Baba v Sheehan [2021] NSWCA 58 | Case summary

Catchwords

[2017] ACTSC 162 Australian Securities and Investments Commission v Carey (No 6) (2006) 153 FCR 50911 ER 1242 El Sayed v El Hawach (2015) 88 NSWLR 214[2015] NSWCA 26 Fitzwood Pty Ltd v Unique Goal Pty Ltd (in liq) [2001] FCA 1628188 ALR 566 Fitzwood Pty Ltd v Unique Goal Pty Ltd (in liq) [2002] FCAFC 285 Hancock v Rinehart [2015] NSWSC 646106 ACSR 207 Hillcrest (Ilford) Pty Ltd v Kingsford (Ilford) Pty Ltd (No 2) [2010] NSWSC 2854 ASTLR 233 In the Marriage of Ashton (1986) 11 Fam LR 457FLC 91-777 In the Marriage of Goodwin (1990) 101 FLR 386FLC 92-192 In the Marriage of K R and M I Davidson (No 2) (1990) 14 Fam LR 817(1991) FLC ¶92-197 Mercanti v Mercanti [2015] WASC 297 Mercanti v Mercanti (2016) 50 WAR 495[2016] WASCA 206 Mills v Mills (1938) 60 CLR 150

Judgment (6 paragraphs)

[1]

Introduction This appeal is concerned with the validity of a purported removal of the third respondent as trustee of the Smart Street Optical Unit Trust (the Trust) and the appointment of the fourth respondent as trustee of the Trust. The purported removal and appointment were made by the first respondent, Mr Paul Sheehan (Mr Sheehan), on 26 October 2016. The appellants, Anna Baba (Mrs Baba) and Mustafa Baba (Mr Baba), contend that the purported removal and appointment were void in that the purported exercise by Mr Sheehan of the power conferred on him to remove a trustee and appoint a new trustee of the Trust was in fraud on that power.

The third respondent was formerly known as Smart Street Optical Pty Limited (Smart Street). However, following the removal of Smart Street as trustee, the registration of Smart Street was cancelled under s 601AB of the Corporations Act 2001 (Cth). The registration of Smart Street has now been reinstated but its name is now "ACN 121 894 479 Pty Limited", by reason of the registration of a new entity with its former name. The fourth respondent is Silktote Pty Limited (Silktote). The new entity, called Smart Street Optical Pty Limited, was registered on 4 March 2020. Silktote is the ultimate shareholder of that new entity. To avoid confusion, the parties will be referred to by their names as at the time of the events in question in the proceedings.
Mrs Baba commenced proceedings in the Corporations List of the Equity Division of the Supreme Court seeking, principally, an order that Mr David Hurst, a registered liquidator, be appointed as receiver and manager of the business and property of the Trust with power to do all things necessary or convenient to effect the sale of the business of the Trust and to pay dividends to holders of units in the Trust. The claim for that relief appears to have been misconceived and is not pressed in the appeal. In addition, Mrs Baba sought a declaration that the appointment of Silktote as trustee of the Trust was void and of no force or effect. Silktote filed a cross-claim seeking, relevantly, a declaration that it is now the trustee of the Trust and that certain payments that had been made by Smart Street, while the trustee of the Trust, were made in breach of trust.
Ultimately, for reasons published on 26 September 2019, [17] 30 April 2020 [18] and 17 July 2020, [19] a judge of the Equity Division (the primary judge) ordered that Mrs Baba's claim be dismissed with costs and that judgment be entered for Silktote against Mr Baba in the sum of $24,528, together with interest in the sum of $4,453.18. By notice of appeal filed on 24 December 2019, Mrs Baba appealed against the orders dismissing her claims. By amended notice of appeal filed on 19 August 2020, Mrs Baba and Mr Baba appealed from the orders made dismissing Mrs Baba's claim and from the orders made on the cross-claim against Mr Baba.
An application for leave to amend the grounds of appeal further, which was made ore tenus on 20 November 2020, was dismissed. During the course of the hearing of the appeal on 20 November 2020, the amended notice of appeal was further amended by leave of the Court, such that the only ground of appeal relied on by Mr and Mrs Baba is that the primary judge was in error in failing to hold that the purported removal of Smart Street and appointment of Silktote as trustee of the Trust by Mr Sheehan was void as a fraud on the power of appointment conferred by the Trust Deed on Mr Sheehan.

