Determination of Requirements for an Approved Guarantee (16/08/2005)

This instrument is a legislative determination made by a delegate of the Australian Prudential Regulation Authority (APRA) under paragraph 11E(1)(a) of the Superannuation Industry (Supervision) Act 1993 (the Act). It prescribes the mandatory form and content of an "approved guarantee" for a narrow, transitional purpose: when an approved trustee applies to APRA under paragraph 27A(1)(a) of the Act for a variation of its approval, specifically requesting a change in the subparagraph of section 26(1)(b) on which its approval is based. The determination applies only during the "licensing transition period", a defined interval in the Act that facilitated the shift from the old approved trustee regime to the RSE licensing framework under Part 2A of the Act.

Mechanically, the determination does one thing: it requires that any approved guarantee given by an authorised deposit-taking institution (ADI) for this purpose must contain solely the terms set out in the attached schedule, which is a standard form deed of guarantee. No additions, deletions or modifications are permitted. The deed itself is a unilateral instrument (deed poll) made by the ADI guarantor for the benefit of the trustee and any successor trustee of all superannuation entities for which the trustee acts. It is an unconditional, first-demand guarantee of all liabilities of the trustee (up to a stated agreed amount) arising from its duties as trustee, triggered by a "default" as defined. The guarantee terminates on the earliest of: the coming into effect of a subsequent approved guarantee under section 29DA, the end of the licensing transition period, or the fifth anniversary of signing.

The practical effect is to standardise the guarantee product that ADIs must provide when a trustee seeks to change the basis of its approval (e.g. from the net tangible assets route in section 26(1)(b)(ii) to the guarantee route in section 26(1)(b)(ii)(a), or vice versa). Before this determination, ADIs and trustees would have negotiated individual guarantee terms; the determination eliminates that flexibility. The stated purpose is to ensure a consistent, APRA-approved safety net for beneficiaries during the transitional period, but the compliance cost falls entirely on the ADI and the trustee: the ADI loses the ability to negotiate limitations or exclusions, and the trustee must ensure the guarantee is executed in the exact prescribed form or risk rejection of its variation application. The instrument creates a regulatory monopoly on the contractual terms, which may increase the cost of obtaining a guarantee since ADIs cannot price for tailored risk allocations.

Approved guarantee is defined in section 11E of the Act. Under this determination, it means a guarantee in the exact form of the schedule. The concept is central to the approval regime: section 26(1)(b) sets out alternative bases on which a body corporate may be approved as a trustee. Subparagraph (ii) refers to net tangible assets; subparagraph (iia) refers to an approved guarantee. Subsection 26(1A) allows APRA to impose conditions relating to an approved guarantee. The determination is made for the purposes of those provisions.

ADI (authorised deposit-taking institution) has its ordinary meaning under the Banking Act 1959, but the determination uses the section 10 definition from the Act. Only ADIs can give an approved guarantee under this regime. That limits the pool of guarantors to banks, credit unions and building societies, which are themselves heavily regulated. The guarantee is a contingent liability on the ADI's balance sheet, subject to prudential standards and capital adequacy requirements. An ADI must have "all requisite authorities, rights and powers" to enter the deed (clause 11 of the deed), meaning its corporate constitution and regulatory permissions must not prohibit giving such guarantees.

Licensing transition period is defined in subsection 10(1) of the Act. This instrument was made on 16 August 2005, during that period, which ran from the commencement of the Superannuation Safety Amendment Act 2004 until a date set by regulation (effectively the introduction of the RSE licensing regime). The guarantee terminates at the end of that period if nothing else happens earlier. This temporal limitation means the instrument has no ongoing force after the transition period ended, though existing guarantees may have continued for their five-year term.

Default is defined in clause 1(e) of the deed. It covers two scenarios: (A) any failure by the trustee to perform any duty or obligation under Superannuation Law resulting in financial loss to any superannuation entity of which the trustee is trustee; and (B) breach by the trustee of an enforceable undertaking under section 262A of the Act requiring payment to a superannuation entity. Note that the default need not be a breach of trust in the traditional equitable sense; it can be any failure under the sprawling definition of "Superannuation Law" in clause 1(l), which includes the governing rules of the entity, the Act, regulations, state Trustee Acts, equity, common law trust rules, and any APRA requirement. This is extraordinarily broad. A purely administrative failure that causes no financial loss does not trigger the guarantee under limb (A) because financial loss is an element of the default definition. But limb (B) has no such loss requirement; any breach of an enforceable undertaking that requires a payment triggers the guarantee regardless of loss.

