary.[133]

The triennial actuarial review for the period ended 30 June 1999

68. Plan Actuary B gave the Trustee its triennial actuarial review for the period ended 30 June 1999 in June 2000. It was dated 25 May 2000 (1999 Report). It gave the Trustee a supplementary report dated 28 June 2000 (1999 Supplementary Report). The main purpose of the reports was to evaluate the Plan's financial position. It recommended the Employer's level of contributions to the Plan and the extent to which the Plan's assets were adequate in relation to the benefits payable from the Plan.

69. The 1999 Report noted that the "... key determinant of the cost of providing defined superannuation benefits relating to salary is the margin between investment returns and salary increases. This margin is effectively the 'real net earning rate' of the Plan."[134] Over the three year review period, the margin had been 1% per annum. As this was less than the 1.5% that had been assumed, there had been a negative impact on the Plan's financial position. The average interest "... rate credited over the period was 12.5% per annum, which was similar to the average net earning rate (including crediting rate reserve) of 12.3% per annum."[135] Since the Trust Deed had been amended in August 1997, 80 Members had elected to leave their benefit in the Plan and so creating "significant future liability in the Plan".[136] In assessing the adequacy of the Employer's contributions, the 1999 Report made a number of assumptions. One was that future investment earnings would exceed salary increases by 1.5% for the following three years and thereafter by 3%. Another was that 75% of those leaving the Plan between the ages of 55 and 65 would take their Benefit in the form of a pension as would 75% of those who left their benefit in the Plan after 10 years' service and took their benefit after reaching the age of 55 years.[137] The 1999 Report concluded that the Plan was in a satisfactory financial position as at 30 June 1999 but that it should be monitored on an annual basis to provide "... ongoing conformation of appropriate employer contributions."[138] In the meantime, it recommended that the Employer recommence contributing to the Plan no later than 1 July 2001 at rates it specified in the report. Plan Actuary B considered that the Trustee's Investment Policy Statement was suitable taking into account the nature and term of the Plan's liabilities and the Plan's then financial position.[139]

Trustee's annual report to Members for the year ended 30 June 2000

70. The Trustee explained in its annual report to Members dated September 2000 that the Plan was a defined benefit plan. That meant that, for most members, benefits were calculated as a multiple of salary and were not reliant on the investment returns achieved by the Fund. Only additional accumulation benefits, such as voluntary contributions, were subject to the Plan's investment performance. It reiterated its crediting rate policy in relation to those accumulation benefits and began by noting that the rate credited to a Member's accumulation benefits was determined after consultation with the Plan's Actuary as specified in the Trust Deed. After referring to the smoothing policy, it noted that:

"Under the previous smoothing method a notional crediting rate reserve of 3.85% had been built up. Following the change in the smoothing method during the 1997/98 year, the Trustee determined that it would be appropriate to allocate that reserve over the next three years (i.e. the years ending 30 June 1998, 30 June 1999 and 30 June 2000).

An interim interest rate is applied to the accumulation benefits for members who leave during the year. This interim interest rate may be reviewed in light of investment experience and will be formally reviewed at 1 January 2001. ..."[140]

VBV's letter to the Employer's Plan representative

71. On 29 November 2000, VBV wrote to the Employer's Plan Representative. VBV was then the Chairman of the Trustee's Board of Directors. He referred to the Plan Actuary B's review of the Plan as at 30 June 1999 and its recommendation that the Employer's contribution holiday should come to an end by 30 June 2001. Plan Actuary B, he went on, had also calculated that the VBI would reduce to 102% over the period 2002 to 2004 although salary movements in the same period would also vary that effect either up or down. VBV noted that there had been considerable discussion among the directors on the implications of a VBI which was much closer to 100% than had historically been the case.[141] The issue concerning the Trustee was whether a VBI of less than 100% constituted a real or perceived risk to the Members. He attached Plan Actuary B's paper advising on those implications and advised the Employer's Plan representative that the paper showed that there were significant possibilities that a mismatch of asset value to vested benefit liability would occur. The VBI could be either greater or less than 100%. While the historical position had represented a very safe position for members, VBV recognised that the Employer might regard it as an inefficient use of capital. The Directors' aim needed to be "... to find a sensible and prudent balance between the conflicting objectives of members and the employer."[142]

72. VBV observed that the vested benefits represented a major component of members' wealth and that those members saw the adequate coverage of the liability as the Employer's responsibility. The risk to members by a VBI less than 100% would only be crystallised if events occurred requiring the vested benefits to be paid at one time rather than progressively as in a normal ongoing business. VBV sought the Employer's views on three options. The first two focused on ways to ensure that the vested benefits would be met if the Employer were sold or liquidated. The third focused on increased contribution rates from the Employer by either termination of the holiday or by a higher medium term rate from 30 June 2001.

Increasing numbers of Deferred Benefit Members

73. On 12 December 2000, Plan Actuary B wrote to the Trustee advising that the number of members leaving their benefits in the Plan on their leaving the Employer's employment was increasing. This raised several issues of concern. The main issue was that of funding and the difficulty in assessing the number of Deferred Pension Benefit Members who would opt for a pension. Since that category of membership had been introduced, there had been a greater number of younger members leaving their benefits in the Plan on their being retrenched by the Employer than had been expected. The cost of funding the Plan's benefits had not been calculated on that basis. Estimating the cost was difficult as the liability for those members was unknown. The problem was exacerbated by the linking of the lump sum accumulation to the current amount available as a lump sum to convert to a pension.[143]

74. Plan Actuary B recommended that the value of the pension option be presented separately from the value of the lump sum option. The lump sum benefit would continue to increase at the Plan crediting rate but the income amount would be increased at a different rate. That different rate "... would be determined to control the financial ramifications of the pension option."[144] Plan Actuary B advised that this would not breach either the Trust Deed or regulatory requirements. One reason for adopting the change was that the Employer faced a substantial cost if the then arrangement continued. In light of the fact that some members might argue that they had made decisions on the basis of the application of the conversion factors to the lump sum accumulated with interest, Plan Actuary B advised that clarifying material should be sent to members.

The Employer's Plan representative's reply to VBV

75. In a letter dated 25 July 2001, the Employer's Plan representative advised VBV that:

"Under the existing procedure, non-contributing members receive a higher benefit than current employees who continue to contribute to the Plan. This is because the deferred benefit of non-contributing members increases in line with the Plan earning rate, while the benefit of current employees increases in line with salary increases, which are much lower. This is clearly inequitable and the trustee, as fiduciary, is obliged to deal with the inequity."[145]

76. The Employer, the Employer's Plan representative went on to say in his letter, understood its ongoing obligation to fund the benefits of active members of the Plan and that it was required to contribute to fund those benefits. It was the Employer's view, however, that benefits were funded to the date that members left its service. No further funding was provided for the benefit of members who had left the service. The Employer did not intend to provide any further funding for members who were not active members of the Plan. The Employer's Plan representative also advised that:

"The Plan Actuary has confirmed that funding of the deferred pension benefit for non-contributing members is imposing an unacceptable burden on the employer sponsor. This burden was not foreseen at the time the Plan Rules were amended to allow deferred benefits, and if this issue cannot be satisfactorily resolved the employer sponsor may be forced to consider closing the Plan. This would be to the detriment of all members of the Plan."[146]

The Employer's Plan representative supported the changes recommended by the Plan Actuary. In doing so, he noted the various features of the change and that advance notice of the change would be given to existing non-contributing members.[147]

Employer seeks legal advice regarding Deferred Benefit Members

77. In a letter dated 21 August 2001, the Employer sought legal advice from its solicitors whether it was legally viable to remove the pension option prospectively for Deferred Benefit Members so that benefits then accrued could be converted to a pension but benefits subsequently accrued could only be taken as a lump sum. The question had arisen because the then present actuarial value of the liability to meet pension benefits at the age of 55 years was approximately 28% more than the lump sum benefit. By converting the lump sum benefit to a pension, the assets required to fund that pension were 28% more than the Plan was then holding.[148]

The Trustee's Annual Report for the year ended 30 June 2001

78. The Trustee's Annual Report for the year ended 30 June 2001 was dated September 2001. In the Introduction, VBV wrote:

"Despite difficult market conditions, I am pleased to report that the Plan has achieved a creditable financial outcome. This is relevant both to accumulation members, members with accumulation balances, and to the Employer in meeting its obligations for the defined benefit division of the Plan. The investment earning for the year ending 30 June 2001 was 5.1%."[149]

He concluded by noting the introduction of an accumulation category in its Plan for new staff members from 1 April 2001. While the defined benefit division of the Plan continued for the Employer's existing staff members, the Employer was considering whether an accumulation option could be provided for existing Defined Benefit Members in the future.

79. The Annual Report advised members that, for the majority of them, the Plan was a defined benefit plan.[150] Defined benefits meant that the benefits were not reliant on the investment returns achieved by the Plan. Only additional accumulation benefits, such as voluntary contributions, were subject to the Plan's investment performance.[151] Under the heading "Plan Earning and Crediting Rates", the Annual Report stated:

"The rate credited to your accumulation benefits (if any) within the Defined Benefits Division is determined after consultation with the Plan's Actuary (as specified in the Plan's Trust Deed).

The crediting rate is determined by smoothing the rate of return to avoid major fluctuations. The Trustee's smoothing method is to use the compound average investment returns over the previous three years. This is subject to a minimum of the lesser of half the net of tax cash rates and half the net of tax 10 year bond yields. When the minimum applies in a year, that year's return is notionally increased and the next year's return is reduced by the same amount.

An interim interest rate is applied to the accumulation benefits for Defined Benefit Division members who leave the Plan during the year. This interim interest rate may be reviewed in light of investment experience and will be formally reviewed at 1 January 2002. ..."[152]

Advice from the new Plan Actuary regarding crediting rates

80. In October 2001, the Actuarial Firm allocated another member of staff to advise the Trustee (Plan Actuary C). Plan Actuary C wrote a letter to the Trustee on 18 October 2001 after it had become apparent that the attacks in New York on 11 September 2001 had contributed to the plunge in world stock market returns. That, in turn, had led to the Plan's earning rate for the July/September 2001 quarter being approximately -5.8%. Plan Actuary C canvassed the net earning rate and the interim and minimum crediting rates and wrote:

"I note that the current crediting rate policies can result in a high degree of smoothing (the current circumstances being a prime example) and effectively assume sufficient reserves are available via the defined benefit section to allow this to occur. They also provide scope for some selection against the Plan by former employees who may choose (to a greater or lesser extent) when to withdraw their benefit from the Plan.

The current crediting rate policies were put in place when the crediting-rate related liabilities were relatively small. These are now in excess of 25% of the Plan's liabilities.

I will give this matter further consideration and advise whether I conclude that a formal review of the crediting rate policies is desirable.

For the time being, however, I confirm that interim rates should continue to be set using the adopted policies, with recommended rates as set out above."[153]

The Employer's Plan Representative's concerns regarding the Deferred Benefit Members

81. The Employer's Plan Representative sent an email to the Employer's Chief Executive Officer (CEO) on 23 October 2001 regarding "... a number of unexpected obstacles to finding a satisfactory solution to the issue of deferred benefits."[154] The Employer had received legal advice that removing the deferred benefit option for all current members entailed an unacceptably high risk of litigation. As an alternative, the Employer had, with its legal advisers, recommended that the fund crediting rate be reduced for all current members and that the deferred benefit option be removed prospectively for all active members who had served nine years or fewer. The pension crediting rate would be lower to fund the cost of providing the pension benefit, which is higher than the lump sum benefit. Before Deferred Benefit Members reached the age of 55 years, they would receive annual statements showing their deferred lump sum based on two different crediting rates. On attaining the age of 55, they would elect to take either the lump sum benefit of the deferred pension based on the lower lump sum. The process for reducing the crediting rate for the Deferred Benefit Members would be to give advance notice of the change in calculating the crediting rates under the Trust Deed and determine the value of the lump sum accrued to the date of the introduction of the change. The variable rates would apply from that time forward.

The meeting of the Trustee's Directors on 25 October 2001

82. Among those present at the meeting of the Directors on 25 October 2001 were VBV, VBR and Plan Actuary C. Also present as a director was a director who we will call PD1. PD1 had been nominated by the Employer. The Directors noted Plan Actuary C's paper and approved the recommended interim crediting rate for Plan members recommended in it. Plan Actuary C agreed to provide a view on the smoothing process and to present alternatives at a future meeting.[155]

The meeting of the Trustee's Directors on 17 December 2001

83. Among those present at the meeting of the Directors on 17 December 2001 were VBV, PD1, VBP, ND1, VBO, VBR, VBQ and Plan Actuary C. The Directors noted Plan Actuary C's report that the proposed change in the crediting rate policy for the Defined Benefit Division for Category T members would bring consistency among categories. They resolved to adopt it.[156]

The crediting rate policy as at 30 June 2001 advised to members in December 2001

84. In a document with a sub-heading of "Interest Crediting Rate Policy Approach" and dated December 2001, the Trustee set out its "... approach to setting interest rates to be credited to all member accumulation accounts, subject to the provisions of the Trust Deed and having considered the advice of the Plan's Actuary."[157] It set out the crediting rate in respect of categories ZG/T and ZD/S members but, for most, it was a compound average investment return of the Plan over the previous three years. It would not be less than the lesser of half the net of tax cash rate and half the net of tax 10 year bond yield.[158] At the foot of the document, it was stated that:

"The Trustee will reconsider the approach if there is likely to be either a significant change in the Plan's demographics or the Plan's benefit design."[159]

85. Plan Actuary C wrote to VBV on 23 January 2002 and set out his review of the interim interest rates applicable to benefit payments other than accumulation members and pensioners. He wrote:

"I have noted previously that the current crediting rate policies can result in a high degree of smoothing (the current circumstances being a prime example) and effectively assume sufficient reserves are available via the defined benefit section to allow this to occur. They also provide scope for some selection against the Plan by former employees who may choose (to a greater or lesser extent) when to withdraw their benefit from the Plan.

The current crediting rate policies were put in place when the crediting-rate related liabilities were relatively small. These are now in excess of 30% of the Plan's liabilities, the great bulk of this relating to deferred benefit members.

I have now given this matter further consideration and recommend that a formal review of the crediting rate policies be undertaken. I suggest that the review be referred to the Investment Sub-committee, with agreed recommendations to be put to the Trustee for consideration.

For the time being, however, I conform that interim rates should continue to be set using the adopted policies, with recommended rates set out above."[160]

86. Interim interest rates and review of the crediting rate policy were agenda items for the meeting of Directors held on 29 January 2002.[161] Those attending the meeting included VBV, VBO, VBP, VBQ, VBR and ND1. VBN was an apology but Plan Actuary C attended for part of the meeting. The Directors noted the advice that they had been given and his recommendations. They resolved to conduct a formal review of the crediting rate policies by the Investment Sub-committee. The members of the Sub-Committee were then VBP and VBR but they were joined by VBO and by ND1 until July when replaced by VBQ.[162]

The Plan Actuary's advice to VBV on 18 February 2002

87. In writing to VBV on 18 February 2002, Plan Actuary C reported on the VBI and its implications since the negative return in the September quarter. The earning rate for the December 2001 quarter had again been negative but only -1.1%. While a substantial improvement, it was well short of the 8% per annum assumed for funding purposes. As a result, Plan Actuary C expected that the vested benefits would not have been fully covered at 1 January 2002. He did not:

"... consider that there is a need at this point to review the employer contribution program with a view to addressing the likely shortfall in coverage, as the Plan may be restored to a satisfactory position without such action if there is a sufficient further recovery in investment markets.

However it would be appropriate that the Company be provided with a copy of this letter so that it is kept informed of the Plan's financial position and the current possibility that additional contributions will be required in order to restore coverage of vested benefits to at least 100%

The position should be reviewed again when March 2001 quarter investment results are available, unless special circumstances dictate an earlier review eg. if substantial discontinuances were being contemplated. As previously noted, there may also be implications for the transfer offer."[163]

The meeting of the Trustee's Directors on 25 February 2002

88. The meeting of the Directors on 25 February 2002 and was attended by VBV, VBN, VBO, VBP, VBQ and VBR. They noted that the crediting rate policies were being dealt with by the Investment Sub-committee in discussion with the Plan Actuary. As to deferred benefits and the actuarial review of associated matters, the Directors noted that the matter then rested with the Employer to make a proposal regarding the matter. They expected the proposal in the next two or three months.[164]

The Investment Sub-committee meeting on 19 March 2002

89. VBO, VBP and VBR as well as ND 1 and the Plan Actuary attended a meeting of the Investment Sub-committee on 19 March 2002. The crediting rate policy review was not discussed in any detail and the meeting noted that Plan Actuary C would circulate a paper about it before the next meeting.[165] The next meeting was scheduled for 18 April 2002 but was deferred to 22 April 2002 to enable Plan Actuary C to prepare the paper.[166]

The meeting of the Trustee's Directors in April 2002

90. In a letter dated 17 April 2002 to VBV, Plan Actuary C recommended that the Trustee set the interim crediting rate policy at 6% per annum for Defined Benefit Members other than Category S and Category T members. Other rates were recommended for those other categories. This was in accordance with the crediting rate policy then applying.[167] The Directors approved the recommendation at their meeting on 22 April 2002 at which VBV, VBN, VBO, VBP, VBR and ND 1 were among those who attended. They noted that the "standard methodology for the review of interim interest rates has been applied." [168]

Meeting of Investment Sub-committee on 22 April 2002

91. Those attending the Investment Sub-committee on 22 April 2002 were VBQ and ND 1 as well as Plan Actuary C. Plan Actuary C had prepared Discussion Notes regarding the review of the Plan's crediting rate policy.[169] In those notes, Plan Actuary C noted that, when the crediting rate policy had been introduced with effect from 1 July 1997, the Notional Crediting Rate Reserve had been 3.85%. As at 1 July 2001, the Notional Crediting Rate Reserve was -5.4%. As the Notional Crediting Rate Reserve represents the excess of past earning rates over crediting rates, this meant that in the four year period, crediting rates had exceeded earning rates by approximately 9%.[170]

92. The Discussion Notes addressed the degree of smoothing and the average reserve. Plan Actuary C noted that the three year average in 2001/2002 based on a nil earning rate was 5.8%. This was much higher than the crediting rate offered by comparable funds and higher than interest rates generally. That would have made sense had the Trustee's been able to subsidise the rate from past earnings that it had held back. That, however, had not been the case and the Trustee had already credited more than it had earned. Plan Actuary C asked the Investment Sub-committee whether this was what the Trustee wanted out of the smoothing method and whether they were comfortable with the level of cross subsidy. Although there would be no new members to consider, those who rolled over contributions and those who made additional contributions were more likely to be credited with an amount approximately 6% less than the earning rate over the following couple of years. This would also apply to new deferred benefits. Plan Actuary C asked whether this would be acceptable to the Trustee and whether it should be drawn to Members' attention. The greater the smoothing above the earned rate, the lower the VBI. This would be recouped if Members were to stay but not if they were to leave or if their deferred benefits were converted to pensions.

93. Plan Actuary C also raised a number of issues regarding the average reserve. If the longer term Crediting Rate Reserve would average approximately -5.4% if the post 1 July 2002 earning rate averaged 7.5% per annum. The average earning rate would need to increase to approximately 13 to 14% to produce a nil average and this was regarded as unrealistic. Therefore, the Crediting Rate Reserve was unlikely to return to a persistent neutral position without modification of the crediting rate method.

