Commissioner of Taxation v Interhealth Energies Pty Ltd1 concerns misconduct in the management and operation of a complying self managed superannuation fund. The mismanagement arose after a defacto couple separated, and the former partner who retained control of the fund used her position to the detriment of the other partner. The mismanagement involved breaches of common law duties of a trustee and Enforceable Undertakings given under section 264A Superannuation Industry Supervision Act 1993 (Cth) (SIS Act).
Patrick Wilson and Joanna Hambrook had been both commercial partners and de facto partners. Both relationships ceased acrimoniously, probably prior to 20042.
The Interhealth Superannuation Fund (the ISF) a self managed superannuation fundwas created in June 1993 during the course of the relationships. It had two members, Patrick Wilson and Joanna Hambrook. The trustee was Interhealth Energies Pty Ltd (Interhealth), with Patrick Wilson and Joanna Hambrookas directors. The ISF owned all the units in the Greenhaven Unit Trust (GHUT) which in turn owned half the units in the Pelican Waters Unit Trust (PWUT). The PWUT owned land at Bilambil, New South Wales.
In October 2004, Patrick Wilson ceased to be a director of Interhealth and the trustee of the Pelican Waters Unit Trust.3 His membership of ISF did not cease.
In early March 2006 Patrick Wilson applied to ISF for payment of his member benefit on the basis of age and retirement from employment.4 Interhealth did not pay the member benefit to Patrick Wilson.5
On 23 August 2007 Patrick Wilson instituted proceedings in the Federal Court against Joanna Hambrook and eventually also Interhealth by which he sought to compel payment of his claimed ISF entitlements. At that stage no benefit had been paid to him by Interhealth.6
On 12 November 2007 a comprehensive deed of compromise was made among Joanna Hambrook, Patrick Wilson, Interhealth, and certain other parties. One of the recitals to that deed was an acceptance by Interhealth that Patrick Wilson had retired and was the vested owner of what were described as "the entitlements" and that "subject to the quantum of the entitlements being determined, the entitlements can be paid to [him]". Those entitlements were defined as "Wilson's Superannuation Entitlements" as "the vested superannuation entitlements payable to Wilson as a consequence of Wilson's retirement and his request that his vested superannuation entitlements be paid to him".
Under the deed Patrick Wilson released Joanna Hambrook, Interhealth and others from all claims in respect of the Bilambil property. The deed further provided for the making of an interim distribution of Patrick Wilson's ISF superannuation entitlement by way of payment by Interhealth of:
- the sum of $150,000 directly to him; and
- (implicitly under the deed by Patrick Wilson's direction) the amount of a costs order made in favour of a related company against Patrick Wilson which had become the subject of a Magistrates Court judgment against him together with related enforcement expenses.7
The deed was also cast on the basis that Interhealth had made application to the Commissioner of Taxation for the acceptance of an Enforceable Undertaking.
The deed of compromise also provided for the taking of accounts and for valuations of the assets of the ISF.8
The taking of accounts assessed the value of the net assets of the ISF at $974,822 as at 14 November 20079 of which $337,443 was referable to the land in GHUT and the remainder current assets.
Interhealth executed an Enforceable Undertaking10 on 28 February 2008 and returned it to the Commissioner. Subsequently, the interim distribution for which the deed of compromise provided was paid on 28 March 2008. Patrick Wilson received $150,000 and $28,342.72 was paid by direction in respect of legal costs.11
A similar amount was paid on that day on behalf of Joanna Hambrook to another superannuation fund.
The following additional transactions were undertaken by ISF in the year ended 30 June 2008:
- $184,456 was paid on account of the earlier litigation between Patrick Wilson and ISF
- Interhealth as trustee of ISF purchased further units in GHUT for $ 121,071 purportedly to discharge the obligation of GHUT to pay outstanding distributions to Interhealth
- An attempt was made to vary the Enforceable Undertaking, although not varied Interhealth acted as if it had been
- On 20 June 2008 Interhealthforwared a cheque for $42,824.15 to Patrick Wilson representing his entitlement to 49.54% of the balance of ISF
- On 19 June 2008 Interhealth had commissioned the accountant who had previously valued ISF to revalue the units in PWUT on the basis of an "urgent liquidation or a fire sale as the units have encumbrances on them ..." . The encumbrances were then listed.12
Subsequently, Interhealth confirmed that the payments made in March 2008 and the payment on 28 June 2008 represented Patrick Wilson's full entitlement in the ISF.13
The Commissioner regarded the position as unsatisfactory.
Was the Enforceable Undertaking breached?
