Determination of Requirements for an Approved Guarantee (25/02/2005)

Approved guarantee: The central concept under section 11E of the SIS Act. It is a guarantee given by an ADI that meets the requirements determined by APRA. The Determination is the instrument that sets those requirements. The guarantee itself must be a deed poll made by the ADI (the guarantor) for the benefit of the trustee of one or more superannuation entities. The deed poll structure means the ADI makes a unilateral promise - it does not require acceptance by the trustee for the obligation to arise. The guarantee is “approved” only if it is in exactly the form of the Schedule, with blanks filled in as needed (the amount, names, etc.). The amount must be at least five million dollars if the guarantee is used for an application under subsection 29DA(4) (which deals with capital requirements for a public offer entity licence), but the Schedule leaves the amount as a placeholder.

ADI (authorised deposit‑taking institution): Defined by section 10 of the SIS Act by reference to the Banking Act 1959. Only ADIs (banks, credit unions, building societies) can give an approved guarantee. This restricts the pool of potential guarantors to prudentially regulated entities, which itself provides a layer of security.

RSE licence: A licence under Part 2A of the SIS Act that allows a trustee to operate a registrable superannuation entity. The capital requirements in section 29DA differ depending on the class of licence. For a public offer entity licence, the trustee must have net tangible assets of at least $5 million or an approved guarantee for that amount (subsection 29DA(3)). Subsection 29DA(4) allows APRA to set a higher amount on application; the Schedule permits the insertion of that higher amount.

Default: Defined in clause 1(b) of the Deed to include any failure by the trustee to perform a duty under Superannuation Law that results in financial loss to a superannuation entity, or a breach of an enforceable undertaking under section 262A of the SIS Act requiring payment to the entity. This is an expansive definition - it covers not just breaches of the SIS Act but also breaches of governing rules, regulations, state Trustee Acts, equitable duties, common law trust principles, and any requirement imposed by APRA or other government authority. The term “Superannuation Law” is defined in clause 1(i) to include all of those sources. The breadth means a wide range of trustee misconduct can trigger the guarantee.

Agreed amount: The capped maximum liability of the ADI under the guarantee. For applications under subsection 29DA(3), the floor is $5 million; for subsection 29DA(4) the amount is whatever APRA specifies in the licence approval. The ADI’s liability is capped at that sum, but the trustee (or other demand‑maker) can demand the full amount upon a single default.

Term of the guarantee: It runs for five years from the later of the date the RSE licence comes into effect or the date the deed is signed. A five‑year term matches typical APRA licensing cycles and ensures the guarantee cannot be revoked unilaterally during that period.

Conclusive evidence clauses: Clauses 5(d) and 6 are critical. A written demand must contain particulars of the default and a quantification of the liability, but errors or inaccuracies do not invalidate the demand. Moreover, those particulars are conclusive evidence of default - the ADI is not entitled to make its own inquiry or challenge the factual basis. The trustee’s determination of the amount is also conclusive absent manifest error. This strips the ADI of many common law defences, including the right to dispute the existence or quantum of the underlying liability.

The Determination directly affects three categories of entity. First, ADIs that wish to provide an approved guarantee for a superannuation trustee. Any ADI considering this business line must ensure its guarantee matches the Schedule exactly. The ADI takes on an extremely onerous, non‑negotiable obligation: an unconditional, irrevocable guarantee for five years, with no right of set‑off, no requirement for the trustee to exhaust other remedies, and no ability to contest the default or amount (save for manifest error). The ADI also waives any right of subrogation against the superannuation entity’s assets - clause 9 - meaning if the ADI pays out, it cannot step into the trustee’s shoes and claim against the fund. Its only recourse is against the trustee personally, and only against assets that are not assets of the superannuation entity. This severely limits the ADI’s ability to recover its outlay. In practice, an ADI will demand security from the trustee or its related entities to cover this risk, and will charge a fee for the guarantee. The Determination therefore shifts costs and compliance burdens onto the trustee and its related parties.

Second, RSE licensees (trustees) that cannot meet the minimum net tangible asset requirements from their own resources. Such trustees must procure an approved guarantee from an ADI. The trustee must negotiate with an ADI, pay a fee, and potentially provide indemnities or security to the ADI. The trustee also bears the risk that the ADI will not pay voluntarily - the guarantee is “pay on demand” but the ADI might resist despite the conclusive evidence clause, forcing the trustee or an appointed receiver to litigate. The trustee also faces a stricter regime: if it defaults, the guarantee can be called on by the trustee itself, by an acting trustee, a receiver, a liquidator, or APRA‑appointed persons. The wide definition of default means the trustee is effectively under a strict financial guarantee regime that extends beyond intentional wrongdoing to any failure that causes loss, even if the failure is technical.