94. A possible solution would be to reduce the 2001/2002 earning rate by -5.4% 1 July 2001 Reserve. This would be consistent with the adjustment used when the current crediting rate method had been introduced. That adjustment had meant that the 1997/1998 earning rate had been increased by 3.85% being the reserve carried forward from the previous crediting method. The cross-subsidy issues were likely to be even bigger with the credited rate likely to be around 10% less than the earning rate over the following couple of years. Given the increase in accumulation liabilities in recent years, it might be appropriate to calculate the reserve adjustment on a liability-weighted basis. Alternatively, the Trustee could move away from the three year averaging method altogether.[171]

95. The Plan newsletter dated April 2002 was sent to members of the Board before their meeting on 22 April 2002 and sometime before Easter to members.[172] The newsletter advised of the changes that had been made "to bring Category T members in line with other categories of members in the Plan."[173] One of those changes related to the crediting rate policy described as:

"The rate credited to members' accounts is smoothed by crediting the average three year net Plan earning rates. The reason for this is to avoid major fluctuations in returns. As part of the policy, the crediting rate is subject to a minimum of the increase in AWOTE plus 2%. Late last year the Trustee reviewed the crediting rate policy and has made an adjustment to bring the policy in line with the other categories in the Plan.

The change in the crediting rate policy of Category T members was amended by including the following wording: 'In any year that the minimum crediting rate applies, that year's rate of return is notionally increased and the next year's return notionally reduced by the same amount, subject to each year's Plan Earning Rate being at least the minimum.'"[174]

Plan Actuary C's letter to VBV dated 14 May 2002

96. Plan Actuary C's letter to VBV dated 14 May 2002 updated his letter of 18 October 2001 taking into account the Plan's return for the nine month period ending 31 March 2002 and salary increases to 1 January 2002.[175] The Plan's investment earning rate had been -1.3% and salary increases had been in the range of 3% to 4%. The shortfall of investment earnings had been offset to a small extent by salary increases being less than expected. Even so, it would be expected that vested benefits would not have been fully covered at 1 April 2002. Unless there was a substantial improvement in investment earnings over the June quarter, the Plan was likely to be in an unsatisfactory financial position at the balance date of 30 June 2002. If that were the case, Plan Actuary C said that he would expect to recommend a review of the employer contribution programme to address the shortfall in coverage over a suitable period agreed between the Trustee and the Employer. Plan Actuary C recommended that the Trustee give the Employer a copy of his letter. That occurred in June 2002 when Plan Actuary C sent a copy to the Employer.[176]

The meeting of the Trustee's Directors on 20 May 2002

97. The minutes of the Trustee's Directors recorded that the Deferred Benefits and Actuarial Review's associated matters had not yet been finalised. The Board was waiting for the outcome of the Employer review/working group.[177] It noted Plan Actuary C's letter "... commenting on the financial position of the Plan. It was agreed that the employer be kept informed of the Plan's financial position as it has been done in past."[178]

Meeting of Investment Sub-committee on 29 May 2002

98. Plan Actuary C prepared further Discussion Notes for the Investment Sub-committee's meeting on 29 May 2002.[179] It summarised the previous notes and went on to discuss the recoupment of the negative reserve and general methodology.

99. Plan Actuary C advised that the Reserve position was unlikely to return to a persistent neutral position without modification of the crediting rate method. As the relevant crediting rate liabilities were approximately $80m at 30 June 2001, subsidisation of the crediting rate involved a significant cost if not recouped. The Trustee, Plan Actuary C recommended, needed to put in place a process for recouping the over crediting of recent years. It needed to do so over a period that was reasonable. A period of three years, for example, might be reasonable as it would have been consistent with the then current crediting policy and the crediting rate could be reduced by approximately 1.8% each of the three years. A second approach would be to reduce the 2001/2002 earning rate by the -5.4% Crediting Rate Reserve as at 1 July 2001. Plan Actuary C repeated his previous advice regarding this approach.[180] There was a further question and that was whether there should be any other modification to the then current crediting rate method. Plan Actuary C repeated his previous advice on this subject[181] and asked whether the Trustee wanted to retain the then current method for 2001/2002. Other options Plan Actuary C raised were: retain the method but introduce further artificial adjustment to achieve a lower rate in 2001/2002; move to a shorter average period of, say, two years; and move to a subjective determination based on earning rate and the notional reserve each year. Plan Actuary C also raised, but did not address, minimum rates, reliance of members on the application of the then current method in 2001/2002, special categories and member investment choice for additional benefits or deferred benefits.

"· the Trustee needs to put in place a process for recouping the overcrediting of recent years

· the preference was for a shorter period than 3 years, if achievable taking into account other objectives

· the Trustee should depart from the three year average method in 2001/02, as it is expected to result in unnecessarily high overcrediting which will need to be recouped in later years

· it appears that a subjective method is likely to be necessary rather than a formula approach

· ... [the Plan Actuary] should do some illustrations of crediting rates in 2001/02, 2002/03 and 2003/04 based on earning rates of -3% - +3% in 2001/02 and 5%-10% in 2002/03 and 2003/4, to give the Trustee a feel for the potential range of outcomes."[182]

101. ND1 "... noted that the committee had some complex issues to deal with and was hampered by the lack of a Plan Executive who could vet and provide some in-depth opinion on the issues and advice provided by the Plan's service providers, as well as employer input."[183]

102. On 5 June 2002, a consultant, whom we will call EC1, to the Employer wrote to another member of staff at the Actuarial Firm regarding the valuation report. We will refer to him as Actuary D. Actuary D was the Employer's consultant actuary from the Actuarial Firm. He did so after speaking with the CEO of the Employer. Among the matters that the CEO had questioned was the identity of the person who decides the crediting rate. It was noted that "[t]he trustee alone should not do this as it puts a financial obligation on the employer."[184] EC1 reported that the CEO was keen on urgent action and wanted to fix the interest rate issue as soon as possible and then look at the pension factors.

103. The Actuarial Firm replied on 6 June 2002 and directed the response to VBN. Among other matters, the Actuarial Firm explained that the interest rate is used for Deferred Benefit Members, additional accumulation accounts for Defined Benefit Members (mostly rolled-in entitlements from other funds) and accumulation entitlements for some Members.[185]

104. On 7 June 2002, the Plan Executive wrote to VBN:

"Following our conversation this morning, I have drawn up a high level implementation plan assuming we reach agreement in principle with ... [the CEO] to:

1. amend the crediting rate from the specified date for deferred pensioners
2. amend the deed so that all future benefit accruals after the specified date will be by lump sum payment with no pension option.

As agreed we will need to prepare a business case to obtain funding etc. You previously suggested that the project could be run from Compliance. ... I agree that this would be a good solution. I can be involved in preparing the business case and draft Trustee/Board papers. ..."[186]

105. On 7 June 2002, the Plan Executive copied an email to VBQ regarding a meeting that he had organised with the CEO. Apart from the Plan Executive and VBQ, Ms Wendy Davis and Actuary D would be attending. The Plan Executive gave them all a copy of his correspondence with Actuary D and a "decision tree with the QC replies and issues".[187] The objectives of the meeting were "to agree (1) changes to the crediting rate for deferred pensioners and (2) all future benefit accruals to be in lump sum form without a pension option (3) next steps and target timescale."[188] The Plan Executive said that he was preparing a high level plan but wanted to include a discussion whether objective (2) replaced the need for further radical steps under the deferred benefit plan for the moment.

106. In an email dated 7 June 2002 addressed to VBN, the Plan Executive said that he had drawn up a high level implementation plan assuming that they reached agreement with the CEO to amend the crediting rate from the specified date for deferred pensioners and amend the Trust Deed so that all future benefit accruals after the specified date would be by lump sum payment with no pension option.[189]

107. Minutes of the meeting were kept.[190] With regard to the crediting rate, they recorded:

"6.1 ... [The CEO] wished the definition of the crediting rate as quoted in the 2001 Trustees report to be reviewed. Rates will have ups and downs, and the crediting rate should be capable of going negative.

6.2 How long has the current definition be used?

6.3 Due to the smoothing method and falling investment returns, the crediting rate has been substantially higher than the earning rate over most of the last four years. It was mentioned that the Investment Committee of the Trustees are considering reducing the crediting rate by more than the published formula to claw-back some of the existing excess. When agreed, this will be published in the next Trustees' report.

Action: 6.1 to 6.3 ...[VBQ], as a member of the Investment Committee of the Trustees."[191]

108. The Minutes also recorded the meeting's consideration of the AWOTE for deferred pensioners. The rationale for using it would be that it is a measure of growth in salaries and better equated to the treatment of those members who have remained in the service of the Employer. It was agreed to retain a single crediting rate for the time being based on the forthcoming Trustee's recommendation. This would be equitable with other member categories that had benefited from excess crediting in the past. The Plan Executive was to co-ordinate the implementation with the Trustee.

109. The meeting also addressed the pension factors noting that, in all cases, the accrued pension to the specified date would continue to attract the existing factors published in the Trust Deed. The Plan Executive was to prepare a business case to implement the changes to the crediting rate and pension factors. There was also a discussion regarding the ways in which the Employer's liability could be reduced in respect of pension factors on existing accrued benefits for deferred pensioners. After the next valuation, an offer should be considered to encourage deferred pensioners to take the lump sum with an additional cash incentive.

The Plan Actuary's review of the crediting rate policy dated 18 June 2002

110. Plan Actuary C's main recommendations arising from his review of the crediting rate policy conveyed to VBV on 18 June 2002 were:

"▪ That the three year average method be discontinued, effective for 2001/02 and subsequent years, and

• That interest crediting rates for 2002/02 and subsequent years be determined by the Trustee having regard to the advice of the Actuary, the earning rate for the year and the level of past under-crediting or over-crediting of earnings ie. a discretionary determination rather than a formula approach."[192]

111. Plan Actuary C referred to different ways of estimating the Crediting Rate Reserve. It could be estimated on a liability-weighted basis.[193] Also detailed in the body of his report was his recommendation that the Trustee put in place a process to recoup the over crediting over a period that it considered reasonable e.g. three years.[194] The Trustee would need to adopt a reserving strategy. That would normally take the form of a minimum and maximum reserve level. A range of between -5% and +5% could be considered, Plan Actuary C suggested. Given that the Notional Crediting Rate Reserve was -5.4% as at 1 July 2002, it might well be less than -5% in the 2001/2002 year.[195]

112. With regard to the rate of interest on benefit payments, Plan Actuary C recommended:

"The same interest rates are currently used for crediting members' accumulation accounts and for adding interest to benefit payments for the period between the date of leaving service and the date of payment. I consider that this is a satisfactory approach while the interim rates are positive but believe that special consideration of this issue would be required if the Trustee were to consider adopting a negative crediting rate. ..."[196]

113. If his recommendations were accepted, Plan Actuary C also recommended that:

"▪ As advised in my crediting rate review letter of 17 April 2002, the latest interim rates were based on an estimated net earning rate of 0.6% to 30 June 2002 (calculated using the nine month investment return to 31 March 2002 of -0.8% and the ten year bond rate of 5.5% p.a. (net of 15% tax) as a proxy for the return for the period from 1 April 2002 to 30 June 2002).

• On the new crediting rate method, taking into account the above estimated earning rate and the Reserve position, I recommend that the interim rates be:
  • Maintained at the current rate of 7.8% pa for Category T members, being the Trust Deed minimum of AWOTE plus 2% pa; and
  • For other members, reduced from the current rates of 4.2% pa (Category S) and 6.0% pa (other members) to the target minimum rate of 2% pa (being the lesser of half the net of tax cash rates and half the net of tax ten year bond rate). It is acknowledged that if there is not a recovery in the earning rate in the June quarter then the Trustee will need to consider declaring a rate below the target minimum of 2% pa."[197]

114. Plan Actuary C concluded his report by advising that the Plan Investment Policy Statement would need to be updated to reflect the new policy. Reserve positions for Categories S and T would also need to be established.

The meeting of the Trustee's Directors on 24 June 2002

115. The meeting of the Trustee's Directors on 24 June 2002 was attended by VBV, VBN, VBP, VBQ, VBR and Plan Actuary C among others. The minutes record that the meeting lasted for seventeen minutes short of four hours. Among the items discussed were the crediting rate policy and the interim crediting rate. The meeting noted the recommendations of the Plan Actuary and those of the Investment Sub-committee.[198] The Board resolved that:

"▪ the negative reserve be recouped over 2 years,

• the current interest rate crediting procedures, methodology and process be discontinued effective for 2001/02 and subsequent years, and
• to develop and implement new current interest rate crediting procedures, methodology and for 2001/02 and subsequent years by the Trustee having regard to the advice of the Actuary, the earning rate for the year and the level of the relevant Crediting Rate Reserve.

The directors requested the Investment Committee to review all related factors and issues.

The directors discussed the need to communicate the changes to members noting:

• the review of the crediting rate policy,
• excessive crediting and the impact thereof,
• decision to move away from a rigid 3 year average method to better reflect reserves and the minimum earning rate.

Communication to be include in the next Newsletter."[199]

116. The Board also resolved to adopt the interim crediting rates recommended by Plan Actuary C in his report of 18 June 2002.

117. Plan Actuary C drafted the section of the Newsletter to members relating to the crediting rate policy and interim crediting rate. It was reviewed by a member of staff of the Actuarial Firm and another who was a lawyer in that firm. We will refer to them as MS1 and MS2. MS2 advised that the text complied with legislative requirements and was neither misleading nor deceptive.[200]

118. The Newsletter began by advising members under the heading of "Return Expectations" that many superannuation funds would be reporting negative returns in the 2002 financial year. It explained that an investment will produce a negative return if "the negatives outweigh the positives".[201] Returns from overseas shares had been strongly negative while Australian shares had fallen slightly in 2001/2002. It explained that high levels of inflation in the 1980s and the strong performance of shares in the 1990s had been the main reasons why there had not previously been negative returns. Despite fluctuations, the pattern of the share markets showed a steady upward trend. Members were reminded that superannuation was a long-term investment and returns should be examined over the long-term to gain a realistic picture of their superannuation's performance.

119. Defined Benefit Members were reminded that they:

"... should understand that their main defined benefits are based on a factor times superannuation salary and are therefore not affected by fluctuations in investment returns. However, any additional accumulation balances they have will be subject to investment return fluctuations."[202]

The crediting rate policy for the Defined Benefit Division was explained in the Newsletter:

"In recent years the rate credited to accumulation benefits within the Defined Benefits Division has been determined based on the average earning rate over the previous three years (subject to some adjustments). This approach was aimed at reducing fluctuations in yearly returns passed on to members' accounts, while still reflecting the actual earnings over longer periods.

The trustee has reviewed this policy having particular regard to the investment earnings outlook for the current year and the year to year differences between earning rates and crediting rates which have occurred and may arise in future from the three year average approach. The outcome of the review was a decision to change the crediting rate policy to allow the Trustee flexibility to determine the rate each year having regard to the current year's earning rate, past earning rates vs crediting rates and other relevant considerations, rather than using a formula approach.

Consistent with the revised policy, the following interim crediting rates have been adopted for benefit calculations for members leaving the Plan (or deferred benefit members converting to a pension):

· 7.8% for Category T members (reflecting the Trust Deed minimum Average Weekly Ordinary Time Earnings increases plus 2% pa carried over from the ... Plan).

The above interim rates apply for updating accumulation accounts (and/or adding interest from the date of leaving service to the date of payment) for the period from 1 July 2001."[203]

Plan Actuary's advice regarding final crediting rate for 2001/2002

120. In his letter dated 23 July 2002 to VBV, Plan Actuary C advised that he had not yet determined the Plan's net earning rate for 2001/2002 as the final details were not then available to him. On the information that he then had, he expected that the relevant earning rates would be in the order of -5.5% to 6.0% per annum. In order to provide some preliminary information, Plan Actuary C assumed that the earning rate for the year would be -5.9%. He took into account the Board's decisions regarding the recoupment of the negative Crediting Rate Reserve and that the Trustee would aim to manage the Crediting Rate Reserve within the range of -5% to +5% as well as the need to strike some balance between members' needs and expectations and previous practice. Plan Actuary C posed some very difficult questions with which the Trustee would be faced:

"· Should the 2001/02 crediting rate be subsidised, with the result that the Crediting Rate Reserve will go even further into the red?

· Should all or part of the current negative Reserve be recouped, meaning that the declared rate would be even lower than -6% pa?

· Should all members be treated the same way or would an approach of different crediting rates for different groups of members achieve a better overall result?"[204]

With regard to the last question, Plan Actuary C said that he considered the disadvantages outweighed the advantages but raised it for consideration.

121. Plan Actuary C advised that he expected to recommend that the crediting rate for 2001/2002 would be the actual earning rate for the year. This would avoid "... drawing on the Crediting Rate Reserve given that it is already slightly lower than the target minimum of -5%".[205] Recouping any Credit Rate Reserve would be extremely difficult to justify when the actual earning rate was already such a large negative.

The meeting of the Trustee's Directors on 29 July 2002

122. Among those attending the meeting were VBV, VBN, VBO, VBP, VBQ and VBR as well as ND1 and Plan Actuary C. The meeting noted that the deferred benefits and actuarial review's associated matters had not been finalised as they were waiting for the outcome of the Employer review/working group.[206] With regard to the crediting rate, Plan Actuary C advised that he had discussed the matter with EC1.[207] At that stage, the minutes of the meeting note that VBN left the meeting. The Directors then discussed the need to consider the crediting rate information and measure the effect on the Plan. The matter was carried forward to an extraordinary meeting.[208]

Plan Actuary's meetings with representative of Employer at Trustee's request

123. On 31 July 2002, EC1 arranged for a paper entitled "... [Employer] SSP Discussion Paper" (Discussion Paper) to be sent to Plan Actuary C and the second Actuary from the Actuarial Firm, VBN and the CEO.[209] The paper provided background to their meeting on 1 August 2002. The Discussion Paper discussed crediting rates, Pension Factors and the scope to provide future service benefits of existing members through a defined contribution scheme. With regard to the crediting rate, the Discussion Paper canvassed the Trustee's decisions to date and the various options that had been considered by Plan Actuary C as well as his recommendations.

124. On 6 August 2002, Plan Actuary C sent the CEO a note setting out a brief outline of his recommendations and asking whether they were acceptable from his point of view.[210] He recommended that the crediting rate declared for 2001/2002 be -5.8% per annum and that the Trustee aim to recoup the negative crediting rate Reserve by 30 June 2004 at the latest. The recoupment pattern would take actual earnings into account. A special tax refund would be used to take the Crediting Rate Reserve back to -5.0% from -5.4%. Interim crediting rates would be set having regard to the projected earning rate for the 2002/03 year and using the actual year to date earnings as they emerged, the recoupment of the negative reserve. Some smoothing would be retained but, if the earnings were below -2.5%, the interim rate would be negative.

125. Plan Actuary C's letter to VBV on 12 August 2002 set out a table showing the Crediting Rate/Reserve for the Plan and their averages in the period from 1997/1998 to 2001/2002. The Start Reserve on 1 July 1997 was 4.2%:[211]

126. He did so in the context of a letter advising the Trustee that it needed to declare a crediting rate for the period 2001/02 and to set an interim rate to apply from 1 July 2002 to Category S and T members and other categories of the Defined Benefit Division of the Plan. As in his note to the CEO, Plan Actuary C stated that the net earning rate for the relevant Plan for 2001/02 was -5.8%. At 30 June 2001, the notional Crediting Rate Reserve was -5.4%. That was based on building up the Reserve from a starting point of +3.85% at 1 July 1997 when the three year average crediting rate method began. In 2001/02, the Plan received special tax refunds relating to the period between 1990 and 1993. As they would have boosted the starting Reserve at 1 July 1997 to 4.2%, that would have increased the reserve at 1 July 2001 to -5.0%.

127. Appendix 1 to his letter illustrated Plan Actuary C's view of the impact on the Reserve of the various options for the 2001/02 declared rate:

"· Continuation of the three year average method would result in the Reserve deteriorating to -13.8% i.e. aggregate over-crediting of 13.8% since 1 July 1997. The Trustee has therefore previously agreed to cease using the three year average.

· A 2001/02 crediting rate of nil would result in the Reserve deteriorating to -10.6% since 1 July 1997.

