Jurgen Werner Preuss v. Australian Prudential Regulation Authority AATA 748
(2005) 87 ALD 629
(Decision by: Murray Allen, Member)
Re Jurgen Werner Preuss (Applicant)
v. Australian Prudential Regulation Authority (Respondent) No W2003/118
Murray Allen, Member
Applicant disqualified from being a trustee or otherwise involved in the management of a superannuation entity, or from being a responsible officer of a body corporate that is a trustee or otherwise involved in a superannuation entity
applicant one of two directors of two companies that performed trustee and investment management services for a superannuation entity
second director misappropriated funds from the superannuation entity
consideration of whether trustee company and the applicant contravened the covenants imposed on the trustees and the directors of body corporates who act as trustees
findings that the trustee and the applicant contravened the relevant covenants
consideration of whether the contraventions by their number, nature and seriousness provided grounds for disqualification
consideration of whether an enforceable undertaking should be accepted as an alternative to disqualification
reviewable decision affirmed
ASC v AS Nominees - (1995) 133 ALR at 12
Re Whiteley - *1886*33ChD347
Re HIH Insurance Limited and ASC v Adler - (2002) 42 ASCR 80
Rich v ASIC - [2004 ] HCA 42
Davies v ASC - (1995) 131 ALR 295
Decision date: 5 August 2005
Murray Allen, Member
The decision of the respondent made on 3 December 2002 and confirmed on 21 February 2003 is affirmed.
.........................................(sgd M Allen)............. Member
REASONS FOR DECISION
1. On 3 December 2002 a delegate of the respondent made a decision pursuant to s 120A (3) of the Superannuation Industry (Supervision) Act 1993 ("the Act") to disqualify Mr Jurgen Werner Preuss ('the applicant') from being " a trustee, investment manager or custodian or a responsible officer of a body corporate that is a trustee, investment manager, or custodian of any regulated superannuation entity " (T2 pg 10). On 21 February 2003 a delegate of the respondent reconsidered that decision and confirmed it pursuant to s 344(4) of the Act, whereupon the applicant commenced proceedings in this Tribunal for review of the decision.
2. At the hearing of the matter the applicant was represented by his solicitor, Mr Staffa, and the respondent was represented by Mr Tzaknis of Counsel. The Tribunal received into evidence the documents filed pursuant to s 37 of the Administrative Appeals Tribunal Act 1975 ("the AAT Act") (T1 to T68) and Exhibits A1 to A7 tendered by the applicant and R1 to R12 tendered by the respondent. Oral evidence was given on behalf of the applicant by himself and his wife, Mrs C P Preuss, and on behalf of the respondent by Mr L J Dods, Mr R H C Brown (who is a senior officer of the respondent), Ms C A Nance (an actuary specialising in superannuation) and Ms S A Long (a chartered accountant and auditor specialising in superannuation).
3. The hearing was conducted in private as is required by s 344(11) of the Act. That section also enables the Tribunal to, by order, give directions as to the persons who may be present at the hearing and directions of a kind referred to in s 35(2) (b) or (c) of the AAT Act (which relate to restrictions on the publication or disclosure of contents of the documents lodged with or received into evidence by the Tribunal). No such directions were applied for by either party, or made, prior to or during the hearing of the matter. At the conclusion of the hearing I raised with the representatives of the parties whether they wished to make application at that stage for any such orders. Neither wished to do so, but both wished to leave open the possibility of doing so in the future. Shortly prior to the finalisation of these reasons for decisions the parties were again approached to ascertain whether they wished the Tribunal to make any orders under s 35 - and both advised the Tribunal that they did not seek any such orders.
4. Much of the factual background material was not in dispute between the parties and the history of the matter can be summarised as follows.
5. The applicant is a solicitor of many years standing, practising from a suburban office. For many years he was involved in the ownership and operation of a settlement agency and he also became involved in property development activities. He has been, and remains, a director of many companies, at least one of which was listed on the Australian Stock Exchange for several years.
6. In July 1994 the applicant was responsible for the creation of the Australian Independent Superannuation Fund ("AISF") and at all times subsequently AISF was a regulated fund within the meaning of and for the purposes of the Act. The signatories to the AISF Trust Deed were the applicant and Mr Dods. AISF operated as a superannuation fund for employees of the applicant's law firm and settlement agency and for some other persons, including the employees of other businesses. The applicant played an important role in soliciting members for AISF. By mid-2000 AISF had approximately 200 members, many of whom maintained quite small amounts. The applicant said in his oral evidence that the 20 members with the largest accounts represented more than 90 percent of the fund.
7. From its commencement until August 2000 the trustee of AISF was Broadway Fiduciary Pty Ltd ('Broadway"), a corporation established by the applicant for that sole purpose. Broadway had paid up capital of six shares of one dollar ($1) each, three of which were held by the applicant and the balance by Mr Dods. The applicant and Mr Dods were the only two directors of Broadway. Mr Dods was also the secretary of Broadway. Broadway also acted as trustee of a second superannuation fund, the Australian Independent Performance Trust ("AIPT"). It was not in dispute that Broadway's role as trustee of AIPT constituted a breach of Broadway's Memorandum of Association, which did not permit Broadway to act as trustee of any entity other than AISF.
8. Upon the establishment of AISF, Broadway appointed another corporation, Fairfax Holdings Pty Ltd ("Fairfax") as the investment manager for AISF. It was not in dispute that Fairfax was appointed to this role for the only reason that it would enable fees to be charged against member accounts in AISF for investment management services, whereas such charges would not be possible if Broadway performed the role of investment manager. The appointment of Fairfax as investment manager was initially by way of an oral agreement ("the oral agreement") but, in circumstances that will be referred to below, in March 1999 Broadway and Fairfax entered into a written agreement under which Fairfax was to provide investment management services ("the Management Agreement"). The applicant and Mr Dods were the only two directors of Fairfax and the applicant was the company secretary.
9. The issued share capital of Fairfax was 12 shares of one dollar each, two of which were held by Mr Dods and the other 10 were held by Ramstone Holdings Pty Ltd ("Ramstone"), a company of which the applicant and Mrs Preuss owned all the issued shares and were the only directors. Ramstone acted as a trustee for a family trust associated with the applicant.
10. Fairfax was the trustee of the Broadway Funds Management Unit Trust, the units of which were held by Ramstone (in its capacity as trustee of the family trust) and by Mr Dods.
11. Mr Dods was the sole shareholder and director of Broadway Nominees Pty Ltd ("Broadway Nominees").
12. Prior to and at the time of the establishment of AISF Mr Dods was employed in the applicant's law firm in an accounting and administrative capacity. When AISF was established and the structure outlined above put in place, there was an understanding between the applicant and Mr Dods that he would, commencing in July 1994, cease that employment and undertake the administrative duties required of Broadway and the investment management duties to be performed by Fairfax. It was part of the oral agreement that Fairfax would be entitled to receive an investment management fee of two percent per annum of the funds held by AISF and $5.00 per member per month. The applicant and Mr Dods agreed that Mr Dods would be entitled to receive all of the fees so paid to Fairfax as remuneration for his services up until those fees amounted to $50,000 per annum and that the arrangements would be reviewed when that position was reached. The $50,000 per annum threshold was never reached.
13. Mr Dods did in fact undertake the investment management and other duties on behalf of Fairfax and Broadway, but from an early date he began to engage in fraudulent transactions involving AISF funds. These involved the misappropriation of funds and the overstating of the value of assets said to be held by AISF. Some of the funds diverted from AISF by Mr Dods were converted to his own use or to the use of Broadway Nominees. On or about 26 June 2000 Mr Dods confessed to police that he had stolen AISF funds since its inception and he was subsequently charged with and convicted of a number of criminal offences and sentenced to a term of imprisonment.
