Trustees: Rights, Powers and
Duties
Cameron Stewart
Appointment
• Trustees are appointed in the original trust instrument. The
trust instrument may also contain a power to appoint new
trustees. This power may be exercised by the trustee or by
a third party (usually referred to as an “appointor”).
• Only a legal person (a natural person or corporation) with
the capacity to hold and deal with property can be
appointed as a trustee. Corporations can be appointed as
trustees, as long as their constitutional documents allow
them to be appointed: Re Levin & Co Ltd [1936] NZLR 558.
• Minors are, however, generally unable to act as trustee,
because they are presumed to lack the capacity to deal
with the management of trust property. In New South
Wales and the Australian Capital Territory, the appointment
of a minor as trustee is void
Failure to accept appointment
• If, for whatever reason, a prospective trustee fails
to take up the office of trustee, the trust will not
fail: Re Smirthwaite’s Trusts (1871) LR 11 Eq 251.
• In the case of a testamentary trust, the trustee’s
office will fall on the legal personal
representatives of the testator’s estate until a
new trustee is appointed. In the case of an inter
vivos trust, the trust property will divest back to
the settlor who will hold it on trust until the
appointment of a new trustee Mallot v Wilson
[1903] 2 Ch 494.
Statutory power granted to trusts to
appoint new trustees
• In the absence of such a power, Trustee Act 1925 (NSW) s 6
grants powers of appointment to particular classes of
individuals. The appointees of the statutory power include
any person named in the trust instrument or, in the
absence of such a person, any continuing or surviving
trustees or legal personal representatives of the last
surviving or continuing trustee. The statutory power can be
exercised when:
• a trustee dies;
• a trustee is out of the jurisdiction for 12 months or more;
• a trustee refuses to accept;
• a trustee is incapable, or unfit to act; or
• a trustee desires to be discharged
Statutory power granted to trusts to
appoint new trustees
• The appointment must be made in writing and, in New South Wales
and the Australian Capital Territory. may be made by registered
deed. In Retravision (NSW) Ltd v Copeland [1997] NSWSC 466,
Young J found that the New South Wales provision required that the
deed be registered before it took effect.
• Later decisions have accepted this analysis: Lubavitch Mazal Pty Ltd
v Yeshiva Properties No 1 Pty Ltd [2003] NSWSC 535 at [40];
Attorney-General for New South Wales v Fred Fulham [2002]
NSWSC 629 at [59]; Commonwealth Bank of Australia v Nick Frisina
Pty Ltd [1999] NSWSC 907 at [12].
• However, in Statewide Developments Pty Ltd (in liq) (Recs and Mgrs
Appointed) v Azure Property Group (Holdings) Pty Ltd (2012) 84
NSWLR 133 at 137–8, Pembroke J felt that these decisions were
incorrect and that a registered deed may not be necessary if the
trust instrument provided for another mechanism of appointment
.
Inherent power
• The court has an inherent power to appoint trustees on
the basis that equity will not allow a trust to fail for
want of a trustee
• Expedient and practical eg
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–
–
–
–
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an infant trustee has been appointed;
a trustee has become bankrupt;
a trustee has been convicted of a felony;
a corporate trustee has been dissolved;
a trustee has gone missing;
a trustee suffers from mental or physical incapacity; and
a trustee resides permanently outside the jurisdiction.
Statutory power
• Trustee Act 1925 (NSW) s 70 – expedient
• Northwest Capital Management v Westate Capital Ltd
[2012] WASC 121 at [283], Edelman J described three
“rules of practice” that must be considered:
– Regard for the wishes of the settlor as expressed in the
trust instrument or clearly to be collected from it …;
– Ensuring that the appointment will not promote the
interests of some of the beneficiaries in opposition to the
interests of others ...;
– Consideration of whether the appointment of a particular
person will promote or impede the execution of the trust.
Disclaimer
• A person cannot be forced to be a trustee of an
express trust and a proposed trustee can always
disclaim the appointment.
• However, disclaimer will be ineffective if the
person has impliedly accepted the trust, for
example, by dealing with the trust property.
• Additionally, to be effective, the disclaimer must
relate to the entirety of the trust.
• Disclaimers should take the form of a deed, but a
disclaimer may be implied from oral declarations
and refusals to act
Death
• If a trust has several trustees and one of them
dies, the office is continued by the surviving
trustees: Trustee Act 1925 (NSW) s 57
• The death of a sole trustee leaves the office
vacant and the trustee’s heirs and assigns
have no automatic right to take up the office.
Retirement
• Trust deeds normally make provision for the retirement of
trustees. Most jurisdictions have provided for a statutory
mechanism for retirement, should the trust instrument be
silent on the issue: Trustee Act 1925 (NSW) s 8
• A trustee is normally required to retire with the consent of
his or her co-trustees and must retire in writing or via a
deed. All things necessary to vest the trust property in
continuing trustees must be done to give effect to the
retirement. A promise or covenant that a trustee will retire
in certain situations does not bring about an automatic
retirement when those situations arise: Whitton v ACN 003
266 886 Pty Ltd (in liq) (1996) 42 NSWLR 123
Removal via the trust
• Trustees may be removed by using express powers outlined in the
trust instrument. If the procedures laid down for the exercise of the
power have not been followed, the attempted removal of the
trustee will fail: Northwest Capital Management v Westate Capital
Ltd [2012] WASC 121 at [218]–[225].
