Trustee Powers and Rights

From Uni Study Guides
Jump to: navigation, search

Contents

Required Reading

Textbook Chapter 13 (13.13-13.19); Chapter 17 (17.38-17.58) and Chapter 19.

Karger v Paul [1984] VR 161

Finch v Telstra Super (2010) 242 CLR 254, [28 – 68]

Nolan v Collie (2003) 7 VR 287 (Ormiston JA)

Trusts and powers

[1]A trust power is distinguishable from a bare power, which also confers discretion on a trustee.

Powers of appointment: empower the trustee to appoint property among a class of potential beneficiaries.

Managerial or administrative powers: facilitate the trustees’ administration of the property, including the power to invest trust funds.

Bare power of appointment: gives a discretion to appoint trust property among the specified class of beneficiaries but places no obligation on the trustee to exercise this obligation.

  • Also called “non-exhaustive” trusts.
  • Frequently, these powers specify who will receive the property if the trustee does not exercise the discretion. The nominated beneficiary’s right to the property is known as a “gift over”, being shorthand for “gift over in default of the trustee’s exercise of discretion.”
  • The presence of a “gift over” clause is determinative of the fact that the power is a bare power.

Trust instruments creating a trust may include both trust obligations and powers of appointment.

  • For example, in superannuation trusts a company will usually confer a power on the trustee to pay income to former employees who leave their employment before retirement age due to total and permanent incapacitation.

Parties

  • The settlor who confers the power is the doner of the power.
  • The person given the power (normally a trustee) is the donee of the power.
  • Potential beneficiaries of the power are objects of the power.

Who can the power be conferred upon?

It is possible for a settlor to confer a power upon a non-trustee as well as a trustee. For example, a testator’s will might appoint a professional trustee company as the trustee but confer power to appoint property on his children to his brother, who can be expected to know the children personally.

Powers conferred on non-fiduciaries attract no legal sanctions if the donee fails to execute the power, as the powers do not need to be exercised.

Types of powers of appointment [2]

a) A general power of appointment entitles the donee to appoint property to anyone, including the donee herself.
b) A special power of appointment entitles the donee to make an appointment among a class of objects selected by the settlor.
c) A hybrid or intermediate power of appointment entitles the donee to appoint anyone except a specified class of persons.

Trustee’s powers

[3]There are three sources of trustee’s powers:

  1. The trust instrument (if any).
  2. Statute.
  3. Court order (if any).

It is common for the trust instrument to confer a wide range of powers, depending on the particular trust in question (for example, for a trust to carry on a business will require different powers than a trust to maintain infant beneficiaries).

In the event that the trustee requires powers not already conferred by statute or the trust instrument, the trustee can apply to the court for further powers.

Exercise of power and review

It may be crucial to the administration of the trust for the trustee to exercise some powers or discretions, such as identifying which beneficiary should be paid trust money under a discretionary trust. The courts, however, have only intervened in the exercise of powers on narrow grounds.

If the trustee has been given a discretion as opposed to being under an obligation, the court will not insist that the trustee exercise it. If the power is exercised the court will insist that it is not exercised improperly. In Tempest v Lord Camoys, Jessel MR said “The Court says that the power, if exercised at all, is to be properly exercised.”[4]

Proper exercise is based on the three “essential components” of exercise:

a) In good faith.
  • Dishonesty and lack of faith also indicate that no real decision has been made.
b) Upon a real and genuine consideration of the discretion given.
  • This will not be the case if the trustee (whether innocently or not) considered the wrong question, did not really apply his mind to the question at all or perversely shut their eyes to the true facts.
c) For the purpose for which the powers were given and not for an ulterior purpose.
  • It should be noted that the trustee is not under an obligation to consider every possible matter so long as all necessary matters are considered. In Esso Australia Ltd v Australian Petroleum Agents’ and Distributors’ Association, Hayne J held that the fact that there is proof of material which might have been considered by the trustee is not the basis for an ill founded decision.[5]
  • It is not necessary that the trustee take any formal steps to gather information to allow themself to exercise discretion.
  • Anyone wishing to complain that discretion was not exercised properly bears the burden of proof.
  • If the trustee chooses to give reasons for their decision the court may examine them for the purpose of determining whether the three “essential components” have been met.

