Trustees Liability Insurance Following Enhanced Trustee Director Obligations and Duties. Chris Ketsakidis Partner Mills Oakley Lawyers

Transcription

1 Trustees Liability Insurance Following Enhanced Trustee Director Obligations and Duties Chris Ketsakidis Partner Mills Oakley Lawyers

2 Trustees Liability Insurance Following Enhanced Trustee Director Obligations and Duties IMPORTANT This is not advice. You should not act solely on the basis of the material contained in this presentation as they are of a general nature only. We recommend that formal advice be sought before acting in any of the areas covered in this presentation. Chris Ketsakidis (03) Partner, Mills Oakley Lawyers cketsakidis@millsoakley.com.au 2

3 Overview Enhanced Trustee and Directors Duties? Has there really been a change? What s new? Consequences of breach/liability Class actions Defences Reliance on advisers Minimising risk Insurances 3

4 Previous standard of skill and care 4 Why is it relevant? Trustees former s.52(2)(b) Must exercise, in 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 Not intended to be an experienced in business standard But higher standard of care may apply, e.g. professional trustee Directors former ss.52(8) & (9) Must exercise a reasonable degree of care and diligence for the purposes of ensuring that the trustee carries out its covenants

5 Standard of skill and care 1 July 2013 Trustee s standard of care & skill new s.52(2)(b) to exercise, in relation to all matters affecting the entity, the same degree of care, skill and diligence as a prudent superannuation trustee would exercise in relation to an entity of which it is trustee and on behalf of the beneficiaries of which it makes investments Superannuation trustee = person whose profession, business or employment is/includes acting as a trustee & investing money for beneficiaries of super entity Intended to increase degree of care, skill and diligence to be exercised by trustee of super entity, cf State Trustee Acts 5

6 Trustee Covenants Examples Expanded trustee investment covenant s.52(6) Must formulate, review regularly and give effect to investment strategy having regard to: risks composition of the investments liquidity and cash flow requirements availability of reliable valuation information ability to discharge liabilities (current and prospective) expected tax consequences* costs & other relevant matters Must also: exercise diligence in developing, offering and reviewing regularly each investment option ensure that investment options offered to each beneficiary provide adequate diversification 6

7 Trustee Covenants Examples (cont) Insurance covenant s.52(7) Formulate, review regularly and give effect to an insurance strategy for benefit of beneficiaries that addresses, amongst other things: kind of cover level of cover Risk management covenant s.52(8) Formulate, review regularly & effect a risk management strategy Maintain and manage financial resources (per prudential standards) to cover operational risk of super fund 7

8 Director s Covenants New s.52a requires directors: to act honestly in all matters concerning the fund to exercise, in all matters affecting the entity, same degree of care, skill and diligence as a prudent superannuation entity director to perform duties and exercise powers in beneficiaries best interests to manage conflicts & prioritize duties to and interests of beneficiaries not to enter any contract, or do anything else, preventing director or trustee performing or exercising their respective functions & powers to exercise a reasonable degree of care and diligence to ensure that trustee carries out its s.52 covenants 8

9 Consequences of breach Liability Loss or damage recoverable against person responsible or any person involved in the contravention: s.55(3) If breach by director, applicant must first seek Court s leave to bring action: s.55(4a). Court must consider whether: the applicant acting in good faith; and there is a serious question to be tried. Provisions apply to contravention of all covenants (not just ss.52(8) and 52A(2)(f)). For example: failure to exercise required level of care, skill and diligence, failure to perform duties and exercise powers in best interests of beneficiaries etc. 9

10 Person involved in contravention Defined in former s.17 as a person who: aided, abetted, counselled or procured the contravention induced contravention, whether by threats or promises or otherwise has in any way, directly or indirectly, knowingly concerned in, or party to, contravention, or conspired with others to effect contravention. Former s.17 repealed in 2000 because deemed unnecessary given Criminal Code: s.9a - Chapter 2 of the Criminal Code (except Part 2.5) applies to all offences against this Act. s.55(2) contravention of a covenant is not an offence 10

11 Person involved in contravention (cont) Yorke v Lucas HCA held that words similar to former s.17 applied to civil liability provision even though provision didn t impose a criminal liability A person could be guilty of offences of aiding and abetting or counselling or procuring contravention of an offence only if intentionally participates in it Required intent = must know of essential matters which go to make up offence (not whether matters amount to crime specifically) Likely that person involved in contravention under s.55(3) would be given a similar meaning to that contained in repealed s.17 In relation to investment and risk management covenants, all parties (especially third parties) are aware of strategies and commit to it 11

12 Avoiding liability 12 Statutory Defences for breach of covenant available under s.323 for breach of s.55(3) where contravention: due to reasonable mistake due to reasonable reliance on information supplied by another person (excludes directors, servants or agents (administrators?)) due to: act or default of another person an accident, or other cause beyond defendant s control and defendant took reasonable precautions & exercised due diligence to avoid contravention

13 Avoiding liability (cont.) 13 Statutory defences (cont) defences limited to loss or damages from : making an investment: s.55(5); and management of reserves: s 55(6) trustee/director must show that complied with all covenants joint submission by stakeholders sought to introduce civil penalty provisions & remove personal liability failed various State Trustee Acts Court can grant relief from personal liability if trustee has acted honestly, and ought to be excused for breach of trust (eg REST case)

14 Avoiding liability (cont.) Reliance on advisers: s.323 reasonable reliance on information supplied by another person (e.g. external independent adviser) does not apply to advice provided by internal management or employees (e.g. in-house counsel or other advisers) not an automatic exemption (per Centro not sufficient to merely rely on external advice) core, irreducible requirement to engage in management of trustee & take all reasonable steps to be in a position to guide & monitor certain standard of diligence and care which is irreducible & which each director presumed to possess at time of appointment 14

15 Avoiding liability (cont.) Reliance on advisers (cont) Lessons from Centro (cont) must have sufficient financial literacy to properly manage and administer fund s affairs and be able to assess, analyse and make determinations about laws affecting trustee and fund, financial condition, investment strategy, general fund administration and expert opinions that trustee may obtain from time to time each director must be able to demonstrate that he/she has properly considered advice obtained 15

16 Class actions Plaintiff lawyers view When will a fund be sued? Bad investment results alone do not ground a cause of action Breach of s.52 SIS Act covenants does (s.55(3)) but note s.55(5) defence regarding investment losses Most likely cause of action is misleading or deceptive conduct (ss.1041e and 1041H of Corporations Act) in communications Company directors rarely sued in class actions to date Requirements under Corporations Act for accessorial liability are more onerous: knowledge of each of elements Super directors have always been exposed accessorially under Corporations Act for misleading conduct Most likely where trustee unable to meet a judgment Now there s s.52a and checklists 16

17 Managing risk Consider policies on access to external advice Board to seek greater access to advice of relevant experts Individual directors may seek own independent advice NB unconditional reliance on advisers is not a defence without satisfying attendant obligations of directors Are indemnities in constitution/trust deed adequate Shareholders may have power to exonerate breaches of director s duties D&O insurance Deeds of Indemnity, Access and Insurance 17