State of Play: What Saves Trustees from the “No-Conflict” Rule when Investing in a Related Entity?

On 30 May 2024, the Supreme Court of Queensland handed down its decision in Perpetual Trustee Company Limited v Shambrook [2024] QSC 105 (PTCo v Shambrook).

The fundamental issue in this case was whether a trustee, in allocating a beneficiary’s funds to a superannuation fund that shared a common parent company with that trustee, breached the rule against conflicts of the trustee’s duty and personal interest (the “no-conflict” rule). The Court ultimately made a declaration that the trustee’s decision to invest in the superannuation fund did not breach the no-conflict rule, as there was no “real sensible possibility of a conflict” arising in the circumstances.

In its assessment, the Court emphasised applying the strict objective standard in assessing conflicts, distinguishing its position from the New Zealand High Court in Jones v AMP Perpetual Trustee Company NZ Ltd [1994] 1 NZLR 690 (Jones v AMP). This led the Court to conclude that even if the trustee’s decision may have been unconsciously swayed in favour of its related entity, it may not necessarily breach the “no-conflict” rule, considering the objective materiality of the possibility of a conflict.

The significance of this decision is therefore twofold: it affirms the application of the “reasonable person” test tailored to specific facts to evaluate whether there was a “real sensible possibility of a conflict”, while also illustrating the Australian approach of legitimising trustees investing in related entities in certain circumstances. This demonstrates that the mere existence of such a possibility of a conflict does not automatically lead to a breach of the rule; it must be a “real and sensible” possibility of a conflict from an objective standard.

In this article, we explore judicial guidance provided by Applegarth J and the current state of play regarding the assessment of whether a conflict exists for the purposes of the “no-conflict” rule, along with the key factors considered by the Court in applying the relevant “reasonable person” test.

The Court’s decision in PTCo v Shambrook

The case concerns Tyson Burns who suffered cerebral palsy at birth, which made him incapable of making financial decisions. In 2009, a damages claim filed by Mr Burns’ mother against Queensland was approved, resulting in the funds being entrusted to Perpetual Trustees Queensland Ltd (PTQ) for management.

PTQ mostly allocated the funds to a superannuation fund named PTSuper, a related entity. In 2013, legislative reforms required trustee companies to hold Australian financial services licenses. Perpetual Trustee Company Ltd (PTCo), the applicant, argued that it became the trustee of the assets formerly managed by PTQ due to these reforms.

Judicial distinctions in applying the “no-conflict” rule: Comparison with Jones v AMP

After finding that PTQ’s investment of trust funds into superannuation was authorised by the previous court order, the Court then considered whether PTQ’s and later PTCo’s interests in transferring the majority of the funds to PTSuper conflicted with their duties as trustees for Tyson.

The central question focused on whether there existed a “real and sensible possibility of a conflict”, a test derived from Lord Upjohn's speech in Boardman v Phipps [1966] UKHL 2:

“The phrase ‘possibly may conflict’ requires consideration. In my view it means that the reasonable man looking at the relevant facts and circumstances of the particular case would think that there was a real and sensible possibility of conflict; not that you could imagine some situation arising which might, in some conceivable possibility in events not contemplated as real sensible possibilities by any reasonable person, result in a conflict.”

The Court then emphasised the fundamental importance of a trustee’s equitable duties as a fiduciary, (at [56] onwards) requiring PTCo to ensure that placing business with a related superannuation fund did not create a “real sensible possibility of a conflict” that would hinder its ability to act in the best interests of Mr Burns and prioritise his welfare. (at [73])

In applying the test to the circumstances of the present case, the Court analysed the precedential value of the New Zealand High Court’s decision in Jones v AMP within the Australian context. In Jones v AMP, it was concluded that there was no breach of the “no-conflict” rule despite the influence of the parent company, as the trustee's actions did not directly conflict with the beneficiaries' interests, and the trustee was not required to choose between its duty and its interests.

Contributing to this conclusion in Jones v AMP were two factors:

1. The parent company (AMP)’s status as a leading life insurance company with an attractive investment record allowed the trustee to direct business to its parent company, while still serving the best interests of the trust; and
2. The trustee’s decision was not motivated by the potential financial benefit to the parent company from fees, as equivalent fees would be payable to any company selected for the policy.

It should be noted in addition that in that case, specific enabling legislation authorised Perpetual to transact with the AMP Society, or any subsidiary of AMP, where the company was satisfied on reasonable grounds that it was in the best interests of the trust to do so.