• Courts will examine the proper construction of the language of the
power to see that it is wide enough to allow for the removal of the
trustee and the appointment of a replacement: Montefiore v
Guedalla [1903] 2 Ch 723 at 725–726; In Re Christina Brown (1921)
22 SR (NSW) 90 at 93–94.
• The express power to remove trustees and appoint new ones has
often been described as a “fiduciary power”. Pope v DRP Nominees
Pty Ltd (1999) 74 SASR 78 at 89–90; Berger v Lysteron Pty Ltd [2012]
VSC 95 at [67]–[83].
Montevento Holdings Pty Ltd v Scaffidi,
(2012) 246 CLR 325
• The power of appointment of a new trustee precluded the
appointment as trustee of a beneficiary under a
discretionary trust.
• In this case, the appointor, who was also a beneficiary
under the trust, removed a corporate trustee of which he
and members of his family were shareholders and
directors, and appointed a corporation of which he was the
sole shareholder and director as the new trustee.
• The High Court upheld the appointment on the basis that
the proper interpretation of the trust’s power of
appointment only precluded his appointment as a natural
person. It did not preclude the appointment of a
corporation that he controlled.
Court’s power to remove trustees
• Both inherent and statutory
• For the inherent jurisdiction, the welfare of
the beneficiaries is the dominant
consideration in determining whether or not it
is proper to remove a truste: Letterstedt v
Broers (1884) 9 App Cas 371 at 387
• For the statutory jurisdiction, the main test is
whether the removal of the trustee is
“expedient”: Trustee Act 1925 (NSW) s 70
Grounds for removal
• Trustees who act in ways inimical to the trust will
be removed: Officer v Haynes (1877) 3 VLR (Eq)
115; McLauchlan v Prince [2002] WASC 274
• Trustees who fundamentally misunderstand their
duties and responsibilities will be removed, as
will be trustees who are hopelessly conflicted:
Mansour v Mansour (2009) 24 VR 498
• Trustees who have disappeared and become
uncontactable may also be removed: Kennedy v
Kennedy [2011] NSWSC 1619
Grounds for removal
• Disagreement?
• In National Westminster Bank Plc v Lucas [2014] EWHC
653 (Ch) at [83], Sales J said:
• There are many contexts in which trustees … have to
make judgments which involve striking a balance
between different competing interests and which may
thus adversely affect some persons claiming under the
trust … It is to be expected that in such cases there will
often be an element of friction between the trustee …
and those disappointed by their decisions. This is not in
itself a good ground to remove the trustee … from their
office.
Rinehart v Welker [2012] NSWCA 95.
• Gina Rinehart sought to enforce an agreement to the
effect that her family would arbitrate any disputes
concerning her trusteeship of her family’s discretionary
trust.
• Some of her children sought to have her removed as
trustee and argued that the agreement was against
public policy, as it ousted the court’s jurisdiction over
the removal of trustees.
• While the Court of Appeal found, for reason relating to
its drafting, that the arbitration agreement did not
apply to the dispute at hand, a majority found that the
court could give effect such an agreement
Rinehart v Welker [2012] NSWCA 95.
• Bathurst CJ said at [175].
• [I]t is my opinion that at least in circumstances where the
trustee and each beneficiary have expressly agreed to their
disputes being referred to arbitration, a court should give
effect to that agreement. The supervisory jurisdiction of
the court is not ousted. It continues to have the supervisory
role conferred upon it by the relevant legislation … There
may be powerful commercial or domestic reasons for
parties to have disputes between a trustee and beneficiary
settled privately. It does not seem to me that the matters to
which I have referred above should preclude a court from
giving effect to such an agreement provided the jurisdiction
of the court is not ousted entirely.
The right to reimbursement and
exoneration
• Trustees have a right to be indemnified for costs
and expenses incurred in the proper
administration of the trust. Such a right is
recognised in equity, but it also may be expressly
conferred by a trust instrument: Franknelly
Nominees Pty Ltd v Abrugiato [2013] WASCA 285
at [212].
• The right also exists pursuant to statute: Trustee
Act 1925 (NSW) s 59(4).
• Indemnity and exoneration
Reasonable expenses
• The trustee’s expenses must have been
properly incurred in the course of the trustee’s
duties: Franknelly Nominees Pty Ltd v
Abrugiato [2013] WASCA 285 at [206].
• If expenses are not properly incurred, the
indemnity may be reduced or completely
denied: Re O’Donoghue [1998] 1 NZLR 116.
Gatsios Holdings v Nick Kritharas
Holdings (in liq) [2002] NSWCA 29
• Nick Kritharas Holdings (NKH) was trustee of a family trust that was
involved in the packaging of snack foods.
• NKH made certain representations in relation to the business that
were held to be in breach of the statutory prohibition against
misleading or deceptive conduct, set out in s 18 of the Australian
Consumer Law.
• As a result, NKH was ordered to pay damages in the sum of
$400,000. Claims that NKH had acted fraudulently were rejected.
• Shortly after judgment, NKH was replaced as trustee by Gatsios
Holdings. NKH subsequently claimed to be entitled to an indemnity
from the trust assets for the liability it incurred.
• Gatsios Holdings argued that liability for misleading or deceptive
conduct was not a proper expense for which the indemnity
principle applied.
• However, the Court of Appeal held that, on the facts of the case,
NKH was entitled to the indemnity
Gatsios Holdings v Nick Kritharas
Holdings (in liq) [2002] NSWCA 29
• Spigelman CJ doubted whether the term was really a
test when he said at [8].