14. On 28 August 2000, acting pursuant to s 133 of the Act, a delegate of the respondent removed Broadway as trustee of AISF (T documents pg 561) and appointed Denara Nominees Pty Ltd ("Denara") as the acting trustee of AISF in place of Broadway. Denara is a company associated with a large accounting firm. Ms Nance is a director of Denara and Ms Long was engaged to investigate and reconstruct AISF's accounts by Denara. As a result of investigations undertaken by and on behalf of Denara the loss to AISF as a result of moneys being diverted or stolen by Mr Dods in the years ended 30 June 1996 until 2000, the errors and false accounting involving the incorrect statement of asset values in the accounts of AISF and other losses were established. Schedule A to Exhibit R9 shows that the total losses to AISF (but excluding legal costs and interest charges) amounted to over $900,000, being itemised as follows:
|Accountants Fees||$ 46,456.00|
|Fees to auditor||$ 6,020.00|
|Fees paid to Denara||$180,454.00|
|Overpayment of Management Fees to Fairfax (based on 2% of assets p.a.)||$ 38,886.00|
|Other fees wrongly paid to Fairfax under the Management Agreement||$ 71,542.00|
|Total investment losses/loss of opportunity||$ 91,332.00|
15. Amounts of money have been recovered by Denara from various parties, including the applicant, and the Australian Government has made a substantial payment of compensation to AISF in accordance with Part 23 of the Act.
16. In June 2002 the respondent invited the applicant to show cause why the respondent should not disqualify him under s 120A (3) of the Act and, following correspondence between the respondent and the applicant's solicitors, in December 2002 the reviewable decision referred to above was made.
17. Section 120A empowers "the Regulator" (which expression includes the respondent - s 10 of the Act) to disqualify individuals in certain circumstances. Section 120A (1) permits the respondent to disqualify an individual if satisfied that:
- the person has contravened this Act on one or more occasions (whether before or after the commencement of this section ); and
- the nature or seriousness of the contravention or contraventions, or the number of contraventions, provides grounds for disqualifying the individual ."
18. Section 120A (2) deals with the situation of an individual who is a responsible officer of a body corporate that is a trustee, investment manager, or custodian. This subsection permits the respondent to disqualify such an individual if satisfied that:
- the body corporate has contravened this Act on one or more occasions (whether before or after the commencement of this section ); and
- at the time of one or more of the contraventions the individual was a responsible officer of the body corporate ; and
- in respect of the contravention or contraventions that occurred while the individual was a responsible officer of the body corporate - the nature or seriousness of it or them or the number of them, provides grounds for the disqualification of the individual ."
19. It is not in dispute that the applicant was a responsible officer in relation to Broadway and Fairfax - (see s 10 of the Act).
20. Section 120A (3) provides that the respondent ".... may disqualify an individual if satisfied that the individual is otherwise not a fit and proper person to be a trustee investment manager or custodian, or a responsible officer of a body corporate that is a trustee, investment manager or custodian ."
21. Section 120A (5) enables the respondent to revoke a disqualification on application by the disqualified individual or on its own initiative.
22. Section 262A of the Act provides that the respondent ".... may accept a written undertaking given by a person in connection with a matter in relation to which the [ respondent ] has a function or power under this Act ." An undertaking may be withdrawn or varied at any time with the respondent's consent and the respondent may apply to the Court for various orders if it considers that the person who gave the undertaking has breached any of its terms.
23. Section 55(1) of the Act provides that: " A person must not contravene a covenant contained, or taken to be contained, in the governing rules of a superannuation entity ."
24. Section 52(1) provides that: " If the governing rules of the superannuation entity do not contain covenants to the effect of the covenants set out in [ s 52(2 )], those governing rules are taken to contain covenants to that effect ." Section 52(5) further provides that: " the regulations may prescribe a covenant to be included in the governing rules of the superannuation entity and, if the governing rules of [ the entity ] do not contain a covenant to the effect of the prescribed covenant, those rules are taken to contain a covenant to that effect ."
25. Section 52(2) and (3) set out a number of covenants that are covenants by the trustee. These covenants are, for all practical purposes, identical to the trustee covenants set out in clause 8.3.1 of the AISF Trust Deed (T4 pg 89) and for convenience I will refer to the terms of the covenants set out in s 52(2), which are as follows:
(2) The covenants referred to in subsection (1) are the following covenants by each trustee of the entity :
- to act honestly in all matters concerning the entity ;
- to exercise, in relation to 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 ;
- to ensure that the trustee's duties and powers are performed and exercised in the best interests of the beneficiaries ;
- to keep the money and other assets of the entity separate from any money and assets, respectively :
- that are held by the trustee personally ; or
- that are money or assets, as the case may be, of a standard employer-sponsor, or an associate of a standard employer-sponsor, of the entity ;
- not to enter into any contract, or do anything else, that would prevent the trustee from, or hinder the trustee in, properly performing or exercising the trustee's functions and powers ;
- to formulate and give effect to an investment strategy that has regard to the whole of the circumstances of the entity including, but not limited to, the following :
- the risk involved in making, holding and realising, and the likely return from, the entity's investments having regard to its objectives and its expected cash flow requirements ;
- the composition of the entity's investments as a whole including the extent to which the investments are diverse or involve the entity in being exposed to risks from inadequate diversification ;
- the liquidity of the entity's investments having regard to its expected cash flow requirements ;
- the ability of the entity to discharge its existing and prospective liabilities ;
- if there are any reserves of the entity - to formulate and to give effect to a strategy for their prudential management, consistent with the entity's investment strategy and its capacity to discharge its liabilities (whether actual or contingent) as and when they fall due ;
- to allow a beneficiary access to any prescribed information or any prescribed documents .
Covenant referred to in paragraph (2)(e)
(3) A covenant referred to in paragraph (2)(e) does not prevent the trustee from engaging or authorising persons to do acts or things on behalf of the trustee .
26. Section 52(8) relevantly provides that a covenant by a corporate trustee, that is to the effect of a covenant referred to in s 52(2), "... also operates as a covenant by each of the directors of the trustee to exercise a reasonable degree of care and diligence for the purposes of ensuring that the trustee carries out the first-mentioned covenant, and so operates as if the directors were parties to the governing rules ."
27. Section 52(9) provides that: Reasonable degree of care and diligence
(9) The reference in subsection (8) to a reasonable degree of care and diligence is a reference to the degree of care and diligence that a reasonable person in the position of director of the trustee would exercise in the trustee's circumstances .
28. It can be seen from the above that a person in the position of the applicant may be liable to disqualification under s 120A (1) or s 120A (2) if the person personally contravened any of the provisions of the Act or was a responsible officer of a body corporate that was a trustee of a superannuation entity that contravened any of the provisions. Because of the operation of section 52(8), if a body corporate that is a trustee breaches any of the covenants imposed upon it then the directors of that body corporate will also contravene the covenant if he or she failed to exercise a reasonable degree of care and diligence for the purpose of ensuring that the trustee carried out the covenant in question.
29. As noted above at paras 1 and 16, when the decision was made on behalf of the respondent to disqualify the applicant the respondent relied upon section 120A (3) and concluded that the applicant was not a fit and proper person to be a trustee, investment manager or custodian, or a responsible officer of a body corporate that is a trustee, investment manager or custodian of a superannuation entity.