The primary parties directly affected are: (1) authorised deposit-taking institutions (ADIs) that are asked to provide an approved guarantee; (2) approved trustees seeking a variation of their approval basis during the licensing transition period; (3) APRA as the regulator and recipient of the variation application; and (4) beneficiaries of the superannuation entities for which the trustee acts, who are the ultimate beneficiaries of the guarantee protection.

For ADIs, the determination imposes a take-it-or-leave-it contract. They must use the exact deed form, with no modifications. This strips them of the ability to negotiate customary exclusions (e.g. for fraud by the trustee, for set-off rights, for subrogation, for limitations on liability for consequential loss). The deed's clauses are heavily one-sided in favour of the trustee. For example, clause 8 lists 17 circumstances that will not prejudice, release or reduce the guarantor's obligations, including variation of the principal contract, illegality or voidness of the underlying trust, winding up of the trustee, material change in circumstances, and any relief granted by a court under Part 17 of the Act. This is a "hell or high water" guarantee. The ADI cannot rely on any change in circumstances to escape liability. It also waives any right of indemnity out of the assets of the superannuation entity (clause 9). That means if the ADI pays out under the guarantee, it has recourse only against the trustee personally, but the trustee may have little or no personal assets. The economic risk is thus concentrated on the ADI. Given that the guarantee is for the benefit of beneficiaries, not the trustee, the ADI effectively underwrites the trustee's performance in a way that cannot be diversified or hedged except through the agreed amount cap. For smaller ADIs or those with limited capital, providing such a guarantee could be a significant regulatory and credit risk.

For approved trustees, the determination simplifies the process of obtaining a guarantee because the terms are predetermined. The trustee does not need to negotiate with each ADI. However, the trustee must ensure that the guarantee is executed in the precise form; any deviation may lead APRA to reject the variation application. The trustee also bears the cost of obtaining the guarantee, which the ADI will price to reflect the lack of contractual protections. That cost is ultimately borne by beneficiaries through the fund's expenses.

For APRA, the determination reduces its administrative burden: it can quickly verify whether a guarantee meets the legal requirements without reviewing bespoke terms. But it also ties APRA's hands: if a particular guarantee term would be inappropriate for a given situation, APRA cannot accept a modified version because the determination mandates "solely the terms set out".

The deed imposes four core duties on the guarantor ADI. First, the duty to pay upon demand: under clause 2, the ADI unconditionally guarantees all liabilities of the trustee up to the agreed amount and must pay upon demand made in accordance with clause 5. The demand can be made by the trustee, any acting or replacement trustee, or any receiver, administrator or liquidator of the trustee. The demand must be in writing and contain particulars of the default including a quantification of the liability (clause 5(d)). However, errors or omissions in the particulars do not invalidate the demand (clause 5(d) proviso), and the ADI cannot require the demanding party to first exhaust remedies against others (clause 3). Payment must be made within 30 days without set-off, counterclaim, deduction or withholding (clause 5). This is a strict, no-defence obligation.

Second, the duty to pay interest on late payments at the Supreme Court judgment rate from the due date until actual payment (clause 7). This aligns the cost of delay with statutory rates, which are relatively low historically but compound.

Third, the duty not to rely on any rights of subrogation or indemnity against the superannuation entity's assets (clause 9). The ADI acknowledges that any liability of the trustee to the ADI is incurred in the trustee's personal capacity only, and the ADI cannot access the fund's assets to recover payments made under the deed. This is a waiver of the ordinarily equitable right of subrogation that a guarantor has after discharging the principal debtor's obligation. It prevents the ADI from stepping into the trustee's shoes and claiming against the fund, preserving the fund's assets for beneficiaries.

Fourth, the duty not to vary or revoke the guarantee without APRA's written consent (clause 10). Even with consent, the ADI remains liable for rights that accrued during the term, whether or not a demand was made.

The trustee (or other demand-maker) has the right to demand payment without first exhausting remedies (clause 3), to rely on the conclusive evidence provisions (clause 6), and to enforce the guarantee summarily. The deed gives the trustee a powerful bargaining chip: if the ADI delays or disputes payment, the trustee can invoke the conclusive evidence clause to short-circuit litigation, though note that "in the absence of manifest error" leaves some room for the ADI to challenge obvious mistakes.