– The use of such terminology as conduct being “proper” or
“reasonable”, cannot be regarded as a test of when a
trustee is entitled to receive indemnity for outgoings
incurred [in] the course of execution of the trust. Such
terminology generally records a conclusion which has been
reached on other grounds. Rather than constituting a
statement of the relevant test it is “the end of the inquiry
and not the beginning”.
• Meagher JA doubted whether it meant anything more
than “non-criminal” or “non-fraudulent”: at [47].
Trustees’ legal expenses
• If trustees are sued in their capacity as
trustees, the trustees are entitled to defend
their conduct as an incident of administration
and they can be indemnified for their legal
costs: Re Llewellin; Llewellin v Williams (1887)
37 Ch D 317 at 327; Bovaird v Frost [2009]
NSWSC 917 at [26]–[45]; Wales v Wales (No 3)
[2015] VSC 151 at [68]–[71].
Metropolitan Petar v Mitreski, [2012]
NSWSC 16
• I therefore do not accept that it can be said that there is a breach of trust
in resorting to trust assets to fund the defence of litigation brought against
the trustee. Upon incurring a liability in the course of its duties as such,
the trustee is entitled to be indemnified out of the trust assets. If it is not
improperly defending proceedings brought against it as trustee, the
trustee is entitled to resort to the trust assets to fund its defence. Only if
the trustee takes more than the proper limit of its right of indemnity
would there be a breach of trust. What costs orders will be made, and to
what extent the [trustee] will be held entitled or disentitled to indemnity
out of the trust assets, will be known only following the outcome of these
proceedings, and any consequential issues in respect of costs. It is not
possible to say now that the [trustee] has, by resorting to trust assets to
fund the defence of these proceedings and the associated litigation,
thereby committed a breach of trust; it may have taken no more than it
was entitled to take in exercise of its right of indemnity. If, when the
question of costs is ultimately determined and quantified, it transpires
that the [trustee] has helped itself to more than its legitimate entitlement,
that will then be a different question.
Rights are proprietary
• The equitable property right flowing from the right to an indemnity
takes the form of either a lien or a charge, and it is effective against
third parties in any priority dispute over the trust property. In
Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360 at CLR 367,
the trustee’s right of indemnity was described by Stephen, Mason,
Aickin, and Wilson JJ as follows:
– It is common ground that a trustee who in discharge of his trust enters
into business transactions is personally liable for any debts that are
incurred in the course of those transactions. However, he is entitled to
be indemnified against those liabilities from the trust assets held by
him and for the purpose of enforcing the indemnity the trustee
possesses a charge or right of lien over those assets. The charge is not
capable of differential application to certain only of such assets. It
applies to the whole range of trust assets in the trustee’s possession
except for those assets, if any, which under the terms of the trust deed
the trustee is not authorised to use for the purposes of carrying on the
business.
Hardoon v Belilios [1901] AC 118
• Hardoon was the registered owner and trustee of certain shares in a bank.
Belilios was the beneficiary of the trust of the shares. When the bank went
into liquidation, the liquidator demanded certain payments from Hardoon.
Hardoon paid these “calls” made upon him in his capacity as the legal
owner of the shares. Belilios, being sui juris, was held liable to indemnify
Hardoon. Lord Lindley said:
– [T]he right of the trustee to indemnity by him against liabilities incurred by the
trustee by his retention of the trust property has never been limited to the
trust property; it extends further, and imposes upon the cestui que trust a
personal obligation enforceable in equity to indemnify his trustee.
• His Lordship noted that, if the trustee seeks indemnity in respect of
transactions in which the trustee should not have engaged in or which
were not within the scope of the trust, the indemnity is only available if
the beneficiary authorised or ratified such transactions.
• It should be noted, as was pointed out in Hardoon v Belilios, that one
cannot be made a beneficiary against their will and that any attempt to do
so can be negated by a disclaimer. However, once a person has accepted
the beneficial ownership of property, they are locked into, as in this case,
the obligation to indemnify a trustee.
J W Broomhead (Vic) Pty Ltd (in liq) v J
W Broomhead Pty Ltd [1985] VR 891
• A corporate trustee of a unit trust in relation to a
construction business was wound up. The trustee had
properly incurred liabilities while conducting a building
business for the unit holders. The trust assets were
insufficient to indemnify the trustee.
• The liquidator of the trustee company sought a personal
indemnity from the unit holders. It was held that he was
entitled to do so.
• However, one of the unit holders was in liquidation and
another had successfully disclaimed her interest as a
beneficiary. It was held that this did not mean that the
other unit holders had to meet the entire shortfall. The unit
holders were only liable in proportion to their beneficial
interests. In such a case, the loss was one to be carried by
the trustee.
The right of contribution
• Co-trustees are jointly and severally liable for losses
occasioned by a breach of trust, even where one trustee is
solely responsible for the loss.
• Where two defendant trustees have committed a breach of
trust, each is liable to pay compensation to the beneficiary,
measured by the amount of loss attributable to their
breach.
• However, if only one trustee is available to be sued as a
defendant, that trustee will be liable.
• Even a passive trustee will be liable, because their inactivity
has allowed the co-trustees to breach the trust.
Selkirk v McIntyre [2013] 3 NZLR 265
• Katz J at 270 summarised the trustee indemnity rules as follows:
• (a) Where one of the trustees is a solicitor an indemnity may be claimed
against that trustee by a co-trustee who has reasonably relied on the
advice of the solicitor trustee (solicitor-trustee rule).
• (b) Where a trustee receives a personal benefit from a breach of trust
which the other trustees did not actively participate in, an indemnity may
be claimed, requiring the defaulting trustee to first contribute the amount
of the personal benefit received (personal benefit rule).