[2]

The Trust

The Trust was established by deed dated 15 December 2006 (the Trust Deed). The parties to the Trust Deed were:

Mr James Tuite, as the Settlor;
Mr Sheehan, as the Appointor;
Smart Street, as trustee; and
Mrs Baba, [20] Sedarni Pty Limited (Sedarni) and Rijalu Pty Limited (Rijalu), as the Foundation Unitholders (the Unitholders). Rijalu is a company controlled by Mr Sheehan. Sedarni is a company controlled by Mr Steven Carney (Mr Carney).

The Trust Deed recited that the Appointor had agreed to act as appointor for certain purposes, that Smart Street had agreed to act as trustee for certain purposes and that, by the Trust Deed, it was intended to establish a unit trust that would be administered for the benefit of the persons provided for in the Trust Deed. Clause 3 of the Trust Deed provided for the beneficial interest in the Trust Fund (as defined) to be divided into 100 units, each of which was to confer an equal interest in the Trust Fund but was not to confer any interest in any particular part of the Trust Fund but only such interest in the Trust Fund as a whole as is conferred on a unit under the provisions contained in the Trust Deed.
Clause 4 of the Trust Deed provided that the 100 Foundation Units were to be issued to the Unitholders as follows:

Mrs Baba - 45 units;
Sedarni - 30 units; and
Rijalu - 25 units.

Clause 2 of the Trust Deed relevantly provided that the Appointor was to be entitled, by instrument in writing, at any time and from time to time: 1. to remove the trustee of the Trust; 2. to appoint any new trustee; 3. to appoint a new trustee in the place of any trustee who resigns or ceases to be a trustee by operation of law.
Prior to the establishment of the Trust, it had been proposed that a partnership would be established to conduct an optometry practice at Charlestown in New South Wales. An agreement signed on 2 September 2006 by Mr Sheehan, on behalf of Rijalu, and by Mr Carney and by Mr Baba purported to record the intention of the parties to that agreement (the Partnership Agreement). The Partnership Agreement provided that the partners of the proposed partnership were to be:

[3]

The Dispute

The accounting work of the Trust was carried out by Mr Darren Tappouras. Mr Baba generally looked after accounting matters and gave instructions to Mr Tappouras.
In early 2016, Messrs Sheehan, Carney and Baba were contemplating a sale of the Trust Business to an entity controlled by Mr Sheehan, which conducted a business known as "Better Eyecare". The proposed purchaser required a "due diligence" to be conducted. Mr Sheehan gave evidence that, in April 2016, he became concerned about the way in which the Trust Business was being managed and that Mr Carney and Mr Baba "were struggling to understand" the financial figures of the Trust Business.
Mr Sheehan said, in particular, that an email exchange between Mr Tappouras and Mr Baba concerning the finalisation of a tax return gave him some concern. Mr Baba wrote to Mr Sheehan saying that Mr Carney had declined to "sign off" on the tax return because it did not make sense. Mr Sheehan also said that he was troubled by an apparent discrepancy in the financial figures of the Trust and by the fact that there was no money in the Trust's bank account for distribution to the Unitholders.
In his evidence, Mr Sheehan said that he became concerned that he was being kept out of the affairs of the Trust. In May 2016, he sent an email to Mr Tappouras requesting information about an increase in what he described as "beneficiary loans" to Mr Carney and Mrs Baba shown in the financial statements of Trust for the year ended 30 June 2015.
In early August 2016, Mr Sheehan was provided with draft accounts for the year ended 30 June 2016. He said that he formed the view that there were "some important issues" raised by the accounts and that he discussed them with Mr Carney and Mr Baba, who had advised him that the financial figures "did not seem right". Mr Sheehan said that Mr Baba told him that he would "follow it up with the accountants".
Subsequently, Mr Sheehan received a copy of an email from Mr Baba to Mr Tappouras stating that some of the distributions had "gone through salary sacrifice" and that that accounted for the discrepancy. Mr Sheehan said in his evidence that he was concerned about that suggestion, since he had never agreed to payments being made by way of "salary sacrifice". He said that he felt excluded because he understood that Mr Tappouras was acting for Mr Carney and Mr Baba personally.

