Plaintiffs v Defendant

Supreme Court of Victoria|2008-09-11|Before: Mandie J

TRUSTS - application to inspect trust documents - trustee's removal of certain beneficiaries by exercise of exclusion power in trust deed - whether power exercised for improper purpose

1 By originating motion filed 13 February 2007, the first, second and third plaintiffs sought a declaration that they were entitled at their expense to the production and inspection of certain Trust documents of the W. S. & N. R. Harvey Family Trust ("the Trust") including accounting records, bank statements, tax returns, records relating to the property of the Trust and to the conduct and management of any business of the Trust and all minutes of directors' meetings of the trustee.

2 The Trust was established by deed of settlement dated 5 June 1981[1]. The defendant ("Vanbreck" or "the Trustee") was and remains the trustee of the Trust. The directors of Vanbreck in 1981 were William Strathern Harvey ("William") [2] and his wife Nancy Rosemary Harvey ("Nancy").[3]

3 William and Nancy had two children. William and Nancy's elder daughter, Mrs Prudence Riddell ("Prudence"), is at present the sole director of Vanbreck. The first plaintiff is their younger daughter ("Sandra") and the second plaintiff ("Charles") is Sandra's husband. Sandra and Charles have two children: the third plaintiff ("Nigel"), and the fourth plaintiff ("Hamish") who, on 14 May 2007, was added as a plaintiff in this proceeding. Having been added as a party, an affidavit sworn by him 14 May 2007 was filed on his behalf ("Hamish's affidavit").

4 In 1990 Vanbreck excluded Sandra and Charles from the class of Beneficiaries of the Trust. By deed executed on 20 December 2006 ("the exclusion Deed") Vanbreck purported to exclude Nigel and Hamish from the class of Beneficiaries of the Trust. At trial, the plaintiffs did not challenge the exclusion of Sandra and Charles but did challenge the efficacy of the exclusion Deed in order to establish the entitlement of Nigel and Hamish to claim the relief sought in the originating motion.

5 The Trust deed is in a fairly typical form of a so-called discretionary trust. The "Principal Beneficiaries" are named as the children and grandchildren of William and Nancy. The "Secondary Beneficiaries" are defined, so far as relevant, as the descendants of the Principal Beneficiaries, the spouse, widow or widower of any Principal Beneficiary, or descendant thereof, and William and Nancy. The "Guardian" is defined, so far as relevant, as William and Nancy jointly during their lifetime and then the survivor of them. "Beneficiaries" are defined to mean the Principal Beneficiaries, the Secondary Beneficiaries and certain other kinds of entities[4] as the Trustee may in its absolute discretion from time to time by instrument in writing, revocable or irrevocable, appoint. The "Vesting Day" is defined as the eightieth anniversary of the date of the deed or such earlier date as the Trustee may appoint.[5]

6 Clause 3(1) of the Trust deed empowers the Trustee to pay apply or set aside the whole or such part (if any) as it shall think fit of the net income of the Trust Fund to or for the benefit of or for all or such one or more exclusive of the others or other of the Beneficiaries in existence in such proportions as the Trustee in its absolute discretion and without being bound to assign any reason therefor shall think fit. Clause 3(2) empowers the Trustee in its absolute discretion to accumulate all or any part of the net income. Clause 3(3) provides that the Trustee shall hold such net income as is not paid or applied under cl.3(1) or accumulated under cl.3(2) upon trust for such of the Principal Beneficiaries who are in existence at the expiration of the relevant accounting period in equal shares.

7 Clause 4 of the Trust deed provides that, as from the Vesting Day, the Trustee shall stand possessed of the Trust Fund and the income thereof in trust for such of the Beneficiaries in existence for such interests and in such proportions and for one or more to the exclusion of the other or others as the Trustee may by instrument in writing revocable or irrevocable before the Vesting Day appoint, and, in default of and subject to any such appointment, upon trust for such of the Principal Beneficiaries as shall be in existence at the Vesting Day in equal shares.

"Subject always to any express provision to the contrary herein contained every discretion vested in the Trustee shall be absolute and uncontrolled and every power vested in it shall be exercised at its absolute and uncontrolled discretion and the Trustee shall have the like discretion in deciding whether or not to exercise any such power..."

9 Clause 20(1) of the Trust deed, importantly for present purposes, provides:

"The Trustee for the time being may at any time and from time to time prior to the Vesting Day by deed whether revocable or irrevocable appoint that any person who would otherwise be a Beneficiary for the purposes of this Deed shall be excluded from the class of Beneficiaries."

10 However, by cl.22(2) of the Trust deed, it is provided that, notwithstanding any other provisions thereof, the Trustee may not, inter alia, make any appointment or determination for the purposes of or pursuant to cl.20(1), without first giving to the Guardian two clear days notice in writing of its intention so to do, such notice containing full and complete details of the specific manner in which the Trustee intends to make such an appointment. Clause 22(3) provides that, if at any time there is no Guardian in existence, the Trustee shall not, inter alia, make any appointment or determination for the purposes of or pursuant to cl.20(1) without first obtaining the consent in writing of all the Principal Beneficiaries who are still sui juris.