Third, APRA is the regulator that determines the form and enforces compliance. APRA must assess whether a guarantee meets the Determination, approve any variation or revocation (clause 10), and can impose conditions under section 29EA(1). The standardised form reduces APRA’s assessment costs but increases its reliance on a single template - if the template proves inadequate in a crisis, APRA may need to amend the Determination (but that would be prospective and would not affect existing guarantees).

Other affected persons include beneficiaries of the superannuation entity, who gain an additional layer of protection: if the trustee defaults and causes financial loss, the guarantee provides a source of funds up to $5 million (or a higher APRA‑approved amount). However, the guarantee does not create a direct right in favour of beneficiaries - they cannot demand payment themselves. Demand can only be made by the trustee, an acting trustee, or other listed persons (clause 5). Beneficiaries must rely on those persons to act. Liquidators, receivers, and administrators of the trustee or of the superannuation entity can demand payment, which aligns with insolvency and winding‑up procedures. Court appointed investigators or acting trustees under Part 17 of the SIS Act also have standing.

The Deed of Guarantee creates a web of absolute obligations for the ADI and a set of powerful rights for the demand‑maker (trustee, acting trustee, receiver, etc.). The ADI’s primary duty is to pay the agreed amount (or part of it) within 30 days of a written demand that complies with clause 5. The demand must include particulars of the default and a quantification of the liability, but clause 6 provides that those particulars are conclusive evidence of default and the amount. The ADI has no right to investigate, to demand proof beyond the demand, to raise set‑offs or counterclaims, or to withhold payment pending resolution of a dispute. The ADI must pay “without set‑off, whether legal or equitable, counter claims, conditions, deductions or withholdings” - a waiver of almost every defence known to the law of guarantee.

The ADI’s obligations under clause 8 are “absolute and unconditional” and cannot be prejudiced, released, discharged, reduced, or otherwise affected by a very long list of events, including: any variation of any agreement between the trustee and another person; any act or omission by a beneficiary; any security becoming void; the principal contract being illegal or void; any compromise, scheme of arrangement, or winding up of the trustee or ADI; any change in circumstances; revocation or cancellation of the RSE licence; breach of licence conditions; appointment of an investigator, receiver, or liquidator; and “any other fact, matter, circumstance or thing whatsoever which, but for this paragraph, would or might operate to prejudice… the Guarantor’s obligations”. This catch‑all makes the guarantee effectively indestructible during its five‑year term. The only exception is that the ADI is not liable for defaults of an acting trustee or receiver (clause 5(g) - the guarantee covers only the original trustee’s duties as trustee of the specified entities during the term).

The ADI has one significant right: to demand and receive from the trustee (in its personal capacity, not from the fund) an indemnity and to enforce any separate security it has negotiated. But it has no right of subrogation against the superannuation entity’s assets - clause 9 expressly waives that. This means if the trustee is insolvent and has no personal assets, the ADI’s payout is effectively unrecoverable. The ADI therefore has a strong incentive to conduct due diligence on the trustee’s financial health and to require collateral from the trustee’s related parties (but those are assets outside the fund).

The trustee (or other demand‑maker) has the right to demand payment immediately upon default, without first exhausting any remedies against the ADI or any other person (clause 3). The trustee can also rely on the conclusive evidence provisions to obtain payment quickly, potentially before any court proceedings are concluded. In practice, a trustee might call on the guarantee to cover a loss, then later be required to pay the funds to beneficiaries or the entity - the guarantee does not specify the use of proceeds; that is governed by the SIS Act and trust law.

The ADI also warrants in clause 11 that it has authority to enter into the deed, and in clause 12 that it has not relied on any representations from the trustee. These warranties are standard but, combined with the conclusive evidence clauses, further limit the ADI’s ability to later claim it was misled.

The Determination itself does not create civil or criminal penalties. It is a legislative instrument prescribing the form of an approved guarantee. The penalties and enforcement mechanisms arise from the underlying SIS Act and from the contractual terms of the Deed of Guarantee.