[4]

Findings of the primary judge

The primary judge did not find Mr Sheehan's evidence as to his purpose in changing the trustee of the Trust to be "entirely satisfactory". His Honour did not read the emails as reflecting any concern on Mr Sheehan's part about the way in which the Trust accounts were being kept or the way in which the affairs of the Trust were being managed. His Honour did not consider that the correspondence indicated that any requests by Mr Sheehan were being ignored. Nevertheless, his Honour accepted that, by 23 October 2016, Mr Sheehan had questions about the affairs of the Trust. His Honour was not satisfied that Mr Sheehan fully understood what had been done about the "salary sacrifice arrangement" and considered that the evidence fell far short of establishing that Mr Sheehan had approved the "salary sacrifice" payments, as Mrs Baba alleged.
The primary judge accepted Mr Sheehan's denial that his sole motivation in appointing Silktote was to obtain control of the Trust. His Honour was satisfied that Mr Sheehan had genuine concerns about the way in which the affairs of the Trust were being conducted and that he exercised his power to appoint a new trustee so as to protect the interests of Rijalu as a unitholder. His Honour considered that that was legitimate and was not foreign to the purpose for which the power was conferred by cl 2 of the Trust Deed. His Honour observed that that conclusion did not depend upon Mr Sheehan's concerns about the Trust being well-founded and that it was sufficient that Mr Sheehan had acted "genuinely and in good faith", as his Honour found he did. His Honour rejected Mrs Baba's challenges to the exercise of the power conferred on Mr Sheehan as Appointor under cl 2 of the Trust Deed and concluded that the power was validly exercised in October 2016.

[5]

The Appeal

In the course of the hearing of the appeal, a question arose as to whether or not the procedure specified by cl 2 of the Trust Deed had been properly followed by Mr Sheehan. The primary judge found that it had been. However, there may be a real question as to whether the evidence supported a finding that there was an instrument in writing, as required by cl 2, whereby Smart Street was removed and Silktote was appointed. Nevertheless, that was not a ground of appeal and the oral application to amend to raise that ground was refused, in circumstances where no prior notice of such an amendment had been given to the respondents. [21]
As indicated above, the only ground of appeal is that the primary judge erred in concluding that Mr Sheehan, as Appointor, validly exercised the power conferred by cl 2 of the Trust Deed to remove a trustee and appoint a new trustee. If the power was not validly exercised, Smart Street remained trustee of the Trust Deed and the cross-claim brought by Silktote would have had no basis, since Silktote sued only in its purported capacity as trustee of the Trust Deed. Thus, if its appointment was ineffective, the only proper cross-claimant was Smart Street.
The exercise of a power may be fraudulent if made, relevantly, for purposes foreign to the power or for a corrupt purpose. The exercise of a power will be for a corrupt purpose if, for example, the holder of the power intends a benefit to result to the holder, such as appointment to a child of the holder who is in ill health, with the intention or hope that the appointor will take the property of the child as next of kin. That is not this case. Rather, the basis for the challenge by Mrs Baba is that the power was exercised by Mr Sheehan for a purpose foreign to the power.
The purpose of a trust deed in conferring a power is to benefit the objects of the relevant trust. If the power is exercised for an unauthorised purpose, which benefits the person on whom the power is conferred, the exercise of the power will be for a foreign purpose. Nevertheless, there must be some ulterior purpose, such as an intention to defeat the purpose of the Settlor of the Trust. A power will be exercised for a foreign purpose if it is exercised with the intention of benefiting someone who is not an object of the power. The objects of the Trust, as specified in the Trust Deed, are the Unitholders. The exercise of the power conferred by cl 2 of the Trust Deed must, accordingly, be for the purpose of benefiting the Unitholders. If the power were to be exercised for the purpose of enabling Mr Sheehan to control the Trust Business and the affairs of the Trust, that would be an exercise for a foreign purpose.