11 In or about 1987 Sandra brought proceedings in this Court and also in the Supreme Court of South Australia against her parents, William and Nancy, and her sister, Prudence, and against various family companies including Vanbreck. On or about 5 March 1990, those proceedings were settled by Terms of Settlement ("the 1990 Terms") by which certain land and other property was to be transferred to Sandra and the total sum of $800,000 was agreed to be paid to Sandra within stipulated times. Sandra testified that she had received both the property and the money in accordance with the 1990 Terms. In cl.4 of the 1990 Terms, there were mutual releases and it was further provided:

"...and in particular [Sandra] hereby irrevocably disclaims any interest in the Trust[6], and agrees that Vanbreck may deal with the Trust assets as it sees fit and may exercise its powers under the Trust Deed as it sees fit without owing any obligation or duty of any kind to her and further [Sandra] disclaims and waives any entitlement or future right or claim which she may have on the estates of any of the Harveys[7] including any rights arising under relevant testator's family maintenance legislation."

12 At some later date in 1990 the Trustee (the directors then being William and Nancy) executed a deed pursuant to cl.20(1) of the Trust deed, with the consent of William and Nancy as Guardians, irrevocably exercising its power of appointment to exclude Sandra and Charles from the class of Beneficiaries[8].

13 On 5 June 1990, Prudence was appointed as a director of Vanbreck.

14 On 24 March 2000, Nancy ceased to be a director of Vanbreck.

15 The evidence suggests that in June 2005 Hamish was involved in discussions with William, Nancy and Prudence in relation to his becoming "more involved in the family activities and businesses." Although the parties were in dispute concerning precisely how his role should be described, it seems that Hamish was indeed heavily involved with some of the farming and business activities of the family, both prior to and after June 2005, and was on good and trusted terms with Nancy and Prudence, until an argument took place with them in about March 2006 (see later below). He had also resided with them at Beckworth Court for some period.

16 In August 2005, William moved into the Kirralee Residential Aged Care Facility in Ballarat ("the nursing home").

17 According to Prudence, she attended a meeting in or around December 2005 with Peter Kennedy of Madgwicks ("Kennedy"), Bill Price of Price Gibson, Vanbreck's accountants ("Price") and Hamish and at that meeting "it was decided that [William] should resign as director of [Vanbreck]." After the paperwork had been prepared, Prudence and Hamish went to the nursing home. According to Prudence, she explained to William in the presence of Hamish that Nancy, Hamish, Price and she were concerned about his ability to make decisions in the event that his condition worsened and that being a director of Vanbreck would place unnecessary stress on him. Prudence deposed that her father agreed and, accordingly, on 7 December 2005, William signed a letter of resignation as director of Vanbreck.

18 A different version of these events is recounted in Hamish's affidavit. Hamish deposed that, at the meeting,[9] Prudence "produced some documents that were bound in purple and asked [William] to sign them", saying "words to the effect that they were to roll over his superannuation." Hamish deposed that William then "signed the documents without appearing to read them." They then left. Hamish further deposed that at around the same time Prudence produced similar looking documents to Nancy, which Nancy signed. He deposed that he later asked Prudence what the documents were about and she told him that William had resigned from the family companies including Vanbreck.

"That evening (after having procured [William's] resignation as director of the Trustee), [Prudence] prepared what appeared to be a celebratory dinner for herself, with a special roast and an aged bottle of red wine and her favourite white wine..."

20 In an affidavit sworn 17 July 2007, Prudence refuted Hamish's account. She denied, inter alia, Hamish's version of what occurred when William signed his resignation as director and the allegation that she thereafter had a celebratory dinner. Prudence further deposed that, in about March 2006, she and Nancy had a serious argument with Hamish. After that argument, Hamish left the property and ceased working there.

21 The ASIC records show William's resignation on 7 December 2005 as both director and the secretary of Vanbreck and that Nancy was reappointed as a director and appointed as the secretary on the same date.

22 Sandra became aware of William's admission to the nursing home. On 3 May 2006 Sandra wrote to Kennedy of Madgwicks requesting that she be immediately informed of the conferring of any powers of attorney by William. Having received no reply, she wrote again to Kennedy on 28 June 2006. As Sandra deposed[10]:

"7. For approximately the last 20 years, I have been estranged (until recently) from my father and (continuing to the present day), from my mother and sister. In recent times, having heard of my father's condition and circumstances, I have reconciled with him and visited him on a number of occasions at said nursing home. I have become increasingly concerned at the seeming neglect of his personal welfare and the failure, as I regard it, to adequately provide for him, given what I believe to be his undoubted assets and needs. On the occasions when I first saw him at the nursing home, his clothing was ill-fitting and unbecoming and it would appear that he had allowed to him, only a small and inadequate sum of money to provide for his personal wants.

As a consequence of our concern about his health and wellbeing my husband and I initially considered inviting my father to leave the nursing home and reside with us at our home at Breadalbane. However, given his seeming physical and mental circumstances, we decided that it was more appropriate to seek to ensure that the level of care provided for him was adequate and appropriate. To this end, we endeavoured to ascertain his medical condition by enquiries of the nursing home, and by requesting an appropriate specialist medical examination, but were frustrated in these endeavours, by what I regard as the negative attitude of the nursing home and the estrangement of my mother and sister.
In addition to my concern, as to my father's health and physical wellbeing, I also have been concerned, given the seeming deterioration in his medical and physical condition, of the risks which I see my father now being exposed to, of financial exploitation. To this end, I have also sought advice from the Trustee and the Trustee's solicitors, in particular Mr. Peter Kennedy of that firm, who has for a considerable period handled the legal affairs of my father and the Trustee, as to the financial position of the family trust. However, as with my attempt to ascertain information about my father's medical and physical condition I was similarly frustrated in my attempts to obtain information about my father's financial affairs.
Having been unable to achieve, by my personal efforts, any satisfactory response to my enquiries and concerns regarding my father's position as aforesaid, I instructed my solicitor Graeme Efron of Efron and Associates to endeavour to obtain the relevant information on my behalf..."

