Court of Appeal (Vic)|2022-07-20|Before: Mr J, Kyrou JA, Niall JA, Walker JA

For the reasons that follow, the claim for payment must fail. In summary, that is because the failure to give real and genuine consideration to the exercise of the discretionary power, in circumstances where a distribution was in fact made to objects that fell within the terms of the trust, did not render the distributions void. Rather, in the events that happened, the distributions were voidable, but no order was sought that they be set aside. The application to amend the pleading to seek that relief was refused and there is no challenge to the refusal to permit the amendment.
In Pitt, the Supreme Court of the United Kingdom considered the circumstances in which a disposition of property or income by a trustee will be set aside. In doing so, the Court distinguished between those cases where the disposition is plainly beyond power and those dispositions that are within power, but in respect of which there has been some breach of duty. An example of the first category is a purported distribution to an entity that is not a beneficiary under the trust. An example of the second category is a distribution that is made to a beneficiary within the terms of the trust, but where there has been a failure by the trustee of its duty to give proper consideration to relevant matters or its duty to give real and genuine consideration to the power. Lord Walker described this class of case as involving 'inadequate deliberation' and the former as involving 'excessive execution', which adequately captures the distinction.[86] A fraud on the power, such as where the power is exercised ostensibly within the terms of the trust but for an improper purpose, would appear to fit within the excessive execution category.[87]
As to the consequences of an inadequate deliberation, the Supreme Court held that first it was necessary to ascertain whether the failing constituted a breach of duty. This condition was thought necessary to avoid capturing those cases where the trustee had made a minor mistake or had acted innocently and conscientiously on advice that was subsequently found to be wrong. Lord Walker explained:

In my view Lightman J was right to hold that for the rule to apply the inadequate deliberation on the part of the trustees must be sufficiently serious as to amount to a breach of fiduciary duty. Breach of duty is essential (in the full sense of that word) because it is only a breach of duty on the part of the trustees that entitles the court to intervene ... It is not enough to show that the trustees' deliberations have fallen short of the highest possible standards, or that the court would, on a surrender of discretion by the trustees, have acted in a different way. Apart from exceptional circumstances (such as an impasse reached by honest and reasonable trustees) only breach of fiduciary duty justifies judicial intervention.[88]

The Court concluded that in those cases where there was a breach of duty in the requisite sense, the breach rendered the decision voidable but not void. That is, a beneficiary could apply to the Court for an order setting aside a distribution, subject to various defences, including any belonging to the recipient. Lord Walker observed that the law has to balance the need to protect beneficiaries from aberrant conduct by trustees with the competing interests of legal certainty, and of not imposing too stringent a test in judging trustees' decision making.[89] Critical to that balance was the discretion in the Court to decline to overturn the trustee's decision. On this point, the ultimate conclusion of the Supreme Court was expressed this way under the heading 'Void or Voidable?':

Counsel on both sides readily admitted that they had hesitated over this point, but in the end they were all in agreement that Lloyd LJ was right in holding (para 99) that,

if an exercise by trustees of a discretionary power is within the terms of the power, but the trustees have in some way breached their duties in respect of that exercise, then (unless it is a case of a fraud on the power) the trustees' act is not void but it may be voidable at the instance of a beneficiary who is adversely affected.

In my judgment that is plainly right, and in the absence of further argument on the point it is unnecessary to add much to it. The issue has been clouded, in the past, by the difficult case of Cloutte v Storey, a case on appointments that are fraudulent in the equitable sense, that is made for a positively improper purpose. Here we are concerned not with equitable fraud, nor with dispositions which exceed the scope of the power, or infringe the general law (such as the rule against perpetuity). We are in an area in which the court has an equitable jurisdiction of a discretionary nature, although the discretion is not at large, but must be exercised in accordance with well-settled principles.[90]