• (c) A trustee who commits fraud will be required to fully indemnify his
or her innocent co-trustees (fraudulent trustee rule). Fraudulent trustees
may not, however, obtain contribution from other fraudulent trustees.
• (d) Where a trustee who is also a beneficiary benefits from a breach of
trust, the value of the trustee-beneficiary’s interest will be deducted from
the amount owed by all the liable co-trustees as compensation to the
trust fund. The remaining sum is then shared equally as an obligation
between the co-trustees (trustee-beneficiary rule).
Section 59(2) of the Trustee Act 1925
• A trustee shall be answerable and accountable
only for the trustee’s own acts, receipts,
neglects, or defaults, and not for those of any
other trustee, nor for any banker, broker, or
other person with whom any trust moneys or
securities may be deposited, nor for the
insufficiency or deficiency of any securities,
nor for any other loss, unless the same
happens through the trustee’s own wilful
neglect or default
Dalrymple v Melville (1932) 32 SR
(NSW) 596
• A trustee had allowed his fellow trustee (a solicitor) to sell part of
the estate of the trust in order to provide for the payment of some
legacies.
• The trustee allowed the solicitor-trustee to be put in the position
where he was able to misappropriate the proceeds of the sale of
the trust property as well as two bearer cheques that were drawn
from the trust funds to pay legatees. T
• he trustee had always acted honestly and did not suspect that the
solicitor-trustee was acting dishonestly. However, the court found
that the trustee knew that it was his duty to safeguard the interests
of the estate and that he failed to take simple precautions.
• Long Innes J found that the trustee was not relieved of liability by s
59(2) of the Trustee Act 1925 (NSW). The conduct of the trustee
was found to have been in wilful default, as he took unnecessary
risks.
The right to be relieved from a breach
of trust
• Trustee Act 1925 (NSW) s 85
• This legislation empowers the court to relieve
a trustee from liability for breaches of trust if:
– the trustee has acted honestly;
– the trustee has acted reasonably; and
– the trustee ought fairly to be excused
The right to impound a beneficial
interest
• If a breach of trust is committed by a trustee
with the consent, advice, or assistance of a
beneficiary, the trustee may impound that
beneficiary’s interest and use it to satisfy the
loss occasioned to the trust: Fletcher v Collis
[1905] 2 Ch 24.
• This right is now included in Trustee Act 1925
(NSW) s 86(1).
The right to get directions from the
court
• Trustees have a right to seek advice and get directions from the court:
Trustee Act 1925 (NSW) s 63
• In Macedonian Orthodox Community Church St Petka Inc v His Eminence
Petar The Diocesan Bishop of The Macedonian Orthodox Diocese of
Australia and New Zealand (2008) 237 CLR 66 at 89 the High Court
observed that “[t]here is nothing in [these legislative provisions] which
limits [their] application to ‘non-adversarial’ proceedings, or proceedings
other than those in which the trustee is being sued for breach of trust, or
proceedings other than those in which one remedy sought is the removal
of a trustee from office”.
• The role of the court in these cases is to determine what it perceives
should be done in the best interests of the trust estate: Application by
Mary Joy Cottee; Estate of Gwenyth Shirley Smith [2014] NSWSC 464 at
[35]; Re Estate Late Chow Cho-Poon [2013] NSWSC 844 at [45].
• The power to give advice is discretionary and courts may refuse to give
advice when they see the advice as inappropriate or futile.
Re
Atlantis Holdings Pty Limited [2012] NSWSC 112 at [23]; Application of
Uncle’s Joint Pty Ltd [2014] NSWSC 321 at [26]–[27].
Re Estate Late Chow Cho-Poon [2013]
NSWSC 844
• Lindsay J said at [187]–[188]
• [T]here is nothing express or implied in the text of s 63 that makes some
discretionary factors always more significant or controlling than others.
There are no implied limitations on discretionary factors arising under s
63. The Court’s discretion is confined only by the subject matter, scope
and purpose of the legislation. Thus: (a) the fact that a court may rely on a
written statement of the trustee, or use other material ‘instead of
evidence’ by reason of s 63(3), gives rise to discretionary considerations of
substantial weight where the question for advice is in form or substance
an application which will determine or affect questions that could also be
resolved in ordinary adversarial litigation; and (b) the Court may properly
decline judicial advice if, for example, a contested construction suit,
constituted by the disputing parties and resolved by a judge acting on
evidence, appears to be more apt to the resolution of a question
concerning the interpretation of a trust instrument; but (c) the discretion
of the Court to consider applications brought under s 63 is not yoked to a
general first principle that, where there is a contest or where there are
adversaries, it is not appropriate to give advice.
Power of sale
• Trustees do not have a general power to sell the trust
property and convert the proceeds, unless such a
power is expressly or impliedly granted in the trust
deed. This is because trustees are charged with the
responsibility of preserving trust property.
• Statute may also confer a power of sale: Trustee Act
1925 (NSW) s 38(1)
• Furthermore, in the absence of a power of sale in the
trust instrument or pursuant to statute, a court order
may grant a power of sale if, in the exercise of its
statutory jurisdiction to vary the terms of a trust, it is
expedient to do so
Power of/Duty to manage
• Legislation has been introduced to grant
trustees wide powers of management. For
example, most jurisdictions grant trustees the
following powers:
– powers to effect repairs and improvement of
property: Trustee Act 1925 (NSW) ss 82, 82A
– powers to insure the property: Trustee Act 1925
(NSW) s 41
– powers to settle claims made against the trust:
Trustee Act 1925 (NSW) s 49
Powers of maintenance and
advancement
• Trust instruments often provide for the trustee to make
payments from the income of the trust towards the
maintenance of beneficiaries, or for payments out of
the capital of the trust for the advancement of the
beneficiaries.