23 In a letter dated 12 July 2006 from Sandra's then solicitors (Efron and Associates - "Efron") to Madgwicks, her solicitors said:

".. We are instructed that you represent members of the Harvey family.

Please advise as to the existence of any Enduring Power of Attorney or Guardianship regarding Mr Harvey. We also request that you inform as to who is managing or exercising control over the personal affairs and financial affairs respectively of Mr Harvey. We note that on previous occasions our client has sought similar information from you and has received no response. ..."

24 On the same date, Efron also wrote to the nursing home, in part stating:

".. [Sandra] recently visited her father in Kirralee. In order to be satisfied as to her father's physical and mental well being she wishes him to be examined by a medical practitioner of her choice. ... "

25 The nursing home replied, with copies to Prudence and to Madgwicks, to the effect that William's affairs were managed by Prudence and by his solicitor, Kennedy, that he was well cared for and that it would be inappropriate to have an additional general practitioner examine him and also that Nancy and Prudence had objected to the same. She was asked to direct any further comments to Madgwicks.

26 At that stage, as she deposed, Sandra took legal advice and decided "in an endeavour to allay my concerns about the conduct of my father's financial affairs and about the family trust to seek access, as a beneficiary, to the relevant Trust documents."

27 By letter dated 6 October 2006, Efron wrote to Vanbreck, Prudence and Madgwicks in part as follows:

".. [Sandra] instructs us that she is a beneficiary under [the Trust] ... As a beneficiary, our client is concerned as to the conduct and administration of the Trust. Accordingly, our client has instructed us on her behalf to obtain access to the Trust documents including the Trust Deed and the relevant books of account, including, in particular, the balance sheet of assets and liabilities. ..."

28 Madgwicks replied by letter dated 10 October 2006 in which they advised that any rights that Sandra had in relation to the Trust were expunged pursuant to the 1990 terms, that they did not believe that Sandra had any rights and that, accordingly, no access would be permitted. A copy of the 1990 Terms was attached to the letter.

29 Efron replied by letter dated 24 November 2006. In the letter, Efron denied that Sandra had validly disclaimed her interest in the Trust but then continued:

"In any event, we further advise that we are instructed to act on behalf of Sandra's husband, Charles and her son, Nigel, each of whom believes that they are a beneficiary ... Accordingly, we now also make the same request .. on their behalf as we have previously made on behalf of Sandra....

In the circumstances, we require a positive response to our said request within 7 days from the date hereof. In the event that the same is not received within the period specified, we have instructions to proceed to make the Application to the Court without further notice..."

30 On 1 December 2006, Nancy ceased to be a director and the secretary of Vanbreck. According to Prudence, Nancy resigned because she had medical problems with her hands and had "trouble signing". As secretary, she was replaced by Prudence who then also became the sole director.

31 On 4 December 2006, Prudence consulted Kennedy in relation to the Trust. Apparently following on from that, on 6 December 2006, Alexandra Farrar, a lawyer employed by Madgwicks, emailed to Prudence and to Price a draft notice to Guardian and a draft "deed of appointment", asking them to read over the documents and advising that Kennedy would be in touch shortly to discuss the matter with them. The draft documents dealt with the exclusion of Hamish and Nigel as Beneficiaries of the Trust.

32 Efron wrote again to Madgwicks on 8 December 2006 noting that they had received no response and indicating that they were in the process of preparing an application to the Court. They also said that they proposed to make a complaint to the Legal Services Commission because they had received no acknowledgment of their previous letter.

33 On the same date, Madgwicks faxed to Prudence a letter attaching a Notice to Guardians, and a Deed of Appointment, dealing with the exclusion of Hamish and Nigel as Beneficiaries (i.e. the exclusion Deed), and asked her to arrange for two copies of the Notice to be executed by Vanbreck and for a copy to be sent to each of William and Nancy. The fax went on to state that the exclusion Deed could be executed on the third day after William and Nancy had received the Notice.

34 On 11 December 2006, Madgwicks forwarded to Prudence a copy of the letter from Efron dated 8 December 2006 and stated: "We will await instructions in relation to the demands made, but note that, as per our fax and email to you on 8 December 2006, we should be able to effect removal of Nigel and Hamish before the end of the week." Later that day, Farrar of Madgwicks sent an email Prudence stating:

"Following our conversation this morning, and bearing in mind that we are trying to have the Deed of Appointment executed as quickly as possible, I believe it would be best if the Notice was sent directly by you to the Guardians, rather than via us ... "

35 On the same day, Madgwicks replied to Efron's letter of 8 December by letter dated 11 December 2006 as follows:

We are currently seeking instructions and will be in a position to respond to your request shortly.

If you have any queries, please feel free to contact Alex Farrar."