The deed does not impose any duties on the trustee to mitigate losses, notify the ADI of potential defaults, or account for recoveries from third parties. The ADI has no right to be kept informed about the trustee's conduct or the fund's financial position. It has no right of inspection, no right to subrogate, and no right to terminate early except through the limited termination provisions in clause 4 (which are controlled by APRA through clause 10). The ADI's only substantive right is the warranty in clause 11 that the trustee has requisite authorities, and the warranty in clause 12 that the ADI has not relied on the trustee's representations (which protects the ADI against claims of misrepresentation, but is a curious inclusion for a deed poll where the grantor is the ADI, not the trustee).

This determination does not itself create penalties. Penalties arise from the underlying Act if a trustee operates without a valid approval or is found to have breached its duties. However, a failure to provide a guarantee in the prescribed form could have consequences for the trustee's variation application: APRA may refuse to vary the approval under paragraph 27A(1)(a) if the guarantee does not meet the determination's requirements. That would mean the trustee remains approved on the original subparagraph basis (e.g. net tangible assets) and may need to maintain that alternative compliance path. There is no penalty for an ADI that gives a guarantee not in the prescribed form; such a guarantee would not be an "approved guarantee" and would not satisfy the Act's requirements. The ADI would be exposed to a contractual claim from the trustee if the guarantee was expressly agreed to be conditional on it being an approved guarantee.

Enforcement of the guarantee itself is through civil proceedings for debt. The demand procedure in clause 5 allows summary judgment applications: the trustee can file the deed and a demand with particulars and move for judgment without pleadings. The conclusive evidence clause (6) shifts the burden to the ADI to prove manifest error. In practice, a court would be reluctant to give full effect to a clause that ousts the court's jurisdiction to determine disputes, especially given the High Court's approach to conclusive evidence clauses in guarantees (e.g. Dobbs v National Bank of Australasia (1935) 53 CLR 643). The phrase "in the absence of manifest error" likely means the clause is not an absolute preclusion but creates a rebuttable presumption that the demanded amount is correct unless the ADI can show obvious error. This reduces the ADI's ability to contest the demand on the merits, effectively requiring it to pay first and seek recovery from the trustee separately. Given that the trustee may be insolvent, that recovery is often illusory.

Interest under clause 7 is enforceable as part of the debt. If the ADI does not pay within 30 days, interest accrues at the Supreme Court judgment rate. The ADI cannot set off any cross-claims against the demand (clause 5). This includes set-off arising from unrelated transactions or even from the same superannuation entity. The ADI must pay in cash; no credit arrangements or deferred payment.

The deed also provides for the ADI's obligations to survive termination in respect of accrued rights (clause 10). So even if the guarantee terminates, a demand based on a default that occurred during the term can still be made after termination, provided the demand is made during the term? Clause 5 says "written demand under this Guarantee may be made during the term of this Guarantee upon default by the Trustee (regardless of when the default occurs)". That wording is ambiguous: it appears to require the demand to be made during the term, but the default can occur before or during. If the term has ended (e.g. fifth anniversary), no demand can be made even for defaults that occurred earlier but were not detected. That is a significant limitation for beneficiaries. However, clause 10 preserves liability for "rights that have fully or contingently accrued" during the term, which may extend to rights to demand payment that have not yet been exercised. The interaction is unclear and likely to be litigated.

The determination is made under the Superannuation Industry (Supervision) Act 1993 (SIS Act) and must be read with that Act, particularly sections 11E, 26, 27A, 29DA and the definition provisions in section 10. The term "approved guarantee" is also used in sections 29DA(3) and (4) for the post-transition period; this determination only covers the transition period variation scenario. The guarantee deed itself references the SIS Act, the Superannuation Industry (Supervision) Regulations 1994, state and territory Trustee Acts, equity, common law trust rules, and any APRA requirement (clause 1(l) definition of Superannuation Law). That means the guarantor's obligations are governed by a complex web of laws, not just the deed.

The Corporations Act 2001 is relevant because the deed contemplates execution under section 127 (two directors or director and secretary) or via power of attorney. The deed is a "financial product" for the purposes of the Corporations Act? Likely not directly, but the ADI's giving of a guarantee may trigger disclosure obligations to ASIC under the Banking Act or Corporations Act if it is a related party transaction or if it materially affects the ADI's financial position.