Klug v Klug[6]

Facts: A daughter benefited from a trust set up under her father’s will. The two trustee’s included her mother. The other trustee wished to exercise a power of advancement to the daughter but the mother refused to agree on the basis that the daughter had married a Frenchman without her consent.

Held: It was held that there had been no exercise of discretion; the Court itself proceeded to exercise discretion in the daughter’s favour.

Re Hay’s Settlement Trust[7]

Facts: The trustees attempted to exercise a power for a purpose other than that for which it had been given; they purported to appoint the property to themselves as trustees of a new trust, effectively extending the original term of the power to from 21 years to 32 years.

Held: This was an improper exercise of power as it was not for the purpose for which it had been given.

Re Pauling’s Settlement Trusts[8]

Facts: A wealthy woman married a penniless navy officer. To stop him from frittering away the fortune her money was settled on trust with the beneficiaries as the woman for life and then her children. The trustee had a power to advance money to the children during the mother’s lifetime, a power that could only be exercised for the benefit of the children. Money was regularly transferred (at the husband’s request), ostensibly to the children, however it went straight into the bank account of the mother and was used for living expenses.

Held: This was a breach of trust as the money was neither directly nor indirectly benefiting the children. It was therefore being used for a purpose other than that which had been conferred.

Karger v Paul[9]

Held: A testamentary trust appointed the testatrix’s husband and solicitor trustees of a trust. The husband was the life tenant, with capital to go to the testatrix’s niece, however, the trustees had an absolute and unfettered power to transfer the capital to the husband upon his request. He did so. The niece alleged that the transfer was actually for the benefit of the husband’s girlfriend.

Held: The niece challenged the trustee’s decision to transfer the capital as not being honest, in good faith or for the purposes for which the power was given. She failed, partly because of the unfettered discretion.

Sinclair v Moss[10]

Facts: Income, and if necessary capital, was to be paid to the testator’s widow in “such generous and appropriate sums as may in opinion of my trustees be necessary or desirable after taking into account the income of which she is in receipt from any other source to support my wife... in the same style of life as that to which she was accustomed immediately prior to her death.” After the widow’s death, one of the other trustees alleged that the trustees had continually failed to take into account the widow’s other income and failed to turn their minds to the level of support the widow needed to keep her in the intended style.

Held: This was established in respect of several years’ distribution and therefore the trustees had no given “genuine consideration to the matter entrusted to their discretion” and the exercise of the discretion had been miscarried.

Exercise of power and review in superannuation trusts

[11]Superannuation trusts differ in some fundamental respects from family trusts, particularly that the beneficiaries are not volunteers, which may give rise to broader powers of review for the courts. Employee-beneficiaries have a strong entitlement to their beneficiary interest.

  • The High Court has recently discussed whether the Karger v Paul test for reviewing exercise of discretion applies to superannuation trusts or whether a more intense level of judicial scrutiny is required.
  • In Finch v Telstra Super Pty Ltd,[12] the Court acknowledged the essential differences between a superannuation trust and a traditional family trust:
  • “It is not a matter of mere bounty, or potential enjoyment of another’s benefaction.”
  • The trustee has a responsibility to make enquiries for information, evidence and advice to enable it to form opinions concerning the entitlement of the applicant.
  • Failure to seek relevant information that would allow the trustee to resolve conflicting evidence as to the condition of the applicant is a breach of trust.
  • Superannuation trusts represent a partial exception to the principle that trustees are required to give reasons for their decision as the court may take into account the trustee’s failure to give reasons as some evidence of improper exercise.