30. In a statement of the reasons for the decision (T3) the decision maker stated at  that the respondent was not relying upon any asserted breach of s 52 by the applicant but that, rather, the covenants set out in s 52 reflect the types of matters which the statutory scheme evinces as being relevant to the conduct of a trustee having responsibility for the supervision of superannuation funds and are, therefore, relevant matters to which the respondent may have regard in deciding whether to disqualify a person under s 120A(3).
31. The decision maker considered (T3 at ) that as a director of Broadway the applicant owed a fiduciary duty to AISF and its members not to put himself into a position of conflict of interest and not to obtain any unauthorised benefit arising from the fiduciary relationship. The decision maker considered the applicant to have failed to discharge that fiduciary duty.
32. In addition, the decision maker considered that as a director of Broadway the applicant owed a duty of care to AISF and its members to exercise reasonable skill, care and diligence in the various matters set out in para 13 of T 3 and failed to discharge that duty.
33. Further, the decision maker considered (T3 at ) that by force of s 52(8), as a director of Broadway the applicant covenanted for the benefit of AISF and its members that he would exercise a reasonable degree of care, skill and diligence that a reasonable person in the position of director of the trustee would exercise in the trustee's circumstances to ensure that Broadway carried out the covenants set out in s 52(2)(a), (b), (c) and (e). The decision maker considered the applicant had failed to do so.
34. After the applicant commenced his review proceedings in this Tribunal the respondent sought to add additional grounds that were said to justify the disqualification of the applicant pursuant to s 120A(1) and s 120A(2). In accordance with directions made by the Tribunal prior to the commencement of the hearing of the matter the respondent filed a statement (dated 23 July 2004) in which the respondent identified alleged contraventions of the Act and the acts or omissions said to constitute those contraventions for the purposes of s 120A(1),(2) and (3). I will refer to that document as the "Statement of Contraventions". It is sufficient at this point to observe that the respondent alleged that, for the purposes of s 120A (1), the applicant contravened s 55(1) by virtue of contraventions of the covenants in 52(2) (b), (c), (d), (e) and (f) and the corresponding clauses of the Trust Deed, that the contraventions were serious and that there were many of them.
35. For the purposes of section 120A (2) the respondent alleged in the Statement of Contraventions that Broadway contravened s 55(1) whilst the applicant was a responsible officer of it by contravening the covenants set out in s 52(2) (b), (c), (d), (e) and (f) and the corresponding provisions of the Trust Deed - and that the contraventions were many and serious.
36. For the purposes of section 120A (3) the respondent contended in the Statement of Contraventions that the contraventions relied on to support the disqualification under subsections 120A (1) or (2) were sufficient to justify disqualification, but that if they were not considered to be so then those contraventions taken together with the matters referred to below, or the matters referred to below on their own, were sufficient to demonstrate that the applicant was not a fit and proper person for the purposes of s 120A (3). The matters referred to by the respondent were as follows:
- In all of the matters alleged to constitute contraventions for the purposes of s 120A(1) and (2) the applicant exhibited a disregard, recklessness, negligence or intent in acting as a trustee/director and failed to apply his skill and experience as a lawyer, company director and business person to protect fund assets;
- As a director of Broadway the applicant owed a duty, including a fiduciary duty, to AISF and its members and by reason of the many matters set out in the Statement of Contraventions, breached that duty;
- As a director of Broadway the applicant, by virtue of s 180 of the Corporations Act 2001 , owed a duty of care to AISF and its members to exercise the degree of care and diligence that a reasonable person in a like position in a corporation would exercise in the corporation's circumstances and the applicant breached that duty by reason of the matters set out in the Statement of Contraventions at .
37. It is appropriate at the outset to identify several of matters contended on behalf of the applicant:
- The respondent is acting on the basis that the applicant should be held accountable for the frauds of Mr Dods because he failed to uncover those frauds and the respondent is attempting to apply some form of strict liability to the applicant.
- The respondent is attempting to make the applicant some sort of scapegoat for a regulatory regime that is flawed; for the failure of the respondent to identify Mr Dods' frauds in a field review it conducted in 1998; and its failure to warn the applicant that it had identified deficiencies in the audit of AISF (conducted by AISF's auditor) that made the audit "non-compliant" and which, had the applicant been made aware of those deficiencies, would have resulted in the frauds being detected earlier.
38. I will refer to aspects of the above in the reasons below, but my conclusion regarding those contentions is that none of them are supportable. The respondent does not assert that the applicant acted dishonestly or that he should necessarily have detected Mr Dods' frauds. Rather, the respondent contends, in essence, that the structure of the AISF and its relationship with Broadway and Fairfax was fundamentally flawed, and that the applicant failed to put in place internal management arrangements and failed to be sufficiently involved in Broadway's performance of its role as trustee - so that the potential for fraud occurring and not being identified at the earliest possible time was magnified.
39. The matters, acts and omissions set out by the respondent in the Statement of Contraventions in relation to alleged contraventions of the s 52(2) covenants for the purposes of s120A (1) and s120 (2) are many, and they overlap and are duplicated to a very great extent - both as between the individual covenants and as between s120A (1) and s120A (2). This is not surprising because, in light of the principal role occupied by the applicant as a director of Broadway, any act or omission alleged to constitute a contravention of one or more covenant by Broadway would, of necessity, be open to the assertion that the applicant failed to ensure that Broadway did or did not act in the way that constituted that contravention.
40. I do not propose to deal in these reasons with each and every alleged contravention individually for that reason. Rather, I propose to examine the circumstances of the matter under several broad headings.
ESTABLISHMENT AND STRUCTURE OF AISF
41. It was not in dispute that at the time AISF was established neither the applicant nor Mr Dods had any experience regarding the administration and prudential requirements of a superannuation fund. The applicant's evidence was that the motivation for establishing AISF was his perception that some of the employees of the firms he was associated with had been prejudiced by the relatively poor performance of some professional fund managers and their high fee structures. He believed that he could do better. Mr Dods had had some experience as an advisor for stockbroking firms and he had given some advice to the applicant regarding investments prior to the establishment of AISF.
42. The decision to establish Fairfax and for it to perform the role of investment manager was made by the applicant and Mr Dods. The respondent does not contend that the appointment of a third party to manage investments on behalf of a trustee is inappropriate. Rather, the respondent contends that it is the responsibility of the trustee to ensure that the investment manager has the expertise and the other capabilities to perform the role, and that the terms and conditions upon which the investment management role is to be performed are appropriate and in the interests of the fund. Where, as in the present case, the roles of trustee and investment manager are, essentially, in the hands of the same two individuals - albeit under different corporate forms - the respondent contends that the possibility of conflict of interest arises and that possibility must be managed very carefully by the trustee. A particular responsibility falls upon the trustee to ensure that the terms and conditions of appointment of the investment manager are appropriate and that proper internal controls and management systems are in place within both the trustee and the investment manager to ensure that the interests of the fund members are protected.
43. I accept the evidence of Ms Nance that the fee chargeable by Broadway for investment management services (five dollars per member per month plus 2% of the fund per annum) was broadly equivalent to the fee Broadway would have paid to commercial investment managers and was not, for that reason, inappropriate. It was, however, in my opinion unwise for the trustees of a fund such as AISF who were themselves inexperienced in the conduct of a superannuation fund to confer the investment management role - in which they were equally inexperienced - on themselves. The fact that the appointment of Fairfax as investment manager was not documented in any formal agreement initially - so that it would not have been possible for any external party to know what the terms were or to have monitored whether Fairfax was operating in accordance with these terms - made the structure even more fraught with risk. In my opinion, from its inception, the relationship between AISF, Broadway, Fairfax, and the two individuals who were the forces behind those two companies was inherently risky, and one that required the most stringent internal systems and administrative arrangements.