The Legislative Instruments Act 2003 (now the Legislation Act 2003) applies because the determination is a disallowable instrument (note 1 of the determination). That means it was tabled in Parliament and subject to disallowance within 15 sitting days. It was registered and took effect from the first moment of the day after registration (note 2). As a legislative instrument, it must be interpreted consistently with the parent Act and may be invalid if it exceeds the power delegated under section 11E. For example, if APRA prescribed terms that are inconsistent with the Act or that impose obligations beyond those necessary for an approved guarantee, a court could strike down the determination. But no such challenge is recorded.

The Banking Act 1959 and prudential standards under the Australian Prudential Regulation Authority Act 1998 govern the ADI's ability to give guarantees. An ADI must hold adequate capital against contingent liabilities. APRA, as both the prudential regulator and the regulator under SIS, has a conflict of interest: it prescribes the guarantee form for SIS purposes and also supervises the ADI's capital adequacy. This may lead to double regulation and higher compliance costs.

This determination was made on 16 August 2005 and registered under the Legislative Instruments Act 2003. It has not been amended. There is no evidence of a replacement determination. Given that it applies only during the licensing transition period, which ended many years ago (the RSE licensing regime commenced on 1 July 2006), the determination is likely spent. However, guarantees executed under it may have continued for up to five years after 2005, meaning the latest such guarantee would have expired no later than August 2010. The determination is therefore of historical significance only for ongoing litigation or closed fund matters.

No amending instruments have been registered. The determination appears to be standalone. There is no indication that APRA has made a similar determination for the post-transition period under section 29DA, though section 29DA(3) and (4) also contemplate approved guarantees. If such a determination exists, it would supersede this one for new guarantees.

The lack of amendment is consistent with the temporary nature of the instrument. APRA likely intended it to cover only the gap between the enactment of the Superannuation Safety Amendment Act 2004 and the full implementation of the RSE licensing regime. The instrument's narrow scope and mandatory form suggest it was drafted quickly to provide certainty during a transitional period when many trustees were applying to change their approval basis.

The source material does not cite any cases. Given that the determination operated for a limited period and involved relatively small numbers of approved trustees (a niche market), it is unlikely to have generated significant litigation. However, disputes may have arisen under the guarantee deeds themselves, particularly around the conclusive evidence clause (clause 6) and the definition of default. Two potential areas of contention:

First, the meaning of "default" where the failure does not result in financial loss. If the trustee fails to comply with a procedural requirement (e.g. not lodging a return on time) but no loss occurs, does that trigger the guarantee? The definition requires "financial loss to any superannuation entity" under limb (a). If no loss, no default. But limb (b) covers breach of an enforceable undertaking that requires a payment, regardless of loss. So the key interpretive issue is what constitutes a "failure to perform any duty or obligation" under Superannuation Law. Does a breach of an administrative duty that later causes loss due to penalties count? Yes, if the penalty is a loss to the fund.

Second, the conclusive evidence clause: courts have generally been reluctant to give full effect to such clauses in guarantees, holding that they cannot prevent the guarantor from challenging the validity of the underlying debt or alleging fraud. In Dobbs v National Bank of Australasia (1935) 53 CLR 643, the High Court held that a clause making a certificate conclusive evidence was valid but subject to an implied term that the certificate be honest and not fraudulent. The "manifest error" exception in clause 6(b) may allow the ADI to challenge obvious mathematical mistakes or factual errors, but not legal arguments about whether the conduct constituted a default. The ADI would need to show the determination was made in bad faith or without reasonable grounds. That is a high bar.

Another possible dispute is around clause 9 (waiver of subrogation). If the ADI pays and then seeks to enforce the trustee's right of indemnity out of the fund (which the trustee may have under the trust deed), the ADI is contractually barred. But if the trustee has no personal assets, the ADI's only recourse is against the fund under the trustee's right of exoneration. Courts may be reluctant to enforce a waiver that leaves the ADI with no practical remedy, especially if the waiver was not adequately disclosed. However, the deed is drafted by APRA and is a legislative instrument; the ADI cannot avoid it by claiming unconscionability because the terms are mandatory.