36 Having received no further communication, Efron again wrote to Madgwicks by letter dated 14 December 2006, insisting that a time for inspection be set no later than the close of business on Friday 15 December 2006. To this letter, Madgwicks replied by letter dated 15 December 2006 stating:

".. We are in the process of obtaining instructions but advise that we will not be in a position to provide access to the Trust within the timeframe you have specified.

In these circumstances it would be prudent to wait until next week before issuing proceedings in this matter..."

37 It would seem that, on the same day (15 December 2006), the Notice from the Trustee was sent to the Guardians.

38 On 20 December 2006, Madgwicks wrote again stating:

"We will not provide the Trust Deed to you for inspection on your clients' behalf, as your clients are not beneficiaries of [the Trust].

Even if your clients were beneficiaries of [the Trust], which we deny, there is no provision in the Trust Deed that grants a right of inspection to beneficiaries..."

39 On the same day (20 December 2006) the Trustee executed the exclusion Deed.

40 Prudence, in her affidavit sworn 17 July 2007, said that she had determined on behalf of the Trustee to execute the exclusion Deed "[f]ollowing consideration by me of the correspondence and matters referred to" in specified paragraphs of her affidavit. The "correspondence" so referred to by Prudence was the correspondence passing between Efron and Madgwicks in the period July 2006 to December 2006[11] and the "matters" referred to principally consisted of the proceedings instituted by Sandra in 1987 and the settlement of those proceedings and the argument with Hamish in about March 2006.

41 It is to be noted that, although Prudence deposed that she had determined, on behalf of Vanbreck, to execute the exclusion Deed after consideration of the matters that she specified, she did not explain how or in what way she took those matters into account in deciding that Nigel and Hamish should be excluded as Beneficiaries. Additionally, Prudence was not cross-examined as to her intention or purpose or mental process in reaching her decision to execute the exclusion Deed.

42 I interpolate here that one aspect of Prudence's state of mind at the relevant time did perhaps emerge in evidence when the following exchange occurred in cross-examination:

"Q: And as you've said in your evidence-in-chief, Sandra ... was estranged until 2005 from her father, correct?

Q: And Sandra's other son, Nigel, had not been involved much in the affairs of his grandfather, had he?

Q: But he was a beneficiary of the Harvey Family Trust, wasn't he?

A: Yes, but we didn't realise it at that time, either, ..."[12]

43 So, in substance, Prudence appeared to be saying that, from 1990 (when Sandra executed the Terms) until the present dispute arose, she had not been aware that Nigel and Hamish remained beneficiaries of the Trust. One possibility, that is therefore suggested by Prudence's statement, is that her realisation that Nigel and Hamish were still beneficiaries of the Trust may have led to her consideration of the exercise of the exclusion power and her decision to exercise it. In other words, it is possible that the demand to access trust documents and other information was the occasion for her decision but not otherwise a reason for her decision.

44 Returning to the sequence of events, in January 2007, the first, second and third plaintiffs instructed Efron to commence proceedings. Apparently, Madgwicks' letter of 20 December 2006 was mislaid by Efron and they requested Madgwicks, on 16 January 2007, to provide a further copy. Madgwicks faxed to them on that day a copy of the letter together with two further documents. The first document was a copy of an undated notice executed by Vanbreck[13] and addressed to William and Nancy. By the document, the Trustee notified the Guardians that it intended to irrevocably exclude Hamish and Nigel (and any trust, company or other body in which either of them had an interest and any descendant, spouse, widow or widower of either of them) from the class of Beneficiaries as defined in the Trust deed. The second document was a copy of the exclusion Deed. In addition to excluding Hamish and Nigel (and related persons and entities), the exclusion Deed also excluded Sandra and Charles (and any related entity) "for the avoidance of any doubt". The exclusion Deed recited that the Trustee confirmed that it had given two clear days' notice in the form abovementioned to William and Nancy.

45 Later that day, Madgwicks wrote to Efron as follows:

"The Notice and Trust Deed sent to you this morning .. were not intended to be transmitted to you, but were accidentally enclosed with the letter dated 20 December 2006. It is clear from the contents of that letter that you were not intended to be a recipient of that Deed or Notice.

You must destroy both the Deed and the Trust. We advise that you are not to rely on either document, nor are you to produce them in Court under any circumstances."

46 An exchange of correspondence then followed on the topic of the plaintiffs' entitlement to rely on the documents said to have been inadvertently disclosed (and related issues). The content of this correspondence is not presently relevant save that Efron indicated the intent to rely on the documents and stated, in a letter dated 17 January 2007, inter alia:

".. What concerns us, on behalf [of] our clients, is that when we requested access to Trust documents, to which a beneficiary is entitled to inspect pursuant to the General Law, you neglected to provide such access, or even respond to our letters. When we persisted, you proceeded to stall the issue on the basis of awaiting instructions, when in fact your clients were proceeding to purportedly exclude [Nigel] as a beneficiary. It seems clear to us that at the time of our request (leaving aside the entitlement of [Sandra and Charles]) Nigel was indeed a beneficiary and entitled to inspect the requested Trust documents and that the Trustee's neglect to provide this was an intentional breach of Trust."

