By Stephen Dickens, Partner, Troy Palmer, Partner, Stuart O’Neill, Special Counsel, Isobel Feben, Senior Associate and Andrew Greenhalgh, Lawyer

Historical position

It is generally the case that the exercise of a trustee’s discretion will not be challenged or impugned by the Courts where the discretion is exercised in good faith, upon real and genuine consideration and in accordance with the purposes for which the discretion is conferred.

Equally, it has been recognised, historically, that trustees need not provide reasons for their decisions, though if they choose to do so, these reasons will be examined by the Court where the opportunity presents itself.

An important component of real and genuine consideration by a trustee involves the trustee being aware of the relevant facts and circumstances – that is, the trustee must have properly informed him/her/itself of such facts and circumstances.

Relevantly, the Courts have impugned the decisions of trustees and/or removed them from office, in circumstances where a trustee has:

• engaged in hostile and adversarial behaviour.
• failed to understand its duties and responsibilities.
• divided beneficiaries and disrupted the administration of a trust.
• colluded with some beneficiaries and excluded others.
• unreasonably withheld information or failed to account.
• unreasonably delayed in paying entitlements.
• acted despite a clear conflict between its own interests and duty.
• failed to communicate with beneficiaries.
• engaged in misconduct and neglected its duties.
• incurred unnecessary costs.
• improperly pursued personal interests.
• exercised its discretions while being subjected to undue influence or unconscionable conduct.

It is important to note that each case turns on its particular circumstances, such that any one of the above circumstances alone may not be sufficient to remove the trustee from office or impugn the exercise of its discretions (including discretionary decisions).

An expanded position?

The recent Supreme Court (and Court of Appeal) decisions have largely not changed the historical position concerning the exercise of a trustee’s discretion.

However, in handing down those decisions, the Courts have highlighted and expanded upon certain crucial factors.

Importantly, the Court of Appeal in Wareham v Marsella [2020] VSCA 92 approved the proposition that a grotesquely unreasonable result (such as one that occurs because of a clear conflict of interest) may be evidence of a miscarriage of duty.  Perversity in that case (being the resolution, by the Member’s daughter (from a previous marriage) as trustee to distribute the Member’s death benefits to herself, rather than the Member’s second husband of 30 years), was equated to dishonesty.  Importantly, dishonesty, or an action which does not meet the threshold of good faith, is something which would invariably allow a Court to conclude that the relevant exercise of discretion had not been in good faith, upon real and genuine consideration of the relevant circumstances, the trustee’s duty and purpose under which the trustee’s discretion was given.

This is of particular note moving forward, as any decision of a trustee to exercise its discretion in favour of distributing (whether income or capital) to itself will, in light of Wareham v Marsella, be taken to involve a clear conflict of interest which, depending on the facts and circumstances in question, will be a factor that the Court will weigh in mind in deciding whether to impugn the trustee’s exercise of discretion.

Of further note, although the trustee in Wareham v Marsella did not provide reasons for the making of its decision to distribute the deceased member’s death benefits in a particular manner, the Court drew a number of adverse inferences against the trustee about its reasons as a result of what was in the minutes of the trustee’s decision and correspondence between the legal representatives of the parties, which were put before the Court.

Finally, it should be recognised that the Court, where a trustee’s decision is impugned, amongst other factors, may find it appropriate in the circumstances, to remove the trustee of the fund, something which may cause considerable disruption and embarrassment. It also needs to be noted that generally speaking, any removal from position will sit on the public record.

A trustee may also lose its right of indemnity against the assets of the trust, which will mean that its legal costs (and any award of damages) will not be able to be paid out of the assets of the relevant trust.

How can a trustee protect its decisions?

Having regard to the recent cases, as well as the historical position, a trustee can take a number of steps to help minimise the risk of any challenge or having any decision/ exercise of discretion impugned by:

1. carefully considering any potential competing (or conflicting) interests that may favour or prejudice the interests of prospective beneficiaries;
2. being properly informed of their own duties, responsibilities, obligations and powers, as set out under the relevant trust deed (as may be varied) and at law;
3. being fully informed of the facts and circumstances concerning each of the potential beneficiaries – this duty is even more important for trustees of self-managed superannuation funds;
4. ensuring the relevant trust deed under which the trustee acts is up to date and contains all relevant provisions to allow the trustee to act appropriately in all circumstances;
5. ensuring, in the case of a self-managed superannuation fund, that the nominations of members are current and valid;
6. seeking independent legal advice before making a decision concerning a distribution or other action which is likely to be contested by a disappointed beneficiary (such as removing or excluding certain beneficiaries); and
7. ensuring the trust’s records are comprehensive and appropriate – particularly those concerning the exercise of a potentially contentious discretion.

It may also assist a trustee, in appropriate cases, to ensure appropriate minutes are made in respect of the decision, which set out the reasons for why it was made – so as to ensure the basis is clear, and that all beneficiaries can see that all relevant facts and circumstances have been identified and carefully weighed in mind by the trustee in coming to his, her or its decision.  One of those may be the fact of potential or actual conflict itself.

Obviously, what should be done by a trustee in each and every case will depend on its own facts and circumstances, and no two cases are ever the same. Contentious or likely contentious decisions should be the subject of independent legal and business advice, which should, to the extent appropriate, be referred to in the trustee’s minutes.

How Mills Oakley can assist you

This is a complex area of the law, and Mills Oakley’s trust and estates experts stand ready to assist trustees in their decision-making, so as to help identify and minimise the risks associated with the exercise of their discretions and to try to protect them from challenge and being impugned by a Court.

For further information, please do not hesitate to contact us.