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Focus: Super fund trustee's denial of total and permanent invalidity claim upheld

10 June 2010

In brief: The Court of Appeal of Victoria has upheld a superannuation fund trustee's decision rejecting a member's claim for total and permanent invalidity benefit, and considered the principles the courts apply when reviewing a trustee's decision. Partner Michael Quinlan and Lawyer Catherine Zahra report.

• Background
• The decision
• Conclusion

Background

The respondent, Mr Finch, was employed by Telstra Corporation Ltd from October 1992 to January 1998. At all relevant times, he was a member of the Telstra Superannuation Scheme (the scheme). Clause 2.3.3 of the trust deed governing the scheme provided that '...if a Member ceases to be an Employee... because of Total and Permanent Invalidity, there is payable to the Member from the Fund a lump sum benefit...'  The expression 'Total and Permanent Invalidity' (TPI) was defined in clause 2.1.2 to mean, in relation to a member, disablement as a result of which:

(a) the Member has been continuously absent from all active Work for a period of at least six months and has been required by the Employer to participate in a Rehabilitation Program; and

(b) the Member has ceased to be an Employee and is unlikely to ever engage in any gainful Work for which the Member is for the time being reasonably qualified by education, training or experience.

During his employment at Telstra, Mr Finch became severely depressed. He commenced sick leave, underwent a rehabilitation assessment Telstra provided, and undertook a program of working from home, with a view to returning to work. After about one month, and with the certification of his psychiatrist and case manager, Mr Finch returned to full-time work, having been absent from Telstra for less than six months. In early 1998, Mr Finch accepted a voluntary redundancy offer and thereby ceased employment at Telstra.

The following year, he commenced work with Foxtel on a full-time basis. However, after an extended period of sick leave, he resigned for 'personal reasons'. Several months later, Mr Finch commenced work with Qantas on a part-time basis. After nearly six months, he terminated his employment for 'personal health reasons'. During his employment at Qantas, Mr Finch was absent on sick leave for an extended period. Mr Finch has not been employed since leaving Qantas.

Shortly after leaving Qantas, Mr Finch lodged an application for the TPI benefit with the appellant, the trustee of the scheme. The application was supported by Mr Finch's treating doctors. The trustee received material from Telstra management expressing the view that, at the time Mr Finch ceased employment at the company, he was fit for duty and not a TPI candidate. This was consistent with the view expressed in a letter to the trustee from Mr Finch's manager at Qantas.

The trustee rejected Mr Finch's TPI claim, on the basis that he did not satisfy the scheme's definition of TPI. Mr Finch's solicitors subsequently wrote to the trustee requesting a review of the first determination, and, to that end, enclosed further medical evidence. Upon receipt of that request, one of the members of the trustee spoke to Mr Finch, at which time, it was alleged that, Mr Finch volunteered the statement that his employment with Qantas 'had been a real job'. The trustee again rejected the TPI claim, for the same reasons given for the first determination.

Mr Finch commenced proceedings seeking declarations that both determinations of the trustee were void and of no effect, and that he was entitled to the TPI benefit under the trust deed. The trial judge held that the trustee's determinations should be set aside. The trustee appealed.

The decision

The Court of Appeal of Victoria allowed the appeal and set aside the trial judge's orders. Justice Hansen gave the leading judgment; Justices Buchanan and Redlich agreed with his Honour's findings.

Construction of the trust deed

Justice Hansen held that the starting point in this case was clause 2.3.3 of the trust deed. The question for the court was whether Mr Finch ceased to be an employee 'because of Total and Permanent Invalidity'. That is, Mr Finch's incapacity, which needed to be TPI as defined, needed to have existed at the time he ceased to be a Telstra employee.

As to whether the relevant disablement existed at the time his employment ceased, the disablement needed to have the consequences referred to in clauses 2.1.2(a) and 2.1.2(b). Justice Hansen observed that, with respect to the operation of clause 2.1.2(a), the clause contained two requirements:

• continuous absence from all active work for a period of at least six months; and
• that the member participate in a rehabilitation program.

The two requirements were cumulative, in the sense that Telstra would not require a member to participate in a rehabilitation program if they had already ceased employment with Telstra, since the very purpose of a rehabilitation program would be to rehabilitate the member so that they could continue to work for Telstra. While the second requirement did not depend on fulfilment of the first requirement, according to Justice Hansen, it did presuppose that the member had been absent from work at, and was still an employee of, Telstra. Reading clause 2.1.2(a) as a whole, his Honour concluded that the proper construction of the clause required the reference to 'active Work' to be read as work at Telstra.