Effect of improper exercise of discretion

[13]The weight of authority in Australia holds that an improper decision is void from the outset. It is as if the decision was never made. Invalidation of the original decision may require the decision to be made again, however, the question of who should make the new decision divides the courts:

  • In McPhail v Doulton,[14] Lord Wilberforce suggested that the court could make the decision itself, if necessary by ordering the trustees to distribute to those entitled, provided that the basis of distribution clearly appeared in the trust instrument. It is suggested that this dictum only applies in comparatively rare cases.
  • An opposing approach was taken in Knudsen v Kara,[15] where it was held that the only orders open to the court were either an order for the removal and replacement of the trustees or an order returning the matter to the trustees to make a new decision in light of the court’s judgement.

Introduction to trustee’s rights and liabilities

[16]Both equity and trustee legislation confer rights on trustees which enable them to perform their obligation effectively and protect them from some of the more onerous aspects of the responsibilities of trusteeship. The most important of these is the trustee’s right of indemnity.

The trustee’s most significant liability is for breach of trust; however, the trustee is also liable to incur the expenses of the trust, which gives rise to the right of indemnity.

Trustee’s liabilities

[17]The trustee is the legal owner of the trust property and is therefore liable for all expenses incurred in respect of that property, whether those expenses arise in contract, tort or otherwise.

  • It is sometimes possible for a trustee to limit or avoid personal liability in contract. the trustee and the other contracting party can agree that the other party will be limited to the trust assets for debt recovery, with the trustee not exposed to personal liability for breach.
  • It is not sufficient for the contract to state that the trustee signs “as trustee”, words indicating that the trustee is not exposing itself to personal liability include signature “as trustee and not otherwise.”

Trustee’s right of indemnity

[18]Expenses the trustee incurs in managing the trust are in equity incurred on behalf of the beneficiaries. The trustee must be reimbursed, if necessary by the beneficiaries themselves.

  • At general law and under statute the trustee is entitled to reimburse itself for expenses already discharged out of trust property and also entitled to discharge the expense directly out of trust property. This is the trustee’s right of indemnity.
  • Expenses that attract indemnification include all the costs of running the trust, such as rates, taxes, agent’s fees and out-of-pocket expenses. This includes legal expenses incurred on behalf of the trust and can even extend to a trustee’s legal fees incurred in defending an allegation of breach of trust.

Re Raybould[19]

Facts: trustees running a colliery had to compensate a neighbour when works at the colliery affected the neighbour’s building.

Held: The damages for negligence and costs ordered against the trustee were held to be the subject of a right to indemnity.

The status of the trustee’s right of indemnity

[20]The trustee’s right of indemnity operates as a lien over the trust property. It gives the trustee priority to the trust property over all other claimants, including the beneficiary. The beneficiary’s title can only be assessed once the indemnity is discharged.

  • In Chief Commissioner of Stamp Duties v Buckle,[21] the High Court stated that the trustee cannot be compelled to surrender the trust property to the beneficiary until the right of indemnity is satisfied. This right survives the trustee’s removal from office.
  • While the trustee’s right of indemnity remains unsatisfied it is not possible to attribute ownership of an asset held by the trust to a beneficiary for tax purposes as it is not possible to conclusively assess the extent of the trust property.
  • The trustee’s undischarged indemnity can operate as a bar to the beneficiaries winding up the trust pursuant to the rule in Saunders v Vautier.[22]

Calculating the value of the trustee’s right of indemnity

[23]The limitation placed on the trustee’s right to be indemnified is that the expense has to be an expense properly incurred in the administration of the trust.

Beath v Kousal[24]

Facts: Two joint trustees could not agree on the appointment if a solicitor to represent the trust in litigation. One of the trustees appointed a solicitor without the other’s agreement.

Held: As trustees must act unanimously, she was in breach of trust in making a unilateral appointment and had to bear the costs incurred personally.

There is considerable doubt as to what must be shown to disqualify an expense. In Re Beddoc:[25]

  • Lindley LJ said “...indemnity is the price paid by [the beneficiaries] for the gratuitous and onerous services of trustees; and in all cases of doubt, costs incurred by a trustee ought to be borne by the trust estate and not by him personally.”[26]
  • Bowen LJ’s statements have been interpreted as meaning that properly incurred expenses are those that are honestly and reasonably incurred; expenses incurred negligently are not properly incurred. This view has not been accepted in all courts.