47 As I have said, this proceeding was commenced on 13 February 2007. Sandra deposed, in a supporting affidavit, that Prudence, who was aged 63, was presently residing at "the family home"[14] with her mother and that she (Sandra) was aged 61. She said that William was then suffering from the apparent onset of dementia and reduced capacity and was then residing at the nursing home. Sandra further deposed that she believed that her father was or had been a person of considerable personal wealth and that his assets had for a considerable time been largely held by the Trust of which the trustee was Vanbreck, of which company Nancy and Prudence were the directors. Sandra deposed that each of the first, second, and third plaintiffs was "properly a beneficiary" of the Trust and entitled to all the rights of a beneficiary.

48 As indicated earlier, Hamish was added as a plaintiff in May 2007. According to Hamish's affidavit, he had always been led to believe by William that he would inherit the property known as Beckworth Court at Clunes, the interest in certain property development companies and a share of the balance of his estate. Hamish deposed that Beckworth Court was a substantial grazing and cropping property of about 5000 acres. He deposed that, ever since he was a young child, he had regularly visited, and at times, lived at Beckworth Court and that, during those times, William had instructed and taught him how to manage the property and he had worked closely with him and his staff in both the day to day operations and the running of the farm. Hamish deposed that his exclusion as a Beneficiary of the Trust, of which he had been informed by Sandra in February or March 2007, was "completely at odds with what [William] had always told me about what he wants to occur with his estate." I note here that Prudence deposed that Beckworth Court "is not owned by Vanbreck but is owned by Scapp Nominees [Pty Ltd]."

49 On 14 June 2007, after this proceeding had commenced, William died. It did not appear to be disputed that he had suffered from Alzheimer's type dementia for about two years and that by December 2005 his mental state had been such that he was considered incapable of executing a power of attorney.

50 Before considering the competing submissions advanced by the parties, I note that there was considerable common ground between them as to the applicable principles of law.

51 The parties accepted that, if the relevant discretion of a trustee was absolute and uncontrolled (and there was some dispute as to whether it was in this case), the applicable principles were as stated by McGarvie J in Karger v Paul[15]:

"...with one exception, the exercise of a discretion in these terms will not be examined or reviewed by the courts so long as the essential component parts of the exercise of the particular discretion are present. Those essential component parts are present if the discretion is exercised by the trustees in good faith, upon real and genuine consideration and in accordance with the purposes for which the discretion was conferred. The exception is that the validity of the trustees' reasons will be examined and reviewed if the trustees choose to state their reasons for their exercise of discretion."

52 In Karger v Paul, McGarvie went on to state that the test of acting honestly was the same as the test of acting in good faith. His Honour said that (in that case) it was open to the Court to examine the evidence to decide whether there had been a failure by the trustees to exercise their discretion in good faith, upon real and genuine consideration and in accordance with the purposes for which the discretion was conferred. He continued[16]:

"As part of the process of, and solely for the purpose of, ascertaining whether there has been any such failure, it is relevant to look at evidence of the inquiries which were made by the trustees, the information they had and the reasons for, and manner of, their exercising their discretion. However, it is not open to the Court to look at those things for the independent purpose of impugning the exercise of discretion of the grounds that their inquiries, information or reasons or the manner of exercise of the discretion, fell short of what was appropriate and sufficient. Nor is it open to the Court to look at the factual situation established by the evidence, for the independent purpose of impugning the exercise of the discretion on the grounds the trustees were wrong in their appreciation of the facts or made an unwise or unjustified exercise of discretion in the circumstances. The issues which are examinable by the Court are limited to whether there had been a failure to exercise the discretion in good faith, upon real and genuine consideration and in accordance with the purposes for which the discretion was conferred. In short, the Court examines whether the discretion was exercised but does not examine how it was exercised.

I regard it as an inherent requirement of the exercise of any discretion that it be given real and genuine consideration...it seems to me that it is in this sense only that the Court can examine whether the trustees gave 'proper' consideration to the exercise of the discretion .. the Courts will examine whether a discretion has been exercised irresponsibly, capriciously or wantonly .. This is another way of saying that there may be an examination as to whether trustees have exercised their discretion on real and genuine consideration ..

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 .. For reasons given above, I would add the further requirement, so obvious that it is often not mentioned, that they act upon real and genuine consideration."

53 As was noted by Beach J in Asea Brown Boveri Superannuation Fund No. 1 Pty Ltd v Asea Brown Boveri Pty Ltd,[17] Karger v Paul had been followed and applied in various Australian jurisdictions in the case of exercises of discretion by trustees of superannuation funds. Beach J referred to what was said by Hayne J (as he then was) in Esso Australia Ltd v Australian Petroleum Agents' and Distributors' Association.[18] In the latter case, Hayne J said that the principle stated by McGarvie J had long been held to be the law.

54 It emerges from the foregoing that, although a trustee's reasons for exercising a discretionary power are not examinable for the purpose of challenging the way in which the discretion was exercised, they are examinable to enable an enquiry as to whether the trustee had an ulterior or improper purpose and as to whether the trustee gave real and genuine consideration to the exercise of the discretion.

55 Nevertheless, that aspect of the principle which requires that the trustee act upon "real and genuine consideration" has its difficulties in cases where the trust deed does not provide any governing criteria for the exercise of the power concerned and the trustee is left entirely at large in deciding whether and how to exercise the power.[19]

56 The plaintiffs accepted that Sandra and Charles had been excluded as Beneficiaries and that, if Nigel and Hamish were validly excluded as Beneficiaries of the Trust as a result of the exclusion Deed, then none of the plaintiffs was entitled to the relief sought in this proceeding.