In critically analysing the above reasoning in Jones v AMP, the Court referred to observations made by Joe Campbell,[1] a former judge of the Supreme Court of New South Wales, and stated (emphasis added):

[84] The point of the no-conflict rule, as stated by Lord Herschell in Bray v Ford, was paraphrased by Campbell as extending to situations of possible conflict so as to “enable it to operate as a way of preventing any temptation or unconscious tendency for the trustee to do anything other than act in the interests of the beneficiaries”.

[85] I agree with Campbell that the two matters that “saved” Perpetual from being found to be in breach of the no-conflict rule are unpersuasive. The fact that the superannuation fund is managed by a pre-eminent company with an impressive investment record does not avoid a potential conflict. … In any case, the strictness of the no-conflict rule tends to not take account of the fact that the dealing was as good or even better than could have been obtained from a competitor.

[86] The second saving factor, namely the absence of a motivation to benefit its parent company by the receipt of fees, focuses upon the subjective state of mind of the fiduciary. However, the existence of a real sensible possibility of conflict is a matter that is assessed objectively. The aim of the fiduciary duty is to preclude fiduciaries from using their position for personal advantage or being swayed by considerations of personal interests. The law recognises that there may be an unconscious tendency to favour a related entity which the trustee is familiar, human nature being what it is. The relationship with another member of a corporate group carries the danger of the fiduciary being swayed by loyalty to the corporate group, rather than a duty to the beneficiary.

These remarks from Applegarth J make clear that that the test of a “real sensible possibility” does not concern subjective motivations, and it is sufficient to establish a breach if there is a connection between the trustee and the corporate group to which it belongs that inherently entails influence and loyalty. This suggests that the Jones v AMP decision is unlikely to be followed in Australia, serving as a cautionary note against relying on this decision in similar circumstances.

Additionally, Applegarth J stated that the present case was distinguishable from Jones v AMP because the parent company benefited only indirectly from the payment of fees to its subsidiary PTSuper, whereas in Jones v AMP, the parent company benefitted directly.

Assessing the “real sensible possibility” of a conflict

In light of the above, Applegarth J identified the key issue as whether a reasonable person, looking at the relevant facts and circumstances, would conclude that there was a “real sensible possibility of a conflict”. Applegarth J recognised that applying the test required tailored consideration of the circumstances in the present case, and found that several financial advantages for Tyson existed due to PTQ and PTSuper being related entities. Relevant considerations from the Court included:

• Avoiding hindsight bias: the substantial increase in funds held for Tyson in PTSuper partly stemmed from tax and other advantages, and the overall increase in equity markets over time. (at [92])
• The assessment of a “real sensible possibility of a conflict” should not be judged by the fund’s growth rate alone, as financial performance during bull and bear markets does not determine the conflict issue. (at [93]) However, this does not diminish the trustee’s role to prudently invest the trust funds for the benefit of Tyson. (at [94])
• Considerations in selecting investment include the need for security, growth, and return on investment, net of fees. While fees are important, they are not a decisive consideration, as higher fees may ensure a better return on investment. (at [95]-[96])
• Investing in PTSuper provided financial benefits for Tyson, as the trustee fees paid to PTQ, and later PTCo, were calculated only on the remaining trust funds and not the funds within the superannuation environment. (at [97])
• Other practical benefits arose from PTSuper being a related entity to PTQ and PTCo sharing management and consistent financial advice across those entities. This ensured the effective management of Tyson’s entrusted funds. (at [99])

Based on these considerations, Applegarth J reiterated that “the no-conflict rule seeks to protect against the unconscious influence of favouring an associate with which the trustee is familiar”. (at [101]) Subsequently, Applegarth J found that there could have been an unconscious breach of the no-conflict rule, given the benefits accruing to PTSuper through fee earnings and the fact that PTQ did not consider other superannuation products due to the additional fees involved with external providers. Objectively, it could be argued that the favourable fee arrangement with PTSuper swayed the trustee to not consider alternatives. (at [102])

However, Applegarth J ultimately concluded that saving on fees was not the only reason for the trustee’s selection of PTSuper, considering the evident financial and practical benefits of investing in it. (at [106]) Therefore, the investment was able to be seen as a prudent decision. In this context, Applegarth J cautioned against theoretical inflexibility in finding a breach of the “no-conflict” rule and underscored the need to adapt general principles to specific facts. (at [108]) As a result, the Court held that there was no “real sensible possibility of a conflict” when assessed by a reasonable person looking at the relevant facts and circumstances. (at [109])