01/06/2020

With the demand for content in the Information Age there is often such an eagerness to interpret court judgments and their breadth of possible implications that there is a risk of hyperbole in excited comments on what is an otherwise context-specific application of legal principle.

Interpretation of Re Marsella; Marsella v Wareham (No 2) [2019] VSC 65 has offered problematic solutions to problems that don’t necessarily exist.

For those unfamiliar with the case, a quick recap: Helen Swanson passed away, survived by her second husband, Riccardo Marsella (who was the executor of her estate), and her daughter from her first marriage, Carol Wareham. Mrs Wareham and Mrs Swanson were the trustees of a self-managed super fund (of which Mrs Swanson was the sole member). At the time of her death, Mrs Swanson’s death benefit amounted to almost $500,000. With no valid death benefit nomination in place (why do people do this?) and noting that superannuation death benefits do not fall within the deceased’s estate, it fell to Mrs Wareham to exercise her discretion as trustee as to whom the death benefit should be given.

In her capacity as trustee, Mrs Wareham was required to exercise a ‘best interests’ duty (also called a bests interests covenant). This duty is a creature of statute, and can be found in s 52(2) of the Superannuation Industry (Supervision) Act 1993 (Cth). Though the section is too lengthy to be dealt with in material detail here, its intent is to ensure honest, skilful and fair actions by trustees when dealing with the superannuation entity in question.

Specifically, s 52(2)(c) states that the trustee has a duty to exercise its powers in the best interests of the beneficiaries. The construction of s 52 means that a self-managed superannuation fund’s governing rules cannot excuse the trustee from its statutory duties.

In Marsella, Mrs Wareham exercised her discretion by giving the entire death benefit to herself. In doing so, the court found that her decision-making process (not the outcome of the decision itself) breached her best interests duty, because Mrs Wareham was unable to demonstrate that she had given the decision adequate consideration informed by expert advice.

Following the Marsella decision there has been an array of opinions. Several have advised that all SMSFs should amend their governing rules to include conflict of interest clauses. Such clauses would effectively state that a trustee’s decision is valid even if the trustee has benefited themselves. Such a recommendation is problematic in three ways.

First, a clause within a private law instrument cannot absolve an individual of their statutory duties unless the statute itself allows for such absolution. An SMSF cannot excuse its trustees from the best interests duty, meaning that Mrs Wareham would have been obliged to make her decision based on expert advice and sufficient consideration irrespective of any provision within the SMSF’s governing rules.

Second, the Marsella judgment offers no comment on the outcome of Mrs Wareham’s decision. The court was only concerned with the method of decision-making. The outcome may be used to demonstrate that the decision-making was in breach of s 52(2) if it is manifestly unreasonable, but this is distinct from judging the outcome on its own merits and amending it accordingly. Conflict of interest clauses are designed to permit certain outcomes; these outcomes, such as a trustee benefiting itself, are already permissible at law. Such a clause would not have benefited Mrs Wareham and does not absolve the trustee of its best interests duty.

Third, lest anyone think that such a clause would be otherwise harmless, it is possible that a conflict of interest clause may act against the trustee that wishes to make decisions in its own favour. In determining whether a trustee has breached s 52(2)(c), the court will factor in a number of considerations, including what the trustee’s likely motivation is for making the decision. A conflict of interest clause may lead the court to conclude that the trustee believed themselves to be unrestrained by their statutory duties pursuant s 52(2); in essence, it is plausible that a court may believe that a trustee did not act in the best interests of the beneficiary, because the trustee did not believe that they were compelled to.

Though it has generated much discussion, Marsella is not a landmark case. Best interests covenants have been brought before numerous state and federal courts before, and although the decisions can be rather nuanced, they are fundamentally consistent: SMSF trustees are required to demonstrate that their decision-making process was in the beneficiary’s best interests. To that end, conflict of interest clauses may be at best ineffective and at worst harmful to the trustee’s exercise of discretion.

For further information, please contact Townsends Business & Corporate Lawyers on (02) 8296 6222 or email info@townsendslaw.com.au to see how we can assist.