Under the SIS Act, if a trustee uses a guarantee that does not comply with the Determination to satisfy its capital requirements, the trustee is likely in breach of section 29DA and may have its RSE licence suspended or cancelled under Part 2A. APRA can also impose conditions on the licence under section 29EA, or take enforcement action under Part 15 (civil penalties) or Part 16 (criminal offences) of the SIS Act for providing false or misleading information. The trustee’s directors can be personally liable under the director penalty provisions and the general law.

Under the guarantee itself, enforcement is by demand and payment. The ADI must pay within 30 days of a valid demand. If the ADI does not pay, the demand‑maker can sue the ADI for the amount due plus interest under clause 7 at the rate applicable to unpaid judgments in the relevant Supreme Court. The conclusive evidence provisions in clause 6 mean the ADI cannot defend on the merits except by showing manifest error in the calculation or that the demand was not made during the term. This creates a very strong position for the plaintiff. In practice, an ADI that resists payment risks an immediate summary judgment application.

The guarantee also provides that the ADI’s obligations survive any revocation or variation that APRA later consents to - clause 10 provides that the guarantee cannot be varied or revoked without APRA’s consent, and that the ADI remains liable for any rights that accrued during the term even after revocation. This ensures that APRA has ongoing control over the instrument and that the ADI cannot walk away from past defaults.

No criminal penalties attach to the ADI for non‑payment under the guarantee; non‑payment is a breach of contract, not an offence. But if the ADI is itself prudentially regulated by APRA, its failure to honour the guarantee could lead to APRA taking supervisory action under the Banking Act 1959, including directions, capital add‑ons, or ultimately licence revocation.

The Determination and the Deed of Guarantee operate within a dense web of Commonwealth and state legislation, equitable principles, and common law rules. The most obvious interaction is with the SIS Act itself. The guarantee is expressly for the purposes of sections 29DA(3) and (4). The meaning of “approved guarantee” comes from section 11E. The SIS Act also governs the trustee’s duties (Part 6), licensing (Part 2A), and enforcement (Parts 15‑17). The determination is a disallowable instrument under subsection 11E(2) and therefore subject to the Legislation Act 2003.

The Deed of Guarantee references the Superannuation Industry (Supervision) Regulations 1994 and the Trustee Acts of any State or Territory as part of the definition of Superannuation Law. This means a breach of a state Trustee Act (for example, the Trustee Act 1925 (NSW)) that results in financial loss to the entity is a default under the guarantee. The ADI thus guarantees compliance with both Commonwealth and state law, as well as equitable duties and common law trust rules.

The definition of “Superannuation Law” also includes “any requirement of any other law governing superannuation entities or superannuation funds” and “any requirement imposed by APRA or any other government authority responsible for administering the laws or rules”. This is extremely broad and could encompass, for example, directions from the Australian Taxation Office (ATO) regarding the superannuation fund’s compliance with the tax law, or conditions imposed by ASIC if it has a role. The ADI effectively guarantees the trustee’s compliance with a potentially unbounded set of legal obligations, though the financial loss requirement provides some limit.

The Deed’s execution clauses contemplate either affixing a common seal, or execution under section 127 of the Corporations Act 2001, or by power of attorney. This means the guarantee must comply with the Corporations Act’s execution rules to be valid. If the ADI executes by power of attorney, the instrument must be legally effective under the Powers of Attorney Act in the relevant state.

Part 17 of the SIS Act deals with the removal and replacement of trustees, the appointment of an acting trustee, and court relief for breach of trust. The guarantee explicitly states in clause 8(q) that its obligations are not affected by any relief granted by a court under Part 17 or any term in the governing rules that exempts or excuses the trustee from breach of trust. This overrides typical trust law protections that might limit a trustee’s liability. Even if a court relieves the trustee of liability (e.g., because the trustee acted honestly and reasonably), the ADI remains liable under the guarantee. This is a material departure from common law principles and puts the ADI in a worse position than the trustee itself.

The guarantee also interacts with insolvency law. If the trustee is wound up, a liquidator can demand payment under clause 5(c). The guarantee is not an asset of the superannuation entity - it is a contractual right of the trustee (or its appointed successor). The liquidator of the trustee can enforce it. However, clause 9 prevents the ADI from claiming subrogation against the superannuation entity’s assets, so if the trustee is insolvent and has no personal assets, the ADI has little recourse. This may affect the ranking of the ADI’s claim in the trustee’s insolvency.