[6]

Endnotes

Baba v Sheehan [2020] NSWCA 361.
Re Skeats' Settlement (1889) 42 Ch D 522 at 526 (Kay J); Re Newen (1894) 2 Ch 297 at 309 (Kekewich J); Re Burton (1994) 126 ALR 557 at 559-560 (Davies J); [1994] FCA 1146; Pope v DRP Nominees Pty Ltd (1999) 74 SASR 78 at 89-90 [46]-[48] (Bleby J; Duggan J and Debelle J agreeing); [1999] SASC 337; Fitzwood Pty Ltd v Unique Goal Pty Ltd (in liq) (2001) 188 ALR 566; [2001] FCA 1628 (reversed on other grounds in Fitzwood Pty Ltd v Unique Goal Pty Ltd (in liq) [2002] FCAFC 285).
See Montefiore v Guedalla (No 3) [1903] 2 Ch 723 at 725-726 (Buckley J); Re Christina Brown (1921) 22 SR (NSW) 90 at 93-94 (Street CJ in Eq); Re Power's Settlement Trusts [1951] Ch 1074 at 1080 (Evershed MR; Jenkins LJ and Birkett LJ agreeing); Re Burton (1994) 126 ALR 557 at 559-560 (Davies J); [1994] FCA 1146; Pope v DRP Nominees Pty Ltd (1999) 74 SASR 78 at 89-90 [46]-[47] (Bleby J; Duggan J and Debelle J agreeing); [1999] SASC 337; Fitzwood Pty Ltd v Unique Goal Pty Ltd (in liq) (2001) 188 ALR 566 at 595 [98] (Finkelstein J); [2001] FCA 1628; Hillcrest (Ilford) Pty Ltd v Kingsford (Ilford) Pty Ltd (No 2) (2010) 4 ASTLR 233; [2010] NSWSC 285 at [38]-[39] (Biscoe AJ); Rayner v NJ Sheaffe Pty Ltd [2010] NSWSC 810 at [150], [152] (Lindgren AJ); Montevento Holdings Pty Ltd v Scaffidi (2012) 246 CLR 325; [2012] HCA 48; Austec Wagga Wagga Pty Ltd v Rarebreed Wagga Pty Ltd [2012] NSWSC 343; Berger v Lysteron Pty Ltd [2012] VSC 95 at [67]-[85] (Habersberger J); Schuhmacher v Emmerson [2013] QSC 205 at [94]-[98] (Daubney J); El Sayed v El Hawach (2015) 88 NSWLR 214 at 227 [69] (Beazley P, Gleeson and Leeming JJA); [2015] NSWCA 26; Mercanti v Mercanti (2016) 50 WAR 495; [2016] WASCA 206; Australian Conservation Services Pty Ltd v Liladel Holdings Pty Ltd (2017) 12 ACTLR 124 at 132-134 [24]-[35] (Mossop J); [2017] ACTSC 162. Characterisation of the power as fiduciary, as in the judgment of Kay J in Re Skeats' Settlement (1889) 42 Ch D 522, was criticised in PD Finn, Fiduciary Obligations (1977, Law Book Company Ltd) at [627].
(2015) 88 NSWLR 214 at 227 [69] (Beazley P, Gleeson and Leeming JJA); [2015] NSWCA 26.
(2012) 246 CLR 325; [2012] HCA 48.
Duke of Portland v Topham (1864) 11 HLC 32 at 54 (Lord Westbury LC); 11 ER 1242; Re Burton (1994) 126 ALR 557; [1994] FCA 1146. In PD Finn, Fiduciary Obligations (1977, Law Book Company Ltd) at [644], it is suggested that the true limitation is that the power of appointment only exists for the benefit of the beneficiaries and Courts will review the exercise of that power only when there has been a fraud on the power. See also Mercanti v Mercanti (2016) 50 WAR 495; [2016] WASCA 206.