44. When AISF was established the applicant decided to appoint a firm of accountants that had previously acted as accountants for his law firm and settlement agency to provide auditing services for AISF. The individual auditor concerned was a registered company auditor who was, accordingly, qualified to act as the auditor as AISF - but I accept Ms Long's evidence that he was inexperienced in such a role. It is a matter for the trustee to choose an appropriate auditor. The applicant said that he had not considered appointing an auditor other than from the accounting firm with which he had a relationship and he was aware that the individual was qualified to do the work. He had not considered appointing other auditors with greater experience in superannuation. That is a matter of great regret because it is apparent from the evidence and the history of the matter that the auditor failed in the years prior to 2000 to conduct the audit of AISF in a manner that met the requirements of the Australian Auditing Standards.
INTERNAL MANAGEMENT SYSTEMS
45. Despite the risks identified above, it is apparent on the evidence that the applicant gave no consideration to whether the structure he had put in place was appropriate or to the need for internal management systems and practices that would safeguard the AISF members' interests and mitigate the structural weaknesses.
46. The evidence is that meetings of directors of Broadway (and Fairfax) rarely occurred in any formal sense and minutes of meetings held or decisions that were made were never recorded in any contemporaneous way. Mr Dods had access to what I accept was a suitable computerised administration and accounting system that was capable of providing the administrative support for a fund like AISF. However, the evidence of Mr Dods, which on this point I prefer to that of the applicant, was that the day to day trustee and investment management functions were, essentially, left in Mr Dods hands with little or no input from the applicant. I do not accept the applicant's evidence that he discussed investment or trustee matters with Mr Dods on a daily basis. Although I accept that the applicant and Mr Dods had offices within a few meters of each other and would have spoken to each other more or less daily, I prefer Mr Dods evidence that he was left to manage AISF investments as he saw fit with only occasional consultation with the applicant.
47. I accept that Mr Dods generated a monthly report regarding the fund from the computer system, but I am satisfied that the purpose of this report was primarily to enable the calculation of Fairfax's monthly management fee and that, at best, the applicant merely perused these reports in a superficial way.
48. In relation to Broadway's bank accounts, both the applicant and Mr Dods were required to sign cheques for payments and the applicant said that he always saw original contract notes issued by stockbrokers when cheques were needed to pay for purchases. He thought this was a reasonable and sufficient safeguard. However, and in my opinion far more importantly, Mr Dods was left to establish and operate the various accounts that Fairfax had with a number of stockbrokers and was able to instruct the stockbrokers to buy and sell shares and to apply the proceeds of sale in whatever way Mr Dods instructed, without any involvement by the applicant. I accept the evidence of Ms Nance and Ms Long that it is a fundamental principal that any money moving out of a trust fund of this kind should have at least dual authorisations and the arrangements put in place by the applicant and Mr Dods in this regard failed that fundamental rule. This is of great significance because the ability of Mr Dods to control funds moving from stockbrokers was an important way that he was able to defraud the fund.
THE ANNUAL AUDIT
49. I have described above how the applicant selected the auditor for AISF. When the audit was conducted each year Mr Dods prepared a set of financial statements that were submitted to the auditor. The role of an auditor under the Act is two fold: the first being to express an opinion as to whether the financial statements prepared by the trustee accurately reflected the financial position of the fund. The second role is to express an opinion as to whether the fund has been administered during the relevant year in accordance with the requirements of the Act.
50. It is now not in dispute that from an early stage the accounts as prepared by Mr Dods were false in that they represented that AISF had investments that were not, in fact, held - because Mr Dods had misappropriated the money that would otherwise have been used to make those investments. By way of example, Ms Nance said that for the year ended 30 June 1999 the financial statements as prepared by Mr Dods showed that AISF held investment assets of $864,000 whereas the reality was that 90% of that amount was not represented by assets held. Ms Long gave the example, for the year ended 30 June 1998, that the financial statements showed holdings of 17 different securities whereas AISF in fact only had 8 holdings.
51. The applicant said in his evidence that he was content to leave all dealings with the auditor to Mr Dods and I accept the evidence of Ms Long and Ms Nance that this was, in itself, an error. It is poor practice to allow a person who has control of investment management and financial statements to deal with the auditor and, in the context of a two person operation such as that of AISF, the applicant should have himself dealt with the auditor or arranged for some person other than Mr Dods to do so.
52. I accept the evidence of Ms Long and Ms Nance that it would have been a simple task for the auditor to have verified that the investments shown falsely in the financial statements did not in fact exist. However, in the years prior to 2000 the auditor apparently chose not to verify the existence of these assets in the usual way - by contacting the relevant companies and stockbrokers - but, rather, relied on proof of investment holdings supplied by Mr Dods. It was not until the audit for the year June 2000 was underway - involving new staff members of the auditing firm - that the normal procedures for verifying assets was employed and it was this procedure, and the realisation that it would quickly identify the non-existence of assets supposed to have been held, that prompted Mr Dods to confess to his previous fraudulent activities.
53. It is apparent that the applicant relied entirely upon Mr Dods to manage the investments in the way described above, to prepare the periodic financial statements, and to deal with the auditors. That was, in my opinion, a completely inappropriate procedure and one that meant the trustee, via its directors, did not exercise any objective measure of control over the audit process - which, had it been used to its potential, might have drawn attention to the activities of Mr Dods many years before they actually came to light.
54. I mention also at this stage that in each year of audit the applicant and Mr Dods signed the financial statements and representation letters addressed to the auditor - in which representations were made regarding the accuracy of these statements. It is apparent that, in so doing, the applicant relied entirely upon Mr Dods and did not exercise any independent judgement or have any independent knowledge about the veracity of the financial statements or AISF's financial condition.
55. The applicant contended throughout his evidence that, in the absence of information to raise suspicions, he was entitled to rely upon persons such as Mr Dods and the auditor. I agree with the assessment of Ms Long that in situations such as this trust is not the relevant consideration. One may well trust others, but one must always be conscious of the possibility of fraud or error and, therefore, it is essential that proper procedures and systems be put in place that will identify problem areas. Broadway clearly did not have such systems and procedures in place and the applicant's explanation - that he trusted Mr Dods and the auditor and the possibility of fraud never crossed his mind - is not, in my opinion, by any means acceptable.
AISF'S INVESTMENT STRATEGY
56. I have referred above to the applicant's motives when establishing AISF, his perception regarding the poor performance of professional investment managers, and also to the way in which investment decisions were made.
57. Between 1994 and 1999 Broadway (or for that matter Fairfax) did not have a written investment strategy. The applicant said that he was aware that a superannuation fund needed to have such a strategy but he believed that an investment strategy "... is one of these public service things which of its very necessity are very vague . I mean the sort of mother and apple pie type statements ...". He said that he thought a written investment strategy for a superannuation fund was irrelevant. He said that the factors that he had regard to when considering investment opportunities for AISF was that they would focus on "midcap" industrial shares with the objective of generating strong capital growth and a reasonable prospect of some form of dividend. He agreed that the strategy in fact employed by AISF was an "aggressive" one but that he would not have used that word when describing the investment strategy of the fund to members or prospective members.