· A 2001/02 crediting rate equal to the net earning rate of -5.8% would result in the Reserve remaining at -5.0% i.e. aggregate over-crediting of 5% since 1 July 1997".[212]

128. Plan Actuary C noted that the Trustee had already agreed that the three year average interest crediting rate would be discontinued with effect from 2001/02. The interest crediting rate for 2001/02 and subsequent years would be determined having regard to the advice of Plan Actuary C, the earning rate for the year and the level of the relevant Crediting Rate Reserve. The Trustee would aim to manage the Crediting Rate Reserve in the range of -5.0% to +5.0% although a reserve outside that target range might be adopted in special circumstances. Plan Actuary C then set out matters that a considering in setting the crediting rate would include:

"· The level of subsidy between different generations of members.

· The financial risk to the Plan of year to year smoothing not evening out, due to changes in the amount of crediting rate liabilities. In particular, it is noted that the bulk of crediting-rate related liabilities are in respect of deferred benefit members, who can withdraw their balances at any time or, once over 55, convert to a pension at the time of their choosing. If substantial amounts are withdrawn or converted when accounts have been over-credited, then future declarations will have to be disproportionately reduced (i.e. remaining members will be disadvantaged) or there will be a financial strain which will fall to the employer sponsor to meet. The latter should only occur if agreed with the employer.

· The needs and expectations of members and the smoothing policy utilised in the past.

· The ongoing crediting rate policy ... - in particular the desire for the Reserve not to fall below the -5% level."[213]

129. On 13 August 2002, Plan Actuary C sent an email to, among others, VBV, VBN, VBO, VBP, VBQ and VBR and copied it to others including MS1. The email attached an Information Notice to be sent to members regarding changes to the crediting rate policy (1998-2001) to be applied for the 2001-2002 financial year. He noted that it would require "legal clearance".[214]

The meeting of the Trustee's Directors on 13 August 2002

130. At its meeting on 13 August 2002 attended by VBV, VBN, VBP, VBQ and VBR and lasting a little over two and a quarter hours, the Board noted the background paper prepared by Plan Actuary C. The Directors made a number of resolutions. Among them were that the Crediting Rate Reserve be returned to a nil or positive state by 30 June 2004, that there be a further review of the crediting rate policy and Investment Policy with the aim of moving away from smoothing and providing members with some choice of investment policy and that the interim crediting rate be set at nil.

Information Notices to Plan members sent on or about 19 August 2002

131. The Trustee informed the Members of the crediting rate for 2001/02 in a letter sent on or about 19 August 2002. It referred to its advice in its Newsletter of June 2002 that it would no longer be basing the Credit Rate on the three year average earning rate approach that had applied since 1 July 1997. The main factors giving rise to the change were said to be the market performance in 2001/02, the likelihood that maintaining the three year averaging approach would result in a 2001/02 crediting rate well in excess of the actual earning rate and that the level of actual earnings held back in previous years would not support a subsidy for 2001/02. Had the three year averaging method been retained, the newsletter suggested that there would have been a deterioration of the Crediting Rate Reserve to approximately -14.0%. A table was included to show how aggregate crediting rates had exceeded aggregate earning rates since 1 July 1997.[215] The Trustee also advised that it had decided not to recoup any of the generous crediting rates that had been set in the past but that it intended to do so by 30 June 2004 through the Credit Rates it set.

The meeting of the Trustee's Directors on 2 September 2002

132. A Plan Executive or Plan Manager was appointed on 2 September 2002.[216] He is an actuary, who reported to an officer in the Employer other than any of the Employer representative Directors and the CEO.[217] His appointment was recorded in the minutes of the meeting of the Board of Directors held on that day. That meeting was attended by, among others, VBV, VBN, VBO, VBP, VBQ and VBR as well as ND1, Plan Actuary C and MS1. It noted the appointment of a Plan Executive. With regard to crediting rate policies, the minutes record that "employer input needed re level of smoothing it will accept. Interim rate to be reviewed at each Trustee meeting."[218] It adopted Plan Actuary C's recommendation regarding the interim crediting rate

Legal advice given in letter dated 14 September 2002

133. The Plan's legal adviser wrote to VBV on 14 September 2002 responding to:

"· Whether the Trustee provided misleading information under the Trade Practices Act 1974;

· Whether there has been a contravention of the SIS Regulation 13.16;

· The (perceived) retrospectivity of the change to the policy;

· Members (sic) concerns about timing of their decisions to withdraw funds;

· Provide comments on the employer proposal on future changes."[219]

He was given the papers from the Board meetings of 24 June, 29 July and 2 September 2002, the June 2002 Newsletter, the August communication to members and members' letters written to the Trustee.

Employer's contributions after adoption of new crediting rate policy

134. After the Trustee had adopted its new crediting rate policy, the Employer agreed to additional contributions of $5 million by 31 December 2002.[220] The additional contributions represented additional contributions of $375,000 per month from 1 July 2002 "in respect of normal benefit payments" and an additional amount of $3,500,000 in respect of benefit payments and transfer amounts arising from the sale of one of the Employer's businesses.[221] In addition, the Employer agreed to contribute $23 million in the year ending 30 June 2003 and $25 million in the year ending 30 June 2004.[222]

135. In January 2002, the Employer made an offer to the members to transfer to another Category of the Plan. That category would be in the nature of an accumulation, rather than a defined benefit fund. We will refer to it as the Accumulation Category.

136. Before the Employer made the offer, it was considered by the Trustee's Directors at various meetings between September and December 2001.[223] The meeting of the Trustee's Board on 24 September 2001 was attended by, among others, VBR, VBV and PD1. In relation to the Accumulation Category, the Directors noted that the transfer offer material had to disclose the fees. The Actuarial Firm would see that the material had been updated.[224] PD1 asked that actuarial advice be provided in respect of the reasonableness of the actuarial assumptions made in the member projection statements.[225]

137. VBP, VBV, ND1, PD1 were among those attending the Board meeting of the Trustee on 26 November 2001. The Directors noted that the Actuarial Firm had drafted the transfer booklets that had been reviewed by the Employer's Legal and Compliance Sections. Those Sections had made comments as had Trustee Directors. The minutes of that meeting continued:

"the directors noted that the employer has responsibility for plan design and the transfer offer, however the Trustee is responsible for information to the members, including new members, further noting SIS and fiduciary responsibilities and obligations. The directors requested independent legal advice that the information contained in the transfer booklets is not misleading or deceptive. ... [A member of the Actuarial Firm] agreed to obtain legal advice on behalf of the Trustee once all amendments had been incorporated. The directors requested appropriate sign offs and requested that the employer certify from expert sources that everything is fair, reasonable and balanced.

The directors noted that in relation to deferred benefit members the pension benefit does not provide a benchmark for comparison. ... [The Employer's Plan Representative] reported the employers [sic] intention is to finalise this matter prior to the December Board Meeting. The directors requested to receive all information and documents that would go to the members, together with the ... Legal and Compliance sign off.

Further requested independent legal advice that the process taken does not breach any trustee duties or obligations under SIS or fiduciary duties. ... [Members of the Actuarial Firm] agreed to draft a letter."[226]

138. PD1 reported that he would not be a party to any decision in relation to the transfer assumptions as he was about to resign as a director and the assumptions would not come into play until after his resignation.[227]

139. At its meeting on 17 December 2001, VBO, VBP, VBQ, VBR, VBV, PD1 and ND1 were among those attending. The Trustee Board received advice from a solicitor, whom we will call FSS, from a firm whom we will call FS. FSS advised the Directors regarding the Trustee's responsibility in relation to the preparation and release of information to the Members regarding the Employer's proposed Transfer Offer.[228] The Directors noted that certain financial advisers would have access to the base data and the Employer would assist eligible advisers by providing training on the Plan and the use of the model. PD1, who attended that meeting, was concerned that the information portrayed in the graphs was based on misleading assumptions. The Directors noted that the assumptions behind and design of the new Accumulation Category had been made on the basis of expert advice.

140. FSS advised the Directors that they should refer any matters of concern to the Employer.[229] Later, the minutes of the meeting record that FSS advised the Directors that "... under SIS legislation, the Trustee must reach a view that members received effective communication to make an informed decision."[230] FSS also:

"... commented that from Defined Benefit member perspective it is difficult to determine what they [are] giving up and getting in return. Therefore consideration to providing a value should be made."[231]

141. FSS also advised the Directors that ... "the Group Legal sign-off was from an employer's perspective which differs to the Trustee perspective however it can be accepted."[232] They agreed that the transfer kit should contain a letter from the Trustee. That letter should give a simple example, although qualified by reference to its being based on then current rates and be subject to change. It should also make a reference to the need to obtain financial advice.[233]

142. VBV signed a letter to be sent with the Transfer Offer. It read in part:

"... After careful consideration, the Trustee has decided that it should write to you separately from ...[the Employer], both in order to emphasise the potential significance of any decision that you might make and to encourage you to obtain financial advice before making any decision.

The issues involved in the Transfer Offer are complex and no matter what you believe to be your level of understanding, the Trustee encourages you to take an active interest and to obtain financial advice from an appropriately qualified adviser. Financial advice in this situation is a wise investment.

Obviously you should read and understand all the Transfer Offer materials. Aspects of particular relevance to you are:

1. Your Personalised Transfer Benefit Statement - understanding the significance of the 'gap' (the difference between earnings and salary increases) and its practical implications to your potential benefits is absolutely fundamental to a sensible decision being made ...
2. The fact that moving from a defined benefit to an accumulation benefit transfers the investment risk in providing your benefits from the employer to you ...
3. The comments on the value of your pension option on retirement ...
4. The comparison of benefits ...
5. Understanding that employer contributions to provide defined benefits are averaged over the whole membership and that the cost of providing defined benefits to each member varies. The actual cost of providing defined benefits for you can therefore be less or more (sometimes significantly more) than the employer contribution rate, depending on your circumstances. A financial adviser will be able to assist you in understanding this aspect and the implications for you. ...
6. ...
7. ...
8. ...

In your own interests, you are encouraged to be fully informed about and interested in this important opportunity."[234]

143. When the Transfer Offer was communicated to Members, they were sent a package including the Trustee's letter as well as:

· a personalised transfer benefit statement which included the Member's account balance as at the end of 30 June 2001;

· a detailed comparison of the benefits available if a Member had a Defined Benefit Pension and if that Member were to choose to transfer to the Accumulation Category;

· the compilation of several examples showing the benefits available under each to a Member and based on varying projections;

· a projection of the Member's current benefit arrangements under the Plan together with the pension benefit available to that Member at varying ages;

· on the basis of a sample purchase price, a comparison between the pension available under the Plan and annuities available commercially from the Employer Sponsor;

· an example of the way in which pension conversion rates are calculated with reference to a Member's benefit; and

· a statement that the Employer would provide each member with a voucher worth $200 that could be used to offset the cost of obtaining financial advice from financial advisers approved by the Employer.[235]

144. The Transfer Offer package contained a comparison of benefits under the Defined Benefits Category and the Accumulation Category. One passage stated:

"Your Defined Benefit Pension Option Can Be Valuable

The pension conversion rates available under the Defined Benefit Section of the Plan can be a very valuable option, depending on your personal circumstances and the economic parameters at the time you retire.

Considerations involved in assessing the attractiveness of the Plan pension conversion option will include your health, whether or not you have a spouse, your spouse's age and health (if applicable), the amount of your benefit, your income needs and your risk tolerance, as well as tax treatment and social security rules.

At the current time, the pension conversion rates offered by your Defined Benefit Division of the Plan are generally very favourable relative to commercial annuity rates ..."[236]

The document went on to set out comparisons illustrating the favourable pension conversion rates.

145. In a paper dated 30 July 2002, EC1 prepared a Discussion Paper regarding crediting rates, Pension Factors and the scope to provide future service benefits of existing Members through a defined contribution scheme. He noted that Plan Actuary C was proposing a crediting rate of -5.9% equal to the earnings rate in the year ending 30 June 2002 and recommending that the remaining -5.4% of over-crediting be clawed back over the following two years. The future approach to smoothing needed to be resolved. If it were abandoned, he wrote, members should be permitted some investment choice although some already had the choice to take their benefits from the Plan.

146. From a funding point of view, he suggested that the Employer's objectives should be to reduce the number of deferred pensioners who had the benefit of generous pension factors fixed in the Trust Deed. Reduction of their number would reduce future uncertainty over funding of the Deferred Benefit fund. He continued:

"The cost to the Fund of pre-1995 members taking a pension is at least 28% more than the cost of the lump sum. The cost is, arguably, much higher (ie up to 100% more) when judged against ... [the Employer's] annuity rates. This is probably an over-statement as account needs to be taken of commissions, expenses, profit margin and different life expectancy of annuitants vs fund pensioners. ..."[237]

147. He sent copies of his paper to the CEO, Plan Actuary C, Actuary D and VBN on 31 July 2002 to provide background for a meeting they were to have on 1 August 2002. Also on 31 July 2002, Actuary D wrote to EC1 setting out estimates he had made on the basis of the Actuarial Review conducted in 1999.[238] He estimated the saving in future benefit costs expressed as a current day lump sum equivalent as some $13m although the savings could be greater if the accrued benefit available for conversion to a pension were fixed at a specified day. Actuary D canvassed the relevant issues and concluded that "plus 28% is of the right order of magnitude in considering the cost of the pension option (and closer than the 'plus 90 odd' that might be implied by the reported ... [Employer] annuity price)."[239]

148. Plan Actuary C wrote to the CEO on 6 August 2002 setting out what the Trustee had reserved for and the enhancement that could be done without additional contributions from the Employer.[240] He emphasised that the decision regarding an incentive to take the lump sum option was a decision separate from the crediting rate decision and not to be raised with the Trustee until the Employer made a decision regarding it if it made a decision at all.[241]

149. In mid August 2002, the Trustee sent Information Sheets to Deferred Benefit Members to advise them of the change to the crediting rate policy and of a "Potential Employer Offer". In the latter regard, the Information Sheet included the following passage approved by VBV after a discussion with the CEO:[242]

"The Trustee has been informed by ... [the Employer] that it is considering making a limited offer to members aged 50 years and above with deferred benefits. We understand that this offer may involve an enhancement to the account balances for members who choose to take their benefit as a lump sum. We understand that ... [the Employer] expects to provide details of this within the next four weeks."[243]

150. In the meantime, work continued on developing the proposal. The CEO wrote to VBV regarding changes in the Plan's benefit design and enclosing a paper prepared by EC1.[244] The Employer indicated that it would withdraw the option for employees to elect on retirement to take a pension for life instead of a lump sum. The change did not affect benefits accrued up to 1 December 2002.

151. A further paper was prepared for the Employer's Board meeting on 28 August 2002.[245] That paper summarised the estimated financial position of the Plan at 30 June 2002 and recent action taken by the Trustee and the Employer. It recommended making an additional contribution of $2.5m to the Plan in the first half of the year and a further $2.5m in the second half. A contribution rate of $5.0m each year was "... roughly equivalent to funding the deficit over a period of 8 years."[246] In so far as the Employer Offer was concerned, the paper recommended:

"... that these deferred members be offered the option to take a lump sum amount 5% higher than their current account balance. This is effectively like at 10%-12% incentive, as they can otherwise expect crediting rates in future to be 5%-7% lower than the earning rate."[247]

152. At its meeting on 28 August 2002, the Board considered the proposal. VBW attended part of the meeting[248] while VBV and VBN attended the whole meeting. The minutes record:

"It is proposed to make an offer to existing deferred members to encourage them to take a lump sum rather than a pension. Members who withdraw lump sums from the fund will be offered a 5% enhancement to account balances."[249]

153. By early September 2002, VBW had been appointed as a director of the Trustee in place of ND1. He too was appointed as an Employer-representative. On 12 September 2002, Plan Actuary C notified the Trustee that the Plan was in an unsatisfactory financial position within the meaning of the SIS Act.[250] On that same day, the CEO wrote to VBV advising him of the Employer's proposal to make an offer to Deferred Benefit Members above 50 years of age.

154. On 17 September 2002, the CEO sent an email to the Plan Executive and copied it to others including VBN and VBW. After expressing concern about whether or not the offer should be extended to those under 50 years of age, the CEO wrote:

"The point is that if people withdraw their lump sum from the fund we avoid the high (and potentially unknown and higher) cost of the lietime [sic] annuity. ... If there is also a 'valuation profit' on the under 50s if they take an enhanced lump sum then I see no problem. ..."[251]

The Plan Executive responded on 19 September 2002 to the effect that he was looking into the matter. At the meeting of the Trustee's Board of Directors earlier in the week, the legal issues had been discussed. VBV and VBN were to talk to the CEO the following week.[252]

155. On 20 September 2002, Actuary D prepared a note regarding the Employer Offer. He canvassed the current account balances of Deferred Benefit Members then totalling $70m but noted that the actuarial reserve for those members was higher than that. It was higher because of the proportion of members who would ultimately opt to take a pension option rather than a lump sum and the additional cost of the pension option. On average and on the basis of assumptions adopted for the 1999 actuarial review, the pension option represented approximately 28% of the account balance for those members who opted for it.[253]

156. The Trustee's Board of Directors resolved at its meeting on 7 October 2002 to ask the Employer to commence making additional contributions to cover the estimated portion of benefit payments not then covered by the Plan's assets. The Plan Executive relayed this request when he wrote to VBW on 10 October 2002.[254] VBW confirmed the Employer's agreement to the additional contributions on 14 October 2002.[255]

157. VBN and the Plan Executive were among those who attended the Employer Plan Steering Committee on 18 October 2002. Among the matters discussed were the progress of the Employer's Offer, the removal of future pension accruals and the Trustee's future investment strategy.[256]

158. When the Plan Executive was initially welcomed to the Trustee's meeting on 2 September 2002, he was welcomed as filling that role. The role of the Plan Executive was later subject to some debate. In an email to VBW and the Plan Executive on 25 October 2002, the CEO wrote:

"As far as I am concerned ... as Plan Manager, is employed by ... [the Employer] as an expert in superannuation to ensure the employer manages its superannuation plan better than we have in the past. No objection to ... [the Plan Executive] giving help, advice to the Trustees but his role is to manage the plan for ... [the Employer], not for the Trustees ... - please can you confirm my understanding.

Not sure the message has yet got through as the Trustees continue to meet and make decisions without discussing them in advance with the employer. One of ... [the Plan Executive's] jobs is to make sure that ... [VBW] and I are made aware WELL IN ADVANCE of any financial issue coming before the Trustee so that we can consider our position and make sure the Trustee knows what it is before making any decisions. The current approach has GOT TO CHANGE. The trustees are still meeting and discussing/deciding on crediting rates, policy on choice of fund etc without a formal process to get [t]he employers [sic] view first.

In fact I want an URGENT review of the investment policy of the fund carried out, and a review of investment performance BY AND FOR THE EMPLOYER. Please could ... [the Plan Executive] talk to me and ... [VBW] about getting this underway."[257]

The email also discussed the Employer's contributions to the Plan.