Judgment

BRERETON JA: I have had the benefit of reading in draft the judgment to be delivered by Emmett AJA. I agree with his Honour that the appeal must be dismissed and, subject to what follows, with his Honour's reasons.
Ultimately, the sole ground of appeal relied upon by Mr and Mrs Baba was that the primary judge was in error in failing to hold that the purported removal of the third respondent Smart Street Optical Pty Ltd (now ACN 121 894 479 Pty Ltd), and appointment of the fourth respondent Silktote Pty Ltd ("Silktote"), as trustee of the Smart Street Optical Trust by the first respondent Mr Sheehan, was void as a fraud on the power of appointment conferred by the Trust Deed on Mr Sheehan. Leave to amend the appeal to raise an additional objection to the formal validity of the appointment of Silktote as trustee in October 2016 was refused. [1]
It is important to distinguish at the outset a "power of appointment" of the kind in question here - that is, to appoint a new trustee - from a power to appoint trust property to a discretionary beneficiary, about which most of the law on the nature of a trustee's powers is concerned. The latter power is of quite a different character: it is conferred on a trustee, to deal with trust property, for the benefit of beneficiaries, and is, unquestionably, fiduciary in character.
Although there are cases that hold that a power of the present kind is also fiduciary in nature, [2] this is open to serious doubt, at least as a general rule, and it is clear that the appointment of the appointor himself or herself as trustee, or of a company controlled by the appointor, is not necessarily prohibited, although many of the cases turn on the terms of the particular trust deed. [3] In theory, it is difficult to see how, in the context of the modern discretionary trust, involving a nominal settlor, a trustee who can be removed and replaced by an appointor who is typically the "true" settlor, and discretionary beneficiaries who have no proprietary interest but a mere right to due administration, there is any reposing of trust or confidence in, or any reliance on, the appointor, by the beneficiaries. However, this case is not an appropriate vehicle finally to resolve this issue, which was left open by this Court in El Sayed v El Hawach, [4] although it is difficult to reconcile the decision of the High Court in Montevento Holdings Pty Ltd v Scaffidi, [5] which upheld the appointment of a company controlled by the appointor, with a fiduciary obligation to avoid preferring one's own interest.
However, though it might not be correctly characterised as a "fiduciary power", it has been accepted that such a power is controlled by the doctrine of "fraud on a power", so that it must be exercised bona fide for the purpose for which it was conferred. [6] As the primary judge recorded, that was common ground in the instant case. [7]
The doctrine of "fraud on a power" operates to avoid the exercise of a power where it has been exercised for a purpose, or with an intention, beyond the scope of, or not justified by, the instrument creating the power. [8] Such an exercise of power for an extraneous purposes is invalid and void, as Dixon J said in Mills v Mills: [9] "Directors of a company are fiduciary agents, and a power conferred upon them cannot be exercised in order to obtain some private advantage or for any purpose foreign to the power. It is only one application of the general doctrine expressed by Lord Northington in Aleyn v Belchier: "No point is better established than that, a person having a power, must execute it bona fide for the end designed, otherwise it is corrupt and void.""
The doctrine therefore directs attention to the purpose for which the power is conferred on its repository. For present purposes, the focus is not on the responsibilities of the trustee, but on the power of the appointor.
The appellants' case was that if Mr Sheehan's only purpose in appointing Silktote as trustee was to obtain control of the trust for himself (which Mr Sheehan denied), that was an improper or extraneous purpose within the doctrine.
I would not accept that a purpose of maintaining or exerting control of a trust is, absent any intention that the appointee act other than properly in accordance with its responsibilities as trustee, necessarily inconsistent with the purpose for which a power of appointment of this kind is created, particularly in the context of the modern discretionary trust. Usually, a significant if not dominant purpose of this type of power of appointment is to reserve to the appointor the ability to "control" the trust by removing and replacing the trustee.
In In the Marriage of K R and M I Davidson (No 2) ("Davidson"), [10] Simpson, Nygh and Murray JJ said that, in the context of a modern discretionary family trust, the appointor was not prevented from appointing a trustee who would comply with the appointor's wishes: "It was argued that such a manipulation of the provisions of the trust would amount to a breach of the fiduciary duty of the husband as appointor relying on the decision of Kay J in Re Skeats' Settlement; Skeats v Evans (1889) 42 Ch D 522. Whatever may have been the position 100 years ago, Australian courts today have to look at the reality of the situation and the purpose which family trusts serve today. A limitation as to the husband's power to control the assets and income of the trust in accordance with the provisions of the trust deed, is inconsistent with the reasoning of the Full Court in Ashton above. Leave to appeal from that decision was refused by the High Court on 5 December 1986 by a bench composed of Gibbs CJ, Wilson and Brennan JJ. Whatever might be the remaining effect of Skeats case, it is not authority for the proposition that the husband is prevented from appointing a trustee who has complied to his wishes."