No specific interaction with the Banking Act 1959 is mentioned, but ADIs are regulated under that Act. APRA may impose conditions on an ADI’s licence relating to its guarantee exposures. The guarantee is a contingent liability of the ADI and will affect its capital adequacy calculations under the prudential standards.

The Determination revokes a previous Determination made on 15 July 2004. The text of that earlier determination is not provided, but the current one dates from 25 February 2005 and was signed by Tom Karp as delegate of APRA. Between 2004 and 2005, APRA appears to have revised the form and requirements. The only structural change evident is that the current Determination includes a note pointing to subsections 29DA(3) and (4) in the Recital B, and the Schedule includes the placeholder for the “agreed amount” with a note that for subsection 29DA(4) the amount is inserted where approval is applied for under that subsection. The earlier 2004 determination may have had different language or missing detail. Since 2005, no further amendments appear in the source. However, it is possible APRA has made subsequent determinations (the text provided is only what is in the source; users should check the current Federal Register of Legislation for any later revocations or amendments). The Determination itself is disallowable, so any future amendment would also be a disallowable instrument.

The source contains no reference to any litigation concerning this Determination or the standard‑form guarantee. The absence of case law may reflect that the instrument is a narrow technical regulation that has not been challenged. However, the clauses of the Deed of Guarantee are designed to minimise litigation risk for the demand‑maker. The conclusive evidence provisions in clause 6 are intended to deter an ADI from contesting a demand. In practice, if an ADI does refuse to pay, the trustee would likely seek summary judgment, relying on those provisions. There is a possibility that a court might find the conclusive evidence clause to be an unreasonable restraint on the ADI’s right to defend itself, but Australian courts have generally upheld such clauses in commercial guarantees, especially where both parties are sophisticated. The High Court has considered similar clauses in the context of bank guarantees and performance bonds, and they are typically held enforceable unless unconscionable. The ADI’s warranty in clause 12 that it has not relied on the trustee’s representations also reduces the scope for a misrepresentation defence.

One potential litigation risk is whether the definition of “default” is so broad as to be uncertain or to cover events that are not truly defaults. For example, a change in law that imposes a new duty on the trustee could, if not complied with, result in financial loss - does that count as a default under “any other law governing superannuation entities”? A court might need to interpret that phrase. Another risk is whether the guarantee covers losses that the trustee itself caused through its own gross negligence or wilful default - the guarantee does not exclude such cases; clause 8(p) makes it absolute. That may be controversial but is likely enforceable.

No reported decisions are known. The litigation history for this specific instrument is effectively nil.

Several traps exist for both the ADI and the trustee. For the ADI, the most significant is the no subrogation clause (clause 9). An ADI paying under the guarantee cannot step into the trustee’s rights against the superannuation entity. This means the ADI cannot recover from the fund itself, even if the trustee’s default was a breach of trust that directly depleted the fund. The ADI’s only claim is against the trustee personally, and then only against assets that are not assets of the superannuation entity. If the trustee is a corporate entity with few assets outside the fund, the ADI may recover nothing. The ADI should therefore negotiate strong separate indemnities and security from the trustee’s related parties, but those are outside the guarantee itself.

The conclusive evidence provisions (clause 6) are another major trap. The ADI cannot challenge the default or the quantum except for manifest error. The demand itself is conclusive. This means the ADI must pay first and argue later, if at all. The risk of a fraudulent or inflated demand is borne by the ADI. The only protection is the requirement that the demand include particulars, but errors do not invalidate it. The ADI has no right to require an auditor’s certificate or a court order before paying - the demand can be based on the trustee’s own determination.

The no set‑off provision is absolute. If the trustee owes money to the ADI under a separate transaction, the ADI cannot deduct that from the guarantee payment. The ADI must pay in full and then seek recovery separately. This can create a cash flow problem if the ADI has a cross‑claim.

The term of five years is fixed. The ADI cannot revoke or vary the guarantee during that period without APRA’s written consent (clause 10). Even if the trustee breaches its ongoing obligations to the ADI (e.g., fails to pay guarantee fees), the guarantee remains in force. The ADI’s only remedy is to terminate the separate agreement with the trustee, not the guarantee itself. And even after APRA allows revocation, the ADI remains liable for all rights that accrued during the term, even if not yet demanded.

For the trustee, the trap is that the guarantee may be called by persons other than the trustee itself - an acting trustee, a receiver, or a liquidator can demand payment. The trustee cannot control that decision. If the trustee believes it can resolve a default without triggering the guarantee, it may be powerless to prevent a third‑party demand.