• “Maintenance” refers to periodic payments for such
goods and services as food, clothes, and medical
treatment; whereas “advancement” refers to lump
sum payments for goods and services that establish the
beneficiary in life, such as payments towards
establishing a beneficiary in a trade or profession
• Trustee Act 1925 (NSW) s 43
Duty to obey the terms of the trust
• In Cowan v Scargill [1985] 1 Ch 270 at 288,
Megarry VC stated:
This duty of the trustees towards their beneficiaries
is paramount. They must, of course, obey the law;
but subject to that, they must put the interests of
their beneficiaries first.
Duty to obey the terms of the trust
• Erzurumlu v Kellog Superannuation Pty Limited [2013]
NSWSC 1115 at [53]., Ball J said:
• The Trustee has a duty to apply the trust assets in
accordance with the Trust Deed. In performing that
duty, it is required to inform itself properly of the
relevant facts. It is also required to act in good faith, on
a real and genuine consideration of the material before
it and for sound reasons, although it is not obliged to
give reasons for its decision. If, for any reason, the
Trustee has failed to discharge its duties in considering
the member’s claim, the appropriate order is to refer
the matter back to the Trustee. The court generally
does not itself seek to execute the trust.
Duty to inquire
• Upon taking up their office, trustees are under a duty to
inquire as to the state of the trust: Hallows v Lloyd (1888)
39 Ch D 686
• This initially involves becoming familiar with the terms of
the trust. Additionally, trustees must examine the trust
property and relevant documentation to ensure that they
have title to and control over trust property: The Trustees
of the Christian Brothers in Western Australia (Inc) v A-G
(WA) [2006] WASC 191 at [37]; Reid v Hubbard [2003] VSC
387; Low v Bouverie [1891] 3 Ch 82 at 99.
• If there are a number of trustees, property should vest in
all of them as joint tenants: Guazzini v Pateson (1918) 18 SR
(NSW) 275 at 282.
Duty to keep accounts
• Trustees are obliged to keep records of the
dealings of the trust, which must be produced
to the beneficiaries when called for: Spellson v
George (1987) 11 NSWLR 300 at 315–6.
• Trustees are also obliged to allow beneficiaries
to inspect trust accounts and documents.
Accounts must be kept up to date and be
accurate: Hancock v Rinehart [2015] NSWSC
646 at [339].
Byrnes v Kendle (2011) 243 CLR 253 at
270–1
• Gummow and Hayne JJ said the following in relation to
the duty to account:
• The references to accounting by [a] … trustee indicate
the several senses in which the term ‘duty to account’
may be used, namely, (i) a duty to keep records, (ii) a
duty to report to the beneficiaries or to the court
concerning the administration of the trust, and (iii) a
duty to pay amounts the trustee is obliged to pay to
the beneficiaries. With respect to (i) and (ii), and as a
matter of first principle, a trustee should gain no
advantage by failure to keep proper records and the
court will resolve doubts against a trustee who fails to
do so.
Duty to give information to
beneficiaries
• Trustees have a duty to provide beneficiaries with
information regarding the trust property
• The right to information about the trust does not mean
that all documents should be handed over to any
beneficiary. The duty to provide information is not
absolute, as it needs to be measured alongside all the
rights and obligations created by the trust instrument.
For example, one beneficiary’s right to view these
documents must be balanced against the rights of the
other beneficiaries to have their identities remain
confidential: Wentworth v de Montfort (1988) 15
NSWLR 348 at 356; Rouse v IOOF Australia Trustees Ltd
(1999) 73 SASR 484.
Re Londonderry’s Settlement; Peat v
Walsh [1965] Ch 918
• A trust had been established that granted the trustees
a discretion to distribute the capital of the fund and
thus terminate the trust. The trustees decided to
exercise the power.
• A beneficiary, who was entitled to the residuary
income if the discretionary power was not exercised,
sought to examine documents such as the agenda and
minutes of meetings of trustees as well as any
documents prepared for the meetings.
• The trustees refused to provide this information. The
Court of Appeal held that the beneficiary had no right
to access the documents
Re Londonderry’s Settlement; Peat v
Walsh [1965] Ch 918
• Salmon LJ said:
• The settlement gave the absolute discretion to appoint to
the trustees and not to the courts. So long as the trustees
exercise this power with the consent of persons called
appointors under the settlement, and exercise it bona fide
with no improper motive, their exercise of power cannot be
challenged in the courts and their reasons for acting as they
did are, accordingly, immaterial. This is one ground for the
rule that trustees are not obliged to disclose their reason
for exercising a discretionary power. Another ground for
this rule is that it would not be for the good of the
beneficiaries as a whole, and yet another that it might
make the lives of the trustees intolerable should such an
obligation rest on them.
Re Londonderry’s Settlement; Peat v
Walsh [1965] Ch 918
• Salmon LJ said ‘trust documents’:
• (1) they are documents in the possession of trustees as
trustees; (2) they contain information about the trust which
the beneficiaries are entitled to know; (3) the beneficiaries
have a proprietary interest in the documents and,
accordingly, are entitled to see them. If any parts of a
document contain information which the beneficiaries are
not entitled to know, I doubt whether such parts can truly
be said to be integral parts of a trust document.
Accordingly, any part of a document that lacked the second
characteristic to which I have referred would automatically
be excluded from the document in its character as a trust
document.