159. An officer of the Employer suggested to the Plan Executive that VBW should be a member of the Employer Plan Steering Committee and he later did so. The officer also recommended that the CEO be copied into the minutes of the committee's meetings and that the CEO be made aware that its role was to develop and review recommendations put to him for his approval or endorsement.[258] In a further email copied to, among others, the Plan Executive and VBW, the CEO wrote about a complaint that had been received from a Deferred Benefit Member regarding the smoothing policy. The CEO thought that the complainant had raised a fundamental issue:

"... As it clearly affects the financial liability of the employer I would like to be involved in the seeking of advice and the briefings given to advisers on this point. It also does go straight to the issue of investment policy and whether the current policy is appropriate."[259]

160. A second consultant actuary engaged by the Employer, Actuary E, wrote to the Plan Executive on 30 October 2002 advising on the impact that the Employer Offer could have on the Plan. Unlike Actuary D, Actuary E was not employed or engaged by the Actuarial Firm. He enclosed a draft letter for the Employer's consideration. It was addressed to the Trustee and included drafts of material to be sent to Deferred Benefit Members.[260] The Plan Executive sent a copy of the letter to others including the CEO, VBN and VBW on the same day.[261]

161. Actuary E outlined the offer's advantage to Deferred Benefit Members:

"- It offsets a significant portion of the reduction in benefit caused by the 2001/2002 crediting rate of -5.8%;

- It offsets any reduction caused by a negative interim crediting rate, subject to a maximum further increase of 5%; and

- Members will leave the Plan before the negative crediting rate reserve is recouped via the crediting rate (noting that they have the option of leaving the Plan at any time in any case)."[262]

162. Actuary E went on to assess the Employer Offer on the basis of the data and valuation calculations provided by the Actuarial Firm. That data, he wrote, had manually updated Members' accounts between 1 July 2001 and 30 June 2002. It had then calculated the present value of the pension option for members individually on the basis of fixed pension conversion factors, pension valuation factors and an appropriate assumption about the gap between future salary growth and investment returns.[263] Actuary E canvassed the financial impact of the Employer Offer on the Plan. To the extent that Members, who would otherwise have taken a pension option, accept the offer, the Plan's expected liabilities are reduced. That comes about from the payment offer of 105% of a Member's account balance being less than the value of a pension option, which is approximately 128% of that account. To the extent that they would have taken a lump sum, the Plan's liabilities are increased as the payment offer was 5% greater than their account balances. That increase was offset by the removal of the risk that they might later choose to take a pension. Members taking the Employer Offer would not contribute to the notional recoupment of the notional investment reserve of -5% of assets. Members taking the offer would receive a further benefit as a result of the Plan's interim crediting rate. Actuary E went on to assess the financial impact of the offer having regard to each avenue Members could adopt and then looking at their combined effect.

163. The letter drafted by Actuary E for the Employer told the Trustee that the Employer proposed the following offer to be made to Deferred Benefit Members:

"Acceptance of the offer requires the member to immediately exit the Plan.

- 105% of any account balance which the member has the option to convert to a pension benefit now or in the future; plus

· If the interim crediting rate is negative for the period from 1 July 2002 to their date of exit, a further increase in their total account balance to offset the impact of the negative crediting rate, subject to a maximum further increase of 5%.

It is further noted that by accepting this payment offer a member will avoid the reductions in the crediting rate for the 2002/2003 and 2003/2004 financial years, planned so as to recoup the current negative investment reserve, (as foreshadowed in the Trustee Report as at 30 June 2002).

Members who do not accept the payment offer will retain their existing entitlements."[264]

"We note that the Trustee is required to consider only the following aspects of the offer:

· That it does not detrimentally affect other Plan members; and

· That it can be legally implemented under the terms of the Trust Deed.

We note that the value of the offer in relation to existing benefit entitlements will be communicated fully to members as part of the offer process, allowing members to make a proper assessment of the payment offer in light of their own financial circumstances."[265]

164. The Employer attached at Appendix A a document entitled "Notice to Deferred Benefit Members" (Employer Offer Notice).[266] The Employer Offer Notice, which was in draft form, conveyed information similar to that which Actuary E had conveyed to the Employer and in the draft letter to the Trustee. As to the pension option, the draft stated:

"The valuation basis adopted for the latest actuarial investigation of the Plan values the pension conversion option at an average of 128% of members' account balances for those exercising the option at age 55, reducing slightly to around 120% of the account balance for members exercising the option at 65.

The actual value of the pension option for any individual member will depend on their ultimate life span, their marital status (and life span of their spouse) as well as future earning rates and CPI increases."[267]

165. A meeting of the Board of Directors of the Employer discussed the Plan on 30 October 2002. VBW and VBV were both present at the commencement of the discussion of that item.[268] VBV expressed the opinion that the Trustee would prefer to see the pension option removed for future service and the only issue was to determine the best way that was to be done. The CEO, the minutes recorded, then asked both VBV and VBW to leave the meeting. They did, returning only after the Board had discussed an unrelated matter regarding the Plan and its Trustee.[269]

166. On 31 October 2002, there was a meeting of the Employer Plan Steering Committee. Among those attending were VBN and the Plan Executive and, for part of the meeting, VBW.[270] Its agenda included discussion of the Employer Offer and a copy of Actuary E's report was attached.[271]

167. On 11 November 2002, MS3, who is an actuary, from Actuary E's firm sent an email to the Plan Executive, and copied it to Actuary E, attaching a revised draft of the Employer Offer Notice. She referred to a discussion with an unnamed person or persons and advised that she had removed the paragraph referring to the actuarial valuation. In its place, she had inserted another telling Members to consider carefully how valuable the pension option was or might be to them and that they might wish to seek advice. She concluded by saying that "As we discussed, it is important for the Trustee to make sure the member understands the value of the option when they consider the payment offer."[272]

168. The next, and final draft of the Employer Offer Notice advised Deferred Benefit Members:

"The actual value of the pension option for any individual member will depend on their ultimate life span, their marital status (and life span of their spouse) as well as future earning rates and CPI increases.

It is important that you carefully consider how valuable the pension option is, or may be, to you. You may wish to seek appropriate advice on this issue.

On acceptance of the payment offer, and hence exit from the Plan, you would forgo the pension conversion option."[273]

169. On 12 November 2002, the Plan Executive sent an email to CEO and VBW and copied it to VBN. It stated:

"Attached is the revised letter re the 5% offer for deferred benefit members. Of note in the Appendix is that the valuation '129% figure' has been removed and a comment that the investment strategy for the deferred benefit members is expected to be more conservative has been added (... [VBW] and I spoke about the strategy this morning)."[274]

170. On 18 November 2002, VBV advised the meeting of the Trustee's Board of Directors that he was waiting on written confirmation from the CEO outlining the details of the Employer Offer.[275] As part of the offer it would be important to consider the investment strategy and risk for Deferred Benefit Members. Several points were made. It was noted that a paper on the future crediting rate policy would be available at the 16 December 2002 meeting. That paper would need to be considered in conjunction with any Employer Offer for an enhanced payment. The Plan Executive, Plan Actuary C and MS1 were working on a future crediting rate policy paper. The Directors discussed the various issues and noted the related issue of the Employer's desire to cease future pension accruals for Defined Benefit Members.[276]

171. They also discussed the CEO's letter dated 18 November 2002 and his request to proceed with the proposal to change future pension accruals.[277] In his letter, the CEO wrote that the Employer had obtained legal advice that the change was permitted by the Trust Deed. The amendment could not reduce Members' accrued benefits to the date of the amendment but it is widely accepted that benefits in respect of future service are not part of accrued benefits. The CEO wrote that he understood that the Trustee had received legal advice recommending that the Trustee should seek an opinion from counsel and/or a ruling from the Court. He considered that approach to be unreasonably cautious. In addition, he understood that Plan Actuary C was prepared to certify to the Trustee that the proposed amendment did not adversely affect the value of the accrued benefits.[278] The CEO concluded by writing:

"... [The Employer] wishes to make it clear that the option to take either cash or a pension on the terms under the Trust Deed cannot continue. Few, if any, other superannuation plans in Australia offer this option, and an option of this nature if allowed to continue, will put serious financial strain on the Plan. We do not believe it is necessary for the Trustees to seek a Court ruling.

Accordingly, I must make it clear that if the Trustees are unable to consent to the change proposed by ... [the Employer], I will recommend to the Board that ... [the Employer] cease contributions to the ... [Employer Plan]. In these circumstances the Plan would be wound up. ... [The Employer] would install a Plan for future service benefits but a replacement Plan would not contain the option to convert the superannuation lump sum into a pension. The members' booklet makes clear under the section ... that the Trust Deed does allow the Plan to be wound up. This is not ... [the Employer's] preferred course of action - we would rather continue the existing Plan but it has to be on a financially sound basis.

I would request that the Trustees consent to the amendment without further delay."[279]

172. On 21 November 2002, the Plan Executive sent an email to the CEO and VBW copying advice sent from the Actuarial Firm to the effect that:

"We would recommend that the unfunded portion of any payments arising from the offer be met via a once-off contribution. This will avoid the offer having any detrimental impact on the asset coverage of remaining members' vested benefits. Our calculations use the overall ratio of 88% of net assets to vested benefits at 30 June 2002, based on the recently advised provisional actuarial review results."[280]

The Plan Executive explained that the Trustee was looking for a cash injection even though the Plan's net liabilities might reduce. He suggested that they and VBN might discuss the implications when they met later in the day.

173. A meeting of the Employer Plan Steering Committee took place on 22 November 2002. VBW was among those who attended. It was decided to put the Employer Offer on hold until there was agreement regarding the longer term superannuation policy.[281]

174. The Board of Directors of the Trustee met on 19 December 2002. Among those attending were VBV, VBN, VBO, VBW and VBP. In considering the crediting rate policy, it was agreed that the initial focus would be on the Deferred Benefit Members and that other accumulation accounts would be considered later. VBV noted that an Employer Offer could not be made until decisions had been made on the crediting policy and the recoupment of the negative crediting rate reserve. In coming to decisions regarding investment objectives, the Directors had regard to the SIS Act and identified the whole of the Plan's circumstances as relevant in formulating those objectives i.e. membership profile including age and expectations, benefit structure and the likelihood of future support by the Employer.[282]

175. Plan Actuary C had prepared a paper dated 16 December 2002 reviewing the investment and crediting rate policies for the Deferred Benefit Division.[283] He summarised that paper for the Directors and they discussed the options. They preferred a cash-based crediting rate and the main considerations leading them to adopt that view were:

"▪ The introduction of deferred benefits has resulted in a substantial additional amount of actual and potential pension liabilities.

• There are considerable funding risks associated with the provision of pension benefits.
• The Employer's attitude to continued support of the Plan is contingent on a number of actions being taken to mitigate the risks associated with the pension liabilities.
• One of these actions is to change the crediting rate policy for deferred benefits to provide a more appropriate growth rate.
• The main purpose of the deferred benefit facility is to allow members to access a Plan pension from age 55. For members in service, growth in their retirement pension option is directly linked to increases in salary.
• Membership of the deferred benefit category is voluntary not compulsory and members can leave and take a lump sum at any time (or a pension if over age 55)."[284]

The Board of the Trustee asked for advice on the manner in which its decision could be implemented and the recoupment of the crediting rate reserve.

176. On the following day, 20 December 2002, VBW wrote an email to the CEO:

"There were two important issues on the staff super fund yesterday.

As I said last night the Trustee Board has resolved to adopt a cash only investment strategy for deferred benefit members. The plan actuary and ... [the Plan Executive] are now working on how this gets implemented in conjunction with the offer to deferred benefit members. There is also a separate piece of work underway to recommend an appropriate investment strategy to match the rest of the liabilities, ie defined benefits and pensions in payment.

In implementing this strategy I do not believe the Trustee Board will agree to recouping the 5% overcredited against a cash investment return. I have to say I am not comfortable with this myself as a trustee. I understand the company's position and that it will have to consider its preparedness to continue to make contributions - so be it. That is a relevant consideration but not the only one.

The other matter which was discussed is the deficit. The Trustees responsibility under law is to have a plan to restore the financial position of the fund although clearly it is for the company to determine how it will fund the plan. The Board considered ... [the Actuarial Firm's] funding paper and it will write to the company with some observations on it and request from the company an indication of how it proposes to address the shortfall such that the Trustees can meet their obligation under law to have a plan. Based on the discussion yesterday notwithstanding the plan actuary's recommendation to restore the position over 5 years the Trustees accept that it may be longer than this and would be comfortable provided there is some additional payment shortly - ... [VBV] told them that the company was considering making an additional payment this year!"[285]

177. On 6 January 2003, VBW wrote to the Plan Executive and the CEO stating that, based on Actuary C's calculations and summary paper and previous discussion at the Trustee's Board meeting, he could see no reason why the Trustee would not accept the Employer's funding plan. If the CEO agreed, he would include the matter on the agenda for the Employer's Board meeting as well as Plan Actuary C's paper. He would also advise VBV of the proposed funding plan.[286] The CEO replied agreeing to the proposal but wanting to meet with him and the Plan Executive. He did so in an email sent an email to VBW on 6 January 2003. He asked VBW for a paper for presentation to the Employer's Board meeting on 28 January 2003 relating to staff superannuation issues. The CEO indicated that he was becoming very irritated regarding the lack of progress in the matters. He remained:

"... concerned with ... [VBV's] attitude re the withdrawal of the pension option for future service, and I am also concerned that the current view of the Trustees with regard to the deferred members and crediting rates will make the special offer of such little relative value that no-one will accept it. We need to get the Board more involved in these issues."[287]

178. On 8 January 2003, the CEO of the Employer copied an email to VBW, VBN and the Plan Executive. In it, he canvassed a range of issues relating to the inappropriateness of a smoothed return for Deferred Benefit Members and the inappropriateness of the design of the scheme relating to them. He pointed out that the Trustee has a duty to ensure that all Members are treated fairly and not just the Deferred Benefit Members. As far as the Employer's shareholders were concerned, it was never envisaged that they would bear the additional cost generated by the policy relating to the Deferred Benefit Members. In his view, it was not appropriate for the Trustee to ignore the fact that the account balances still exceeded the underlying asset value by about 5 or 6%. The smoothing mechanism was intended to smooth but not to deliver a return to Deferred Benefit Members that had not been earned. The cost of not recouping the deficit would be magnified if it were to be applied in the future to securing guaranteed pensions in the future on the extraordinarily generous rates. He then canvassed possible solutions to recoupment but concluded by saying that moving from the old to the new would be a matter of judgment for the Trustee based on actuarial advice. The Employer Offer could not be put until the approach to crediting rates and the remaining asset deficit was resolved. One of the potential attractions for this approach would be that the Employer would agree to bear the cost of not recouping the deficit from members who take up the offer. If the Trustee has a policy of not recouping the deficit, this either makes the offer less attractive, or more expensive, to the Employer.[288]

179. On 8 January 2003, MS4 from the Actuarial Firm wrote to VBV, VBW and VBN with a copy to the Plan Executive. She wrote that she and the Plan Executive felt that a circular should be sent to the Deferred Benefit Members as early as possible in view of the complaints that were being received. VBW responded that he understood the desire to keep them informed but thought it dangerous to create new expectations. Although there was a definite willingness by the Trustee to resolve the matters, they were not simple and there could be no guarantee when they would be resolved.[289] VBN also queried whether the matters could be addressed by February.[290] The draft was amended to remove mention of timing and MS4 advised of that amendment on 9 January 2003.[291] The solicitor from the Trustee's solicitors made further suggested changes on 13 January 2003.[292] We will refer to the solicitor as TS and his firm as TSF.

180. Actuary E wrote to the Plan Executive on 10 January 2003 advising on the implications of the Employer's giving notice under cl 41 of the Trust Deed.[293] He emailed it to the Plan Executive, who forwarded it to VBN.[294] VBN advised the Plan Executive that this was not the CEO's preferred option at that time but, if that course had to be taken, "heaps of advice" would not be needed.[295]

181. The CEO wrote to the Plan Executive on 13 January 2003 regarding the Deferred Benefit Members and crediting rates. He noted that, apart from those who had become Deferred Benefit Members since 1 July 2001, all had been credited with more than their asset share. The CEO went on to summarise the consequences of choosing to convert to cash returns on accrued balances or to recoup the remaining overcrediting. He could not see any reason why the Trustee could not decide to move from a fully smoothed approach to a cash approach in this way. Whichever option it chose, the Employer Offer was "... not looking worth very much".[296] He asked whether the Plan Executive could summarise the financial impact if the Employer were to increase the Employer Offer from 5% of account balances to 10%.

182. On 15 January 2003, TS gave further advice to the Employer through the Plan Executive. He recommended that the Employer Offer Notice not be sent to Deferred Benefit Members at that time. His reasons were that there was no certainty when the review of the investment and crediting rate policy would be completed, it was uncertain whether the Employer would make an offer to Deferred Benefit Members and many of the relevant Members had already engaged in correspondence with the Trustee and so would learn nothing new from the draft notice. Until the Trustee could be more certain of these issues, he did not recommend its circulation.[297]

183. MS4 from the Actuarial Firm took responsibility for the coordination of the comments and the preparation of the material regarding the Employer Offer.[298]

184. On 22 January 2003, Plan Actuary C wrote two letters to VBV. The first dealt with the Plan's financial position and the need to monitor it more closely than annually. If a review of the Plan indicated that the financial position of the Plan differed significantly from what had been expected, Plan Actuary C would discuss a revised programme of additional contributions with the Employer and the Trustee.[299] His second letter addressed the crediting rate and the investment policy for Deferred Benefit Members. As part of that, it addressed whether the Trustee's decision that the investment strategy for Deferred Benefit Members should be 100% cash was appropriate or whether it would lead to further complaints from Members.[300]

185. VBW and the Plan Executive prepared a paper for the Employer Plan Steering Committee some time before 24 January 2003. It addressed the financial status of the Plan, crediting rates, withdrawal of the guaranteed pension option for future service and the status of complaints from Deferred Benefit Members. It concluded by noting that the Trustee would be considering all of the issues at its meeting on 24 January 2003.[301]

186. On 24 January 2003, the Trustee decided to adopt the second of two alternatives proposed by Plan Actuary C in his letter of 22 January 2003. That is, that it would advise the Employer that, provided investment returns averaged 8% per annum, its proposal to contribute $17m in 2002/2003 with a further $5m per annum thereafter until 100% coverage of the VBI and the Accrued Benefits Reserve was achieved. It would reassess the adequacy of this programme annually.[302] The Trustee also decided not to recoup the 5% Notional Crediting Rate Reserve.[303] Although not recorded in the Minutes, VBW recalled that the Employer Offer was discussed at the meeting.[304]

187. On 28 January 2003, VBW sent an email to the CEO and copied it to the Plan Executive. He advised the CEO of the outcome of the Trustee's Board meeting. With regard to the crediting rate policy and the Employer Offer, he wrote that it had been resolved:

"To prepare an implementation strategy in relation to moving to a cash investment strategy/crediting rate policy for deferred benefit members and communications materials. This would need to be communicated in conjunction with employer's offer if still proposed. The Trustee Board are not however prepared to agree a recoupment of the $2m overcredited against a cash strategy. They understand however, that in light of this the employer may wish to review its position re the offer and more generally."[305]

188. On 29 January 2003, the Employer's Board met. VBW introduced the discussion of the agenda item dealing with the Plan and VBV reported on recent proceedings of the Trustee Board. The CEO also discussed the proposed Employer Offer and it was agreed that an offer of between 5 and 10% of account balances could be offered.[306]

189. The next day, VBW sent the Plan Executive a note of the Employer's Board's proceedings regarding the Plan. He told the Plan Executive that they needed to move quickly on the implementation of the cash crediting rate. Two months' notice of the change should be given and it should be implemented over a phased period of 12 months. VBW observed that:

"The offer is integral to the change because those that became deferred members since negative investment returns have the opportunity to recover most of their losses. We need to dust of (sic) the files re what this cost plus run some numbers if we were to increase it to 10%."[307]

190. On 4 February 2003, VBW sent an email to the CEO, who replied that cash returns are not necessarily a proxy for inflation. The Employer would be free to mismatch and to try to recover some of the cost of the annuity guarantee.[308]

191. On 12 February 2003, Plan Actuary C sent draft material relating to the Employer Offer to the Plan Executive.[309] The Plan Executive sent it on to VBW.[310]

192. On 21 February 2003, VBW sent an email to the CEO setting out his consolidated thoughts on the status of the various issues surrounding the Defined Benefits Scheme. He thought that they needed to work their way towards preparing a communication to the Members. In that way, they would bring the issues to a head and resolve them as quickly as possible.[311] He also sent it to Plan Actuary C for comment and copied it to the Plan Executive.[312] Plan Actuary C provided his comments later that day.[313]

193. The Plan Executive wrote to VBW on 26 February 2003. Among the matters he addressed was the possibility of the Employer's allowing Members to take some cash out under its Employer Offer. Allowing them to do that might lead to more Members accepting the offer and so to a reduction in the pension liability. Work for the Trustee meeting could proceed without its knowing exactly what form the Employer Offer would take.[314]

194. VBW sent the email to CEO on 26 February 2003.[315] The CEO replied in an email on 27 February 2003 that it had been helpful. He expressed his concern that an offer for partial cash would lead to Members getting 10% more on the cash they would have taken anyway and so increasing, rather than reducing, the ultimate cost. On that basis, it would be highly appropriate for the actuary to assume that what was not taken in cash would be taken in pension.[316]

195. The CEO sent an email to VBW on 1 March 2003 asking him to tell certain matters to the Trustee at its next Board meeting. The two main topics were Deferred Benefit Members and existing Members. With regard to Deferred Benefit Members, the Employer wanted to move as soon as possible with the Employer Offer. It would consist of a 10% enhancement where the Member takes 100% of the benefit in cash or transfers to another superannuation plan. The only exception would occur if a Member were to take the maximum pension qualifying for taxation concessions. He noted that the Trustee did not want to recoup the negative Crediting Rate Reserve at the time. While the Employer did not agree with the Trustee's position, it would not pursue it so long as it put the Employer Offer as quickly as possible. The Employer agreed with the policy to move to cash returns on 1 July 2002 and agreed to the crediting rate policy VBW was suggesting. The CEO told the Trustee that the Employer wished to examine the Trust Deed and Rules regarding the investment policy. As far as the CEO was concerned, the:

"... employer regards this as a balance of cost scheme and therefore is of the view that no changes to investment policy should take place without the consent of the employer. In the short term there should be no change in policy notwithstanding the move to a cash crediting rate for deferred members."[317]

196. As far as the existing Members were concerned, the CEO asked VBW to tell the Trustee that the Employer would be withdrawing the pension option for future service as soon as possible. The Employer would give the Trustee an indemnity regarding any action that might arise from the change. It should give minimum notice of, say, one month of the change.