The definition of default is extremely broad. It covers any failure to perform a duty under Superannuation Law that results in any financial loss to the entity. That includes failures that are not intentional, not negligent, and even unforeseen. For example, an inadvertent administrative error that causes a tax penalty could be a default. The trustee cannot rely on exculpatory clauses in the governing rules - clause 8(q) says those do not affect the ADI’s obligations, meaning the guarantee covers defaults even where the trustee is excused from liability.

The interest clause (clause 7) requires the ADI to pay interest at the judgment debt rate if payment is late. That rate is currently around 7‑10% depending on the state, but it compounds. The ADI should ensure internal processes allow payment within 30 days to avoid this.

Finally, the guarantee is a deed poll, not a bilateral contract. This means the ADI cannot argue that the trustee’s failure to accept or sign the deed (if the trustee does not execute) somehow invalidates the guarantee. The ADI’s unilateral promise is binding once delivered.

Compliance with the Determination is mandatory for any trustee wishing to use an ADI guarantee to satisfy the capital requirements under subsections 29DA(3) or (4). The trustee must ensure that the guarantee it obtains from an ADI is in exactly the form of the Schedule, with no additions, deletions, or alterations. The Determination states that an approved guarantee “must contain solely the terms set out in the Schedule”. The blanks must be filled in correctly.

Step 1: Identify the correct agreed amount. For a standard application under subsection 29DA(3), the minimum is $5 million. The Schedule uses the placeholder “five million dollars” but the note indicates that where approval is applied for under subsection 29DA(4) a different amount may be inserted. The trustee must check its RSE licence conditions to determine if a higher amount has been imposed. The inserted amount must be in Australian currency.

Step 2: Ensure the guarantor is an ADI. Only an entity that is an ADI as defined in section 10 of the SIS Act can give an approved guarantee. The ADI must have the capacity to enter into the deed - clause 11 includes a warranty to that effect.

Step 3: Ensure the guarantee is executed correctly. The Schedule provides three execution options: (a) affixing the common seal in accordance with its articles of association, witnessed by a director and director/secretary; (b) signing under section 127 of the Corporations Act 2001 by two directors, or a director and a company secretary; or (c) by a registered power of attorney, giving the power of attorney number. The ADI must use one of these methods. The trustee should verify that the execution is valid and that the power of attorney (if used) has not been revoked.

Step 4: Complete the schedules and any blanks. The Schedule has placeholders for the ADI’s name and ABN, the trustee’s name and ABN, and the agreed amount. These must be accurately filled. The date should be the date of execution, but the guarantee’s term runs from the later of the RSE licence coming into effect or the signing date.

Step 5: Obtain signed copies. The deed is a deed poll, so it is binding once the ADI signs and delivers it. The trustee should retain an original or certified copy. The guarantee is for the benefit of the trustee and any acting trustee, receiver, etc., so the trustee should hold it securely.

Step 6: Lodge with APRA if required. The Determination does not itself require lodgment of the guarantee with APRA, but the trustee must demonstrate to APRA that it has an approved guarantee in place to satisfy the capital condition. This is typically done as part of the licence application or during an APRA review. APRA may request a copy.

Step 7: Monitor the guarantee’s term. The guarantee runs for five years. The trustee must ensure that a new guarantee is in place before expiry if it continues to need it for licence conditions. The trustee should also ensure that it does not cause a default that triggers a demand - if it does, the guarantee may be exhausted (only one payout up to the agreed amount) and then cannot be used again.

Step 8: Do not seek variation or revocation without APRA approval. Clause 10 requires APRA’s written consent. If the trustee and ADI wish to change the guarantee or end it early, they must apply to APRA. APRA may impose conditions. This is not a simple bilateral decision.

For the ADI, compliance means being willing to accept the onerous terms. The ADI should conduct thorough due diligence on the trustee and, if comfortable, execute the deed as prescribed. The ADI should also consider requiring separate security from the trustee or its related parties, but must ensure that any such arrangement does not conflict with the guarantee terms (e.g., by attempting to get subrogation rights, which are waived). The ADI must also ensure that its own internal credit and prudential requirements are satisfied, as the guarantee is a contingent liability that will affect its risk profile. Finally, the ADI must ensure it can pay within 30 days of a demand. This means having systems to verify the demand’s form (but not its merits) and to process payment quickly.