58. The applicant was referred to the annual report to members of AISF for the year ended 30 June 1998, which described the investment objectives of what was called the "balanced pool"(T pg 1065). The objective was stated to be: " to provide sound long term growth from exposure to a well diversified portfolio of investments including Australian shares, international shares, direct property, indirect property (trusts) and fixed interests ." The trustee's investment strategy at that time was stated to be "... to place high importance on the protection of capital yet maximise earning opportunities by exposure to more volatile but potentially better performing markets ." AISF's purported investment holdings at that time (which were not of course the complete picture because of the activities of Mr Dods) consisted of some ordinary shares in listed companies and a substantial number of holdings of listed options over shares. The applicant was asked whether such holdings could properly be described as a balanced portfolio or a well diversified portfolio. He eventually agreed that the shares in small capitalised companies may be more difficult to sell and that such securities could be called "volatile" - but only because "we expected them to go up". He conceded that the investments in the fund at that time could not be described as a well diversified portfolio. I am satisfied that was indeed the case and that the information provided to members of AISF about the approach to investment and the nature of the holdings was inaccurate and misleading insofar as it conveyed the view that the holdings were "balanced" or "well-diversified". The information was, in any event, inaccurate because of the falsified accounts.
THE 1998 REVIEW BY THE RESPONDENT
59. As part of its regulatory role in relation to superannuation funds the respondent conducts a programme pursuant to which it reviews a sample of funds each year with a view to determining whether the trustees thereof have the ability to discharge their duties and obligations under the Act and the prudential management of the funds, operations, systems and controls. Reviews involve looking such matters as whether the trustee has a compliance regime, a risk assessment process, an investment strategy appropriate for the fund, the competency, integrity and knowledge of the trustee, and a strategic plan placing due focus on the long term nature of member interests; see Exhibit R7 at para 40.
60. As part of its 1998/99 review programme the respondent selected AISF for review on the basis of certain risk criteria - which included that AISF had more than 20 members and was self-administered, and that unrealised capital gains represented more than 20 percent of total assets. These characteristics were considered by the respondent to indicate a greater potential for deficiencies.
61. The review was conducted by officers of the respondent between August and November 1998 and it was not in dispute that all dealings with the respondent's officers on behalf of AISF were done by Mr Dods.
62. By letter dated 10 November 1998 addressed to the directors of Broadway and marked for the attention of Mr Dods (see annexure C to exhibit R7), the respondent identified the major concerns that had been identified in the review and for which the trustee was asked to consider making relevant changes to improve the operation of the fund.
63. The major concerns raised by the respondent in the letter were set out in considerable detail in an attachment to the letter of 10 November 1998, the main points of which were as follows (using numbers of paragraphs referred to in that attachment):
1. 1 Trustee responsibilities: The observation was made that the trustee did not have adequate procedures or knowledge of its responsibilities to ensure compliance, based on the compliance concerns identified in the review, and should ensure that procedures and controls were put in place to enable the trustee to meet all its obligations and duties.
1.2 Equal representation: It was observed that the applicant and Mr Dods had been appointed as employer and member representatives on the board of Broadway without any formal election procedures identified. Steps were to be taken to ensure appropriate elections of employer and member representatives on the board of the trustee.
1.3 Administrator - Agreement: It was noted that there was no administration agreement between Broadway and Fairfax. Such an agreement would assist in the separation of responsibilities of the applicant and Mr Dods given their various roles. The respondent advised that it would be prudent to document the relationship with Fairfax and to establish performance criteria and a regular reporting structure so that Broadway could effectively evaluate the performance of Fairfax. A number of matters were identified that should be included in such an agreement.
1.4 Year 2000 millennium bug: The trustee was asked to advise what steps it would take to ensure adequate internal control systems against this risk.
1.5 Disqualified persons: It was observed that the trustee had no procedure to identify whether any of the individual trustees were disqualified under the Act from performing a role of directors of the trustee.
3.1 Investment Strategy: The investment strategy of AISF should be reviewed to ensure consistency with fund objectives and it was noted that the property holding of the fund was outside the asset allocation specified in the investment strategy that existed at that time. Any changes to the investment strategy were to be appropriately minuted.
3.2 Beneficiary investment choice: It was noted that no beneficiaries had elected to participate in the cash pool option, but there was inadequate documentation regarding this.
4.1 Documentation of Meetings of the Trustee: The minutes of Broadway that had been provided to the respondent were considered to be inadequate in meeting the requirements of s 103 of the Act. All of the matters about which the trustee made decisions were specified in the letter and the trustee was asked to confirm that accurate and complete minutes of all meetings and decisions would be maintained in future.
4.2 Contributions from associated employers: It was noted that there were several participating employer sponsors for AISF but no documentation indicating acceptance of the terms and conditions of the trust deed - and Broadway was to confirm that all contributing employers had been admitted as associated employer sponsors in accordance with the trust deed.
4.3 Related party disclosures: It was noted that, because of the common directorships of the applicant and Mr Dods of Broadway and Fairfax, details of all payments made to Fairfax should have been included in the related party disclosures within AISF's financial statements - and this was to occur in future.
64. In early December 1998 AISF responded to the respondent, in a letter signed by both the applicant and Mr Dods. The letter addressed the matters identified by the respondent and noted the actions that were to be taken in relation thereto. Broadway did not respond to the matter raised at point 1.1 above regarding trustee responsibilities. In relation to point 1.2, a fresh election would be held for employee representatives and the applicant's appointment as employers' representative would be confirmed by the current participating employer sponsors. In relation to 1.3, the applicant's law firm would be commissioned to prepare an administration agreement that would address the points raised by the respondent and a copy would be sent to the respondent when completed. In relation to 1.4, a computer consultant would check all Broadway's hardware and letters of comfort would be sought from Fairfax and the supplier of the computerised administration software. In relation to 1.5, all directors of Broadway would sign a statutory declaration to the effect that they were not disqualified and would notify if they ever were. In relation to 3.1, the investment strategy would be checked at every Board meeting and Fairfax would be asked to explain any variation from the guidelines laid down by the trustee. In relation to 3.2, the cash pool option would continue and the trustee would direct Fairfax to place any monies received under this option in a Cash Management Trust. In relation to 4.1, the need for accurate and complete minutes was acknowledged and the respondent's recommendations would be used for all future meetings as a check list for all meetings. In relation to 4.2, all employer sponsors would ratify the applicant as their representative and sign their acceptance of the Trust Deed. In relation to 4.3, all related party transactions disclosed would be in future financial statements.
65. By letter dated 7 December 1998 (Annexure E to exhibit R7) the respondent informed the directors of Broadway that, based on the information contained in the letter, AISF's status as a complying fund would not be altered, no action would be pursued by the respondent regarding the matters identified, and that it would not be necessary for Broadway to report the issues raised as contraventions in the Annual Report of AISF for the 1997/98 year.
66. In its review APRA also identified some matters of concern in relation to how the audit of AISF had been conducted by the auditor. In a letter dated 16 November 1998 (Exhibit R8) to the auditor the respondent identified two matters that needed to be addressed by the auditor prior to conducting further audits. The two matters identified were, first, that the compliance audit procedures carried out by the auditor were not fully adequate and there was insufficient documentary evidence of the work performed. The compliance audit programme had not been cross-referenced to documentation and audit procedures performed. Reliance appeared to have been placed on representations of the trustee in several areas and no further testing was conducted to verify the accuracy of those representations. The second matter identified was that some documentation of audit procedures referred to in the auditor's working papers by cross-reference was not to be found in the audit working papers supplied to the respondent by the auditor. Documentation supporting the existence, ownership and valuation of the fund's investments should be maintained on the auditor's file and should be current, complete and easily understood.