The applicants submit that Pitt can be distinguished on the basis that it concerned a failure by a trustee to take into account a relevant consideration, not in the exercise of a discretion, but as to establishment of the trust. That submission must be rejected. The Supreme Court heard two appeals together, one of which (Pitt) was concerned with a decision to settle moneys on a discretionary trust and the other (Futter v Futter) was concerned with a mistake by the trustee as to the revenue consequences of a disposition out of the trust. It is clear that the reasoning to which we referred applied in each situation and the distinction on which the applicants rely is unsound.
The applicants also submit that Wareham provides contrary authority, which this Court should follow unless persuaded it is plainly wrong. The short answer is that the issue was not argued or determined in Wareham.
We consider it is appropriate to follow the decision in Pitt. It is directly on point, canvasses all of the relevant authorities in the United Kingdom and is consistent with the judicial restraint that informs Karger.
Of course, the outcome in Pitt does not mean, as the applicants' submissions implied, that a failure to give due consideration to the interests of a beneficiary or object of a power has no consequences. The point is that such a failure will not automatically lead to the decision being set aside and its consequences reversed. Rather, it is necessary for a plaintiff to establish that the decision should be set aside; it would also be necessary to determine any defence that might be raised in answer.
The insurmountable problem for the applicants is that they did not seek at trial the relief that they now seek in this Court. The trial was run on the pleadings and the parties are bound by the way they ran the case below. At the conclusion of the trial, the applicants sought leave to amend their pleadings to raise this issue. In our view, such leave was necessary in order for the judge to entertain the argument, but it was refused by the judge. That refusal is not challenged in this Court and the applicants are fixed with the consequences. For that reason, the applicants' claim that the impugned distributions be set aside and an order be made for the payment of money to them must be refused.
Proposed grounds 9 and 10 must be rejected.

In proposed ground 11, the applicants contend that the judge erred in failing to remove the trustee.

Two relevant bodies of principle are involved in the consideration of this proposed ground. First, the principles that the Court must adopt in dealing with the question whether a trustee should be removed. Second, the nature of review in this Court of a decision of a judge to decline to remove a trustee.
On the second issue, it was common ground in this application that the decision of the judge was discretionary and that to overturn it, the applicants must establish an error of the kind identified in House v The King.[91] In Miller v Cameron, Dixon J observed on this point:

Such a judgment must be largely discretionary. A trustee is not to be removed unless circumstances exist which afford ground upon which the jurisdiction may be exercised. But in a case where enough appears to authorize the Court to act, the delicate question whether it should act and proceed to remove the trustee is one upon which the decision of a primary Judge is entitled to especial weight.[92]

On the first issue, there is no dispute between the parties as to the principles. There is no suggestion that the judge erred in his articulation of the principles. In Wareham, this Court identified the welfare of the beneficiaries as a 'safer guide' to the exercise of the power to remove a trustee, and referred to the following passage from the High Court in Miller as giving content to that notion:

The jurisdiction to remove a trustee is exercised with a view to the interests of the beneficiaries, to the security of the trust property and to an efficient and satisfactory execution of the trusts and a faithful and sound exercise of the powers conferred upon the trustee. In deciding to remove a trustee the Court forms a judgment based upon considerations, possibly large in number and varied in character, which combine to show that the welfare of the beneficiaries is opposed to his continued occupation of the office.[93]

In order to justify a removal of a trustee, the Court 'must find something which induces the Court to think either that the trust property will not be safe, or that the trust will not be properly executed in the interests of the beneficiaries'.[94] The justification may be found in a lack of impartiality as between beneficiaries.[95] It would be unrealistic however, in the context of many family trusts, to ignore the fact that the trustee will often be imbued with the vagaries of the family dynamic, its antagonisms and alliances. Impartiality does not require the trustee to bring a blank slate to the exercise of its powers.

The parties' submissions on removal of the trustee

The applicants submit that there is nothing gained by leaving the trustee in control of the trust. They submit that Mr Sampson's failure to act impartially, the animosity that exists between Michael and his siblings, and the previous breaches of trust found by the judge make it unrealistic to expect that the trustee is able to properly administer the trust for the benefit of all three remaining beneficiaries.
The respondent submits that a breach of trust will not necessarily lead to the Court exercising its discretion to remove a trustee. It submits that the judge had regard to multiple factors, including the matters raised by the applicants, and gave them appropriate weight in determining not to remove the trustee.

