Senate

Revised Explanatory Memorandum

(Circulated by the authority of the Minister for Financial Services and Superannuation, the Hon Bill Shorten MP)

Chapter 5 - Actions for breaches of directors' duties

Outline of chapter

5.1 Schedule 1 to this Bill amends the SIS Act to:

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require persons who have suffered loss or damage due to a director's contravention of duties under the SIS Act to seek leave from the court before bringing an action against a director;

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extend the availability of the legal defence for trustees and directors in court proceedings to proceedings involving breaches of MySuper obligations; and

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amend the defences to actions for loss or damage suffered as a result of the making of an investment or the management of reserves to take into account the relevance of the breach of covenants or MySuper obligations to the loss or damage suffered.

5.2 All references in this Chapter are to the SIS Act unless otherwise stated.

Context of amendments

5.3 The Trustee Obligations and Prudential Standards Act separately identifies the duties of directors of superannuation funds and imposes extra obligations on directors and trustees of funds with MySuper products.

5.4 The aim of the changes, which will apply from 1 July 2013, is to improve the governance of superannuation funds. This was in response to concerns raised in the Review that accountabilities in the system had become obscured by the corporate trustee structure, and that there have been difficulties for trustees and their directors in understanding what is expected of them.

5.5 While the superannuation industry has supported heightened obligations and the need for improved accountability of directors, concerns have been raised about the potential for frivolous and vexatious legal action being brought against directors.

Summary of new law

5.6 This Bill will require persons who have suffered loss or damage due to a director's contravention of duties under the Act to seek leave from the court before bringing action against directors.

5.7 In deciding whether to grant an application for leave, the court must take into account whether the applicant is acting in good faith and there is a serious question to be tried.

5.8 The Bill also extends the defence of having acted with reasonable precaution in section 323 so it is available to directors and trustees who are facing allegations of a breach of their MySuper duties. Comparison of key features of new law and the position under the Trustee Obligations and Prudential Standards Act

Detailed explanation of new law

Requirement to seek leave for pursuing a breach of directors' duties

5.9 If a person seeks to bring an action against a director under subsection 55(3) for loss or damage due to contravention by a director of their duties in section 52A, or prescribed under section 54A, that person needs to seek leave from the court. [Schedule 1, item 65, subsection 55(3) and item 66, subsection 55(4A)]

5.10 Leave to commence an action against a director under subsection 55(3) for loss or damage as a result of a breach of director duties may be sought at any time within 6 years after the day on which the alleged breach occurred. The court may specify a period within which the action may be brought. [Schedule 1, item 66, subsections 55(4B)and 55(4D)]

5.11 Before granting leave, the court will take into account whether the person is bringing the action against the director in good faith and in bringing the action there is a serious question to be tried. [Schedule 1, item 66, subsection 55(4C)]

5.12 The Bill also inserts relevant headings in section 55. [Schedule 1, item 62, before subsection 55(1), item 63 before subsection 55(2), item 64 before subsection 55(3) and item 67, before subsection 55(5)]

Requirement to seek leave for pursuing a breach of directors' MySuper obligations

5.13 The MySuper obligations for directors are contained in section 29VO and require directors of funds with a MySuper product to exercise a reasonable degree of care and diligence to ensure that the corporate trustee carries out its MySuper obligations.

5.14 The Bill introduces a requirement to seek leave from the court where a person seeks to bring an action against a director under subsection 29VPA(4) for loss due to contravention by a director of their MySuper obligations at section 29VO. [Schedule 1, item 43, section 29VPA]

5.15 In deciding whether to grant leave, the court will take into account two things. The first is whether the person is bringing the action against the director in good faith and the second is that in bringing the action, there is a serious question to be tried. [Schedule 1, item 43, subsection 29VPA(5)]

5.16 Leave to commence an action against a director for breach of a MySuper obligation under the Act may be sought at any time within six years after the day on which the alleged breach occurred. [Schedule 1, item 43, subsections 29VPA(4)]

5.17 In granting leave to bring such an action, the court may specify a period within which the action may be brought. [Schedule 1, item 43, subsection 29VPA(6)]

5.18 The existing provisions for members taking action against trustees for breach of their MySuper obligations remain. [Schedule 1, item 43, section 29VP]

5.19 The MySuper obligations for trustees are contained in section 29VN and include a requirement for trustees to promote the financial interests of the beneficiaries of the fund that hold the MySuper product. For clarity, this requirement applies to the financial interests of the membership of the MySuper product as a whole.

Defences for a breach of MySuper obligations

5.20 The Bill expands the defence in section 323 to cover MySuper obligations.

5.21 Directors will be able to utilise the defence where a person brings legal action under subsection 29VPA(3) for a breach of the director's MySuper obligations if their contravention was due to reasonable mistake, reasonable reliance on information supplied by another, or the contravention was due to the act of another, an accident or something outside of the director's control. Where a director or trustee seeks to rely on one of the last three reasons to explain contravention, then it must also be demonstrated that the director took reasonable precautions and exercised due diligence to avoid the contravention. [Schedule 1, item 114, paragraph 323(1)(b)]

5.22 Access to the defence in section 323 will also be expanded to cover trustees MySuper obligations in subsection 29VP(3). [Schedule 1, item 114, paragraph 323(1)(b)]

Defences to actions for loss or damage suffered as a result of the making of an investment or the management of reserves

5.23 The Bill amends the defences to actions for loss or damage suffered as a result of the making of an investment or the management of reserves so that the test will be whether the defendant complied with the covenants relevant to the act or omission that caused the loss or damage.

5.24 A trustee or director will be able to rely upon a defence to an action for loss or damage suffered as a result of the making of an investment where they can establish compliance with all of the covenants and MySuper obligations that apply in relation to each act, or failure to act, that resulted in the loss or damage. This creates a requirement for there to be a nexus between the act or omission of the director or trustee and the loss or damage which occurred. [Schedule 1, item 68, subsection 55(5)]

5.25 A similar change has been made in relation to the defence for loss or damage suffered as the result of the management of any reserves, so that the trustee or director will need to establish compliance with all of the covenants and MySuper obligations that apply in relation to each act, or failure to act, that resulted in the loss or damage. [Schedule 1, item 69, subsection 55(6)] .

Application and transitional provisions

5.26 The changes to the defence for a breach of MySuper obligations commences on 1 July 2013.

5.27 The remaining provisions commence on 1 July 2013, immediately after the commencement of Schedule 1 to the Trustee Obligations and Prudential Standards Act.