67. It was not in dispute that the respondent did not inform the directors of Broadway of these items of concern raised with the auditor. It is also not in dispute that in the audit of the year ended 30 June 1999 the auditor's practices regarding verification of assets and documentation thereof did not improve.
THE MANAGEMENT AGREEMENT
68. In the early part of 1999 the applicant drafted an agreement that was eventually executed by the applicant and Mr Dods in their capacities as directors of Broadway and Fairfax as the Management Agreement. The applicant says that at some stage he discussed the terms of the agreement with one of the officers of the respondent who had conducted the review and sent that officer a copy of the executed agreement. A number of pertinent points can be noted in relation to the Management Agreement:
- Recital D recorded that Fairfax "... professes skill and knowledge in respect to matters pertaining to the provision of advice for trustee companies ".
- Clause 1(b) provided that Fairfax would provide management, investment and accounting services to the trustee to a standard "reasonably required by ... [Fairfax]". Whether this was an error and it was intended that the agreement specify the standard was to be set by the trustee was never clarified.
- Clause 1(c) required Fairfax to report to the trustee on a monthly basis regarding AISF's operation. The applicant acknowledged (see exhibit A2 at para 119) that he did not see a need to go through these monthly reports as Mr Dods was reporting to him on virtually a daily basis. For the reasons that I have specified above I do not accept that Mr Dods was reporting daily.
- Clause 2 (a) provided that the Management Agreement would run from 1 January 1999 until 30 June 2002 or until it was terminated in accordance with the Management Agreement, whichever was the earlier. If terminated Broadway would review the "benefit of the management and advisory service provided by" Fairfax and if Broadway thought the performance of Fairfax inadequate then the trustee was not obliged to renew the term. Clause 7 gave Broadway the right to terminate the Management Agreement early only on the occurrence of certain events specified in that clause, none of which related to dissatisfaction by Broadway with Fairfax's performance.
- Clause 4 required Fairfax to obtain a policy of fidelity and professional indemnity insurance "for a sum not less than that mutually agreed upon from time to time" to cover the risks referred to in Clauses 9 and 10. Those clauses referred to Fairfax being obliged to reimburse AISF for any moneys lost by the fund as a result of fraud or theft from the fund by a servant, agent or contractor of Fairfax and that a policy of insurance against such fraud or theft would be maintained. In addition, a policy of indemnity for an amount of not less than $500,000 was to be maintained by Fairfax, who was to notify Broadway of the details of the insurance policies taken out.
- By Clause 5 Fairfax was entitled to the remuneration set out in item 2 of the Schedule to the Management Agreement. In addition, Fairfax was entitled to keep any "commissions, fees or benefits" that it received outside of the terms of the Management Agreement because of its acting as manager, but was obliged to inform Broadway if it received any such benefits. Item 2 of the Schedule specified that Fairfax was entitled to $5 per calendar month per member plus 2 percent per annum of the net assets of AISF payable monthly. Item 3 required Fairfax to pay for staff sufficient to ensure that the terms of the agreement were carried out; expenses relating to giving advice to the trustee; and "all expenses relating to providing satisfactory return on funds invested". Item 4 of the Schedule required AISF to pay all outgoings incurred in connection with the operation of the fund in its own office, including rent for the fund offices, telephones and telephone lines and call costs, office furniture, computer hardware and software, stationery and office expenses.
69. It is not in dispute that at no time did Fairfax obtain or attempt to obtain the policies of insurance referred to in the Management Agreement. The applicant said in his oral evidence that he intended that insurance would be obtained, but he "forgot" to pursue the matter with Mr Dods. It was also the applicant's position that, because events of fraud had already occurred prior to 1999, any disclosure of that fraud at that time would have meant that no insurance could have been obtained. Alternatively, if insurance had been obtained without full disclosure of the existing fraud, then it would not have been possible for Fairfax to recover under the policy in due course because of that non-disclosure. Accordingly, so the applicant contended, Broadway was ultimately no worse off as a result of the failure to obtain insurance.
70. It was also not in dispute that from the time the Management Agreement was entered into AISF began to pay to Fairfax expenses to cover office rent, furniture, telephones and other communication costs, and other such administrative expenses. This was said to be in accordance with Item 4 of the Schedule and was in addition to the two percent plus $5 per month fees otherwise chargeable by the manager. I accept the evidence of Ms Nance (see para 13 of Exhibit R9) that in the year to 30 June 2000 Broadway paid to Fairfax amounts totalling $71,542.00 for these administration expenses in addition to the other remuneration paid to Fairfax (which totalled $36,677.00).
71. The applicant's evidence was that it was appropriate for Broadway to pay these additional administration fees because the investment returns that had been generated for AISF since 1994 had been better than would have been obtained from a professional fund manager, and because up until that time Broadway had occupied office space rented by the applicant's law firm or settlement agency at no charge. On the other hand Ms Nance gave evidence, which I accept, that the additional costs were unacceptable because the applicant, as a director of Broadway and Fairfax, had a conflict of interest in entering into such an agreement that increased the monies paid to Fairfax; the agreement disadvantaged the members of AISF as it increased the costs payable by them; and, in any event, the members of AISF were at no time advised by Broadway of these increased costs. Finally, and in my opinion most importantly, Ms Nance's evidence was that the additional payments were unacceptable because of the size of AISF. The fees of $36,677 payable in the year to June 2000 were, according to Ms Nance, comparable to the fees that would have been paid to an arms length professional superannuation fund administrator and in that case all of the additional administration costs would not have been payable by a fund such as AISF. In other words, AISF should not have had to pay anything by way of administration costs over and above the normal fees payable to an investment manager on a commercial basis.
72. It is to be observed that, apart from the reference above to the uncertainty inherent in Clause 1(b) as to who was to specify the standard of the services provided by Fairfax and the somewhat vague reference in Clause 2 to Broadway examining and comparing with similar entities the benefit of the management advisory service provided by Fairfax, the Management Agreement does not specify any clear performance criteria that would enable Broadway to effectively evaluate the performance of the manager as required by the respondent
STANDARD OF CARE REQUIRED
73. In ASC v AS Nominees (1995) 133 ALR 1 at 12 Finn J reviewed the standard of care expected of trustee companies and their directors in the conduct of trust business, albeit not in the context of the requirements of the Act. His Honour observed that, in the context with which he was concerned, a trustee should exercise the same care as an ordinary, prudent business person would exercise in conducting that business as if it were his own - but that there is a well accepted adjunct to that rule in the context of making investment decisions, which he referred to as "the requirement of caution", where a somewhat higher standard is required to reflect that a trustee cannot necessarily "take the hazard of adventures" that prudent business people may take in the conduct of their own affairs. His Honour referred to the observations of Lindley LJ in re Whiteley (1886) 33 ChD 347 at 355 in relation to a trustee's investment power: " The duty of a trustee is not to take such care only as a prudent man would take if he had only himself to consider : the duty rather is to take such care as an ordinary prudent man would take if he were minded to make an investment for the benefit of other people for whom he felt morally bound to provide ."
74. It can be seen that the exposition by Lindley J of the duty of a trustee is in terms almost identical to the terms of the covenant set out in s 52(2)(b). To that extent, it seems clear that the duty of a trustee in the context of covenants such as the one in s 52(2) (b) is a one that requires a standard of care, skill and diligence that is in excess of that normally imposed on a trustee.