The judge's decision was made, in part, on the basis that the challenges to the distributions in 2017 and 2019 in relation to Paul and Deborah had failed. That was important to the judge's reasoning because it underpinned his conclusion that the change in the directors of the trustee had seen an alteration in decision making without a repetition of past errors.[96] Our conclusion that the challenge to the 2017 and 2019 distributions in relation to Paul and Deborah must succeed means that the judge reached his conclusion on an erroneous basis. In our opinion, that error is sufficient to require this Court to revisit the discretion itself.
We are well satisfied that it is necessary to remove the trustee. In our view, the trustee has, over a number of years, failed to act impartially, failed to give real and genuine consideration to the interests of two of the primary beneficiaries, and relations between the beneficiaries and those involved in managing the trustee are, at least from this vantage point, irreconcilably damaged, such that it is not in the best interests of the beneficiaries for the trustee to continue in office.
The judge stated that he was not persuaded that the trustee was incapable of properly administering the trust into the future under the directorship of Michael and Mr Sampson.[97]
The basis on which Mr Sampson would act as a director of the trustee does not appear from the judge's reasons, given that the judge concluded that Mr Sampson had not been validly appointed. However, the premise appears to have been that he would continue to play such a role into the future. Neither party suggested in this Court that Mr Sampson would cease to be involved and, as noted earlier in these reasons, both parties accepted that Mr Sampson is currently a director of the trustee. It is thus appropriate to consider the question of removal on that basis.
The judge found that Mr Sampson had acted in good faith in relation to the invalid variations.[98] There is no basis to conclude that Mr Sampson would act otherwise than in good faith should he continue as a director of the trustee. However, over an extended period, Mr Sampson can be seen to be aligned with John, Eva and Michael. For example, he put forward the proposal in December 2017. That proposal reflected his understanding of the wishes of John and Eva and would have cemented Michael's ongoing control of the trust. He authored the purported variations to the trust deed. He participated in the 2018 distribution as a purported director and was present at the meeting in 2019 when the 2019 distributions were determined. Mr Sampson complied with Eva's instructions not to provide trust documents to Paul despite knowing that Paul had an entitlement to them.
Mr Sampson also took a dim personal view of Deborah's response to the decision to transfer the South Yarra apartment to her. He regarded Deborah as being 'grumbling, bad-tempered and ungracious'.[99]
The position of Michael is, to our mind, even clearer. It is plain that the relationship between him and his siblings is fractured. The incident when he made a silent telephone call to Deborah because he did not believe she had been in hospital is disturbing and reveals a high degree of suspicion. It bespeaks a total breakdown in trust between the two. Over a number of years he was favoured by the trustee over Paul and Deborah. His parents sought to install him into a position of control. With the passing of John and Eva, and given that none of the Owies children have children themselves, the trust now stands principally for the benefit of Michael, Paul and Deborah. It remains a trust of substantial assets likely to continue to generate substantial annual income. It would not be for the welfare of the beneficiaries as a whole for Michael and Mr Sampson to remain in control of the trustee.
The history of breaches in the administration of the trust deed, the antipathy and lack of trust between the siblings means, in our view, the continuation of the trustee or any trustee in which Michael has a controlling hand is untenable.
We would uphold proposed ground 11. In our opinion, an order for the removal of the trustee should be made. An independent trustee should be appointed.

We would grant leave to appeal and allow the appeal.
The findings made by the judge in relation to the distributions of income in 2015, 2016 and 2018 remain undisturbed. In addition, we have concluded that the 2017 and 2019 distributions were made without any real and genuine consideration by the trustee of whether a distribution of income should be made to either of the applicants.
JJE Nominees Pty Ltd should be removed as trustee. An independent trustee should be appointed.

[1] Without any disrespect to the parties, first names are used because of the common surname.

[2] Defined to mean 'the period from the date hereof to the next ensuing thirtieth day of June and thereafter each period of twelve months ending on the thirtieth day of June in each year until the thirtieth day of June next preceding the Vesting Day and the succeeding period terminating on the Vesting Day.'

[3] Re Owies Family Trust [2020] VSC 716, [199]-[202] ('Reasons').

[4] Re Owies Family Trust (No 3) [2021] VSC 114. An order for payment had been sought in respect of the 'no distributions' claims, but those claims had failed. The 'no real and genuine consideration' claims were advanced in the alternative to the 'no distribution' claims, and did not include orders avoiding the resolutions allegedly made without real and genuine consideration. Nor had the applicants opened or closed their case on the basis that they sought such orders in relation to the 'no real and genuine consideration' claims: [41]-[42].

[9] (1936) 55 CLR 499; [1936] HCA 40.

[11] The parties did not agree whether the resolution dated 10 March 2020 ratified the earlier, defective appointment, or whether it appointed Mr Sampson as a director from 10 March 2020. It is not necessary for us to resolve that question.

[29] Relying on Karger v Paul [1984] VicRp 13; [1984] VR 161,165-6 (McGarvie J) ('Karger').

[33] Ibid [344]-[345] (emphasis in original).

[34] Monty Financial Services Ltd v Delmo [1996] VicRp 7; [1996] 1 VR 65 ('Monty'); Miller v Cameron (1936) 54 CLR 572; [1936] HCA 13 ('Miller').

[35] Monty [1996] VicRp 7; [1996] 1 VR 65, 81 (Ashley J).

[36] Nicholls v Louisville Investments Pty Ltd (1991) 10 ACSR 723, 728 (Needham J) ('Nicholls').