Reasonable expenses

Gatsios Holdings Pty Ltd v Nick Kritharas Holdings Pty Ltd (in liq)[27]

Facts: the NSW Court of Appeal considered whether damages payable for trustees’ breach of trade practices legislation could be indemnified as “properly incurred expenses.”

Held: The Court held that the trustee should be indemnified. Meagher JA stated that is was not necessary to show that an expense was both reasonable and proper. In his view, the only limitation was that the trustees’ activity was not fraudulent.

Nolan v Collie[28]

Held: The Court rejected the “reasonable” test.

  • Ormiston JA said the question of whether the expense was proper or improper had to be considered in the circumstances of the duty or power the trustee was seeking to perform in incurring the expense.
  • A distinction should be drawn between duties that require strict compliance (such as fiduciary obligations) and more day to day functions of trust management that call for a reasonable standard of care. If strict compliance has not been achieved, any expenses incurred are inevitably improperly incurred but the same is not true of more commonplace performance, where lack of care does not necessarily determine whether the trustee should be indemnified.

Reasonableness is not part of the test as to whether an expense is proper but it can impact upon the quantum (amount).

  • In RWG Management Ltd v Commissioner for Corporate Affairs,[29] it was held that the trustee’s right of indemnity was liable to reduction where the trustee had caused a loss to the trust in breach of trust.
  • The Court would strike a balance between what the trustee owed the trust and what the trust owed the trustee.

Can the trustee’s right to indemnity out of trust assets be excluded by the trust instrument?

[30]Courts have not reached a consensus on this issue. The view in NSW is that the right of indemnification cannot be excluded.

  • In JA Pty Ltd v Jonco Holdings Pty Ltd,[31] Santow J stated that the right of indemnity arose as a necessary incident to the office of trustee and was integral to the institution of the trust.
  • In a South Australian decision it was said that exclusion of a right to indemnity was contrary to public policy. [32]

Liability of the directors of trustee companies

[33]Many trustees are corporations; instruments setting up these trusts may contain provisions excluding indemnification from trust assets. The insolvency of the corporation raises the real prospect that unsecured creditors will fail to recover, even thought the trust may have assets to cover the debts.

  • Federal legislation to overcome this problem makes directors of corporate trustees personally liable for debts in certain cases where the right to indemnity is excluded. (Section 197 of the Corporations Act 2001 (Cth)).

Third parties and the trustee’s right of indemnity

[34]Parties who have advanced credit to a trust by contracting with a trustee are entitled to be subrogated[35] to the trustee’s right of indemnity out of the trust assets. They effectively “stand in the trustee’s shoes”.

  • Creditors are limited to assets secured by the lien over properly incurred expenses.

Matters become complicated when the trustee is insolvent.

  • After secured creditors have satisfied their securities, the trustee’s remaining assets will be available for distribution amongst unsecured creditors. Because the trustee’s interest in the trust under the right of indemnity is proprietary, that interest passes to the trustee in bankruptcy on insolvency.
  • It is not entirely clear if the property received via the trustee’s right of indemnity can be used to pay the trustee’s general creditors (even if they are personal debts) or whether it should only be used to discharge debts incurred by the trustee on behalf of the trust.
  • In Re Byrne Australia Pty Ltd,[36] Needham J held that proceeds of a right of indemnity could only be used to discharge trust debts.
  • In contrast, in Re Enhill Pty Ltd,[37] the Full Supreme Court of Victoria held that the trustee’s liquidator could be paid its fees out of the proceeds of a right of indemnity because the trustee’s lien is a personal asset and therefore available for distribution amongst all creditors.
  • In Re Suco Gold Pty Ltd,[38] the court drew a distinction between cases where the trustee was seeking reimbursement for expenses already paid and cases where the debts had not been discharged. The proceeds of reimbursement for expenses already paid could be distributed amongst general creditors but if the trust debt had not been discharged, money coming into the hands the liquidator on behalf of the trust could only be used to discharge trust debts.