75. Finn J also observed in ASC v AS Nominees (supra) at 13 that where a trustee is a company the requirements of care and caution are in no way diminished and that there is a "flow on effect into the duties and liabilities of the directors of such a company" - particularly where the directors of a trustee company are themselves "concerned in" the breaches of trust by the company. If directors of a trustee company are themselves concerned in the breaches of trust by the trustee company then those directors are liable to the company according to the same standard of care and caution as is expected of the company itself.
76. Such a conclusion sits well with the provisions of s 52(8) and s 52(9) referred to above. By virtue of the latter provision a director (such as the applicant) of a trustee company (such as Broadway) must exhibit the degree of care and diligence that a reasonable person in the position of director of such a trustee would exercise in the trustee's circumstances. The trustee has to exhibit the degree of care, skill and diligence referred to in s 52(2) and, in my opinion, a director of such a trustee must exhibit and satisfy the same standard.
CONCLUSIONS REGARDING CONTRAVENTIONS OF THE S 52(2) COVENANTS
77. It has not been contended that the applicant acted dishonestly in any matter concerning AISF or in the conduct of the affairs of Broadway. To that extent it is not contended that the applicant contravened the covenant in s 52(2) (a). However, as noted above, it is contended that both Broadway and the applicant contravened the covenants contained in s 52(2) (b) (c) (d) (e) and (f).
78. Because of the view I have taken regarding the overall conduct of the applicant and the performance of his duties as a director of Broadway, I do not propose to consider individually each and every allegation made by the respondent said to constitute a contravention of these covenants by Broadway or the applicant. Rather, I will identify those matters which I consider do constitute contraventions.
79. In so doing it is important to bear in mind that one should not be wise after the event. The losses suffered by the members of AISF are due, directly, to the fraudulent activities of Mr Dods. It remains the case, however, that those fraudulent activities occurred in the context of what I consider to be a systemic failure in the structure and operations of AISF. The applicant was, throughout his evidence, at pains to avoid acknowledging any personal responsibility for the failings of Mr Dods and the auditor, and the applicant's perceptions of the failings of the respondent in meeting what he thought were its regulatory duties. At no time would the applicant acknowledge systemic failure or a failure of diligence on his own part to ensure a sound structure was put in place with appropriate control and risk processes that were complied with.
80. This is a case in which a superannuation fund was established with good intentions, but it was established by two individuals who had no experience conducting such a fund, although the applicant had considerable experience as a legal practitioner and company director and must be taken, therefore, to understand the general duties of those with fiduciary responsibilities to others. My assessment of the applicant's evidence is that he was at all times reluctant to acknowledge the extent to which, as a director of a trustee company of a superannuation fund, there was a personal duty upon him to understand not only the legislative requirements governing the operation of such a fund, but to also understand the practical requirements of setting up and running such a fund in a prudential way. The applicant, in my assessment, was not prepared to acknowledge that he did not appreciate sufficiently the defects in the structure that had been put in place or the deficiencies in the operating arrangements. I have observed above that the applicant relied on and trusted Mr Dods and the auditor but, as I have also noted above, trust is no substitute for personal knowledge of and involvement in the day to day activities of a superannuation fund where the preservation and growth of the money of others is at stake.
81. In my opinion, the duties and powers of Broadway were not performed and exercised in the best interests of the beneficiaries of AISF because the applicant and Mr Dods, in their capacities as directors of Broadway, appointed Fairfax as administrator and investment manager in circumstances where the applicant and Mr Dods had a personal financial interest in such an arrangement, and in circumstances in which neither the applicant nor Mr Dods had relevant knowledge or experience in the administration of a superannuation fund. In the case of Mr Dods the financial interest was immediate and direct (in that it was to generate his only income) and in the case of the applicant it was a more indirect financial interest in that he was aware that Fairfax would derive substantial sums of money from Broadway and that, when those amounts exceeded $50,000 per annum, he would or might derive personal financial benefits directly.
82. That structural weakness and the conflicts that were inherent in it, resulted in the arrangements with Fairfax being, initially, unspecified to any material degree and, after the Management Agreement was put in place, by no means arms length in nature. The failure of the applicant to even contemplate having Fairfax capitalised to any material amount or to have insurance that might provide a measure of security to Broadway, and in particular the applicant's failure to ensure that Fairfax obtained insurance when the respondent insisted on that, clearly indicates that the arrangements between Broadway and Fairfax were such that they prevented or hindered Broadway from properly performing or exercising the trustee's functions and powers. This is not to say that Broadway could not or should not have obtained investment management services from some third party. Section 52(3) of the Act clearly contemplates that such a thing may be done. What is important, in the context of AISF, was that no consideration was given by the applicant as to whether the interests of AISF members required that there be professional funds management - or at least a degree of administrative and investment management skills that could not have been delivered by the applicant and Mr Dods alone.
83. For the reasons referred to in the preceding paragraphs I consider that Broadway and the applicant contravened the covenants referred to in s 52(2) (c) and (e).
84. In relation to the covenant in s 52(d), it was not in dispute that Broadway acted as trustee for the AIPT trust and that it was not permitted to do so. Money and assets of the two funds were not kept separately in contravention of the covenant in s 52(2) (d) and the covenant in s 52 (2) (c).
85. In relation to the covenant in s 52(2) (f), I have set out above the deficiencies that I perceive in the investment strategies and the management of investments on behalf of AISF. It may be that an investment strategy that was "aggressive" in the nature of the investment products held could be appropriate for a superannuation fund such as AISF but, in my opinion, the investment strategies (such as they were) that were formulated by the applicant and Mr Dods did not have regard to the whole of the circumstances of AISF and did not have regard, specifically or any significant degree, the factors referred to in s 52(2) (f) (i) to (iv). The evidence of the applicant in relation to how investment decisions were made was in my opinion quite unsatisfactory.
86. Finally, in relation to the covenant in s 52(2) (b), which in my opinion is at the heart of the deficiencies of the applicant's performance, I have concluded that the applicant failed to exercise the degree of care and diligence that was required of him to ensure that Broadway was able to perform its duties and powers with a degree of care, skill and diligence that was required by that covenant. My overall conclusion regarding this covenant is that the applicant, in essence, thought that it was sufficient to establish AISF and to put Broadway and Fairfax in place - and then to leave Mr Dods to get on with doing all of the things that were necessary to be done by Broadway and Fairfax in their respective roles. Had Mr Dods performed his duties consciously and honestly it is possible that no losses would have occurred for the fund members but, regrettably that did not occur. The fact that Mr Dods' activities were not identified earlier was partly due to the deficiencies of the auditor but, in my opinion, they were substantially due to the fundamental flaws in the structure and operations that the applicant put in place and allowed to be maintained without any material input from him. Had the applicant taken a greater role in dealing with the auditor and the respondent, and had he taken a greater role in ensuring that Fairfax provided truly arms length services to Broadway, then some of the deficiencies of others may have been identified at a much earlier stage. The applicant did not do any of those things and to that extent he failed to do the things that an ordinary prudent person would do when dealing with the property of others for whom that person felt morally bound to provide. In my opinion, the applicant has contravened the covenant in s 52(2) (b).
CONCLUSIONS REGARDING S 120A
87. For the reasons that I have set out above I consider that both Broadway and the applicant contravened a number of the covenants in s 52(2). Those contraventions are many in number and occurred over many years and continued after the applicant had many relevant matters drawn to his attention as a result of the respondent's review in 1998. The contraventions are serious in that they provided the circumstances in which a substantial fraud could occur and go undetected for a considerable period of time and enabled the funds belonging to the members of AISF to be lost. Superannuation is a fundamental part of the economic life of this country. Superannuation is compulsorily provided to employees as part of their terms of employment and, at the time in question, employees did not generally have a choice as to which fund their monies were paid into. Further, superannuation is a long term investment and generally inaccessible to employees for long periods of time, and there are significant taxation concessions for superannuation contributions and earnings. In such circumstances any failure by the trustee of a superannuation fund and the directors thereof to meet the obligations imposed by the Act and the general law with the consequence that funds are lost, is serious. Good intentions and trust can be no substitute for proper structures and procedures and the applicant failed to exercise the degree of involvement, skill and diligence that is expected.