[38] Reasons, [246]-[247], [364(a)], [386].

[42] Ibid [376] (emphasis in original).

[47] Ibid [385]-[386] (citations omitted).

[48] Pitt v Holt [2013] UKSC 26; [2013] 2 AC 108, [10]; [2013] UKSC 26 (Lord Walker) ('Pitt').

[51] Minister for Aboriginal Affairs v Peko-Wallsend Ltd (1986) 162 CLR 24; [1986] HCA 40.

[52] Khan v Minister for Immigration and Ethnic Affairs [1987] FCA 713. See also Bondelmonte v Bondelmonte [2017] HCA 8; (2017) 259 CLR 662, 672 [29], 675 [43] (Kiefel, Bell, Keane, Nettle and Gordon JJ); [2017] HCA 8; Minister for Immigration and Citizenship v SZJSS (2010) 243 CLR 164; [2010] HCA 48.

[53] Cf jurisdictional error in public law: Craig v South Australia (1995) 184 CLR 163; [1995] HCA 58; Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355; [1998] HCA 28.

[55] Minister for Immigration and Citizenship v Li (2013) 249 CLR 332; [2013] HCA 18.

[58] (1999) 197 CLR 83; [1999] HCA 28 ('Breckler').

[59] Ibid 99-100 [7] (Gleeson CJ, Gaudron, McHugh, Gummow, Hayne and Callinan JJ) (citations omitted).

[61] Ibid 288 [91] (Tate, McLeish and Hargrave JJA).

[62] Ibid 289 [95] (Tate, McLeish and Hargrave JJA).

[64] Ibid 280 [66] (French CJ, Gummow, Heydon, Crennan and Bell JJ) (citations omitted).

[65] Re Londonderry's Settlement [1965] Ch 918, 936-7 (Salmon LJ) (citations omitted).

[69] Ibid 285 [30] (citations omitted).

[70] I Hardingham and R Baxt, Discretionary Trusts (Butterworths, 2nd ed, 1984) 97 [504].

[75] The Originating Motion and Statement of Claim did not contain any relevant information as to the circumstances of Paul and Deborah and the witness statements were not served until August 2019.

[77] Reasons, [365] (emphasis in original).

[78] The term appears to have originated in J D Heydon and M J Leeming, Jacobs' Law of Trusts in Australia (LexisNexis Butterworths, 8th ed, 2016) 327 [16-08], which stated that 'a grotesquely unreasonable result may be evidence of a miscarriage of duty', and gave as a reference Re Lofthouse [1885] UKLawRpCh 160; (1885) 29 Ch D 921, 930. That case did not use the phrase 'grotesquely unreasonable'. Both Jacobs' Law of Trusts and Lofthouse were discussed in Wareham [2020] VSCA 92; (2020) 61 VR 262, 283-4 [72], and the Court concluded that there was no reason to doubt the correctness of the proposition in Jacobs' Law of Trusts.

[79] [2020] VSCA 92; (2020) 61 VR 262, 289 [95] (Tate, McLeish and Hargrave JJA).

[81] Karger [1984] VicRp 13; [1984] VR 161, 166 (McGarvie J).

[91] (1936) 55 CLR 499; [1936] HCA 40.

[94] Re Wrightson [1908] UKLawRpCh 34; [1908] 1 Ch 789, 802-3 (Warrington J); [1908] UKLawRpCh 34.

[95] Nicholls (1991) 10 ACSR 723, 728 (Needham J).

[97] Ibid [387] set out above at [76].

Owies v JJE Nominees Pty Ltd [2022] VSCA 142 (20 July 2022)

TRUSTS - Family trust - Whether trustee had sufficient knowledge of applicants' circumstances to exercise its discretion to distribute income of trust - Whether judge erred in finding trustee exercised its discretion upon real and genuine consideration in certain years - Whether decision of trustee void or voidable - Wareham v Marsella (2022) 61 VR 262; [2020] VSCA 92 discussed - Pitt v Holt [2013] 2 AC 108; [2013] UKSC 26 applied - Leave to appeal granted - Appeal allowed.

TRUSTS - Removal of trustee - Whether trustee should be removed following breach of trust - Conflict between trustee and two of three remaining beneficiaries - Where judge erred in finding trustee exercised discretion upon real and genuine consideration - Miller v Cameron (1936) 54 CLR 572; [1936] HCA 13 applied - Order for removal of trustee.

Owies v JJE Nominees Pty Ltd [2022] VSCA 142

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Owies v JJE Nominees Pty Ltd [2022] VSCA 142 (20 July 2022)