WERE PAYMENTS OF UNPAID DISTRIBUTIONS OWED TO THE ISF BY THE GREENHAVEN UNIT TRUST COLLECTED BY 30 MAY 2008?
Interhealth submitted that, "[GHUT] did not have the liquidity to pay the unpaid trust distributions ... It was, therefore, necessary for the unpaid trust distributions to be applied as consideration for the issue to [Interhealth] of further units in [GHUT], thus extinguishing the liability". On this basis it submitted that it has complied with the collection obligation in respect of unpaid GHUT distributions.14
The Court found that Interhealth had done no such thing.
In April 2008, Interhealth, as trustee of the ISF, already owned all of the issued units in the GHUT. The asset of the GHUT was its 50% holding of the issued units in the PWUT. In turn, the worth of units in the PWUT was whatever was able to be realised for the Bilambil property after allowing for expenses of sale. The acquisition of further units in the GHUT could not possibly have increased the value of the assets of the ISF. If the GHUT had paid the amount receivable, the ISF would still have owned all of the units in the GHUT. Far from increasing the worth of the ISF, the transaction on 30 April 2008 diminished that value. In return for extinguishing the GHUT liability consisting of unpaid distributions to the ISF, Interhealth received worthless units.Worthless because before and after the transaction Interhealth held 100% of the issued units in the GHUT.Interhealth did not, as it had undertaken, collect the unpaid distributions. It deliberately extinguished a subsisting obligation to pay them. A consequence of the collection of the unpaid distributions would have been that the liability was discharged, but nothing has been collected here.15
The Court found that Joanne Hambrook knowingly caused Interhealth to fail to collect unpaid distributions in the amount of $121,071 from the GHUT. In so doing, she caused the trustee of GHUT to act completely contrary to how an "ordinary, prudent man of business managing his own affairs"16 would act and thus caused Interhealth to commit a breach of the obligations to which it was subject as trustee of the ISF. She also caused Interhealth to breach this requirement of the Enforceable Undertaking. Her actions were wilful, cynical and self interested.17
The Court found that the collection requirement in the Enforceable Undertaking was not to be read in isolation from the other principal requirement of the undertaking, which was to pay out in full Patrick Wilson's member entitlements by 30 May 2008. For this, liquid funds were needed, not worthless units.18
WAS MR WILSON PAID HIS FULL SUPERANNUATION ENTITLEMENT BY 30 MAY 2008?
The Court observed that the only written undertaking given by Interhealth as trustee of ISF required payment of the full superannuation Patrick Wilson by 30 May 2008.19
Thus, the written undertaking having been breached in that payment was not made by 30 May 2008, should any relief be ordered? The Court held that if Interhealth did pay Patrick Wilson his full entitlement by 20 June 2008 the date on which the letter enclosing the cheque for the alleged balance was sent, there would be no basis for granting relief.20
The Court considered the financial statements of ISF as at 30 June 2006, finding that the net assets available to pay benefits comprised $876,481.5721 and that in the year that Patrick Wilson sought the payment from the ISF of his retirement benefit, there were sufficient liquid funds in the ISF to pay his benefit.22
The Court considered the instructions given on 19 June 2008 which had the effect of placing the worth of the Bilambil property and thus the trust units dependent upon it for value at nil. The instructions upon which that valuation was based were those of Joanna Hambrook. The Court found that the instructions painted a dramatic picture of ongoing serious disputation. They made no reference whatsoever to the deed of compromise and to the comprehensive releases it contained or that Patrick Wilson remained bound by the deed of compromise. By that omission the Court found that Joanna Hambrook was not merely reckless, she was deliberately misleading. In causing Interhealth to adopt that valuation and to calculate what was said to be the amount of the instalment necessary to pay in full the amount of Patrick Wilson's retirement benefit the Court found Joanna Hambrook did not act honestly. The valuation which she adopted was, to her knowledge, based on a false premise;23 it had beenobtained dishonestly.24
The Court concluded that this was one reason why that Interhealth did not pay in full by 19 June 2008 Patrick Wilson's full retirement benefit.25
According to Interheatlth, the second reason why Patrick Wilson's second payment was only $42,824.15 was because of legal and related expenses.