Trust documents
• Circular definition
• In Hancock v Rinehart [2015] NSWSC 646 at
[359], Brereton J said that, at the very least,
trusts documents include “documents
containing or evidencing the terms of the
trust, documents relating to the trust
property, and the accounts of the trust”.
Intention
• Breakspear v Ackland [2009] Ch 32- the settlor sent the
trustees a non-binding “wish” letter which contained
instructions as to what factors should be included in the
trustees’ deliberations. Briggs J acceded to the wish on the
facts of the case and denied the beneficiaries access to the
settlor’s letter. However, Briggs J in explaining that the
trustees or the courts could disclose such a letter, said:
In the absence of special terms, the confidentiality in which a wish letter
is enfolded is something given to the trustees for them to use, on a
fiduciary basis, in accordance with their best judgment and as to the
interests of the beneficiaries and the sound administration of the trust.
Once the settlor has completely constituted the trust, and sent his wish
letter, it seems to me that the preservation, judicious relaxation or
abandonment of that confidence is a matter for the trustees or, in an
appropriate case, for the court.
Legal advice to the trust?
• Talbot v Marshfield (1865) 62 ER 728 - a legal opinion
given to trustees when they were being sued did not
have to be produced to beneficiaries. Kindersley VC
said:
– This was not to guide the trustees in the execution of their
trust; but, after proceedings had been commenced against
them, they took advice to know in what position they
stood, and how they should defend themselves in the suit.
It appears to me that the cestuis que trust have no right to
see this case and opinion, unless they can make out that
the trustees can charge the expense thereof on the trust
funds. As to this there is no proof; the trustees may
themselves have to bear the expense of this case and
opinion, as having been stated and taken by them as
litigant parties with the cestuis que trust.
Rollo Ventry Wakefield Gray v BNY Trust Co
of Australia Ltd [2009] NSWSC 789
• Bergin CJ in Eq refused to order the production
of documents that had been prepared in litigation
against a beneficiary where the trustee’s legal
costs were paid out of the trust estate. Her
Honour said:
The fact that an order was made that the plaintiff pay the
defendant’s costs coupled with an order of its entitlement to
indemnification, does not in my view convert the privileged
advice received by the defendant to defend itself into an advice
for the benefit of the plaintiff and thus a trust document to
which the plaintiff is entitled to access.
Schreuder v Murray (No 2) (2009) 41
WAR 169
• The beneficiary sought to remove the trustee and,
during the course of proceedings, wished to inspect
documents held by the trustee regarding the
administration of the estate, including legal advice.
• The trustee claimed legal professional privilege.
• The Court of Appeal of Western Australia found that
the legal advice had been given for the administration
of the estate and not to the trustee personally.
• The documents had not been created for the purpose
of defending the trustee against any claims made by
the beneficiary. On that basis the beneficiary was
entitled to inspect the documents.
Krok v Szaintop Homes Pty Ltd (No 1)
[2011] VSC 16
• Judd J said:
• In my opinion, a trustee’s right to withhold, in the
course of litigation, disclosure of a document
from a beneficiary, on the ground of client legal
privilege, is not to be determined by an analysis
of the beneficiary’s proprietary right to trust
documents. The question is to be resolved by
reference to the ordinary principles applicable to
the protection of privileged information and
documents, and obligations of disclosure in
litigation.
Proprietary or discretionary right?
• O’Rourke v Darbishire [1920] AC 581 at 626, Lord
Wrenbury said:
The beneficiary is entitled to see all trust
documents because they are trust
documents and because he is a beneficiary.
They are in this sense his own.
• Fixed or discretionary
Schmidt v Rosewood Pty Ltd [2003] 2
AC 709
• Son was tracking own the fortune of his deceased
father which was held in a discretionary trust
• Son wished to see trust records but was denied
information by the trustees
• Lord Walker:
• Their Lordships have already indicated their view that a
beneficiary’s right to seek disclosure of trust
documents, although sometimes not inappropriately
described as a proprietary right, is best approached as
one aspect of the court’s inherent jurisdiction to
supervise (and where appropriate intervene in) the
administration of trusts
AIT Investment Group Pty Ltd v Markham Property
Fund No 2 Pty Limited [2015] NSWSC 216
• Bergin CJ in Eq :
• It involves the following propositions: (a) the object of a
discretion, including a mere power, may apply to the Court
for access, as well as beneficiaries with a ‘fixed’ interest; (b)
the power to order disclosure is “one aspect of the court’s
inherent jurisdiction to supervise, and if necessary to
intervene in, the administration of trusts”; (c) the power to
order inspection is discretionary; and (d) the Court may
have to “balance” the competing interests of different
beneficiaries, the trustees and third parties, with disclosure
being limited and safeguards being put in place.
Avanes v Marshall (2007) 68 NSWLR
595
• Gzell J said at 599 :
• In my view, the approach in Schmidt should be adopted
by Australian courts. The decision should not be
regarded as abrogating the trustee’s duty to keep
accounts and to be ready to have them passed, nor the
trustee’s obligation to grant a beneficiary access to
trust accounts. But when it comes to inspection of
other documents there should no longer be an
entitlement as of right to disclosure of any document.
It should be for the court to determine to what extent
information should be disclosed
.
