Implications of Morris case on Self-Managed Super Funds and Binding Death Benefit Nominations

Wills and Estates: 18 March 2019

Wooster and Smoel v Morris & Ors
Supreme Court Proceeding No. SCI 2012 03693
Wooster v Morris [2013] VSC 594

On 1 November 2013 Her Honour Justice McMillan of the Victorian Supreme Court handed down a significant judgment affecting self-managed superannuation funds. Aitken Partners acted for the successful Plaintiffs.

The Case

The litigation arose as a result of a binding death benefit nomination (BDBN) executed by a deceased in favour of his two daughters from a previous marriage. As a result of his death, the deceased's widowed spouse was left to essentially control the Fund as the sole remaining Trustee. After making arrangements to appoint a corporate Trustee, of which the widow was the sole director and shareholder, the Trustee rejected the binding death nomination as being invalid and sought to transfer the deceased's entitlement in the Fund to the widow. At the time of death, the deceased's entitlement was approximately $930,000 and the widow's entitlement was approximately $500,000.

Proceedings were issued by the deceased's daughters seeking a declaration that the BDBN was valid and enforceable against the Trustee and that they be paid the deceased's entitlements.

The claim was defended by the Trustee on the basis that the BDBN was not valid and binding on the Trustee for a number reasons, some of which included:

• A copy of the BDBN was not provided to the widow, as co-Trustee, in her capacity as Trustee. There was a requirement in the Deed that the BDBN be "providedto the Trustee; and
• The BDBN did not name the Fund. 

In the event the BDBN was valid, it was further argued that the Plaintiffs were only entitled to the balance of the deceased's accumulation account at the time of death of approximately $30,000 and not the balance of the deceased's pension account at the time of death of approximately $900,000.

Pursuant to an order of the Supreme Court by consent, two questions were referred to a special referee pursuant to r. 50.01 of the Supreme Court (General Civil Procedure) Rules 2005, namely:

• Was the BDBN valid; and
• If the BDBN was found to be valid, which sum would the Plaintiffs be entitled to receive pursuant to it.

Evidence was adduced and accepted during the course of the special reference that upon death, it is accepted practice that the deceased's pension account ceases and reverts to his accumulation account.

The Special Referee found in favour of the Plaintiffs on both issues deciding that the BDBN was valid and binding on the Trustee as she and the corporate Trustee must have been provided with it for them to take advice on and determine that it was not valid and that the Plaintiffs were entitled to the entirety of the deceased's interest in the Fund plus interest from 30 June 2010, being a date on which the Funds should have reasonably been paid.

The Special Referee's report was adopted by the Court by consent and interim judgment was ordered.

However, the Trustee then argued that all of the Trustee's legal and accounting costs associated with defending the claim brought by the Plaintiffs had been and should properly be charged to and paid from what was said to be the deceased's entitlement in the Fund. The Trustee maintained that the Plaintiffs' judgment could not be satisfied from the Fund's other assets being the widow's entitlement in the Fund. The charging of the legal costs meant there were insufficient assets in what was said to be the deceased's share of the Fund to meet the judgment. Indeed, because of interest and costs, the judgment could not be satisfied if the widow's entitlements in the Fund were not available to meet the Fund's judgement debt (and in the circumstances not even then).

These disputes came before Her Honour Justice McMillan in July 2013 who was asked in effect to determine whether the Plaintiffs were entitled to:

• the balance of the deceased's entitlement in the Fund after payment of the Trustees costs of defending the BDBN and related claims in the sum of approximately $300,000;
• statutory interest or only interest at the rate the Trustee had been able to obtain; and
• relief against the entire Fund, the current corporate Trustee or also against the former Trustees and the widow personally. 

Her Honour made clear in her judgment that 'one of the purposes of a reference by the Court to a special referee is to provide a form of partial resolution of disputes in a manner alternative to orthodox litigation'; and that 'if the Court were required to reconsider disputed questions where the parties have had the opportunity of giving evidence and submissions before the special referee, the purposes of the reference would be frustrated'. In essence, the Court should not be used as a quasi-appellant jurisdiction from a special referee's decision once adopted.

Her Honour accordingly upheld the special referee's findings and found the BDBN to be valid.

Statutory interest was awarded to the Plaintiffs from 30 June 2010 in accordance with the special referee's decision. The argument in respect of Trustee interest was rejected.

Her Honour acknowledged that generally a successful party is awarded costs. In this instance, the balance of assets comprising the Fund were not sufficient to meet the Plaintiffs' judgment. Her Honour also found that the widow was the only person to gain from the decisions made by the Trustee, she was also essentially controlling the Trustee. Further, that the Trustee had failed to take account of the interests of the other beneficiaries in breach of its duties. The Plaintiffs were thus entitled to judgement against the Fund, the Trustee and the widow personally.

Her Honour held that the entire Fund, including what was said to be the widow's interest was available to meet the Plaintiffs' judgment as the Trust deed provided that any member, dependant or beneficiary has an interest in trust Fund as a whole and not in any particular part of the Fund.

Arguably the most significant aspect of judgment is in relation to the loss of right by the Trustee to claim an indemnity in relation to both payment of the judgment and in relation to the legal costs incurred by it, out of the trust assets.

Her Honour found that if the Defendants were entitled to an indemnity to be borne solely from the deceased's entitlement in the Fund, the loss suffered as a result of the unsuccessful litigation would be borne almost entirely by the successful Plaintiffs in depletion of their interest in the Fund as the deceased's entitlement in the Fund was not sufficient to meet the judgment. The Trustee lost its right to an indemnity by acting to benefit of the widow as it failed to act impartially in administration of the trust.

Importantly Her Honour emphasised the necessity, in certain circumstances, for Trustees to seek judicial advice or direction in accordance with r. 54.02 of the Supreme Court (General Civil Procedure) Rules 2005. In this case, the Trustee failed to do so it two circumstances, namely (a) in refusing the BDBN; and (2) in defending the Plaintiffs' claim. The Trustee should have sought advice in both instances due to the inherent conflict of interest existing. The fact that the Trustee had obtained legal advice was not sufficient.

Lessons for Trustees

Her Honour's decision stressed the need for caution if those who control a superfund (or any Trust for that matter) benefit from a decision of the Trustee.

Further, Her Honour's decision actively advocates Trustees seeking an order to allow it to fund litigation over matters where those who control a superfund stand to benefit from the approach the Trustee intends to take. Indeed a prudent Trustee may require such persons to indemnify the Trustee and effectively fund the litigation.