197. There was a further meeting of the Trustee's Board of Directors on 5 March 2003. Among those attending were VBV, VBN, VBP, VBQ, VBW, the Plan Executive, Plan Actuary C and MS1. Plan Actuary C gave an overview of his letter of 27 February 2003. The Directors resolved that the Cash Crediting Rate be based on a suitable external rate, the investment policy be reviewed to take account of the crediting rate policy and that the then current investment policy be maintained pending any decisions arising from the review.[318]

198. VBW advised the meeting that the Employer supported the proposed change to the new cash crediting rate policy. Subject to that change, the Employer agreed to meet the cost of foregoing recoupment of the negative Crediting Rate Reserve. VBW also gave the Directors an overview of the Employer Offer it intended to make available to Deferred Benefit Members. The Trustee would ask for written confirmation of both proposals from the Employer. Given that was forthcoming, the Trustee and the Employer would need to coordinate their actions. Responsibility would lie with VBW, in his role as an officer of the Employer, the Plan Executive and Plan Actuary C on behalf of the Administrator. The Directors were to review and approve the material issued to the Deferred Benefit Members.[319] They agreed to ask TS to review the Member communication material and documentation and to respond to any enquiries from the Members.[320]

199. VBW wrote an email to the Plan Executive on 15 March 2003. He told the Plan Executive that he was becoming very nervous about the Employer Offer. He added:

"... The market continues to work against us as we discussed the other day. We must get the member comms out bey [sic] end of month. I am going to have lots of egg on my face with ... [the CEO] if this does not happen. Please make sure we are well placed to achieve this time line and bear in mind the approval process we will need to go through will take time."[321]

200. MS1 of the Actuarial Firm sent draft newsletters in respect of the new crediting rate policy and the Employer Offer to the Plan Executive and VBV on 18 March 2003. She copied her email to Plan Actuary C and advised all that she would send drafts to TS for review that day.[322] Also on 18 March 2003, MS4 emailed to VBV, VBW and VBN a draft of a communication to Members.[323]

201. On 21 March 2003, VBW's personal assistant sent MS1 at the Actuarial Firm his comments regarding the draft newsletter to Members and an email he had sent to the Plan Executive.[324] She wrote that VBW "... would like his comments to be reflected in any future version before he receives another copy."[325] Later that day, MS4, on behalf of MS1, sent drafts of various documents including the Employer Offer Notice to VBN. VBO, VBP, VBQ, VBV and VBW as well as, among others, the Plan Executive and Plan Actuary C. The drafts incorporated changes suggested by VBN, VBW, the Plan Executive, Plan Actuary C and MS1. They were then "undergoing legal review" by TS.[326]

202. Also on 21 March 2003, VBW sent an email to the CEO in relation to their previous discussions regarding the Employer Offer. In summary, VBW explained that it was too difficult to allow any partial withdrawal of account balances and to reconcile that with a Member's Reasonable Benefit Limits. He remained of the view that there was an optimal point at which Members might be allowed to make a partial withdrawal. That point was a matter of judgment. VBW told the CEO that he was happy to proceed on whatever basis he was most comfortable with be it no option for partial withdrawal or with a minimum withdrawal of something like 60% or 75%.[327] The CEO responded on 23 March 2003 opting for 75%. VBW advised the Plan Executive, who responded that the Trustee now needed the Employer to give written advice that it would forego the recoupment of the negative 5% Crediting Rate Reserve and the terms of the Employer Offer.[328]

203. TS gave the Plan Executive his preliminary views on the newsletters relating to the change in crediting rate policy and the Employer Offer in his letter dated 24 March 2003. With regard to the draft Employer Offer Notice, he wrote:

"10. I have not sighted the Employer Offer referred to on page 5 of the New Crediting Rate Policy newsletter and, of course, in the newsletter devoted to the offer itself. There are two issues of broad application that I raise in relation to the Employer Offer. The first is that consideration should be given to providing members with the document received by the Trustee from the Employer which sets out the offer.

1. Secondly, given that the Employer Offer is clearly of significance, it may be incumbent upon the Trustee to make a recommendation to members in relation to it rather than merely acting as a conduit between the Employer on the one hand and members on the other."[329]

On the basis of their evidence, we accept that VBN, VBO, VBP, VBQ, VBV and VBW did not recall receiving a copy of TS's advice.[330]

204. TS met with representatives of the Actuarial Firm and the Trustee on a number of occasions regarding the Employer Offer. They occurred on 5, 26 and 27 March and 1 April 2003.[331] VBV provided comments on the draft documents on 25 March 2003 after discussing them with VBW and the Plan Executive.[332] On 26 and 28 March 2003, MS4 advised the Directors and the Plan Executive that the drafts were being worked on and that the comments had been received.[333] MS4 sent TS a draft of the letter from the Employer to the Trustee outlining the Employer Offer on 28 March 2003. [334] TS followed this with further advice to the Plan Executive in a letter dated 31 March 2003. He addressed both the newsletter regarding the Cash crediting rate and the Employer Offer Notice. In relation to the latter, he recommended that:

"Out of an abundance of caution, I suggest that the Trustee Recommendation in Section 4.4, be amended to read as follows:

'In the circumstances the Trustee recommends that each member should obtain independent financial advice in relation to the Employer Offer, including but not limited to the pension option and the new Crediting Rate Policy'."[335]

205. Early on 1 April 2003, VBW emailed to the CEO a package of information to be sent to Deferred Benefit Members as well as the letters to be sent from the Employer to the Trustee in relation to the same matters. There were still to be a few minor changes to be made relating to style but VBW wanted to be sure that the CEO was comfortable with all of the substantive points before the package was sent out to Members. As far as he knew, he and the CEO had discussed all of the substantive points and there was nothing new.[336] The CEO responded later in the morning indicating that they were "generally fine".[337] He also noted that there was nothing in the documents relating to the withdrawal of the pension option and asking about it.

206. VBW also wrote an email to the Plan Executive on the morning of 1 April 2003. He commented on the draft letter to be sent by the Employer to the Trustee regarding its agreement that the negative Crediting Rate Reserve not be recouped. It had been attached to an email the Plan Executive had sent him the previous day. VBW told the Plan Executive that he had also received the information package from the Actuarial Firm and had sent it to the CEO for final sign off. He returned the draft letter with comments. Before suggesting a form of words for consideration, VBW wrote:

"The one outstanding issue I have is the covering letter which I still think could be a bit more helpful. Without actually drafting it I think it should go something like this. Also if we can make it a bit more friendly and not sound like this is bad news! I know we have to be careful."[338]

207. MS4 sent revised drafts to TS in the early afternoon of 1 April 2003. She sought his comment before she sent them to the Plan Executive and then to the Trustee.[339]

208. The Plan Executive replied to VBW's email on 2 April 2003. He asked that he receive the Employer's letters as soon as possible as the Trustee would not give its approval until it saw them.[340] Attached were the final drafts of the Employer's letters to the Trustee regarding recoupment and the Employer Offer. VBW signed the letters on behalf of the Employer.[341] They were dated 31 March 2003.

209. On 2 April 2003, TS sent his comments on the documents relating to the change to a Cash Crediting Rate and the Employer Offer.[342] MS4 revised the drafts and returned them to TS.[343] She told him that the Plan Executive had signed off on them and asked him to "review them fully and provide appropriate legal certification". At 12.37 pm on 3 April 2003, MS1 sent an email to all of the Trustee's Directors enclosing the final package of information and the two signed letters sent by the Employer. She told them that they had previously been provided with drafts and had undergone extensive review including legal review by TSF. Also included in the email was a Circular Resolution.

210. In fact, TS did not send a proposed letter of certification until later in the afternoon of 3 April 2003.[344] It was dated 2 April 2003. Subject to a qualification in [4] of the letter, TS confirmed that the firm was of the opinion that:

"(1) It is in order for the Trustee to publish the Documents and to subsequently issue copies of the Documents to Deferred Benefit Members of the Plan in accordance with the information requirements of the Corporations and SIS Acts_;_

(2) The Documents and their language and form are consistent with and/or satisfy the requirements of:

(b) the applicable provisions of the SIS Act and Regulations_; and_

(c) the applicable provisions of the Corporations Act and Regulations."[345]

The qualifications in [4] concerned the identity of the documents in relation to which TS expressed his opinion, an assumption that the Trustee had made valid resolutions to introduce a new crediting rate policy and Employer Offer, the limit of the matters checked and a limitation upon those to whom the certification could be disclosed.[346]

211. On 4 April 2003, the Directors signed the Circular Resolution.[347] Also on that day, VBW responded to the CEO's query regarding the withdrawal of the pension option. He explained that the processes to deal with it were entirely different from those to deal with the Employer Offer and crediting rate policy but he was pushing all of them as hard and as fast as possible. The pension accrual withdrawal required an amendment to the Trust Deed and he would forward it to the CEO as soon as possible.[348] The CEO responded later that day to the effect that there would have been benefit in dealing with the withdrawal of the pension accrual before the other matters relating to Deferred Benefit Members. That was because it was the pension accrual that was costing them money potentially and there was a risk of some creating lots of noise and publicity. It was too late to worry about that then.[349]

212. On 7 April 2003, the Trustee sent the Deferred Benefit Members a package comprising a covering letter,[350] a notification regarding the new crediting rate policy[351] and the Employer Offer Notice.[352] The covering letter, dated 7 April 2003, advised Members that the package included important notices relating to the new crediting rate policy and the Employer Offer. Two forms were included. One enabled the Member to make an election regarding the crediting rate policy and the other to make an election regarding the Employer Offer. The letter, signed by VBV as Chairman of the Trustee's Board, concluded:

"There are significant differences in the circumstances of each individual Deferred Benefit Member. As a consequence, the Trustee is unable to make a recommendation to Deferred Benefit members as a group in relation to these matters. The Trustee therefore recommends that each member should seek their own independent financial advice regarding the elections available to them."[353]

In the August 2002 newsletter to members, the Trustee advised that ... [the Employer] was considering making an offer to Deferred Benefit Members. The Trustee has now received an offer from the Employer. As the impact of the offer will vary for each member, the Trustee is unable to make a recommendation to Deferred Benefit members as a group as to whether the offer should be accepted or not, and has therefore resolved:

1.1 That details of the offer be conveyed to Deferred Benefit Members.

1.2 That the Trustee recommends each member should obtain independent financial advice in relation to the offer.

1.3 ...

As a Deferred Benefit member, you are entitled to convert your Retained - Defined Benefit Account to a pension benefit on or after your 55th birthday (subject to preservation requirements). The conversion factors are set out in the Plan Trust Deed and Member Booklet.

The pension is payable for your lifetime and is indexed annually in line with CPI (with a maximum increase of 5% p.a.). On your death, if you have a spouse who survives you, the pension will be reduced by 40% and paid to your surviving spouse. If the total of all pension payments made is less than the initial capital value applied to commence your pension, the Trustee will pay the difference to your dependants or legal personal representative.

The actual value of the pension option for individual members will depend on their ultimate life span, their marital status (and life span of their spouse) as well as future earning rates and CPI adjustments.

It is therefore important that you carefully consider how valuable the pension option is, or may be, to you.

The Trustee recognises that there are significant differences in the circumstances of individual members. As a consequence, the Trustee is unable to make a recommendation to Deferred Benefit members as a group as to whether to accept the Employer Offer or not."[354]

214. The package contained an Employer Offer Acceptance Form. The front page of that form contained five points that Deferred Benefit Members should keep in mind before completing the form. Parts of the first four were in bold type. The fifth, which was entirely in bold type, was at least as prominent as the others despite its being made last. It stated:

"The Trustee recommends you obtain independent financial planning advice on the Employer Offer."[355]

215. There was no dispute between the parties that the Employer Offer was accepted by 47 Deferred Benefit Members. After the Employer made a new offer as a consequence of its entering an Enforceable Undertaking under s 262A of the SIS Act, one of those 47 elected to reverse his decision.[356]

216. We will first consider the various legal principles on which our decision is based before considering the evidence against those principles. The principles themselves fall into two categories. The first concerns principles relating to the manner in which the case was presented. The second concerns the interpretation and application of the provisions of the SIS Act and, in particular, of the covenants.

Relevance of APRA's disqualifying seven, but not all, of the Trustee's directors involved in the decision-making

217. Understandably, the applicants questioned that APRA had decided to disqualify only seven of the Trustee's directors who were involved in the decision-making. Given that one is gravely ill, there seemed to be tacit acceptance that no action should have been taken against that director. The other, ND1, is not. In so far as she was a member of the Board of Directors at the relevant times and played a part in making the decisions and taking the actions under consideration in this case, there is little, if anything, to distinguish the position of that director from that in which the rest of the directors find themselves. APRA sent her a letter on 16 November 2004 asking her to show cause as to why she should not be disqualified under s 120A(2) of the SIS Act.[357] After receiving her submission, which relied in part on the Trustee's submission, the delegate said, without any elaboration:

"I have reviewed the material and have decided that you should not be disqualified under s 120A(2) of the SIS Act."[358]

218. Mr Santamaria QC drew our attention to Australian Securities and Investments Commission v Parker[359] and Rich v Australian Securities and Investments Commission.[360] In Parker, decided the year before the High Court made it clear in Rich that disqualification is a penalty, Drummond J had said that the punitive nature of the decision with which he was concerned meant that he could take into account that the Australian Securities and Investments Commission had chosen to proceed against only one of four directors. He said: "Disparity between the sentences imposed on co-offenders can justify an otherwise appropriate sentence imposed on one of the offenders being reduced."[361] On behalf of APRA, Mr Tracey QC submitted that we should pay no regard to APRA's decision not to disqualify ND1 at all. He pointed to the decision-making regime in which APRA operated.

219. At the outset, we note the general position in relation to decisions affecting persons other than the applicants is that stated by Spender J in Theo v Secretary, Department of Family and Community Services:[362]

"... the proceedings in the Tribunal fall to be determined on the material before it, and not on the basis of whether that material was the same as, or different to, the material before other decision-makers in other applications. Generally there cannot be an estoppel against the terms of a statute."

220. That decision-making regime persuades us that the general principles are applicable in this case. We can have no regard to the delegate's decision not to disqualify ND1 in any sense. In summary, the decision-making regime is such that APRA can make a decision regarding a set of circumstances only once. It cannot decide that it does not like the decision its delegate has made and appoint another to decide the matter again. As it cannot do that, it can never properly be known in a case such as this whether APRA embraced the decision or did not. It is not a decision that the Tribunal can review as review has not been sought. Therefore, ND1's circumstances cannot be taken into account in considering the matters we must decide.

221. The decision-making regime, to which we refer, is found in the Australian Prudential Regulation Authority Act 1998 (APRA Act). It establishes APRA as a body corporate[363] for the purpose, among others, of regulating bodies in the financial sector in accordance with Commonwealth laws providing for prudential regulation or for retirement income standards.[364] Among its functions are those conferred on it by the SIS Act.[365] It has power to do anything that is necessary or convenient to be done for or in connection with the performance of its functions.[366] APRA consists of between three and five members.[367] It may delegate its functions or powers to one of its members or to an "APRA staff member"[368] and the delegate must comply with any directions given by APRA.[369] An "APRA staff member" means any of the following persons: a person appointed by APRA under s 45, assisting it under s 46 or engaged by it under s 47. Under s 47(1), APRA may engage consultants or other persons to provide advice to it or perform services for it.

222. APRA has stated that neither Mr Kennedy, who was the delegate who made the decision, nor Ms Tongue, who reviewed his decision, is a staff member. Presumably, they were appointed under s 47. It is not necessary to explore that further for, as a delegate, there is no question that they were properly engaged and properly made their decisions under ss 120 and 344 of the SIS Act respectively. Their decisions became APRA's decisions.[370] Once Ms Tongue had reviewed Mr Kennedy's decision, there is no express provision in the SIS Act for APRA to review its delegate's decision. The only express right of review is given by s 344(1) to a "person who is affected by a reviewable decision of the Regulator". In this case, each of the applicants is clearly such a person in relation to the particular decision made about each of them. Each of the applicants is the person who may ask APRA to review its decision. In so far as the decision relating to ND1 is concerned, none of the applicants may ask APRA to review its decision. While each of the applicants is presumably taken aback by the decision and perhaps puzzled by it, that is a different thing from saying that each, or any, of them is affected by it.[371]

223. Section s 344(8) is concerned with applications to the Tribunal. Although it is expressed in the passive voice, its ordinary meaning is that "Applications may be made to the Administrative Appeals Tribunal for review of decisions of the Regulator ..." by the person affected by the APRA's reviewable decision. The provision must be read with s 344(1) that sets the review process in motion. For the reasons we gave in the previous paragraph, none of the applicants could have sought application of the delegate's decision relating to ND1. She would not have had any interest in doing so.

224. Could APRA have looked at the matter again and made a fresh decision about ND1 if it thought that she should have been in the same position as the seven applicants? After all, s 33(1) of the Acts Interpretation Act 1901 (AI Act) provides that "Where an Act confers a power ..., then, unless the contrary intention appears, the power may be exercised ... from time to time as the occasion requires." In considering whether there is a contrary intention, regard needs to be had to the passage from the judgment of Gleeson J in Minister for Immigration and Multicultural Affairs v Bhardwaj[372]:

" The requirements of good administration, and the need for people affected directly or indirectly by decisions to know where they stand, mean that finality is a powerful consideration. And the statutory scheme, including the conferring and limitation of rights of review on appeal, may evince an intention inconsistent with a capacity for self-correction. Even so, as the facts of the present case show, circumstances can arise where a rigid approach to the principle of functus officio is inconsistent with good administration and fairness. The question is whether the statute pursuant to which the decision-maker was acting manifests an intention to permit or prohibit reconsideration in the circumstances that have arisen. That requires the examination of two questions. Has the Tribunal discharged the functions committed to it by statute? What does the statute provide, expressly or by implication, as to whether, and in what circumstances, a failure to discharge its functions means that the tribunal may review the exercise of its powers or ... reconsider the whole matter afresh?"[373]

Principles such as these are equally applicable to decision-makers who are not tribunals e.g. Ministers[374] and a Ministerial Corporation.[375]

225. Here APRA has discharged its function in relation to ND1, albeit through its delegate. The nature of the decision under review and the structure of the review provisions both suggest that the decision, once made, cannot be revisited. The decision to disqualify under s 120A of the SIS Act requires APRA first to decide whether certain circumstances exist. Only if they do, can it exercise its discretion to disqualify. Under s 120A(2), the circumstances include whether the Trustee has contravened the Act and under s 120A(3) they include whether a person is a fit and proper person to be a responsible officer of the Trustee. Decisions as to whether those circumstances exist are made on information available to APRA whether as a result of its extensive investigatory powers or otherwise. The circumstances necessarily relate to events in the past even if they also encompass ongoing events. To suggest that it can gather the information about such circumstances and make a decision but then put it to one side if it does not like the decision seems contrary to the requirements of good administration. It does not bring finality. It discounts the APRA's extensive investigative powers if they are to be used intermittently as APRA chooses and calls into question the finality of the review process to which we have referred. Its position can be contrasted with that of an agency such as Comcare that may reconsider its decision, and by implication its delegate's decision, at any time.[376]

226. Having regard to all of these matters, we consider that APRA discharged its functions in relation to ND1 when Mr Kennedy made his decision. That Mr Kennedy did not give reasons for his decision is most unfortunate for his decision is a bitter pill for those who feel, rightly or wrongly, that they have conducted themselves in a manner similar to that adopted by ND1. Good administration demands that all persons in a similar position be treated in a similar manner. Had Mr Kennedy given some insight into his reasons, the applicants would at least have been in a position to know how he saw their position differing from her position. That might have assisted them in understanding how they had erred in his eyes. It would have given them insight into how he had made his decisions without discrimination amongst the directors.

