On 20 September 2019, the Federal Court of Australia delivered its much-anticipated judgment in the highly publicised proceedings brought by APRA against IOOF's Chairman, Managing Director, three senior executives and two trustee entities for alleged breaches of the SIS Act. Jones Day acted for the former Chairman, Mr George Venardos.

Justice Jayne Jagot ordered that the entirety of APRA's application be dismissed and that APRA pay the respondents' legal costs.

The judgment was a resounding win by IOOF and the individual respondents. It is an important decision in relation to obligations under the SIS Act and also more broadly in relation to corporate governance and directors' duties.

The Facts

At a high level, APRA alleged that in approving a series of plans to compensate beneficiaries for technical issues that had caused losses to the beneficiaries of certain super funds, the trustees and their directors had failed to manage conflicts of interest between shareholders and beneficiaries and failed to act in the best interests of beneficiaries. This was on the basis that they approved payment of compensation from the operational risk and general "reserves" of the trusts which, in APRA's case, was money already belonging to the beneficiaries. The proposition that the reserves were "members' money" was a foundation of APRA's case.

APRA sought declarations that the trustees, Mr Venardos and Mr Kelaher had breached the covenants to: (i) act with due care and skill; (ii) act in the best interests of beneficiaries; and (iii) give priority to superannuation beneficiaries in circumstances where there is a conflict of interest. Further, a second stage of the trial was to be heard at a later date, at which APRA would be seeking disqualification orders against Mr Venardos, Mr Kelaher and three other senior executives of IOOF on the basis of the declarations.

Use of Reserves—A Key SIS Act Issue

Justice Jagot found that none of APRA's claims of contravention by any of the respondents were sustainable, and on that basis that there was no foundation for making any disqualification orders against any of the individual respondents. A key reason for her Honour's conclusions was that she found that: (i) the operational risk and general reserves are not "members' money" in the way submitted by APRA; and (ii) the IOOF trustee entities were entitled to use the reserve to pay for compensation in each of the relevant circumstances.

Broader Issues for Institutions, Directors and Officers

The following broader issues emerge from the case:

• Directors' reliance on management: APRA submitted that it was no longer the law that directors can rely upon officers without verification. APRA's contention was rejected. Instead, Justice Jagot's findings on the role of directors were consistent with the view that directors have an oversight role and can, in appropriate circumstances, continue to rely on the information and advice provided to them by management.
• Board minutes: APRA submitted that the absence in the relevant board minutes of detailed records of discussion and consideration of the compensation plans supported a conclusion that such discussions or consideration did not occur. Justice Jagot disagreed and instead ruled that "minutes of a meeting are not required to record everything that was said". The findings are consistent with the view that minutes are not expected to be complete transcripts of words spoken at a meeting, nor do they need to record arguments for or against resolutions.
• Requirement of directors to obtain legal advice: APRA was critical of the directors' failure to obtain or instruct management to obtain independent legal advice in relation to the compensation plans, despite the fact those plans had been prepared with input from IOOF's in-house legal team. Justice Jagot disagreed with APRA and found that the directors had no reason to question the actions of management or to consider legal advice necessary in the circumstances.
• Conflicts of interest: APRA submitted that the directors were in a position of conflict between their duties to shareholders and beneficiaries when approving the relevant compensation plans. Justice Jagot ruled that APRA had been unable to establish that the asserted conflicts were anything more than theoretical or hypothetical. She also noted that the directors' obligation under the "no conflicts" covenant in the SIS Act was a duty to manage actual, rather than theoretical, conflicts of interest.

APRA has until 18 October 2019 to lodge an appeal if it chooses to do so.