The Court found that at least some of these expenses were those of PWUT, in which GHUT and therefore ISF had only a half interest but were met in full by ISF.26
In respect of Joanne Hambrook, the Court found:
The Court found Interhealth did cause a report of payment in full to be made on 25 June 2008, but the instructions given to make that report were necessarily predicated upon the making of a payment referable in amount to Interhealth's failure to administer the ISF according to law. It followed that Patrick Wilson was not then paid in full and that the report of 25 June was not truly as to a full payment. On any view, Interhealth did not report a payment in full by the date specified in the Enforceable Undertaking. The Court was satisfied that this requirement of the Enforceable Undertaking was breached.28
Section 262A(4) Superannuation Industry Supervision Act 1993(Cth) 1993(SIS Act) provided:
"If the Court is satisfied that the person has breached a term of the undertaking, the Court may make all or any of the following orders:
- an order directing the person to comply with that term of the undertaking;
- an order directing the person to pay to the Commonwealth an amount up to the amount of any financial benefit that the person has obtained directly or indirectly and that is reasonably attributable to the breach;
- any order that the Court considers appropriate directing the person to compensate any other person who has suffered loss or damage as a result of the breach;
- any other order that the Court considers appropriate"
The Court held in respect of those superannuation funds to which the SIS Act had application, section 262A supplemented the general law of trusts. The section permitted recourse to an exercise of judicial power by the Court in circumstances where the exercise of executive power by the Commissioner as Regulator in accepting an undertaking had proved insufficient to ensure that a particular superannuation fund was administered according to law. The Court stated that section 262A was not just a remedial provision; its scope and purpose were designed to ensure the integrity of the administration of superannuation funds governed by the SIS Act.
The Court found that Patrick Wilson was entitled to a lump sum retirement benefit in 200629 , but because the undertaking was given in 2008 and required a payment by a specified time in 2008 rejected the notion that 2006 was the correct date for calculation of Patrick Wilson's retirement benefit.30
The Court also found that once satisfied that an undertaking has been breached, section 262A required the Court to consider making orders which are compensatory and appropriate.31
The Court made the following orders:
- The respondent has breached the enforceable undertaking dated
28 February 2008 under the SIS Act in that it failed by 30 May
- to collect a distribution payable to the Interhealth Superannuation Fund (ISF) by the Greenhaven Unit Trust by that date;
- failed to pay in full to Mr Patrick Shaun Wilson, a member of the ISF the retirement benefit then due to him; and
- failed to report the making of payment in full by the date specified in the undertaking.
- the respondent likewise failed to perform the actions referred to in paragraphs (a)(i) and (a)(ii) by 19 June 2008 and failed to report by 25 June 2008 its carrying out of those actions;
- the amount of Mr Patrick Shaun Wilson's residual interest in the ISF as at 20 June 2008 was, after allowance for the payment to him by the respondent of the sum of $42,824.15 by cheque sent to him that day and earlier payments made to him or on his behalf by the respondent, $249,457.35;
- a reasonable time by which the respondent should have paid in full the amount of Mr Patrick Shaun Wilson's residual interest in the ISF was 30 September 2008;
- the amount which the respondent should have paid to Mr Patrick Shaun Wilson by 30 September 2008 so as to pay in full his residual interest in the ISF was $249,457.35.
Further orders were made that Interhealth pay to Patrick Wilson the sum of $249,457.35. The Court concluded that section 262A(4) permited the making of an order allowing Patrick Wilson to enforce that payment order against Interhealth as if he had obtained judgment for that amount against it.
Finally the Court commented that though there have been multiple breaches by Interhealth of the SIS Act and its general trust law duties, that, for the Commissioner to treat the ISF as non-complying, would only serve to diminish whatever might otherwise be available to pay to Patrick Wilson.The Court stated:
"It may be that the breadth of the jurisdiction conferred by s 262A(4) empowers the Court to order that a fund be treated as complying notwithstanding evident breaches."32
The Court offered the parties an opportunity to make further submissions in relation to the point contained in the preceding paragraph.
Commissioner of Taxation v InterhealthEngergies Pty Ltd serves as a reminder that trustees of any trust including superannuation funds have obligations imposed on their conduct of the trust by the general law. It is also an example of the operation of section 242A SIS Act, and in particular is an example of the Court giving the section a wide operation.
In Interhealth the party controlling a self managed superannuation fund managed the fund in such a way as to dishonestly diminish the interest of the other member in the fund. What action could and did the court take under section 262A SIS Act?
1  FCA 120
2 Paras 1, 19
3 Para 24
4 Para 27
5 Para 28
6 Para 29
7 Para 30
8 Para 32
9 Para 33
10 Within the meaning of section 262A SIS Act
11 Para 39
12 Para 44
13 Para 49
15 Para 54
16 Re Speight (1882) 22 Ch D 727
17 Para 57
18 Para 58
19 Para 60
20 Para 61
21 Para 62
22 Para 62
23 Para 69
24 Para 74
25 Para 70
26 Para 75
27 Para 80
28 Para 82
29 Para 93
30 Para 94
31 Para 95
32 Para 98
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