Indemnification by the beneficiaries

[39]Since the trustee assumes personal risk for the benefit of the beneficiaries, the beneficiaries may be liable to indemnify the trustee personally where the indemnity cannot be satisfied out of trust assets.

The rule does not apply to beneficiaries of a discretionary trust because they cannot insist the trustee distribute in their favour and therefore cannot be expected to bear the burdens of the trust.

This liability arises in the following ways:

a) Where a trustee is acting at the request of one or more beneficiary.
b) Under statutory protection for a trustee who commits a breach of trust at the instigation or with the consent of a beneficiary.
c) More generally, on the basis that justice requires that beneficiaries who have the benefit of the trust should bear its burdens.

Hardoon v Belilios[40]

Facts: The plaintiff held partly-paid shares in a bank on behalf of the defendant. When the bank went into liquidation the plaintiff was liable to pay the subscription price on the shares in full. He sought indemnification from the defendant.

Held: The Privy Council held that the trustee’s right of indemnity included an in personam right against the beneficiary in addition to the in rem right against trust assets.

J W Broomhead (Vic) Pty Ltd (in liq) v J W Broomhead Pty Ltd[41]

Facts: The trustee of a unit trust incurred debts of around seventy thousand dollars and was otherwise insolvent. 24% was held jointly by a husband and wife. The wife had no knowledge of the trust and disclaimed her interest. The husband claimed that he held the units as trustee for a sub-trust, the beneficiaries of which were infants.

Issue: Whether the individual beneficiaries were liable to reimburse the trustee and if so, the proportions in which they were liable (given at least one of the other beneficiaries was insolvent and therefore could not pay).

Held: Beneficiaries were only liable to indemnify the trustee to the extent that they benefited from the trust and were not required to make up the shortfall cause by one beneficiary’s insolvency.

  • Under the circumstances where the wife had disclaimed the trust, the husband should only be liable to indemnify the trustee for the liability attaching to one half of their joint interest, as he had never expected to be entitled to the interest in full.
  • A trustee cannot recover from infant beneficiaries. (It seems unnecessary to create this special rule because they could disclaim the trust as they cannot be accept the benefit of the trust until the age of 18).

McLean v Burns Philip Trustee Co Pty Ltd[42]

Held: Clauses which limit indemnification by beneficiaries (as opposed to be trust property itself) are valid, although equity will not allow such clauses to be used as a vehicle for fraud.

Creditor’s rights to be subrogated to the trustee’s personal indemnification by beneficiaries

[43]Although creditors can be subrogated out of the trustee’s right to indemnity out of trust assets it is not clear whether they can be subrogated to the trustee’s personal rights against beneficiaries.'

  • In Marginson v Ian Potter & Co,[44] it was assumed that creditors could be subrogated to the trustee’s personal right against beneficiaries.
  • In the Queensland case of Ron Kingham Real Estate Pty Ltd v Edgar,[45] it was thought that creditors could subrogate to the rights against beneficiaries without first seeking to recover trust assets. In another decision of the same court[46] the Ron Kingham case was distinguished on its facts and it was held that the creditor had to exhaust its claim against the trustee (in respect of trust assets) before proceeding against beneficiaries.

Trustee’s right to impound beneficiary’s interest

[47]Where a beneficiary has participated in a breach of trust by instigating it or requesting it, the court has statutory power to impound all or part of the beneficiary’s interest in the trust in order to indemnify the trustee. This protection is relatively limited in practice.

Re Somerset[48]

Facts: Two life tenants requested that the trustees alter trust investments. Some negligence occurred in the reinvestment, causing loss to the trusts. Later, one life tenant and the capital beneficiaries sued for breach of trust.

Held: The protection had no application where the trustee’s act itself was not a breach of trust but became one because of the trustee’s negligence. The life tenants here had asked the trustees to act within their powers and were entitled to expect that the trustees would act with the appropriate level of care. Therefore the trustees could not impound the life tenant’s interest.