227. This principle is applied in the administration of other areas of the law. Speaking in the context of taxation, Lord Scarman in Inland Revenue Commissioners v National Federation of Self Employed and Small Business Ltd[377] was:

"... persuaded that the modern case law recognises a legal duty owed by the revenue to the general body of the taxpayers to treat taxpayers fairly; to use their discretionary powers so that, subject to the requirements of good management, discrimination between one group of taxpayers and another does not arise; to ensure that there are no favourites and no sacrificial victims."[378]

228. The duty to act fairly to all does not preclude the duty to act fairly to the individual. As Lord Templeman said in Re Preston:[379]

"Mr Brodie, on behalf of the appellant, submitted that if, as Lord Scarman announced in the Self-Employed case [1981] UKHL 2; [1982] AC 617, the commissioners owed a duty of fairness to the general body of taxpayers, the commissioners must equally owe a duty of fairness to each individual taxpayer. I agree, but a taxpayer cannot complain of unfairness, merely because the commissioners decide to perform their statutory duties including their duties under section 460 to make an assessment and to enforce a liability to tax. The commissioners may decide to abstain from exercising their powers and performing their duties on grounds of unfairness, but the commissioners themselves must bear in mind that their primary duty is to collect, not to forgive, taxes. And if the commissioners decide to proceed, the court cannot in the absence of exceptional circumstances decide to be unfair that which the commissioners by taking action against the taxpayer have determined to be fair. The commissioners possess unique knowledge of fiscal practices and policy. The commissioners are inhibited from presenting full reasons to the court for their decisions because of the duty of confidentiality owed by the commissioners to each and every taxpayer.

The court can only intervene by judicial review to direct the commissioners to abstain from performing their statutory duties or from exercising their statutory powers if the court is satisfied that the 'unfairness' of which the applicant complains renders the insistence by the commissioners on performing their duties or exercising their powers an abuse of power by the commissioners."[380]

229. The principles in this case have been approved by the Federal Court.[381]

Although focused on the collection of revenue, the principles are no less applicable in the exercise of powers in the area of prudential regulation. Whether they have been followed can only be seen if the decision-maker gives reasons for each decision and not merely for those decisions that may lead to applications for review being lodged in this Tribunal.

230. The Trustee and the applicants submitted that, unless the Tribunal is affirmatively satisfied of the relevant matters in s 120A, it is bound to set aside APRA's decisions. They relied on a passage from the judgment of Woodward J in McDonald v Director-General of Social Security:[382]

" If the AAT finds itself in a state of uncertainty after considering all the available material, unable to decide a question of fact either way on the balance of probabilities, it will be necessary to analyse carefully the decision it is reviewing. If, for example, it is a decision whether or not to cancel a pension in the light of changed circumstances, then it has failed to achieve the statutory requirement of reaching a state of mind. ..."[383]

231. They relied too on a passage from the judgment of Beaumont J in Minister for Health v Thomson[384] when he said:

"Generally speaking, concepts of onus of proof used in adversary proceedings are inapplicable in administrative proceedings in the social security area: (see McDonald v Director-General of Social Security) ... However, where, as here, a breach of discipline, or something analogous, is alleged, the onus of proving such a breach lies upon the accuser. ..."[385]

232. This passage was approved by Hill J in Casarotto v Australian Postal Commission[386] when he said that "It may be that what was said by Woodward J in McDonald should be confined to the context of social security legislation."[387] In Secretary, Department of Social Security v Willee,[388] Foster J also approved the passage. In the case before him, he would have found no error had a disciplinary committee proceeded on the basis that the Secretary bore the general onus of establishing the breach it had charged.[389] His Honour said:

"... In my opinion, in a de novo hearing, the person in the position of prosecutor bears the overall onus of establishing not only the offence but also all the facts upon which he seeks to rely for the grounding of a penalty of a particular nature. ..."[390]

233. No mention was made in any of these cases of the judgment of Fox J in Minister for Health v Thomson when he said:

"... I do not think it useful, and it may be misleading, to talk in terms of onus of proof in relation to proceedings such as those with which the committee was concerned. The committee was one of inquiry, and it was inquiring into the services charged by one doctor. It was obliged to find the facts, so far as it could do so, concerning those services. There were not multiple parties to the inquiry. The process of hearing was one in which documentary evidence was formally laid before it by its secretary and thereafter Dr Thomson gave evidence and was questioned at length by members of the committee. No other evidence was called. To talk of onus of proof, its legal sense, is in my view inappropriate: cf McDonald v Director-General of Social Security ..."[391]

234. The Trustee and the applicants referred also to two earlier High Court cases. The second of those cases was Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd.[392] It concerned proceedings originally taken in the Supreme Court of Western Australia under the Insurance Contracts Act 1984. It does not relate to merits review. The first does concern merits review. It is The Commonwealth v Muratore [393] in which the High Court considered an application for judicial review of a determination made under the Compensation (Commonwealth Employees) Act 1971. Jacobs J, with whom Gibbs, Stephen and Aickin JJ agreed, said of allegations made by the Commonwealth that an employee is either physically able to earn in some suitable employment an amount not less than that employee's former weekly pay at the date of injury or is not physically incapacitated for work:

"... In both situations the Commonwealth is, or would be, alleging that the circumstances of the employee had changed; and the onus lies upon the party alleging the change of circumstances to prove it. The position is quire [sic] different if there has been no previous finding of partial incapacity with a consequent assessment of the compensation payable. It is established that the employee then bears the onus of proving the partial incapacity for work and its reflection in the degree of his ability to earn ..."[394]

235. The submission made by the Trustee and the applicants gives us the impression that it is underpinned by notions of a legal burden or onus of proof. If that is so, we cannot accept it for none of the cases goes so far. In the first instance, neither party bears a legal onus of proof in the Tribunal unless the legislation governing the decision under review provides to the contrary. That was made clear by Woodward J in McDonald v Director-General of Social Services.[395] This is not contradicted by the subsequent cases and, in particular, is not contradicted by Beaumont J's judgment in Minister for Health v Thomson. His Honour was speaking of the practical reality that the party wanting to change the status quo must ensure that the relevant evidence is brought to the Tribunal to consider. The party may introduce the evidence, may draw it out in cross-examination of the other party's witnesses or trust that the other party will produce it.

236. When the evidence is insufficient to persuade the Tribunal, its very insufficiency will determine the outcome of the case. That is because, as Woodward J said, the Tribunal must analyse the question it must decide. As it stands in the shoes of the decision-maker,[396] it has all the powers and discretions of the decision-maker whose decision is under review. It may exercise them after having regard to all relevant material whether that material was seen or considered by the decision-maker or not. In other words, unless its powers are qualified by the relevant legislation, the Tribunal undertakes the review afresh. Therefore, the question it must analyse must be the question that the decision-maker, in this case APRA, had to ask and answer.

237. Given that s 120A gives APRA the power to disqualify an individual "if satisfied" of certain matters specified in that section, the question that the Tribunal must ask itself has two parts: is it satisfied of those certain matters; and, if it is satisfied, should it disqualify all or any of the applicants? The requirement that it be "satisfied" of those matters:

"... is to be understood as requiring that ... [the decision-maker] _be persuaded of the matter according to the balance of probabilities (_Rejfek v McElroy [1965] HCA 46; (1965) 112 CLR 517 at 521). That is, that the ... [decision-maker] be persuaded, having given proper consideration to those circumstances and that the Act requires him or her to give consideration to, that such matters be more probable than not."[397]

The word "satisfied" is not qualified by a word such as "affirmatively". The test is that of satisfaction alone. If, after considering all of the material in a particular application, we are not persuaded on the balance of probabilities[398] that the first question should be answered in the affirmative, we will not be satisfied of the matters that must precede any consideration of the discretionary question whether disqualification should be imposed. We will decide that disqualification is not the correct or preferable decision and set aside APRA's decision. If we are satisfied that the first question should be answered in the affirmative, we will ask ourselves whether the discretion to disqualify that particular applicant should be exercised.

Is APRA circumscribed by its Statement of Facts and Contentions?

238. VBT and the applicants have submitted on various occasions that APRA has strayed from the matters it canvassed in its Statement of Facts and Contentions (SFC) by seeking to rely on new grounds. Mr Collinson submitted that an SFC, like pleadings, is designed to avoid surprise. He referred us to the decision of Senior Member Bayne in Re Payne and Comcare.[399] The Tribunal had been asked to review Comcare's decision refusing to meet the costs of a home spa recommended by Mrs Payne's doctor. At the hearing, Comcare sought to contend that Mrs Payne was no longer suffering an injury and so not entitled to compensation. Senior Member Bayne refused to allow Comcare to do so.[400] In giving reasons for his ruling, he carefully analysed the Tribunal's General Practice Direction (GPD) and noted its requirements that an SFC be lodged before the second conference held under s 34 of the Administrative Appeals Tribunal Act 1975 (AAT Act). He said:

"It thus appears that the GPD contemplates that the statement of facts and contentions will be taken to have framed the issues of fact and law for consideration at the hearing. In practice however, the parties may shift ground after the second conference. ... [T]he discussion at the conference may have indicated to a party a weakness in its theory of the case. A member of the tribunal may at the conference have issued directions to facilitate this process of refinement of the issues."[401]

Senior Member Bayne went on to consider the issue on the basis of what was fair between the parties and what enabled the Tribunal to conduct its business in a timely and cost-effective way.[402]

239. Mr Sackar QC drew our attention to a passage from the reasons for decision of Senior Member Allen in Aerolink Air Services Pty Ltd v Civil Aviation Safety Authority.[403] Senior Member Allen permitted the Civil Aviation Safety Authority (CASA) to lead evidence in relation to the breaches of the Civil Aviation Act 1988 it had alleged in its SFC lodged with the Tribunal some six weeks before the hearing. He also permitted CASA to lead evidence in relation to a further allegation that had arisen out of evidence given in another matter before the Tribunal and that the applicant in that case was in a position to deal with. His reasons for his decision were:

"6. As pointed out by the then President of this Tribunal in Re Applicant and Deputy Commissioner of Taxation _[1995] AATA 95; 41 ALD 683 at 688 the principal (_sic) of trial by ambush has never applied in the Administrative Appeals Tribunal (AAT). The Tribunal has in place Practice Directions, which require legally represented parties to submit well before the hearing Statements of Facts and Contentions in order that each party may know the case it has to meet. Moreover, subsection 28(1) of the Administrative Appeals Tribunal Act 1975 ('AAT Act') specifically provides that if a person makes a decision in respect of which an application may be made to the AAT, then any person entitled to make application to the AAT for review of that decision is entitled to demand from the decision maker reasons in writing for the decision. This provision is clearly designed to provide to the party aggrieved the specific reasons for the decision which can then be challenged in the Tribunal. As the Tribunal pointed out in Re Geoffrey Thompson & Growers Coop Pty Ltd and Export Developments Grant Board 7 ALN, N242 at N244 where grounds other than or in addition to those relied upon at the time of making the decision under review are to be raised by a Respondent notice should be given to an Applicant and the Tribunal well in advance of the hearing.

7. What the Respondent attempted in these proceedings was to give certain reasons for its decision and then at the hearing to add to and expand on those reasons, thus altering the case the Applicant had every reason to think it was required to meet upon review. This is clearly contrary to the intent both of the AAT Act itself and the Tribunal's Practice Direction. Apart from a direct subversion of the principles of modern administrative law, it does not fit well at all with the Respondent's ethical responsibilities as an entity of the Commonwealth to act as a model litigant: see Moline and Comcare [2003] AATA 827 and the directions given by the Attorney General of the Commonwealth."

240. While we would not presume to question Senior Member Allen's decision in the case before him, our case requires us to consider the principles underlying his decision a little further. True it is that s 28 of the AAT Act enables most persons, who are affected by a decision[404] and who have not already been given reasons,[405] to ask a decision-maker for reasons. The decision-maker may refuse the request if not made within specified time limits[406] but must otherwise give a statement setting out findings of fact, referring to the evidence on which those findings were based and giving reasons for the decision.[407] Certainly, a statement of reasons may assist a person in deciding whether to apply to the Tribunal for review, pursue a claim in a court or make some approach to government or otherwise. It goes too far, however, to suggest that the decision-maker's reasons circumscribe, in some way, the grounds that will be raised by the decision-maker at the hearing before the Tribunal. That the decision-maker is not bound by them is clear from s 37(1)(a) of the AAT Act. It requires the decision-maker to give a statement of reasons and does so regardless of whether the person has been given a statement of reasons under s 28 or otherwise. There is no suggestion in s 37 that the decision-maker is anyway bound by any earlier statement of reasons although s 37(1AB) does authorise the President to permit a decision-maker to lodge a document setting out the reasons for the decision. Unless the issues are so clear cut as to require no further elucidation and the evidence complete, the parties and the Tribunal will then draw on that statement and the supporting materials in developing and refining the issues in the conference and directions hearings as well as in any alternative dispute process.

241. It is in these preliminary stages that the SFC is required either under the GPD made under s 33 of the AAT Act, as referred to by Senior Member Bayne, or under a specific direction of the Tribunal directed to the needs of the particular case. It is apparent from the GPD that the SFC will be filed quite early in the proceedings. That enables it to function as a tool to define the issues as the parties see them and to provide a background against which the parties, either with or without the assistance of the Tribunal, can become aware each other's cases. That may lead them to test their cases and perhaps explore settlement.

242. An SFC cannot limit the issues that the Tribunal must consider for to do so would be to impinge on its duty to conduct a de novo review of the decision.[408] It must satisfy itself that the decision it reaches on that review is objectively the right one to be made on the facts of the case and according to the law.[409] If more than one decision is open to it, it is required to reach the preferable decision of those decisions that may correctly be made.[410] It could not fulfil these functions were it to limit itself to the issues defined by the parties or one of them. Rather:

"The considerations that are, or are not, relevant to the tribunal's task are to be identified primarily, perhaps even entirely, by reference to the Act rather than the particular facts of the case that the tribunal is called on to consider."[411]

243. For the same reasons, the decision-maker's reasons cannot restrict the Tribunal's jurisdiction. In Re Becker and Minister for Immigration and Ethnic Affairs,[412] Brennan J noted that that the Tribunal has been based on the judicial model independent of the Executive:

"Its function is to decide appeals, not to advise the Executive. The remedies which it awards may be limited or large, but the remedies are incidental to the decision at which it arrives. The decision of the Tribunal in the particular circumstances of each case is therefore to be resolved according to its opinion as to the merits of that case. It forms that opinion after considering the views of the decision-maker, but it is not bound by those views. ...".[413]

244. If the Tribunal is not bound by the views of the decision-maker, it cannot be bound by the views of the decision-maker as to what is relevant or not nor the views of the parties as a whole. In this, it is quite different from the courts. As McHugh J said in Minister for Immigration and Multicultural Affairs v Wang[414]:

"Care must be taken not to confuse the role of the [Refugee Review] tribunal with that of the court which must necessarily find or rely on facts that are relevant to defined [sic] issues between the parties, issues that concern facts that have occurred in the past."[415]

Even though the decision-maker is represented at a hearing in the Tribunal and not in the Refugee Review Tribunal, this passage is equally applicable to the Tribunal. Both conduct merits review. In the Tribunal, the proceedings may often have the appearance of adversarial proceedings but appearances should not obscure the differences between merits review and adversarial litigation:

"In adversarial litigation, findings of fact that are made will reflect the joinder of issue between the parties. The issues of fact and law joined between the parties will be defined by interlocutory processes or by the course of the hearing. They are, therefore, issues which the parties have identified. A review by the [Refugee Review] Tribunal is a very different kind of process. It is not adversarial; there are no opposing parties; there are no issues joined. The person who has sought the review seeks a particular administrative decision - in this case the grant of a protection visa - and puts to the Tribunal whatever material or submission that person considers will assist that claim. The findings of fact that the Tribunal makes are those that it, rather than the claimant, let alone adversarial parties, considers to be necessary for it to make its decision. ..."[416]

245. This passage refers to the Refugee Review Tribunal in which the Minister is generally not represented at the hearing. The Tribunal is somewhat different and is regarded as being under a duty to act judicially.[417] Deane J, with whom Fisher J agreed, had considered the Tribunal's position in the earlier case of Sullivan v Department of Transport:[418]

"... In the ordinary case, a tribunal which is under a duty to act judicially and which has the relevant parties before it will be best advised to be guided by the parties in identifying the issues and to permit the parties to present their respective cases in the manner in which they think appropriate. Circumstances may, of course, arise in which a statutory tribunal, in the proper performance of its functions, will be obliged to raise issues which the parties do not wish to dispute and to interfere, either by giving guidance or by adverse ruling, with the manner in which a particular party wishes to present his case. ..."[419]

246. In light of these principles, it would be wrong to give an SFC a status equivalent to that of pleadings in a court. The parties may well identify the issues but they are not the sole arbiters of them. The Tribunal may identify them and will be under an obligation to do so if the issues identified by the parties do not permit it to reach the decision that is correct in law as well as in fact or, where there is more than one correct decision, the preferable decision. While the Tribunal's obligation to give reasons may extend only to its reasons in respect of the reasons that it considers relevant, it may commit an error of law if it does not address in its reasons those issues that are necessarily raised for consideration by the relevant legislation. Saying that, though, is not the same as saying that a party can change its SFC and its position as and when it will. There are three other obligations that must be taken into account in deciding the question.

247. The first is APRA's obligation to be a model litigant. This is a reference to the:

"... old-fashioned traditional, and almost instinctive, standard of fair play to be observed by the Crown in dealing with subjects, ... [which is] elementary ..."[420]

It is equally applicable to courts and public administrators who share a concern in securing good administration and so in maintaining public confidence in the integrity of administrative government.[421]

248. The model litigant obligation has now been given a statutory foundation. On 1 September 1999, the Attorney-General issued Legal Services Directions (Directions) applying generally to legal work or to Commonwealth legal work being performed, or to be performed, in a particular manner.[422] They are binding on a body such as APRA.[423] The Directions expressed expanded upon the old-fashioned standards of fair play. Although the Directions have since been replaced,[424] they were in force during the entire hearing. Under them, "Claims are to be handled and litigation is to be conducted by the agency in accordance with the Directions on the Commonwealth's Obligation to Act as a Model Litigant ...".[425] Clause 2 of the Directions:

"... requires that the Commonwealth and its agencies act honestly and fairly in handling claims and litigation brought by or against the Commonwealth or an agency by:

(a) dealing with claims promptly and not causing unnecessary delay in the handling of claims and litigation,

(g) not relying on technical defences unless the Commonwealth's or the agency's interests would be prejudiced by the failure to comply with a particular requirement,

The obligation imposed by the Directions is further explained in the notes appearing at the end. Of relevance in this case are:

1. In essence, being a model litigant requires that the Commonwealth and its agencies, as parties to litigation, act with complete propriety, fairly and in accordance with the highest professional standards. ...
2. The obligation to act as a model litigant may require more than merely acting honestly and in accordance with the law and court rules. It also goes beyond the requirement for lawyers to act in accordance with their ethical obligations.
3. The obligation does not prevent the Commonwealth and its agencies from acting firmly and properly to protect their interests. It does not therefore preclude all legitimate steps being taken to pursue claims by the Commonwealth and its agencies and testing or defending claims against them. ..."

