The SIS Act’s Weapon of Mass Destruction -Navigating the Minefield of Personal Liability A relatively unknown statutory provision buried within the operating standards of the superannuation laws is section 55 of the SIS Act. This provision is relatively untested as to its scope and for an unsuspecting client or adviser, involved with the management of a superannuation fund, it has the potential power, shall we say, of a weapon of mass destruction (WMD) that can be deployed in the hands of a litigation lawyer and more insidious than those other weapon apparently lurking somewhere in a Bagdad bunker. The effect of section 55 is to impose personal liability on any person who is engaged in a contravention of the mandatory covenants that are imposed into each superannuation fund deed, and which cause another person any loss or damage as a result of the conduct of that person. In those circumstances, the other person “may recover the amount of the loss or damage by action against that other person or against any person involved in the contravention”  [emphasis added]. It is the potential breadth and depth of personal liability, particularly for clients and their advisers of SMSFs that this article attempts to fathom. The starting point to this enquiry is to determine the mandatory covenants that section 55 imposes liability for loss and damage. In the context of a self-managed superannuation fund (SMSF), these mandatory covenants are expressed to be the existing rules of the fund contained in the trust deed and those covenants imposed under section 52B and 52C of the SIS Act (“section 52 covenants”). These section 52 covenants are broadly drafted to include the following common law duties: (a) to act honestly; (b) to exercise care, skill and diligence as a prudent superannuation trustee would exercise in relation to an entity of which it is a trustee and on behalf of the beneficiaries of which it makes investments; (c) to perform the trustee’s duties and exercise the trustee’s powers in the best interests of the beneficiaries; (d) to not act with a conflict of interest between the duties of the trustee and the beneficiaries, (e) to act fairly in dealing with classes of beneficiaries within the fund; (f) to keep the money and other assets of the fund separate from any other money and assets, (g) 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;                (h) to formulate, review regularly and give effect to an investment strategy for the whole of the fund having regard to risk, investment composition, liquidity, discharge of current and future liabilities, and adequate diversification for each beneficiary. (i) To formulate, review regularly and give effect to an insurance strategy for the benefit of beneficiaries of the fund that addresses levels of cover and premiums The range of people, therefore affected by section 55 liability include: – • Clients who are trustees of SMSF’s • Clients who are directors or corporate trustees; • Accountants carrying out taxation or administration services to SMSF’s; • Financial planners advising trustees on SMSF portfolio investment; • SMSF property managers; • Actuaries, and • Anyone else who causes or contributes to the cause of loss by a contravention. It should also be noted that for clients who are trustees, the operation of section 55 is in addition to other duties imposed under general trust law and the Corporations Act for company trustees. Advisers often consider that while they are providing services to trustees, it is the trustees who are ultimately liable for decisions that are made, however, the scope of section 55 would purport to extend responsibility to advisers where they are in any way “involved in a contravention” that contributes to the cause of financial loss to another person either directly or indirectly. Section 55 contains a defence (ss (5)) to anyone affected by the loss suffered from a failed investment, but this defence is only available if they have complied with all of the section 52 covenants above, including the fund’s documented investment strategy. Section 323 of the SIS Act also provides a defence to proceedings under section 55 but only if the contravention was due to a “reasonable mistake” or “reasonable reliance on information supplied by another person”, or by the “default of another” or “by some other cause beyond the defendant’s control”. “Another person” in this context does not include a “servant or agent of the defendant”. In other words, for a trustee who makes decisions, they cannot rely on information that has been provided to them by their accountant or financial adviser, for example, even if it was reasonable to rely on that information. Further, whether information from another source is “reasonable”, is assessed objectively by a court. In a recent case of Kelaher (1), handed down in September of this year, the court held that the obligations of section 55 cannot be overruled by contrary powers in the trust deed and trustees cannot be indemnified from the assets of the fund for any liability. Since the introduction of the SIS Act in 1993, there has been only one reported SMSF case involving a section 55 liability claim, and that is a November 2000 case of Dunston-v Irving (2). The few reported cases on section 55 relate to large industry, employer or retail funds involving TPD claims. Dunston -v Irving was a business SMSF and a dispute between two business owners, one of which argued that the SMSF balances should be  “equalised” due to an apparent agreement. While section 55 was raised, its scope or operation was never canvassed by the court because it found that there was no evidence of an equalisation agreement. So, you might ask, “how could I ever become responsible to another person under section 55 of the SIS Act?” In light of the little judicial guidance on section 55 as it applies to SMSFs, this is a very … Continue reading THE SUPER BRIEF NEWSLETTER – November 2019