Regarding the operation of clause 2.1.2(b), Justice Hansen held that the trustee was not required to form the two opinions referred to in that clause before the member ceased to be an employee. The trustee could only form the opinions after a claim was submitted to the trustee, as it was only at that point the trustee would address the issues. As to the first opinion (whether as a result of the disablement the member has ceased to be an employee), the trustee had to examine the member's position at the time they ceased to be an employee. As to the second opinion (whether the member is unlikely to engage in any gainful work), the trustee had to consider whether, as a result of disablement, the member has ceased to be an employee and is unlikely to engage in gainful work. According to Justice Hansen , the trustee's task is to make an assessment of what is likely in the future, also taking into account past events.

Turning to the present case, Justice Hansen held Mr Finch was not eligible for the TPI benefit, as he did not satisfy clause 2.1.2(a). He had not been continuously absent from active work at Telstra for a period of at least six months at the time he ceased to be a Telstra employee.

Good faith/real and genuine consideration

Justice Hansen held that the trial judge erred in concluding the trustee failed to give Mr Finch's claim real and genuine consideration. His Honour summarised the relevant principles of law as follows:

• the court has the power to set aside the decision of a trustee if it was not made in good faith, upon real and genuine consideration, and for a proper purpose;¹
• the mere fact that a trustee makes an error as to a fact or some other matter, or does not make all inquiries that may have been open to be made, is not sufficient reason for the court to set aside a determination that was made in good faith, upon real and genuine consideration, and for a proper purpose;² and
• it is impossible and undesirable to lay down prescriptive rules as to what constitutes a lack of real and genuine consideration by a trustee. The content of the trustee's duty will depend on the facts and circumstances in each case. There may be cases where a trustee's errors or failure to take particular steps are sufficiently extensive to indicate that the trustee's decision was not made upon real and genuine consideration.³

In this case, the trial judge's conclusion as to lack of good faith/genuine consideration flowed from 'breaches of process': namely, the trustee's failure further to investigate the 'real job' statement, by at least inviting Mr Finch to comment on the matter, and the trustee's failure to make inquiries as to the circumstances of Mr Finch's last months of employment at Telstra. As to his Honour's findings, Justice Hansen held:

• the 'real job' statement did not detract from Mr Finch's case; the trustee would have acted on the basis that Mr Finch had secured 'real jobs' at both Foxtel and Qantas, but that neither had worked out and that, as a result, Mr Finch's rehabilitation attempt had failed. Accordingly, there was no reason why the trustee should have sought Mr Finch's comment on the matter; and
• any inquiries as to the circumstances of Mr Finch's last months of employment at Telstra would have had limited relevance to the issues for determination. The question for the trustee was whether Mr Finch was unlikely ever to engage in gainful work in the future, not whether he had left Telstra in circumstances where he was mistreated.

Whether the trustee's decision was open to it

Justice Hansen rejected Mr Finch's contention that the trial judge erred in finding that the trustee's reasons for the decision and the decision itself were sound, and the determinations were not so unreasonable that no reasonable trustee could have reached them. As to the latter, his Honour held that the question was whether the trustee's decision was open to it; it was not enough that the court might have reached a different conclusion on the material before it. In this case, Justice Hansen held that, on the materials before the trustee, including Mr Finch's employment history, his apparent competence in the jobs he did after leaving Telstra, and the inference that Mr Finch's psychological distress might lessen over time, it was open to the trustee to form the opinion that Mr Finch was not unlikely ever to engage in any gainful work. It followed that it was open to determine that Mr Finch was not eligible for the TPI benefit.

Conclusion

The Court of Appeal's decision demonstrates the courts' reluctance to interfere with the decision of a trustee where it was open to the trustee on a proper construction of the relevant trust deed, and there is insufficient evidence to ground an allegation of lack of good faith or genuine consideration.

Mr Finch applied for special leave to appeal to the High Court of Australia. On 23 April 2010, Justices Gummow and Crennan referred Mr Finch's application for special leave to appeal to an enlarged Bench of the court as a one-day case, on the basis that the parties should be prepared to argue the case on a final basis at that time.⁴ It will be interesting to see whether the High Court grants special leave on that occasion and, if it does and goes on to hear the matter, whether it upholds the general principles of law as enunciated by the Court of Appeal; in particular, as to a trustee's duty of good faith and genuine consideration.

Footnotes

1. [2009] VSCA 318 at [65].
2. Ibid.
3. Ibid at [66].
4. Finch v Telstra Super Pty Ltd [2010] HCATrans 111.

For further information, please contact:

• Mark CerchéPartner, Melbourne
  Ph: +61 3 9613 8872
  Mark.Cerche@allens.com.au
• John MorganPartner, Sydney
  Ph: +61 2 9230 4953
  John.Morgan@allens.com.au