Trustee’s right of contribution from co-trustees

[49]Multiple trustees are jointly liable for breach of trust. Frequently only one of several trustees will discharge a liability for breach of trust. The general rule is that this trustee can seek contribution and recoupment from the other trustees of their appropriate share.

  • One trustee might be required to indemnify fellow trustees in full where the fellow trustees were entitled to, and did, rely on their advice which proved to be negligent. This often applies to solicitor-trustees.

Goodwin v Duggan[50]

Facts: Two trustees were liable for a breach of trust. One had misused trust funds for his own benefit but the other was liable for having improperly delegated her duties to him.

Held: Both trustees were liable for breach of trust but the honest (but passive) trustee was entitled to be indemnified fully by the trustee who had benefited from the breach.

Chillingworth v Chambers[51]

Facts: A joint trustee was also one of the beneficiaries. The trustee lost money through unauthorised investments.

Held: Although the trustees were held to be jointly liable, the loss was paid out of the trustee/beneficiary’s share of the estate. The trustee/beneficiary was not entitled to contribution from his co-trustee.

  • The usual rule did not apply because the trustee/beneficiary (in his role as beneficiary) had been a party to the breach of trust and was liable to indemnify the trustee out of his share of the trust.

Trustee’s right to recover overpayment from a beneficiary

If overpayment occurs the trustee can withhold payments from that beneficiary’s share of the trust fund. If that beneficiary’s share of the trust fund has been exhausted the trustee will need to recover directly from the beneficiary.

  • The beneficiary is liable to a common law action for money paid by mistake, subject only to a change of position.

References

  1. Textbook, pp 216-7.
  2. Textbook, pp 217-8.
  3. Textbook, pp 296-7.
  4. (1882) 21Ch D 571, 578.
  5. [1999] 3 VR 642.
  6. [1918] 2 Ch 67.
  7. [1982] 1 WLR 202.
  8. [1961] 3 All ER 713.
  9. [1984] VR 161.
  10. [2006] VSC 130.
  11. Textbook, pp 300-2.
  12. (2010) 242 CLR 254.
  13. Textbook, pp 302-3.
  14. [1971] AC 424.
  15. [2000] NSWSC 715.
  16. Textbook, pp 323.
  17. Textbook, pp 323.
  18. Textbook, pp 323-4.
  19. [1900] 1 Ch 199.
  20. Textbook, pp 324-5.
  21. (1998) 192 CLR 226.
  22. See textbook [13.3].
  23. Textbook, pp 325-7.
  24. [2010] VSC 24.
  25. [1893] 1 Ch 547.
  26. Ibid.
  27. (2002) ATPR 41.
  28. (2003) 7 VR 287.
  29. [1985] VR 385.
  30. Textbook, pp 327-8.
  31. (2000) 33 ACSR 691.
  32. Moyes v J & L Developments Pty Ltd (No 2) [2007] SASC 261.
  33. Textbook, pp 328-9.
  34. Textbook, pp 329-31.
  35. Subrogation is the legal doctrine whereby one person takes over the rights or remedies of another against a third party.
  36. [1981] 1 NSWLR 394.
  37. [1983] 1 VR 561.
  38. (1983) 33 SASR 99.
  39. Textbook, pp 331-3.
  40. [1901] AC 118.
  41. [1985] VR 891.
  42. (1985) 2 NSWLR 623.
  43. Textbook, pp 333.
  44. (1976) 136 CLR 161.
  45. [1999] 2 Qd R 439.
  46. Belar Pty Ltd (in liq) v Mahaffey [2000] 1 Qd R 477.
  47. Textbook, pp 334.
  48. [1894] 1 Ch 231.
  49. Textbook, pp 334-5.
  50. (1996) 41 NSWLR 158.
  51. [1895] 1 Ch 685.
Personal tools
Namespaces

Variants
Actions
Navigation
Toolbox