57 The parties had been directed, prior to trial, to exchange statements of facts and contentions. On the day before the trial commenced, the plaintiffs filed and delivered an amended statement of facts and contentions in which their primary contention was that Vanbreck had exercised the exclusion power in bad faith and/or for an ulterior motive or purpose.

58 Prior to the commencement of oral submissions, the plaintiffs had provided to counsel for the defendant a written outline of submissions dated 17 March 2008 which advanced two bases for an attack on the validity of the exclusion Deed, namely:

(a) Vanbreck exercised its discretion to make the exclusion Deed in bad faith for the ulterior purpose or motive of resisting proper requests by beneficiaries to inspect the Trust accounts and other Trust documents;

(b) Prudence exercised the discretion reposed in Vanbreck as Trustee for the ulterior purpose or motive of excluding Sandra's children, irrelevantly (and, indeed, contrary) to the intentions of the Settlor and Guardian.

59 It can readily be seen that these submissions by the plaintiffs looked to the principle stated in Karger v Paul that the exercise of discretion could be attacked if it was exercised in bad faith or for an ulterior purpose.

60 In oral argument, a number of submissions (some additional) were advanced on behalf of the plaintiffs as to why the exclusion Deed should be declared void or invalid.

61 First, the plaintiffs submitted that Vanbreck had exercised its discretion to make the exclusion Deed in bad faith and for the ulterior purpose or motive of resisting proper requests by beneficiaries to inspect the Trust accounts and other Trust documents. Again, this submission was based upon the principle stated in Karger v Paul.

62 In relation to that first submission, the plaintiffs submitted that, faced with a proper request from a beneficiary to inspect Trust accounts and related documents, Vanbreck was obliged to grant access and furnish the requested information. On 24 November 2006 Vanbreck received a request to inspect Trust accounts and other documents on behalf of Charles and Nigel. At that time Nigel was within the class of Beneficiaries under the Trust.[20] The plaintiffs argued that, rather than complying with its obligation to grant Nigel access and furnish the requested information, Vanbreck instructed its solicitors to prepare the exclusion Deed excluding Nigel, Hamish and others as Beneficiaries. The solicitors, on instructions from Prudence, told the plaintiffs' solicitors that they were obtaining instructions but, once the exclusion Deed had been executed, refused the plaintiffs' request because none of the plaintiffs was a Beneficiary of the Trust.

63 Mr Derham QC who appeared with Mr Borsky of counsel for the plaintiffs said that the plaintiffs put at the forefront of their submissions the sequence of events in November and December 2006 as showing that Vanbreck's purpose, in exercising the exclusion power under cl.20(1) of the Trust deed, was to prevent scrutiny of the accounts of the Trust by any of the beneficiaries entitled. Mr Derham submitted that Vanbreck's discretion in exercising the exclusion power was not absolute and uncontrolled because, while cl.17 of the Trust deed provided, subject to any express provision to the contrary, that every power vested in the Trustee should be exercised at its absolute and uncontrolled discretion, there was express provision to the contrary in that cl.20 provided for notice to the Guardian. In any event, he submitted that, even if Vanbreck's discretion was absolute and uncontrolled, the exercise of the power could be challenged where it was shown to have been exercised in bad faith or for an improper purpose.

64 Mr Derham submitted that there was strong support for an inference, having regard to the surrounding circumstances, that the exclusion Deed was executed in bad faith and for the improper purpose of preventing Nigel and Hamish from having access to the Trust accounts and other information relating to the Trust. The device had been adopted of stalling a beneficiary's proper request while steps were being taken to exercise the exclusion power and until the exclusion Deed had been executed. Mr Derham further contended that bad faith was shown by Vanbreck in that it must have been appreciated that there was, at the very least, a real risk that William, as one of the Guardians, would not understand the course that Vanbreck was proposing to adopt in excluding Nigel and Hamish as Beneficiaries. Vanbreck, and its solicitors, knew that William was suffering from dementia and, for example, was unable to execute a power of attorney.

65 Mr Derham submitted that it was not a proper object of the exclusion power to frustrate the rights of beneficiaries that existed at the time of the request to inspect accounts and that the evidence showed that Prudence acknowledged that the request for access to trust documents was one of the matters that actuated her (Vanbreck's) exercise of the exclusion power.

66 Mr Derham said (when I raised the matter with him) that it was not equally open to infer that Vanbreck's purpose (having been alerted to the position of Nigel and Hamish under the Trust deed) was to exclude them as beneficiaries, not in order to obstruct Nigel's access[21] to the Trust accounts and other information, but simply because Vanbreck considered that Nigel and Hamish ought not to be Beneficiaries of the Trust. Mr Derham contended that there was no material to support such an inference, pointing out that, in the Terms of Settlement entered into by Sandra alone, she only gave up her own rights and there was no material suggesting that her children were in any way affected by this.