McDonald v Ellis (2007) 72 NSWLR 605
• Bryson AJ at 619:
• In Avanes v Marshall Gzell J after review of authorities, including
recent authorities in Australia in which Schmidt reference has been
made to, expressed the view that the approach in Schmidt should
be adopted by Australian courts. I respectfully do not agree. It
might be that the approach of Schmidt is appropriate where the
interest of the beneficiary is no higher than those of the potential
objects of a discretionary trust, although opinion in New South
Wales is otherwise. However that may be, in the present case
where the plaintiff’s right is already vested in interest, it would be a
departure from clearly established opinion in New South Wales not
to treat the claim to information as based on a proprietary interest,
or to withhold enforcement of it except so as to enforce some
competing entitlement, such as that of the trustees considered in In
re Londonderry’s Settlement, which required such departure.
Duty not to profit from the trust
• No remuneration
• 3 exceptions:
– Trust deed sets out remuneration
– By agreement
– Court awarded (NSW inherent jurisdiction)
Self-dealing and trafficking
• The duty not to profit from the trust also prevents trustees from
taking a beneficial interest in trust property, or from borrowing
from trust funds.
• This is sometimes referred to as “trafficking” or “self-dealing”.
• In Fenwick, Kingi and Heke v Narea [2015] NZSC 68 , the majority
judgment of the Supreme Court in New Zealand said that “[u]nder
the ‘self-dealing’ rule … if a trustee sells the trust property to him or
herself, the sale is voidable by any beneficiary ex debito justitiae (as
of right), however fair the transaction”.
• Furthermore, the majority judgment rejected the proposition that
the self-dealing rule was confined to purchases of trust property
and held that it applied to other forms of commercial transactions,
such as a lease of trust property. Finally, the majority judgment held
that the rule applied to circumstances where the purchaser of the
trust property is another company in which the trustee has shares
or some interest, although it may be that is such cases exceptional
circumstances may negate the application of the rule.
Duty to act impartially between
beneficiaries
• Life tenants and remainderpersons
• Howe v Lord Dartmouth (1802) 32 ER 56
• Apportionment
Duty to sell trust property
• Trustees may be subject to a duty to exercise a
power of sale, such as where the creator has
intended that the trust property be sold and a
fund be created for the purposes of the trust.
• In such circumstances, the trust is referred to as a
trust for sale.
• The duty to sell can be expressly stated in the
trust, or be implied from the intention of the
creator as expressed in the trust document
• Fair and reasonable price within a reasonable
time
Duty to invest
• Gerner v Mattila [2015] NTCA 1 at [34], the
Northern Territory Court of Appeal said:
• [The duties relating to investment] include the
duty to exercise the care, diligence and skill that a
prudent person of business would exercise in
managing the affairs of other people, a duty not
to invest in speculative or hazardous investments,
a duty to take advice, and a duty (as trustee
exercising a power of investment) to exercise that
power in the best interests of the beneficiary.
• Not a fiduciary duty
Cowan v Scargill [1985] 1 Ch 270
• Beneficiaries sought to force the trustee to
invest in union friendly businesses
• Court found that, absent an express terms of
the trust, that the trustee’s duty was to
advance the best financial interests of the
beneficiaries – they should invest wherever
they could get the best return
Standard of investing
• The standard of care applicable to the trustee is to take as much
care as an ordinary prudent person “would take if he were minded
to make an investment for the benefit of other people for whom he
felt morally bound to provide”: Re Whiteley; Whiteley v Learoyd
(1886) 33 Ch D 347 at 355.
• Moreover, the word “investment” has been read restrictively to
exclude purchases of property for the enjoyment of the
beneficiaries, and unsecured loans based on a promise to repay.: In
the Will of Sherriff [1971] 2 NSWLR 438; Khoo Tek Keong v Ch’ng Joo
Tuan Neoh [1934] AC 529
• In Perpetual Trustee Company Ltd v Cheyne [2011] WASC 225 at
[52]–[56], Edelman J found that the word “investment” would not
cover the purchase by the trustee of membership rights in a
superannuation fund which would then be legally owned by the
beneficiary (a man with severe disabilities). The fact that the
trustee would retain no legal right to the superannuation
membership, nor receive anything back from the superannuation
fund, meant that the purchase could not be classed as an
“investment”
Re Speight (1883) 22 Ch D 727
• Gaunt and Wilkinson were trustees of the
estate of the late Mr Speight.
• They hired a broker, Cooke, to invest the
estate's money into company shares. The
trustees gave over the money.
• Cooke stole the money
• The beneficiaries sued the trustees
Re Speight (1883) 22 Ch D 727
• Lord Blackburn:
• …as a general rule a trustee sufficiently discharges his duty
if he takes in managing trust affairs all those precautions
which an ordinary prudent man of business would take in
managing similar affairs of his own. There is one exception
to this: a trustee must not choose investments other than
those which the terms of his trust permit, though they may
be such as an ordinary prudent man of business would
select for his own money; and it may be that however usual
it may be for a person who wishes to invest his own money,
and instructs an agent, such as an attorney, or a
stockbroker, to seek an investment, to deposit the money
at interest with the agent till the investment is found, that
is in effect lending it on the agent's own personal security,
and is a breach of trust
Statutory standards
• Trustee Act 1925 (NSW) s 14A: A trustee
exercising the power, is to exercise it according
to the standard of care, diligence, and skill a
prudent person of business would exercise in
managing the affairs of other persons
Duty to act personally, unfettered, and
unanimously
• Trustees must exercise their own discretion
• Three exceptions:
• delegation permitted by the trust instrument: Re
Trusts of Kean Memorial Trust Fund (2003) 86
SASR 449 at 471;
• delegation permitted by statute: Trustee Act 1925
(NSW) s 64; and
• situations where delegation is a matter of
necessity and the agency relates to ministerial
acts unconnected with the trustee’s exercise of
discretion.