The High Court did not disagree; in dismissing an application for special leave to appeal in Davidson, Mason CJ said: [11] "We are not persuaded that there was an error of principle on the part of the Full Court of the Family Court in concluding that the applicant [husband] could cause the trustee company to apply the capital of the trust fund for the benefit of the respondent [wife] or for the benefit of a company in which he was a shareholder, so long as a beneficiary is a shareholder. The primary judge found as a fact that the trustee company was a creature of the applicant and the provisions of the trust deed are well open to an interpretation which supports the conclusion reached by the Full Court."
This approach was referred to by Murphy JA and Hall J in Scaffidi v Montevento Holdings Pty Ltd, as follows: [12] "[151] If, however, on the proper construction of the instrument, the power of the appointor to remove and appoint trustees may be exercised for the purpose of controlling the trust estate for the appointor's benefit, the trust property may be regarded, at least for certain statutory purposes, as effectively owned by the appointor, or as property in which the appointor has a contingent interest: Australian Securities and Investments Commission v Carey (No 6) [2006] FCA 814; (2006) 153 FCR 509 [19], [29],[37]-[46]; Public Trustee v Smith [2008] NSWSC 397; (2008) 1 ASTLR 48; [108]-[138]; In the Marriage of Goodwin [1990] FLC 92-192 ; 1990) 101 FLR 386 at 392; In the Marriage of Davidson (No 2) [1991] FLC 92-197; (1990) 101 FLR 373."
In Mercanti v Mercanti, [13] the appointor had removed a corporate trustee and replaced it with another corporate trustee which he controlled. The primary judge, Le Miere J, held that in the absence of evidence of any purpose beyond placing the appointee in control of the trust, this did not involve an exercise of a power for any improper or ulterior purpose (emphasis added): [14] "[175] Appointing a company controlled by him as trustee was not of itself the exercise of the power by Tyrone for a foreign or improper purpose. Tyrone's purpose was to appoint in place of Slondia … as trustee … a company which would reinstate the management of the business which had been removed without consultation or notice by Slondia … acting by its shareholders, Michael and Yvonne. There is no evidence that Tyrone intended to effect any purpose beyond putting Parradele in control of the [MMF Trust] and the management of the family business. For example, there is no evidence that Tyrone intended Parradele to deal improperly with trust assets. As trustee, Parradele was bound to exercise its powers, including its power in relation to the assets and income of the trusts, as a fiduciary. [176] Tyrone's purpose was to restore the status quo in the sense I have described. There is no evidence that Tyrone did so to achieve any purpose other than the proper and effective management of the business. It is not for the court to assess the relevant competence of Parradele on the one hand and Slondia … on the other hand to act as trustees of the trusts and control the management of the business. The action of Tyrone in removing Slondia … as [trustee] and replacing [it] with Parradele does not give rise to an inference that Tyrone did so for any purpose other than that Parradele would properly fulfil its duties as trustee including properly managing the business. The plaintiffs have not established that Tyrone executed the notices of removal and acceptance of appointment of trustee for any improper or ulterior purpose."
On appeal, Buss P, having referred to that passage, held that the purpose of transferring control to the appointee was not of itself improper: "[326] The effect of Tyrone Mercanti exercising his power as Appointor to remove Slondia and appoint Parradele as Trustee was consistent with the purpose of the MMF Trust, as revealed by the MMF Trust Deed of Variation. The effect of executing the MMF Trust Deed of Variation in 2004 was to transfer effective control of the MMF Trust and its business to Tyrone Mercanti immediately. Tyrone Mercanti's action in preserving the status quo was not improper. He was not acting dishonestly or in bad faith or for any extraneous or ulterior purpose. [327] The trial judge's finding that there was no evidence that Tyrone Mercanti, in exercising his power as Appointor to remove Slondia and appoint Parradele as Trustee, sought to achieve any purpose other than 'the proper and effective management of the [trust] business' [176], was consistent with and, in substance, involved an additional finding that Michael Mercanti and Jason Mercanti had failed to establish that Tyrone Mercanti exercised the power for a purpose personal to him as distinct from a purpose related to the best interests of the MMF Trust and the Beneficiaries as a whole. … [329] It was reasonably open to his Honour to make the findings of fact which underpin his conclusion that Michael Mercanti and Jason Mercanti had not established that Tyrone Mercanti's conduct in causing Slondia to be removed as Trustee, and Parradele to be appointed as the new Trustee, of the MMF Trust did not constitute a fraud on the power of the Appointor or a breach of duty. His Honour did not make any material error in his fact-finding process or in the facts as found."