67 Mr Osborne, who appeared as counsel for the defendant, submitted that Vanbreck's power or discretion to exclude a person from the class of Beneficiaries was absolute and uncontrolled. Mr Osborne submitted that the exclusion Deed was only invalid if its making constituted a fraud on the power set out in the Trust deed. He submitted that the fraud on the power doctrine was confined to appointments which had the effect on conferring benefits on persons outside the class of beneficiaries contemplated by the trust deed and that the doctrine did not extend to a power exercised in such a way as to result in benefits going to one class of beneficiaries rather than another. He submitted that the concepts of "bad faith", "dishonesty" and "improper purpose" in the context of the exercise of a discretionary power of a appointment were confined to circumstances amounting to such a fraud on the power and that, if that were not so, it would amount to a merits review by a court of the trustee's exercise of discretion which was impermissible. Mr Osborne submitted, in the alternative, that "bad faith", "dishonesty" and "improper purpose" meant conscious dishonesty and that this required "in the present case not only that the [plaintiffs] establish that the specific purpose the [exclusion Deed] was to deny Hamish and Nigel access to the documents, but that such a purpose was knowingly improper."

68 Mr Osborne further submitted that, while it was the fact that the plaintiffs' request to inspect the Trust accounts and other documents had activated Vanbreck to exercise its exclusion power, the plaintiffs had not proved (and the said fact did not, of itself, constitute proof) that Vanbreck's purpose in excluding Nigel and Hamish was to prevent such inspection.

69 The plaintiffs secondly submitted that there had not been a genuine and reasonable consideration by Vanbreck of its exercise of the exclusion power.

70 In relation to that second submission, Mr Derham submitted that Vanbreck had not taken into account the sorts of factors that a trustee of a family trust of this kind should take into account. He referred to the fact that Hamish had lived at Beckworth Court on and off for some years and had been close to the Guardians for a considerable period.

71 Mr Osborne said that the plaintiffs' second submission raised a new case that was not referred to in the plaintiffs' statement of contentions. Moreover, he said, Prudence in her affidavit had identified the matters to which she had had reference in exercising her discretion and that she had not been challenged on that. Mr Osborne submitted that it could not therefore fairly be put as part of the plaintiffs' case that Vanbreck had failed to give genuine and reasonable consideration to its exercise of the exclusion power. I will say at once that I agree with this submission. The contention that Vanbreck had not given genuine and reasonable consideration to its exercise of the exclusion power was raised too late. It was not put to Prudence, in cross-examination, that she had failed to give genuine or reasonable consideration to Vanbreck's exercise of the exclusion power. As Mr Osborne rightly pointed out, Prudence had identified the matters to which she had had reference and she had not been challenged on that. The question of what consideration Vanbreck (i.e. Prudence and Vanbreck's advisers) gave to the exercise of the exclusion power was not investigated. It would not only be unfair to permit the plaintiffs to rely upon this point but the evidentiary foundation for their submission was never established.

72 Thirdly, the plaintiffs submitted that there was no evidence of notice having been given to William, as one of the joint Guardians, of Vanbreck's intention to exercise the exclusion power and, in any event, William was incapable of understanding such a notice and the power could not in those circumstances be exercised.

73 In relation to that third submission, Mr Derham submitted that Vanbreck was prevented by cl.22(2) of the Trust deed from exercising the exclusion power without first giving notice to the Guardian. He submitted that there was no evidence that such notice had been given to William and that, in any event, as William was and would have been incapable of understanding such a notice, and as there was no other person lawfully able to receive the notice on his behalf, it was not possible to satisfy the requirements of cl.22(2). As a result, Vanbreck was unable to validly exercise the exclusion power.

74 Mr Osborne had noted in his outline of argument dated 17 March 2008 that there was "no allegation that the formalities of notification [of the Guardian] were not observed." In his closing submission, Mr Osborne repeated that there was no challenge to the formalities or the process by which Vanbreck notified the Guardian. Mr Derham acknowledged, at this point, that this issue was not raised in the plaintiffs' statement of facts and contentions but that "as the evidence unfolded it's a matter which we have to raise." Mr Derham said that it was an issue that had two facets. First, it went to the question of good faith in the exercise of the exclusion power given Prudence's knowledge of the dementia suffered by her father. Second, it went to the question of the efficacy of the notice when it was given to a guardian who was known not to be of sound mind. After this exchange, I suggested to Mr Osborne deal with the matter in reply after he had heard the plaintiffs' argument.

75 In his submission in reply, Mr Osborne said that the plaintiffs' third submission raised a new case that was not the subject of the originating motion or the plaintiffs' statement of facts and contentions. Mr Osborne said that the defendant was prejudiced as a result as it had not sought to call any evidence concerning the question of formal notice to William or concerning what William understood at the relevant time. I will again say at once that I agree with this submission. The matters relevant to this submission were not notified to the defendant beforehand. Further, although, during the evidence, there was some reference to William's mental capacity, it did not appear that any issue was being squarely raised in terms of this aspect of the submission ultimately sought to be put on behalf of the plaintiffs. The defendant was thereby prejudiced as it could not have anticipated the need to provide evidence, including expert evidence, as to William's mental capacity at the relevant time.

76 Fourthly, the plaintiffs submitted that Prudence had exercised the discretion reposed in Vanbreck as Trustee for the ulterior purpose or motive of excluding Sandra's children, irrelevantly (and, indeed, contrary) to the intentions of the Guardians.

77 In relation to the fourth submission, the plaintiffs submitted that Prudence, as the sole director of Vanbreck, had excluded Nigel and Hamish contrary to the earlier expressed intentions of William (one of the joint Guardians).

78 Mr Osborne said, in relation to this submission and generally, that the exclusion power was by its very nature discriminatory and that the Trustee had the power in its absolute and uncontrolled discretion (subject to notice to the Guardian) to exclude a person or persons from the class of Beneficiaries under the Trust deed and that its reasons for doing so were, accordingly to well-accepted authority, unexaminable.