88. In my opinion, the contraventions of the applicant and of Broadway are, by their number, nature and seriousness such as to provide grounds for the disqualification of the applicant under both s 120A (1) and s 120A (2).
89. I was advised by the respondent that the nature and scope of the powers conferred on the respondent by s 120A has not been the subject of judicial decision and I have not located any relevant authorities. As to when a contravention will provide grounds for disqualification of an individual is not something that s 120A provides guidance in relation to. The issue of whether, and for how long, persons should be disqualified from acting as a director of a company under s 206C of the Corporations Act has been reviewed in recent years in cases such as Re HIH Insurance Limited (in liquidation) and ASC v Adler [ 2002 ] 42 ACSR 80 at  to  and in Rich v ASIC  HCA 42. These cases provide some guidance as to the types of matters that may be relevant in the assessment of whether a person should be disqualified under s 120A of the Act.
90. I have the mentioned above the importance of superannuation to the community and it is clear that the protection of the public is vital to the ongoing confidence in the superannuation industry. I am by no means satisfied that the applicant had a proper understanding of the role of a trustee and the duties owed by a trustee and a director of a trustee company. Although there was no suggestion of dishonesty or intention to defraud on the part of the applicant, there was, in my opinion, in the attitude of the applicant towards the alleged contraventions, an element of incompetence and a lack of contrition and acceptance of responsibility. I have noted that the applicant maintained that the essential reason for the losses of the fund members was the failure of others and an absence of acceptance that his failings contributed.
91. Taken over all, I consider that the contraventions that I believe have occurred do provide grounds for disqualifying the applicant. It is not, of course, part of the Acts legislative framework that it is necessary to consider for how long the disqualification should apply.
92. Having arrived at the above conclusion it is unnecessary to consider whether the applicant would also be liable to disqualification under s 120A (3). In the context of legislative provisions that were similar, but not identical, Hill J in Davies v ASC (1995) 131 ALR 295 considered that a power to disqualify an auditor who "is otherwise not a fit and proper person" provided a separate basis for disqualification in addition to the other, more specific, grounds that would enable disqualification. Hill J observed (121 ALR at 307) that the words "or is otherwise" express a legislative view that a person who fails to perform the duties or functions that would provide the specific grounds upon which to disqualify would ordinarily not be a fit and proper person to remain registered as an auditor. I consider the relationship between s 120A (1)(2) and (3) to be similar and I have expressed the view above that the contraventions by the applicant did provide adequate grounds for disqualification.
93. However, the respondent contends that apart from the specific contraventions of the s 52 covenants there were other matters that demonstrated that the applicant was not a fit and proper person for the purposes of s 120A (3) - see para 36 above..
94. Hill J in Davies v ASC also commented on the meaning of the expression "fit and proper person", noting that what is necessary to constitute a person as fit and proper to occupy a particular office or pursue a particular vocation will vary having regard to the office or vocation under consideration. Elements of reputation; a proper knowledge of applicable laws; a practical ability to carry out duties competently; and overall competence, integrity and honesty will be relevant. Generally speaking a person who fails to carry out adequately and properly his duties or functions in a particular office would not be a fit and proper person to continue to hold such an office. For the reasons that I have set out above I consider that the applicant did not carry out adequately and properly his duties and functions as a director of Broadway, even if it could not be said (which I do not consider to be the case) that any of his actions constituted contraventions of the covenants to which he was subject. The applicant failed, in my opinion, to demonstrate a sufficient understanding of the obligations that were imposed upon him and was not prepared to accept that to be the case or that his practical performance of his duties fell short of the required standard. In my opinion, had it been necessary for me to deal with the matter under s 120A (3), the applicant is not a fit and proper person for the purposes of that provision.
SHOULD THE RESPONDENT HAVE ACCEPTED AN ENFORCEABLE UNDERTAKING?
95. I have noted at para 22 that s 262A of the Act empowers the respondent to accept a written undertaking from a person such as the applicant. During the course of the proceedings the applicant submitted to the respondent a form of undertaking that he would be prepared to enter into. The respondent was not prepared to accept the undertaking offered or any undertaking in similar terms.
96. The undertaking that was offered was, in effect, that the applicant would not without the prior consent of the respondent act as a trustee, investment manager or custodian, or a responsible officer of a body corporate that performed such roles of any regulated superannuation entity "...other than a self managed superannuation fund (or any similar future superannuation fund)" of which he and his wife were the only members. It was contended by the applicant that such an undertaking was an appropriate way to deal with the situation. This was so because there was no suggestion that the applicant was dishonest; he had not stolen any funds and he would not steal from himself; and he is a reputable legal practitioner and businessman. The applicant's position is contrasted to that of the auditor, against whom disqualification action had not been taken despite an obvious failure by the auditor to perform his duties adequately. I observe at this point that the respondent's position regarding the auditor was that disqualification action was not needed because the auditor was in poor health and was no longer practising as an auditor, and, hence, there was no prospect of him resuming his duties.
97. In the circumstances of this case I agree with the contentions made on behalf of the respondent that an undertaking is not an appropriate way to deal with the matter. I have already referred above to the importance of superannuation and the need to maintain confidence in the system. There is also a substantial tax payer interest in how superannuation funds are administered and it is not possible to say that a superannuation fund, even a self managed one, is an entirely private matter. I have no doubt that the applicant's wife trusts him in much the same way as many of the members of the AISF would have trusted him - and to that extent there is an element of protection required for his wife.
98. Importantly, however, it seems to me that the applicant's failure to acknowledge the shortcomings in his performance as a director of a trustee company indicates that he does not really accept those shortcomings. To that extent there is some risk that he will not have learned from the experience to the degree that would provide sufficient certainty to be able to say that this would never happen again. I was advised that the applicant does not presently administer any superannuation fund and disqualification of the kind here in question does not impede any of his other activities.
99. Finally, it is relevant to note that the consequences of contravening a disqualification order (i.e. the commission of an offence) differ from that of contravening an enforceable undertaking - in which case the respondent must apply to a court for appropriate orders.
100. Even if it were the case that an enforceable undertaking may be an appropriate way of dealing with this situation (which I do not consider to be the case), in my opinion the undertaking offered by the applicant would not be an appropriate one. For example, it makes no reference to any steps that might be taken by the applicant to educate himself regarding the obligations of a trustee and the practical matters that trustees must have regard to in the operations of superannuation funds. I accept the respondent's advice that various industry bodies and other education providers offer courses that would be of direct relevance to the applicant and would provide the respondent with some measure of confidence that the shortcomings evident from the AISF history would not be repeated in future.
101. A disqualification under s 120A operates indefinitely, but I have noted above that the respondent can revoke a disqualification at any time. It would be open to the applicant to apply for revocation at a time when circumstances have changed - such as by the applicant undertaking one of the relevant courses referred to above.
102. For the reasons given above I consider that disqualification of the applicant is appropriate and that acceptance of an enforceable undertaking would not be an appropriate alternative. My decision is that the decision of the respondent made on 3 December 2002 and confirmed on 21 February 2003 is affirmed.
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