To the same effect, and with reference to same passage in the judgment of Le Miere J, Newnes and Murphy JJA said that the reinstatement of earlier arrangements for the management of the trust's business in place of those which had operated for the last seventeen years was not in itself an improper purpose: "[400] The appellants nevertheless contend that Tyrone exercised the power 'for reasons purely personal to himself and in disregard to the interests of all other beneficiaries', and that the exercise of the power did not maintain the 'status quo', but rather substantially changed it 'by removing the trustee of over 17 years that was controlled by the heads of the Mercanti family and replace it with a trustee which was not controlled by the heads of the Mercanti's [sic] family'. The appellants also suggested that the abuse of power was 'all the more egregious' because Tyrone had not consulted the other beneficiaries before exercising the power under cl 21. [401] The question of the purpose for which Tyrone appointed Parradele as Trustee was a question of fact. The judge found, in effect, that Tyrone's purpose was to appoint Parradele to reinstate the management of the business. The reinstatement of the management of the trust's business was not, as the judge said, an improper purpose in itself. Even though the reinstated 'management' was effectively Tyrone, the exercise of the power of the Appointor was, in the circumstances of this case, as the judge found, consistent with a legitimate concern for 'the proper and effective management of the business'. The effective management of the trust's business would be to the benefit of all the objects of the trust. There is no error in the judge's reasoning or conclusion."
In Australian Conservation Services Pty Ltd v Liladel Holdings Pty Ltd, [15] Mossop J considered that the trust in question was one in respect of which the power of the appointor to remove and appoint trustees could be exercised for the purpose of controlling the trust estate for the appointor's benefit: "[22] Because of the effective control of Mr Davey over the Trust through his position as appointor, by his participation in the initially appointed trustee and because of the fact that the definition of the beneficiaries of the Trust is focused upon him, it can be seen that the trust is effectively under his control. The Trust falls into that category of trust where "the power of the appointor to remove and appoint trustees may be exercised for the purpose of controlling the trust estate for the appointor's benefit" Scaffidi v Montevento Holdings Pty Ltd [2011] WASCA 146 at [151]; Australian Securities and Investments Commission v Carey (No 6) [2006] FCA 814; 153 FCR 509 [37]-[46]."
In the present case, the judgment of the primary judge included the following findings: [16] "[60] In these circumstances, I accept Mr Sheehan's denial that his sole motivation in appointing Silktote was to obtain control of the Trust. I am satisfied that Mr Sheehan had genuine concerns about the way in which the affairs of the Trust were being conducted and he exercised his power to appoint a new Trustee so as to protect the interests of his company, Rijalu, as unit holder. In my view this was legitimate and not foreign to the purpose of which the power was conferred. [61] My conclusion does not depend upon Mr Sheehan's concerns about the company having been well founded in fact. In my view it is sufficient that Mr Sheehan acted, as I have found, genuinely and in good faith. [62] But in fact, as I have already stated, the attitude subsequently taken by Mr Carney, Mr Baba and Mr Tappouras goes some way to vindicating Mr Sheehan's concerns. Furthermore, as we will see, the "salary sacrifice" payments did actually involve a breach of trust. To my mind, this shows why the Court should not too readily find a fraud on a power in a case such as this. Mr Sheehan's only other remedy would have been to bring proceedings for breach of trust, or possibly some form of derivative action. Otherwise the wrong to the Trust would have gone unredressed. The Court should be slow to shut a beneficiary of a trust out from using the self-help remedy of removing the trustee merely because of a doubt about the motivation behind that action."
There was no specific challenge to the findings of fact contained in those paragraphs. As Emmett AJA demonstrates, they were well open to the primary judge, notwithstanding that he considered Mr Sheehan's evidence as to his purpose in changing the trustee not to be "entirely satisfactory". Moreover, even if Mr Sheehan's sole motive was to obtain control of the trust, I am not persuaded that would have been "improper" in the relevant sense, absent any intention that his appointee act other than properly in accordance with its responsibilities as trustee.
I agree with the orders proposed by Emmett AJA.
EMMETT AJA:

Baba v Sheehan

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Cases Cited (36)

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