79 In my opinion, the Trustee's exercise of the power under cl.20(1) of the Trust deed is absolute and uncontrolled. I do not accept the plaintiffs' submission that, because notice was required to be given to the Guardian under cl.20, the Trustee's discretion was somehow constrained. Clearly there was, in effect, a practical veto given to the Guardian but the provision having that consequence does not amount to an "express provision to the contrary" within the meaning of cl.17 of the Trust deed.

80 Dealing with the plaintiffs' primary submission, therefore, the question is whether Vanbreck's discretionary exercise of the exclusion power under cl. 20(1) of the Trust deed is shown to have been exercised in bad faith or for an improper purpose. There was no direct evidence of an improper purpose and, on the face of it, Vanbreck had the power to do what it did. In that regard, the plaintiffs' submission was that an improper purpose should be inferred, having regard to the sequence of events, that improper purpose being to prevent Nigel and Hamish from having access to the trust accounts and other information relating to the Trust.

81 The improper purpose, if there was one, could only have been an intent or purpose formed or adopted by Prudence, as she was the sole director of Vanbreck. Yet it was not put to Prudence that this was her intention or purpose, nor was her mental process investigated in cross-examination. It seems to me therefore that, although the inference is open, having regard to the sequence of events and the timing of the decision, that Nigel and Hamish were excluded in order to prevent them from having access to trust documents or information, the inference can hardly be drawn when Prudence was given no opportunity to deal with the allegation.

82 Furthermore, it seems to me that an alternative inference is equally open on the evidence, namely, that Vanbreck (i.e. Prudence), realising that Nigel and Hamish were beneficiaries and having regard to the nature of the settlement with Sandra or to the later argument with Hamish, or to both of these matters, or to other undisclosed considerations, decided that it was appropriate to exclude Nigel and Hamish as beneficiaries. The demand to inspect trust documents might reasonably be viewed, in that light, as merely the occasion that brought these matters to a head.

83 I accept that the exercise of an exclusion power, such as the one here, would be invalidated if the trustee's purpose, (or one of the trustee's purposes),[22] was to prevent access by a beneficiary (including a beneficiary of a discretionary trust) to trust accounts or other information relating to a trust. That is because, in my view, the denial of such access rights to a beneficiary would not be a proper purpose for exercise of the exclusion power. However, in the present case I am not satisfied, on the balance of probabilities, that such improper purpose was one of Vanbreck's purposes in exercising the exclusion power. For the reasons already stated, this conclusion is only one of two or more competing inferences, none of which were investigated during the evidence of the sole relevant protagonist (Prudence).

84 The only other submission of the plaintiffs that I now need to consider is the submission that Prudence had exercised the discretion reposed in Vanbreck for the ulterior purpose or motive of excluding Sandra's children, irrelevantly (and contrary) to the intentions of the Guardians. I do not accept that submission. As was submitted on behalf of Vanbreck, the exclusion power is necessarily discriminatory and, as I have already said, the reasons for its exercise in this case were never investigated. As regards the intentions of the Guardians, there was no evidence other than some evidence concerning William's earlier relationship with and statements of intention to Hamish. In my opinion, that evidence was irrelevant to the question whether, at the relevant time, Vanbreck exercised the exclusion power for an improper purpose. Indeed, there was no legal compulsion upon Vanbreck to take into account the wishes of the Guardian (either William or Nancy) - the Trust deed provided a different mechanism.

85 For the foregoing reasons, the originating motion will be dismissed with costs.

[1] The settlor was a solicitor, Darren Douglas Moses.

[4] These entities include "an Eligible Trust" under which any Principal or Secondary Beneficiary has an interest and "an Eligible Corporation" in which a Principal or Secondary Beneficiary or the trustee of an Eligible Trust is a shareholder and any charitable or non-profit corporation or association.

[5] Clause 19 deals with the Trustee's power to appoint an earlier Vesting Day.

[6] This was earlier defined as the W.S.& N.R. Harvey Family Trust.

[7] "The Harveys" were earlier defined as William, Nancy and Prudence.

[8] The instrument also excluded all other bodies within the definition of Beneficiaries in which Sandra or Charles had an interest.

[9] Hamish said that the meeting was on or about 20 January 2006.

[10] In Sandra's supporting affidavit in this proceeding (sworn 12 February 2007).

[12] Prudence continued her answer by saying, "that was - we understood from 1990" but, at that point she was cut off and asked to confine herself to answering the question.

[13] The document bore the common seal of Vanbreck which purported to have been affixed in the presence of Nancy as Director/Secretary and Prudence as Director.

[14] 455 Beckworth Court Road, Clunes, Victoria.

[18] Supreme Court of Victoria, unreported, 5 October 1993.

[19] See D.M Maclean: Trusts and Powers (The Law Book Company Limited 1989) pp 48-51.

[20] The plaintiffs mentioned that there was no reason, at that time, to think that Charles had been excluded as a Beneficiary but nothing seems to turn on the position of Charles.

[21] Hamish had made no request at that stage.

[22] A combination of proper and improper purposes would constitute a fraud on the power: see D.M MacLean, supra, p.118.

At a glance

Court

Decision date

Before

Source

Judgment (136 paragraphs)

Parties