Duty to consider the exercise of trust
powers
• Trustees are obliged to properly consider the use of
their powers: Re Gestetner Settlement; Barnell v
Blumka [1953] Ch 672; [1953] 1 All ER 1150.
• In cases where trustees are granted a discretion to
choose when and how they will act, they are bound by
fiduciary duty to give, from time to time, real and
genuine consideration to the issue by examining the
options and determining which one was an appropriate
course of action: Fay v Moramba Services Pty Ltd
[2010] NSWSC 725 at [34]–[40]; Re Baden’s Deed
Trusts; McPhail v Doulton [1971] AC 424 at 449; [1970]
2 All ER 228 at 240.
Re Beloved Wilkes’s Charity (1851) 42
ER 330
• Lord Chancellor Truro said at 333–4.
• [I]in such cases as I have mentioned it is to the discretion of the trustees
that the execution of the trust is confided, that discretion being exercised
with an entire absence of indirect motive, with honesty of intention, and
with a fair consideration of the subject. The duty of supervision on the
part of this Court will thus be confined to the question of the honesty,
integrity, and fairness with which the deliberation has been conducted,
and will not be extended to the accuracy of the conclusion arrived at,
except in particular cases. If, however, … trustees think fit to state a
reason, and the reason is one which does not justify their conclusion, then
the Court may say that they have acted by mistake and in error, and that it
will correct their decision; but if, without entering into details, they simply
state, as in many cases it would be most prudent and judicious for them to
do, that they have met and considered and come to a conclusion, the
Court has then no means of saying that they have failed in their duty, or to
consider the accuracy of their conclusion.
Elovalis v Elovalis [2008] WASCA 141
• Buss JA said at [63]:
• Where a trust instrument confers on the trustee
discretionary powers which are described as “absolute” or
“uncontrolled”, that description does not authorise the
trustee to “do what he likes” with the trust fund. Where the
trust instrument confers on the trustee an “absolute and
uncontrolled” discretion in relation to the exercise of a
power, the court will not compel the trustee to exercise it,
but if the trustee proposes to exercise it, the court will
ensure that it is not exercised improperly or unreasonably.
Further, where the power is combined with a trust or duty,
the court will enforce the proper and timely exercise of the
power, but will not interfere with the trustee’s discretion as
to the particular time or manner of his or her bona fide
exercise of it
Lutheran Church of Australia v Farmers’ Co-operative
Executors & Trustees Limited (1970) 121 CLR 628
• Windeyer J said at 652:
• A discretionary power, given to a trustee as such, to act or not to act in a
specified manner imposes a duty on the trustee at least to consider the
matter and decide deliberately whether to exercise the power. Lord Reid
recently said, in In re Gulbenkian’s Settlement [1970] AC 508 at 518: ‘A
settlor or testator who entrusts a power to his trustees must be reliant on
them in their fiduciary capacity so that they cannot simply put aside the
power and refuse to consider whether it ought in their judgment be
exercised’. If it is a mere power, the court cannot dictate to the trustees
whether it should be exercised or not exercised. That discretion is
committed to them. But, even in that case, the court is not entirely
unconcerned; for if trustees having a purely discretionary power refuse to
consider whether and how they will exercise their discretion, then the
court will remove them and substitute new trustees — who will have the
same discretion but who, it is hoped, will not be recalcitrant. That would
not be a usurpation by the court of the discretion given to trustees. It
would be merely a means of accomplishing its exercise one way or
another by dutiful trustees.
Fraud on a power
• “Fraud on a power” relates to situations where a
trustee has exercised a discretionary power for an
unauthorised or improper purpose.
• Hancock v Rinehart [2015] NSWSC 646 at [57],
Brereton J said:
• A power must be exercised in good faith for the
purpose for which it was given, and not for an ulterior
purpose — whether for the benefit of the trustee or
otherwise - not contemplated by the instrument
creating the power. A “fraud on a power” is an exercise
of a power for such an extraneous purpose.
Karger v Paul [1984] VR 161
• Trustees made a decision to transfer the entire
capital of the trust to the deceased’s husband,
who died shortly thereafter.
• A residuary beneficiary, who was deprived of
any entitlements by the trustee’s decision,
challenged that decision.
• McGarvie J found that there had been no bad
faith or failure to give genuine consideration
to the decision
Karger v Paul [1984] VR 161
• It is an established general principle that unless
trustees choose to give reasons for the exercise of a
discretion, their exercise of the discretion cannot be
examined or reviewed by a court so long as they act in
good faith and without an ulterior purpose … I would
add the further requirement, so obvious that it is often
not mentioned, that they act upon real and genuine
consideration. In the context, it was in that sense that
Lord Truro LC used the expression “with a fair
consideration” in Re Beloved Wilkes’ Charity (1851) 42
ER 330 at 333. In the case of an absolute and
unrestricted discretion such as the discretion in the
present case, the general principle is given unqualified
operation.
Curwen v Vanbreck Pty Ltd [2008] VSC
338
• Discretionary beneficiaries who were the grandchildren
of the settlor had been excluded by the corporate
trustee (which was controlled by their aunt) only after
their parents had requested information about the
trust.
• It was alleged that the aunt had exercised the power to
exclude her nephews after she had realised that they
were potential beneficiaries.
• Nevertheless, the claim of bad faith failed, as the aunt
had not been asked in cross-examination regarding her
reasons for excluding the grandchildren.
• There was, therefore, no evidence upon which to base
a claim of bad faith