Clipped wings for Trustees? Lessons from the Owies appeal decision

The Victorian Supreme Court of Appeal in Owies v JJE Nominees Pty Ltd [2022] VSCA 142 (Owies) examined the circumstances where a trustee of a discretionary trust may be held to have breached their fiduciary duty by not giving ‘real and genuine consideration’ to all beneficiaries.

Despite the trust’s deed providing the trustee with ‘absolute and uncontrolled’ discretion the Court of Appeal found that the trustee had overstepped the bounds of that discretion and even removed the trustee of the trust. The Court’s decision is a warning to all trustees of discretionary family trusts.

The Owies family trust was settled by deed in 1970 (Trust), under which Dr John and Dr Eva, and their three children, Michael, Deborah and Paul were all beneficiaries. The Trust’s deed named ‘the children of John and Eva’ as the primary beneficiaries, with clause 17 of the deed describing the trustee’s discretions (including to distribute net income) as ‘absolute and uncontrolled’. In default of a distribution the deed provided that the net income would be held on trust for each of the children in equal shares.

For the income years 30 June 2011 to 30 June 2018, the trustee, JJE Nominees Pty Ltd (Trustee), resolved to distribute all of the net income in the following proportions:

• 40% to John;
• 40% to Michael; and
• 20% to Eva.

In the 2019 income year, the Trustee resolved to distribute 100% of net income to John. This was despite him being 96 years of age, living in full time residential care and with no apparent need for the income in that year. Eva, who was a director of the Trustee, had a ‘fractured’ relationship with both Deborah and Paul.

Deborah and Paul took issue with these distribution patterns and commenced proceedings against the trustee seeking, amongst other things, a declaration that these distributions were made in breach of the trust as the trustee continually breached its fiduciary duty to them by failing to give real and genuine consideration to all of the objects of the trust. Additionally, Paul and Deborah sought an order to remove the trustee on that basis.

The trial judge held that the trustee did not give proper consideration of Paul and Deborah in 2015 and 2016 only and to Deborah in 2018. In reaching that conclusion, the trial judge considered that the trustee had ‘some information’ about Deborah in 2017, as both Deborah and Paul had visited John whilst he was in the residential care facility in 2017. The judge declined to remove the Trustee as trustee of the trust. Paul and Deborah appealed to the decision to the Victorian Supreme Court of Appeal.

What did the Victorian Supreme Court of Appeal conclude?

In short, the Court of Appeal concluded that the trustee had breached its fiduciary duty in the 2015, 2016 and 2018 years (when proportional distributions were made) and also in the 2017 and 2019 income years. As a result, every annual trustee distribution made from 2015 to 2019 was voidable (rather than void).

The Court of Appeal also held that, given the longevity of the annual breaches and the animosity that existed between the siblings, the Trustee should be replaced with an independent trustee, in order to ensure the proper administration of the Trust.

So what constitutes ‘real and genuine consideration’?

Every trustee owes a fiduciary duty to the objects of a trust, which includes informing themselves, before making a distribution or decision, of matters that are relevant to that decision.

The Court of Appeal held that the Trustee had breached this duty for the income years 2015 to 2019 inclusive because the Trustee simply had not made any enquiries of Paul or Deborah, noting that Deborah had numerous medical conditions, such as lupus, Crohn’s disease, hypertension, and rheumatoid arthritis, and had been unwell for much of her adult life. Deborah also faced financial difficulties and at different times required spinal surgery and knee surgery. In 2019 she was diagnosed with primary liver cancer and drug-induced hepatitis. Despite all of this, Deborah received no distribution from the Trust.

Paul also faced a ‘difficult time’ in the years 2010 to 2013, when he was looking to purchase a business.

In contrast, Eva, Michael and John had no comparable need for the income during the income years 2015 to 2019 inclusive. The Court of Appeal held that trustee is not required to distribute on a needs basis, but should adopt a needs-based analysis as part of considering the distribution of income to beneficiaries and therefore considered this discrepancy in the beneficiaries’ situations as salient given that the purpose of the Trust, as stated in the Trust’s deed, was to provide for the children of John and Eva, which included Paul and Deborah, who were always primary beneficiaries of the Trust during those years.

Whilst the Trustee was not subject to any requirement for it to provide reasons for its distribution decisions, the Court of Appeal held ‘the stark pattern of distributions to speak for itself’. Further, the Court of Appeal stated that it not reasonable for a trustee to rely on the fickle nature of the family relationships as the source of the information it needed to discharge its powers under the trust deed.

What happens when a distribution is voidable?

Where a distribution is voidable, an application must then be made to a Court of Appeal in order to formally declare the distribution void, meaning it has no legal effect and the income that was invalidly distributed is then dealt either with in accordance with the default beneficiary clauses contained in the trust deed or it is taxed in the hands of the trustee at the top marginal rate.

Unfortunately for Paul and Deborah, they had not sought an order to declare the distributions void in their initial pleadings and the Court of Appeal would not allow them to later amend their pleadings to allow for this. They therefore were not granted relief on this basis, due to their administrative oversight when first lodging their pleadings.

How was the removal of Trustee justified?

The Court will only ever order the removal of a trustee where Court loses confidence in a trustee’s ability to administer the trust in the future, having regard to the interests of the beneficiaries, the security of the trust property, the proper execution of the trust and the sound exercise of the powers conferred on the trustee. Where, for instance, the trust property would not be safe with the trustee, the Court will be justified in removing the trustee (Owies, at [74]).

The Court of Appeal came to the view that, given the antipathy and lack of trust between the siblings, any trustee in which Michael has a “controlling hand” (as was the case with the Trustee) would be untenable for the Trust. As such, an order for an independent trustee was made.

What are the key-takeaways?

In the wake of Owies, trustees should always be mindful of any overarching purpose for which the trust in question was set up.

Although there may be no obligation to provide reasons for trustee decisions, trustees can always protect themselves by making inquiries as to the beneficiaries’ circumstances and/or by providing reasons (such as in trustee resolutions or otherwise) and other documentary evidence for decisions, in order to show that they have given genuine consideration to the beneficiaries and purpose of the trust.

More information from Maddocks

For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Commercial team.

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