249. Lest there be any doubt whether the Directions applied to the Tribunal, the Attorney-General specified in the general notes that the word "litigation" includes proceedings "... before the courts, tribunals, inquiries and in arbitration and other alternative dispute resolution processes" unless otherwise indicated.[426] By doing so, he continued the common law tradition of requiring the Commonwealth to observe what could be described as fair play in both a curial and an administrative context. While this is the requirement imposed by the Directions, Mr Tracey drew our attention to s 55ZG(3) of the Judiciary Act 1901 providing that "The issue of non-compliance with a Legal Services Direction may not be raised in any proceeding (whether in a court, tribunal or other body) except by, or on behalf of the Commonwealth". This provision complements s 55ZG(2) which provides that the Attorney-General may enforce compliance with the Legal Services Direction.

250. The second obligation is the obligation on the part of the decision-maker and those acting on its behalf to assist the Tribunal.[427] With effect from 1 May 2005, this principle has been included in the AAT Act in the form of s 33(1AA). It provides that the decision-maker must use "... best endeavours to assist the Tribunal to make its decision in relation to the proceeding"[428] (emphasis added). The obligation of the Tribunal under s 39 of the AAT Act, to which we refer below,[429] means that the assistance will have to be transparent so that the other party has an opportunity to address any issues that the decision-maker raises. Just as what is fair in a given situation depends on the circumstances so too must what amounts to assistance and when it should be rendered.[430]

251. The third obligation is imposed on the Tribunal. It has a duty to "... ensure that every party to a proceeding before the Tribunal is given a reasonable opportunity to present his or her case ...".[431] This duty must extend to ensuring that each party has a reasonable opportunity to know the issues being relied on by another party and also the issues that the Tribunal itself regards as relevant. Giving the parties a "reasonable opportunity" to present a case is one aspect of natural justice, or of procedural fairness.[432] As with the obligation to assist the Tribunal, what amounts to procedural fairness "... in a given situation depends upon the circumstances. And it is not a one-sided business."[433]

252. There are at least two sides of the business. The parties and the issues they raise form one side of that business, the issues raised by the relevant legislation are another. If the new issue were an issue required to be decided under the relevant legislation in order to make a decision, it could not be ignored however late in the piece it were raised. If it were raised during the hearing and the other party could not deal with the point at the time, the Tribunal would have little option but to adjourn the proceedings. Its hands would be tied, quite properly, by its obligation to give each party a reasonable opportunity to present its case. There are cost implications in such a course but they could be accorded little, if any, weight as they are essential to the review of the decision.

253. If the new issue were simply a new contention in relation to an issue that must be decided under the legislation but that has already been raised, the situation may be different. Cost considerations to the parties may have greater weight in the consideration of what amounts to a reasonable opportunity for a party to present a case. Considerations such as the time at which the party became aware of the issue and raised it with the other party and/or the Tribunal will be of some relevance. The effect on the orderly disposition of the business of the Tribunal may, on occasion, be relevant. The Tribunal's role to reach the correct or preferable decision will also be a factor that must be taken into account.

254. In this case, there have been various amendments to APRA's SFC over the course of the proceedings. Changes at such a late stage might in another case have caused us to be a little critical of APRA. Not so in this case. It must be remembered that the Trustee and the applicants argued vigorously for an early hearing of the applications for review. Their arguments were strongly resisted by APRA on the basis that they could not prepare seven cases. A very early hearing was set down despite APRA's protestations that it would not be ready. It was set down on a general understanding that APRA might have to develop its case at a late stage and the parties would accommodate that as would the Tribunal. APRA has done that. Where it has raised new issues or presented new arguments, we are satisfied that the applicants and the Trustee have had a reasonable opportunity to present their cases.

When should evidence be accepted as expert evidence?

255. In his opening, Mr Tracey stated that APRA's position regarding the meaning of the words "reserves of the entity" in s 52(2)(g) would be supported by expert evidence regarding the terminology used in relevant professions.[434] In summarising the evidence that would be called with regard to the crediting rate issue, Mr Tracey said:

"Can I conclude by saying something about the evidence that we propose to

call. We have put on statements from six directors, and one expert, and

there is another one coming, ... - I am sorry, six members, who have been complainants about relevant events. In substance, what each of those members will tell the Tribunal is that they had no notice of the change of crediting rate policy or even that the matter was under consideration before the decision was taken by the board on 24 June 2002. They will tell you that they didn't find out about it until July."[435]

It transpired that there were two witnesses called on behalf of APRA as experts: Professor Wesley Andrew McMaster[436] and Mr John Leo Maroney.[437] The Trustee and the applicants had notice of their being called to give expert evidence.

256. There was no mention of a third expert until APRA presented its volume of closing submissions. It referred to PD1, who had complained to APRA. In its written submission, APRA said that PD1:

"... gave important, unchallenged evidence about the nature and operation of the crediting rate reserve. ... [PD1]'s expertise as an actuary specialising in superannuation, including modelling the behaviour of smoothing crediting rate policies, is set out in [14] of his statement. APRA submits this evidence as to the nature of the crediting rate reserve as a 'reserve' within the meaning of covenant (g) is compelling."[438]

257. In oral submissions, Mr Santamaria said that APRA had never put PD1 forward as an expert but simply as an aggrieved member. PD1's witness statement was not prepared in accordance with the Federal Court's Practice Direction and the Trustee and applicants had not challenged his evidence because it was not germane to any case being put forward by APRA in relation to the reserve.[439] Mr Tracey responded:

"... [W]e submit that ... [PD1's] opinion evidence has been admitted without challenge. He was clearly giving evidence from a range of perspectives: as a member of the fund, as a director, and as an actuary. Next, his statement demonstrates his experience and expertise, and should be given significant weight. A substantial scholastic paper involving modelling of crediting rates and reserves is exhibited to his statement, and although ...[PD1] cannot said to be entirely independent vis-a-vis the subject matter, we would note that [Plan Actuary C] is also someone hardly entirely independent, having given advice to both the employer sponsor and the trustee.

He has been promoted by the applicants as an expert, as Mr Collinson so

referred to him at transcript 2171, and all that we want to say is that relevantly, there is nothing to distinguish between them on the basis of their perceived interest. They are nonetheless experts, and they have expressed expert opinions, on which the parties seek and do rely. There is other evidence that is suggestive of the accuracy of ... [PD1's] evidence."[440]

258. While there is no doubt that the Tribunal is not bound by the rules of evidence[441] it is not a case that there are no rules. The Tribunal must act lawfully. It will make an error of law unless "... there is evidence rationally and legally capable of supporting a finding of fact, then the finding of fact does not involve an error of law."[442] At the same time, it must ensure that, subject to certain qualifications that are not relevant in this case, it must give every party to a proceeding a reasonable opportunity to present its case and to inspect any documents to which the Tribunal proposes to have regard in reaching its decision. [443] In meeting each of these obligations, the rules of evidence can provide very useful guidance to the Tribunal. After all, those rules have been developed in the civil and criminal courts to assist them in making findings of fact on the basis of logically probative evidence. Rules of procedure and concepts of procedural fairness developed in the courts can assist it in meeting its obligation under s 39(1) of the AAT Act .

259. What are the rules in the courts and at common law?[444] As a rule, a witness may only give evidence as to fact and not as to opinion. An exception is made in relation to expert evidence. In Clark v Ryan,[445] Dixon J set out the principles governing that exception when he said that:

"... the opinion of witnesses possessing peculiar skill is admissible whenever the subject matter of inquiry is such that inexperienced persons are unlikely to prove capable of forming a correct judgment upon it without such assistance, in other words, when it so far partakes of the nature of a science as to require a course of previous habit, or study, in order to obtain knowledge of it."[446]

In more modern times, Gaudron J, quoting from a judgment of King J in R v Bonython,[447] expressed the principles in this way:

"The position at common law is that, if the relevant, expert or opinion evidence is admissible with respect to matters about which ordinary persons are unable 'to form a sound judgment ... without the assistance of [those] possessing special knowledge or experience ... which is sufficiently organised or recognised to be accepted as a reliable body of knowledge or experience'."[448]

260. On some occasions, there may be no question that a witness possesses such special knowledge or skill or, indeed, that there is an area of knowledge in which that special knowledge or skill has been accepted as reliable. On others, there may be a question about one or the other and the issue will have to be tested. Even if there is no question on those matters, there may be questions on issues such as whether the expert's knowledge will assist the court to find the facts in issue. All of these questions presuppose that the party or parties not calling the witness know that the witness is being called on the basis of that witness's special knowledge or skill and not simply as a witness who can attest to the facts in issue. They also presuppose that the witness understands the boundaries of the evidence that an expert witness may give. So, for example, an expert witness may not generally give evidence as to the ultimate issue that a court must decide[449] and should state the assumptions of fact that underpin the opinion given to the court.[450] Parties themselves have been permitted to give expert evidence but only if their evidence meets the standards expected of independent expert witnesses.[451]

261. Current practice in the Federal Court reflects the common law principles. It relates to practitioners who wish to retain a witness "... for the purpose of preparing a report or giving evidence in a proceeding as to an opinion held by the witness that is wholly of substantially based on the specialised knowledge of the witness ...".[452] Practitioners are required to give each such witness a copy of guidelines explaining expert witnesses' general duty to the Court and the form of the expert evidence to be given. As for their general duty, they are told that they have an overriding duty to assist the Court on matters relevant to their expertise, that they are not an advocate for a party and that their paramount duty is to the Court and not to the person by whom they are retained. The Guidelines specify the form in which the expert's written report is presented. Those matters include such matters as the assumptions of fact made by the expert witness, the literature and other material used in making the report and the expert witness's qualifications. These sorts of matters assist both the Court and the other parties to the proceedings. They enable both the Court and the parties to determine the preliminary questions whether they accept the witness as an expert witness and whether that witness has expert knowledge. In addition, they enable the Court and the parties to test the expert evidence that is given.

262. The Tribunal does not have a Practice Direction of the sort issued by the Federal Court. Despite that, the principles that have been set out by that Court seem no less applicable to the Tribunal. If the Tribunal is to have regard to evidence as expert evidence it must be assured of the same matters of which a court must be assured. It must afford the parties the same opportunity as a court would afford the other parties to a proceeding to test such matters as the expert qualifications of the witness. In the case of a witness who has relevant professional qualifications and who is a person interested in the outcome, it can only do this if it is aware that the witness is presented as an expert witness. If it is not aware, and could not reasonably have been aware, then it has not been given a reasonable opportunity to test the evidence.

263. It is one thing to decide not to challenge the evidence of a person who has professional qualifications and who is giving evidence of his own opinions in the Tribunal but who has not been presented as an expert witness and another to decide not to test the evidence of an expert witness. Given that the Tribunal is not bound by the rules of evidence, a party may decide not to challenge evidence given on the first basis on the understanding that the Tribunal may decide not to exclude the evidence even though it breaches the rule against hearsay. Instead, the party may decide to argue that it should be accorded little, if any, weight and particularly as it has been given by a witness who has had an interest in the matter. A decision not to challenge evidence given on the basis that it is expert evidence is to accept that it is likely to be accorded weight by the Tribunal if its factual assumptions are consistent with the findings of fact made by the Tribunal.

264. APRA's written closing submission referred to PD1's expertise as an actuary specialising in superannuation, including modelling the behaviour of smoothing crediting rate policies, being set out in [14] of his statement. That paragraph reads:

"I appreciated that there was a medium term risk in the accumulated difference growing large, although under an averaging-based smoothing policy, in the long term, the difference (or reserve) would revert to zero. However, in my view, the risks in such a smoothing policy were manageable. I had considered actuarial models, and by way of example a model of a crediting rate smoothing policy, as part of a substantial paper I presented to IAAust in November 1997 entitled 'Uses of S.I.S. (Superannuation Investments Simulations)'. The paper demonstrated (at Table 3.1, see chart and footnote at bottom right hand side of page 31) that three year smoothing in an accumulation superannuation fund invested in a 'balanced portfolio' will produce a reserve outside the range of -5% to +5% for approximately 5-% of the time, but that (as a consequence of the 3 year averaging) the reserve usually reverts to more than -5% within a few years (and seldom gets less than -20%, nor greater than +20%). The result would not be different for accumulation benefits within a defined benefit fund. I provided a copy of the paper to each person who was a member of the Trustee board at the time. ... "[453]

Earlier in his statement, PD1 had referred to his having been employed as an actuarial student and later as an actuary by the Employer for 34 years. In that time, he had held a variety of managerial, superannuation, actuarial and investment roles in the Employer.[454] He had also set out his further actuarial studies and his extensive professional experience in the superannuation industry.

265. Having regard to these passages from PD1's statement and to his statement as a whole, we do not consider that the Trustee or the applicants would have had an understanding that PD1 was called as an expert witness. In view of that, we do not consider that we can accord his opinions the weight that would otherwise be accorded those of an expert witness of whom notice has been given to the parties.

266. Before we leave the issue of expert evidence, we note that APRA relied on PD1's evidence as to the nature of the crediting rate reserve as a "reserve" within the meaning of s 52(2)(g). While not expressed in terms of relying on the evidence to determine the meaning of "reserve", it edges upon such a submission. Lest it be intended to do more than edge upon it, we remind ourselves that the general rule is that evidence may not be admitted to establish the ordinary meaning of a word or phrase. As Jordan CJ explained in Australian Gaslight Co v Valuer-General: [455]

"The question what is the meaning of an ordinary English word or phrase as used in the statute is one of fact not of law ... The question is to be resolved by the relevant tribunal itself, by considering the word in its context with the assistance of dictionaries and other books, and not by expert evidence ... although evidence is receivable as to the meaning of technical terms ... and the meaning of a technical legal term is a question of law ..."

267. Determining whether a word has a trade or technical meaning is a question of fact and evidence is admissible.[456] Whether or not that word is intended to be given that trade or technical meaning or another is a question of law.[457] Hill J summarised the circumstances in which evidence of the meaning or usage of a word in a trade can be given. He did so in Pepsi Seven-Up Bottlers v Commissioner of Taxation:[458]

"(1) Where it is clear that a word in the statute is used in a specialised or trade sense and that usage differs from the ordinary English usage of the word. The courts will be more ready to conclude that the word is used in a specialised or trade usage where the statute to be construed is a revenue law directed to commerce.

(2) Where the word is used in a specialised or trade sense in the statute, the word has an accepted trade usage and it is necessary to determine whether that trade usage differs from the ordinary English usage.

(3) Where the word is used in a specialised or trade sense in the statute and it is necessary to determine whether there is an accepted trade usage as a preliminary to showing that the usage differs from the ordinary English usage.

(4) Where the word in a statute is directed to a particular trade and there has not been occasion for a widespread adoption by the general public of the word or a particular denotation of the word.

(5) Where the trade usage assists in supplying the context of background of surrounding circumstances necessary to the construction of a word used in the statute.

(6) Where the trade usage may assist the court by way of background to determine whether the word used in the statute is used in a specialised or trade usage or in accordance with ordinary English usage."[459]

The construction of the covenants in s 52: the submissions

268. Mr Tracey submitted in the first instance that the words of the covenants in s 52 of the SIS Act are to be given their ordinary meaning. They are not to be read down or otherwise restricted by the application of principles of trust law. In interpreting the covenants, the primary focus must be upon the words that Parliament has chosen when read with the benefit of the definitions and in the context of the other provisions of the SIS Act. A construction that assists the purpose or object underlying the legislation must be preferred.

269. The applicants and the Trustee submitted that the covenants cannot be interpreted in a vacuum. Their language is derived directly from the general law duties imposed on trustees. Section 52(2)(b) is the prudent person covenant, s 52(2)(c) is the best interests covenant and s 52(2)(g) is the reserves covenant. Parliament wanted to ensure that trustees could not avoid their duties by means of a provision in the superannuation fund's governing rules absolving them of their duties. The focus of the covenants is not on the outcome of the trustee's decision-making process but on the process itself. The grounds on which the courts have been prepared to interfere with the exercise of a trustee's discretion have been quite narrow. Even if it were appropriate to interpret the covenants in s 52 according to the ordinary meaning of the words in which they are expressed, that meaning could not displace the established principles by which exercise of a trustee's discretions are reviewed. Furthermore, even if the covenants were interpreted by reference to their ordinary meaning, the trustee's conduct would need to be measured by reference to a guiding principle. Determination of that guiding principle would inevitably lead to the existing general law principles.

A sketch of some of a trustee's duties under the general law

270. In establishing a trust, a settlor or testator can specify the trustee's powers, duties and discretions but may not derogate from what are always a trustee's core duties to perform the trusts honestly and in good faith for the beneficiaries. In Rankine v Rankine,[460] De Jersey CJ described these as "an irreducible core of obligations".[461] Other duties that have been treated in the same way are those to keep and render accounts[462] and to act personally.[463]

271. The trustee also has a duty to observe the terms of the trust. In Pikos Holdings (Northern Territory) Pty Ltd v Territory Homes Pty Ltd,[464] Kearney J said:

"The requirements of the trust deed take precedence over any perceived economic benefit to the beneficiaries ... It is a trustee's duty to adhere

rigidly to the terms of the trust deed under which it is appointed, and that duty which modifies all other duties (apart from statutory duties and duties ordered by a court). A trustee departs from the provisions of the trust deed at its peril of afterwards having to satisfy a Court that its departure was necessary or beneficial."[465]

272. In addition to these duties are several duties that may be mitigated by the trust instrument.[466] We will refer briefly to several of them. A trustee has a duty of care that arises first in the management of the trust affairs and then in respect to the beneficiaries. In Speight v Gaunt,[467] Lord Blackburn said:

"The authorities show that as a general rule a trustee sufficiently discharges his duty if he takes in managing trust affairs all those precautions which an ordinary prudent man of business would take in managing similar affairs of his own."[468]

"It ... does not follow, that, because prudent men may, and often do, conduct their own affairs with the hope of growing rich, and therein take the hazard of adventures which they deem hopeful, trustees may do the same; the preservation of the fund, and the procurement of a just income there from, are primary objects of the creation of the trust itself, and are to be primarily regarded."[469]

In In re Whiteley; Whiteley v Learoyd,[470] Lindley LJ accepted the principle but explained that:

"... in applying it care must be taken not to lose sight of the fact that the business of the trustee, and the business which the ordinary prudent man is supposed to be conducting for himself, is the business of investing money for the benefit of persons who are to enjoy it at some future time, and not for the sole benefit of the person entitled to the present income. The duty of a trustee is not to take such care only as a prudent man would take if he had only himself to consider; the duty rather is to take such care as an ordinary prudent man would take if he were minded to make an investment for the benefit of other people for whom he felt morally bound to provide. This is the kind of business the ordinary prudent man is supposed to be engaged in; and unless this is borne in mind the standard of a trustee's duty will be fixed too low; lower than it has ever yet been fixed, and lower certainly than the House of Lords or this Court endeavoured to fix it in Speight v Gaunt ..."[471]

273. Sir Robert Megarry in Cowan v Scargill[472] explained that:

"That duty includes the duty to seek advice on matters which the trustee does not understand, such as the making of investments, and on receiving that advice to act with the same degree of prudence. This requirement is not discharged merely by showing that the trustee has acted in good faith and with sincerity. Honesty and sincerity are not the same as prudence and reasonableness. .... [A]lthough a trustee who takes advice on investments is not bound to accept and act on that advice, he is not entitled to reject it merely because he sincerely disagrees with it, unless in addition to being sincere he is acting as an ordinary prudent man would act."[473]