No reported cases on this specific determination or the standard deed appear in public databases. The instrument is too narrow and temporary. But for completeness, any litigation would have been in the Supreme Court of the state where the trustee's registered office is located (clause 13), typically New South Wales or Victoria.

Several traps for the unwary:

The guarantee covers defaults of the trustee that occurred at any time, even if not discovered until after termination? Clause 5 permits demand during the term upon default "regardless of when the default occurs". So a default that occurs before the guarantee was signed but only discovered during the term can be demanded. But if the default occurs during the term but is not discovered until after the guarantee terminates (e.g. after 5 years), clause 5 requires the demand to be made "during the term"; the term has ended, so no demand can be made. Yet clause 10 preserves liability for rights that accrued during the term. A right to demand payment arises only upon default and demand; the right "accrues" when the demand is made, not when the default occurs. So if the term ends before demand, the right to demand has not accrued, and the ADI may escape liability. This is a trap for trustees and beneficiaries: they must ensure they discover and demand within the term.

The "agreed amount" is a cap, but it applies to all liabilities, not per fund. If the trustee holds multiple superannuation entities, the guarantee covers all of them up to the one agreed amount. The ADI cannot allocate the cap per fund. If two demands are made for different funds totalling more than the agreed amount, the ADI pays in the order demands are received until the cap is exhausted (since the deed does not provide for pro-rata distribution). The trustee can trigger a race to demand among beneficiaries.

Clause 8(p) is a catch-all that saves the ADI's obligations from being affected by "any other fact, matter, circumstance or thing whatsoever". This is extremely broad and could cover events like force majeure, change of law making performance illegal (but illegal performance may still be void under general law; the clause likely does not override illegality). The ADI cannot rely on frustration, impossibility, or hardship. The only possible escape is if the underlying obligation becomes illegal and the court refuses to enforce the guarantee on public policy grounds.

**The waiver of subrogation (clause 9) means the ADI cannot pursue the fund's assets even if the fund has benefited from the trustee's default (e.g. where the default was a misappropriation that the fund later recovered). The ADI pays and loses the right to take the trustee's place. This is unusual: in most commercial guarantees, the guarantor is subrogated to the creditor's rights. Here, the ADI is subrogated only against the trustee personally, not against the fund. Creditors of the trustee may also have claims, but the ADI ranks behind unsecured creditors of the trustee, which are likely few.

Compliance with this determination is required only during the licensing transition period and only for trustees seeking a variation of their approval basis under paragraph 27A(1)(a). Since the transition period ended over 15 years ago, no new compliance is needed. However, for historical understanding or if similar instruments are made in the future, the steps are:

1. Verify the trustee's application: The trustee must be applying to APRA under section 27A(1)(a) for a variation of its approval, specifically seeking to change the subparagraph of section 26(1)(b) on which approval is based. The guarantee is given in support of that variation.

2. Confirm the guarantor is an ADI: Only an ADI as defined in section 10 of the Act can give an approved guarantee. The ADI must have the capacity under its constitution and regulatory permissions.

3. Use the exact deed form: The guarantee must contain solely the terms set out in the schedule. No additional clauses, no deletions, no modifications. The blanks must be filled correctly:

   • The name and ABN of the guarantor and its registered office.
   • The name and ABN of the trustee and its registered office.
   • The agreed amount (in Australian dollars, presumably).
   • The election between the two alternative bases: if approval is sought under paragraph 26(1)(b)(ii)(a), the agreed amount must be inserted and the subparagraph reference must reflect that. The schedule shows angle brackets for the subparagraph reference: <<26(1)(b)(ii)>><<26(1)(b)(ii)(a)>> indicating that one should be chosen.
   • Execution details: either affix common seal with director/director-secretary signatures, or execute under section 127 of the Corporations Act with two directors or director and secretary, or under power of attorney (specify number).

4. Execute the deed properly: The deed must be signed as a deed poll (by the ADI alone). Ensure the execution complies with the ADI's constitution and the Corporations Act. Date the deed.

5. Deliver the deed to the trustee: As a deed poll, it is effective upon delivery. The trustee should accept and hold the deed.

6. Notify APRA: The trustee's application to APRA under section 27A(1)(a) must include the executed guarantee as evidence that the guarantee requirement is met. APRA will check that the guarantee complies with the determination. If it does not, the variation may be refused.