274. Sir Robert Megarry VC also considered the trustee's duty towards the beneficiaries of the trust in Cowan v Scargill. He did so in considering whether five of ten trustees were in breach of their fiduciary duties in delaying the adoption of a new investment plan relating to monies contributed by coal workers and their employer. He said:

• "The starting point is the duty of trustees 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 of the trustees towards their beneficiaries is paramount. They must, of course, obey the law ..."[474]
• "In considering what investments to make trustees must put on one side their own personal interests and views."[475]
• "Trustees may even have to act dishonourably (though not illegally) if the interests of the beneficiaries require it."[476]

275. Sir Richard Scott VC underlined the context in which Sir Robert Megarry had set out these principles. It was the context of an exercise of an investment power, Sir Richard Scott said in Edge v Pensions Ombudsman.[477] He was not dealing with an exercise of a discretionary power to choose which beneficiaries, or classes of beneficiaries, should be the recipients of trust funds. Had he been dealing with the exercise of such a discretionary power, it would have been:

"... meaningless to speak of a duty on the trustees to act impartially. Trustees, when exercising a discretionary power to choose, must of course not take into account irrelevant or improper factors. But, provided they avoid doing so, they are entitled to choose and to prefer some beneficiaries over others. ..."[478]

276. In Edge v Pensions Ombudsman, the trustees, wanting to minimise adverse taxation consequences, amended the trust fund's rules allowing them to reduce its surplus by reducing employers' and members' contributions. In this way, they increased the benefits for employees but not for pensioners. The Pensions Ombudsman decided that this was unjust and that the trustees had acted in breach of trust. He directed that the amendment be set aside. On appeal, Sir Richard Scott VC allowed the appeal explaining that:

"... it is not for a judge to exercise the discretion. The judge may disagree with the manner in which the trustees have exercised their discretion but, unless they can be seen to have taken into account irrelevant, improper or irrational factors, or unless their decision can be said to one that no reasonable body of trustees properly directing themselves could have reached, the judge cannot interfere. In particular he cannot interfere simply on the ground that the partiality shown to the preferred beneficiaries was in his opinion undue."[479]

277. On appeal, the Court of Appeal said of the duty to act impartially:

" Properly understood, the so-called duty to act impartially ... is no more than the ordinary duty which the law imposes on a person who is entrusted with the exercise of a discretionary power: that he exercises the power for the purpose for which it is given, giving proper consideration to the matters which are relevant and excluding from consideration matters which are irrelevant. If pension fund trustees do that, they cannot be criticised if they reach a decision which appears to prefer the claims of one interest - whether that of employers, current employees or pensioners - over others. The preference will be the result of a proper exercise of that discretionary power."[480]

278. The Pension Ombudsman had noted that the trustees' policy was to maintain the viability of the funds and considered pensioners' existing benefits as adequate. He had concluded that this and past general improvements to scheme benefits were not valid reasons to exclude pensioners and Deferred Benefit Members from benefit increases. Sir Richard Scott rejected this as an appropriate conclusion to reach:

"In this passage the Pension Ombudsman was putting himself in the position of the trustees. He was endeavouring himself to assess the fairness of the trustees' decision to confer additional benefits on members in service and none on member pensioners. This was not, in my judgment, his role. He was not entitled to substitute his own opinion for the opinion of the trustees themselves on what was fair or what was a valid reason for the decision. The reason given ... [by the trustees] cannot, in my judgment, be categorised as irrelevant or irrational or in any other respect improper to be taken into account."[481]

279. The duty to act impartially with regard to a power of investment does not necessarily mean that the interests of some beneficiaries may not, in the outcome, be preferred to those of others. In In re Charteris; Charteris v Biddulph,[482] the Court of Appeal considered the trustees' discretionary power to postpone or delay the sale or conversion into money of any part of the real or personal estate that a will directed be sold and converted. The trustees declined to exercise the power to appropriate some of the investments as it was a most inopportune time for their realisation. The trial judge found that the trustees had acted to benefit the residual beneficiaries to the detriment of the person entitled to the income for the term of his life.[483] He had concluded that the trustees' first duty was to provide the specific legacy in full. They had declined to realise any of the trust assets in order to do that because, if they did, there would be little or nothing left for the residual beneficiaries.

280. The Court of Appeal allowed the trustees' appeal. Warrington LJ said:

"The duty of trustees entrusted with a discretionary power of this kind is not to have regard to the interests of one person or of another interested in the estate, but to have regard to the interests of the estate as a whole, and I take it that in such a case as the present this means that they are to exercise their discretion in the way that will, in their opinion, tend to produce ultimately the largest amount of money for distribution amongst the several persons interested...."[484]

It might be that the life tenant received a lesser amount of income than he would have received had the trustees converted the estate but this was immaterial. The trial judge had confused the motive of the trustees in the exercise of their power with the outcome. In postponing realisation, the trustees had acted on proper grounds. As they were, the court could not interfere.

281. In considering what investments to make, trustees must put on one side personal interests and views. This was touched upon in Edge v Pensions Ombudsman. The rules of the trust fund required there to be employee members. From time to time, they would have to exercise discretions in which their duty and their interest might conflict. There was, in his judgment, "... no rule of equity that requires them to account for the benefits that an entirely proper exercise of discretionary powers may produce for them."[485]

A sketch of a court's power to review the exercise of a trustee's discretion

282. We will begin with the general principles upon which the courts may review a trustee's discretion before moving to consider briefly the nature of each of the three covenants that are relevant in this case: the prudent person covenant, the best interests covenant and the reserves covenant.

283. In Karger v Paul,[486] McGarvie J considered a trust established by a will. The testatrix had left her entire estate to her husband:

"... during his lifetime with power to my Trustees in their absolute and unfettered discretion and upon the request of my said husband to pay or transfer the whole or part of the capital of my said estate to ... [my husband] for his own use absolutely.

4. UPON the death of my said husband then my said Trustees shall pay or transfer to my cousin RITA KARGER ... the rest and residue of my Estate for her own use absolutely."

After receiving a request from the husband, the trustees, one whom was the husband, transferred the entire capital to the estate of the husband. The husband died leaving his estate to a person other than Rita Karger. Ms Karger sued the surviving trustee and Ms Karger alleged that the trustees had acted wrongly and so deprived her of her entitlement under the will.

"... In my opinion the effect of the authorities is that, with one exception, the exercise of a discretion in these terms will not be examined or reviewed by the courts so long as the essential component parts of the exercise of the particular discretion are present. Those essential component parts are present if the discretion is exercised by the trustees in good faith, upon real and genuine consideration and in accordance with the purposes for which the discretion was conferred. The exception is that the validity of the trustees' reasons will be examined and reviewed if the trustees choose to state their reasons for their exercise of discretion."[487]

285. The High Court expressed similar principles in Attorney-General v Breckler[488] in considering a trust deed giving the trustees an absolute and unfettered discretion. The majority of the High Court set out a passage from Wilkinson v Clerical Administrative and Related Employees Superannuation Pty Ltd:[489]

" Where a trustee exercises a discretion, it may be impugned on a number of different bases such as that it was exercised in bad faith, arbitrarily, capriciously, wantonly, irresponsibly, mischievously or irrelevantly to any sensible expectation of the settlor, or without giving a real or genuine consideration to the exercise of the discretion. The exercise of a discretion by trustees cannot of course be impugned upon the basis that their decision was unfair or unreasonable or unwise. Where a discretion is expressed to be absolute it may be that bad faith needs to be shown. The soundness of the exercise of a discretion can be examined where reasons have been given, but the test is not fairness or reasonableness."[490]

286. We will begin with the exception identified by McGarvie J in Karger v Paul. He stated first that:

"... that the validity of the trustees' reasons will be examined and reviewed if the trustees choose to state their reasons for their exercise of discretion."[491]

As to the purpose of that examination and the manner in which it differs from cases in which the trustees have not given their reasons:

"When trustees disclose their reasons, making those reasons examinable, they are examined to see whether they satisfy the standard of being valid reasons. The principle which I apply is that, apart from cases where the trustees disclose their reasons, the exercise of an absolute and unfettered discretion is examinable only as to good faith, real and genuine consideration and absence of ulterior purpose, and not as to the method and manner of its exercise."[492]

287. It is clear from the judgment that trustees exercising a discretionary power are not required to disclose their reasons for their decisions to the beneficiaries or otherwise and so are not required to expose their decisions to review.[493] Why that should be so was explained by McGarvie J by first referring to the judgment of Salmon LJ in Re Londonderry's Settlement.[494] Salmon LJ had given the court's power as one of the reasons why trustees are not obliged to give beneficiaries their reasons for exercising their discretionary powers in a certain way. He continued:

"... Another ground for this rule is that it would not be for the good of the beneficiaries as a whole, and yet another that it might make the lives of trustees intolerable should such an obligation rest on them ..."[495]

288. In Re Londonderry's Settlement, Harman LJ had given a further explanation:

"... This is a long-standing principle and rests largely, I think, on the view that nobody could be called upon to accept a trusteeship involving the exercise of a discretion unless, in the absence of bad faith, he was not liable to have his motives or his reasons called in question either by the beneficiaries or the court. ..."[496]

A further reason is apparent from the earlier case of Re Beloved Wilkes' Charity[497] in which Lord Chancellor Truro said that:

"... it is to the discretion of the trustees that the execution of the trust is confided, that discretion being exercised with an entire absence of indirect motive, with honesty of intention and with a fair consideration of the subject."[498]

289. In the more recent case, Esso Australia Ltd v Australian Petroleum Agents' & Distributors' Association, Hayne J had adopted a similar course. Unless a decision of a trustee can properly be described as perverse, his Honour said, a court "will not sit on general appeal from the decisions of the trustee".[499] Earlier in his judgment, he had said:

"In my opinion the approach spoken of in Re Beloved Wilkes' and Karger v Paul is not inconsistent with the kind of approach taken in administrative law cases. It is not inconsistent because the premise from which any review of a decision of the trustee which was taken in exercise of a discretion given to the trustee is, in Lord Truro's words, that 'it is to the discretion of the trustees that the execution of the trust is confided.' In the absence of a statement of reasons, it will not usually be possible to reach the kind of conclusion of which Dixon J spoke in Avon Downes [Pty Ltd v Federal Commissioner of Taxation [1949] HCA 26; (1949) 78 CLR 353 at 360] viz. 'that you can see that in some way he must have failed in the discharge of his exact function according to law' because it will not ordinarily be possible to say from the conclusion reached that it is capable of explanation only on the ground of some misconception by the trustee. In particular, in the absence of a statement of reasons, it will not usually be possible to conclude that the trustee has taken into account irrelevant matters or has failed to take into account relevant matters. First and foremost, it will not be possible to say from the decision reached by the trustee what it was that the trustees did (or did not) take into account."[500]

290. What are the "essential component parts" of the exercise of a discretion that must be present and whose absence will justify a court's interfering if one or more is absent? McGarvie J identified three in Karger v Paul: that the discretion be given real and genuine consideration,[501] that that it be exercised in good faith[502] and that it not be exercised for a purpose other than that for which the discretion was conferred.[503]

291. Considering the first component part, McGarvie J said that the exercise of the discretion:

"be given real and genuine consideration. ... [W]hen the occasion for the exercise of a discretionary power has arisen, trustees, while not bound to exercise the discretion, are bound to consider whether it ought in their judgment to be exercised ... I think that it goes without saying that they must give real and genuine consideration. It seems to me that it is in this sense only that the Court can examine whether the trustees gave 'proper' consideration to the exercise of the discretion. ... The courts will examine whether a discretion has been exercised irresponsibly, capriciously or wantonly ... This is another way of saying that there may be an examination of whether trustees have exercised their discretion on real and genuine consideration ..."[504]

292. Of the second component, McGarvie J considered that:

"... the test of acting honestly is the same as the test of acting in good faith ... Honest blundering and carelessness do not of themselves amount to bad faith ... An act which falls short of good faith is done in bad faith."[505]

The third component part is self explanatory although it has no relevance when the trustee's discretion is unfettered.

The principles to be applied in construing s 52

293. During the hearing, reference was made to codification of trustees' obligations. In their book, Statutory Interpretation in Australia[506], DC Pearce and RS Geddes describe a codifying Act:

"A consolidating Act gathers together and re-enacts all legislation on a particular topic: a codifying Act does that but also incorporates all the relevant common law on the topic into the Act. A code thus becomes a complete statement of all the law on a particular issue with which it deals. ... This means that it supersedes the existing common law to the extent that the code and the common law conflict. ..."[507]

294. Assuming for the moment that s 52 presumes to codify the law relating to a trustee's obligations, what is the effect of codification? Is it possible to have regard to the prior law or is the section presumed to supersede the previous law? DC Pearce and RS Geddes explored three answers to that question:[508]

· "...[the Criminal Code of Western Australia] forms part of a code intended to replace the common law, and its language should be construed according to its natural meaning and without any presumption that it was intended to do no more restate the existing law. It is not the proper course to begin by finding how the law stood before the Code, and then to see if the Code will bear an interpretation which will leave the law unaltered." (Brennan v R[509])

· "The [Tasmanian Criminal] Code is to be read without any preconception that any particular provision has or has not altered the law. It is to be read as an enactment of the Tasmanian Parliament. ... [I]t was enacted when it could be said of the criminal law that it was 'governed by established principles of criminal responsibility'. And for that reason we cannot interpret its general provisions concerning such basic principles as if they were written on tabula rasa, with all that used to be there removed and forgotten. Rather is ch iv of the Code written on a palimpsest, with the old writing still discernible behind." (Vallance v R[510])

· "The meaning ... is to be ascertained in the first instance from its language and the natural meaning of that language is not to be qualified by considerations deriving from antecedent law (Bank of England v Vagliano Bros ...). An appeal to earlier decisions can only be justified if the language of the statute is itself doubtful or if some other special ground is made out, eg if words would have previously acquired a technical meaning.

Here the ordinary meaning of the words is clear and it is not suggested that they previously acquired a technical meaning. Accordingly, it is not to be presumed that the section was intended to reiterate the antecedent law or to conform as closely as possible to that law." (Sungravure Pty Ltd v Middle East Airlines Airliban Sal[511])

295. Despite their differences, each of these approaches contains a common thread. That common thread is that regard is first to be had to the language of the legislation. This is consistent with the rules of statutory interpretation that apply whether the SIS Act were regarded as a codification or restatement of the existing law or simply as enacting a new legislative regime. They begin with "the cardinal rule of statutory interpretation that requires the words of a statute to be read in their context ..."[512] In a passage quoted with approval by Mason J in K & S Lake City Freighters Pty Ltd v Gordon & Gotch Ltd,[513] Viscount Simonds said in Prince Ernest Augustus of Hanover:[514]

"... The real question which we have to decide is: What does the word mean in the context in which we find it here, both in the immediate context of the sub-section in which the word occurs and in the general context of the Act, having regard to the declared intention of the Act and the obvious evil that it is designed to remedy?"[515]

296. The same principle was expressed in this way by Mason and Wilson JJ in Cooper Brookes (Wollongong) Pty Ltd v Federal Commissioner of Taxation:[516]

"... The fundamental object of statutory construction in every case is to ascertain the legislative intention by reference to the language of the instrument viewed as a whole. But in performing that task the courts look to the operation of the statute according to its terms and to legitimate aids to construction."[517]

In the same case, Gibbs CJ sounded a note of caution:

"... if the language of a statutory provision is clear and unambiguous, and is consistent and harmonious with the other provisions of the enactment, and can be intelligibly applied to the subject matter with which it deals, it must be given its ordinary and grammatical meaning, even if it leads to a result that may seem inconvenient and unjust."[518]

297. In two judgments, Kirby J has explained why this approach is equally applicable when Parliament has chosen words that have been used by the courts in explaining common law or equitable principles. In Federal Commissioner of Taxation v Linter Textiles Australia Ltd (in liq)[519], there was a question whether a company beneficially owned its shares in another for the purposes of s 80A(1) of the Income Tax Assessment Act 1936. Kirby J, in dissent,[520] said:

" The meaning of beneficial ownership of property and rights in property obviously depends on the context. ...

... [E]quating the concept of beneficial ownership in s 80A(1), by reference to 'the traditional sense which encompasses both equitable ownership, and legal ownership where nobody else would be regarded by a court of equity as having a proprietary interest in the shares' ... diverts attention from the interpretation and application of the Act. It glosses the statute with concepts developed for other, earlier and different legal purposes. To burden s 80A of the Act with all of the expositions about beneficial ownership derived from the law of trust, and elsewhere in the law, is to fall into a serious error of statutory interpretation. The duty of the interpreter is to give the words in the Act meaning in the context and to achieve the purposes of s 80A and those purposes alone."[521]

298. In the subsequent case of Federal Commissioner of Taxation v Stone,[522] Kirby J explained the dangers in diverting attention from the language of the legislation to principles previously developed in the courts:

"... the danger of incorporating judicial words when fulfilling the task of giving meaning to legislative command ... is such that remarks can easily be taken out of context. Thus, they may pay insufficient attention to the provisions of the legislation there under consideration. This is a very common problem in statutory interpretation. In effect, it derives from the methodology of the common law and the respect that it conventionally accords to judicial elaboration.

In every case where an earlier judicial elaboration is said to be relevant to giving meaning to provisions in legislation, it is essential to compare the statutory language that is under consideration. Otherwise, judicial words, uttered in relation to earlier and different statutory formulae, will be applied unthinkingly although the foundation of the written law has changed."[523]

299. Apart from the words themselves in a provision and the remaining words of the relevant legislation, what is the material to which we may refer in discovering Parliament's intent? This question was answered by Brennan CJ, Dawson, Toohey and Gummow JJ in CIC Insurance Ltd v Bankstown Football Club Ltd:[524]

" It is well settled that at common law, apart from any reliance upon s 15AB of the Acts Interpretation Act 1901 (Cth), the court may have regard to reports of law reform bodies to ascertain the mischief which a statute is intended to cure .... Moreover, the modern approach to statutory interpretation (a) insists that the context be considered in the first instance, not merely at some later stage when ambiguity might be thought to arise, and (b) uses 'context' in its widest sense to include such things as the existing state of the law and the mischief which, by legitimate means such as those just mentioned, one may discern the statute was intended to remedy .... Instances of general words in a statute being so constrained by their context are numerous. In particular, as McHugh JA pointed out in Isherwood v Butler Pollnow Pty Ltd (1986) 6 NSWLR 363 at 388, if the apparently plain meanings of a provision are read in the light of the mischief which the statute was designed to overcome and of the objects of the legislation, they may wear a very different appearance. Further, inconvenience or improbability of result may assist the court in preferring to the literal meaning an alternative construction which, by the steps identified above, is reasonably open and more closely conforms to the legislative intent ..."[525]

300. In addition to CIC Insurance Ltd v Bankstown Football Club Ltd, a number of cases have considered the use that may be made of extrinsic material e.g. Wacando v Commonwealth of Australia and State of Queensland [1981] HCA 60; (1981) 148 CLR 1; 37 ALR 317 at 25-26; 335-6 per Mason J; TCN Channel Nine Pty Ltd v Australian Mutual Provident Society [1982] FCA 169; (1982) 42 ALR 496 at 507-508; and Alexandra Private Geriatric Hospital Pty Ltd v Blewett (1984) 2 FCR 368; 56 ALR 265 at 375-6; 271-2 per Woodward J). It is clear that reference may be made to parliamentary debates as well as to a Second Reading Speech made by a Minister in relation to a bill and explanatory memoranda. So too may reference be made to other legislation on occasion. Australian Securities Commission v AS Nominees Ltd & others[526] provides an example of the SIS Act's being used as part of the extrinsic material to identify whether public interest was a proper matter on which to rely to justify a winding-up of a company. Apart from the standards of conduct prescribed in s 52, Finn J was referred to provisions dealing with the keeping of minutes and records, ensuring that investments were made on an arm's length basis and accounting records. Finn J said: