Trustees and Appointors Pay Heed: Recent Victorian Supreme Court decision serves as a stark reminder of the consequences of misusing your power

Background Facts

Patrick, a person with profound disabilities, was born with cerebral palsy, intellectual impairment, blindness, and epilepsy. In 1987, Hugh, father of Patrick, in his capacity as litigation guardian brought proceedings for medical negligence relating to Patrick’s birth which was settled in 1991 for $2.5 million. The settlement was approved by a judge, who ordered that $2.25 million be invested for Patrick's benefit, and $250,000 be paid to Hugh and Pamela, his parents.

In 1992, the court ordered the establishment of a trust for the benefit of Patrick with the express intention that the funds held for the benefit of Patrick be transferred to the trustees of the trust. This declaration of trust was never executed. In 1994, Hugh and Pamela established the PTD Trust (the Trust), with Patrick as the “Specified Beneficiary” and in addition a discretionary class of beneficiaries with power for the trustee to make any payments out of the capital of the trust to any member of the discretionary class at the trustee’s absolute discretion.

Hugh and Pamela were the initial trustees of the Trust, and in 1997, they appointed PTD Nominees Pty Ltd as trustee. The directors of PTD Nominees included Hugh, Pamela, and Patrick's brother Crispian.

For a period of nearly 10 years, amounts held for Patrick’s benefit were paid out to fund the purchase, in whole or in part, of 14 properties, comprising apartments in Melbourne, UK and Paris. The final payments were made in 2001, and Patrick's account had a nil balance.

In 2001, shortly after the final payment out of the investment account, Hugh and Pamela resigned as directors of PTD Nominees and their other son Dominic appointed as director. Around 2020 disputes started to arise around Patrick’s living and care arrangements with Dominic who was also the primary carer of Patrick. Consequently, Hugh as appointor demanded that Hugh and Pamela appointed as directors of PTD Nominees and were appointed.

In 2021, after Hugh died, Pamela was appointed as the appointor of the Trust by way of a Will left by Hugh.

Dominic applied to VCAT to be appointed as Patrick’s administrator and guardian. VCAT ordered that Dominic, who was the primary carer of Patrick, be appointed Patrick’s medical treatment decision-maker. However, Public Advocate was appointed as a guardian and independent persons were appointed as Patrick’s joint and several administrators.

In 2022, Pamela as appointor removed PTD Nominees as trustee and appointed her daughter Alice and herself as trustees. At a shareholder meeting of PTD Nominees, Pamela was removed as director and Dominic became the sole director.

Further, Dominic brought the proceedings claiming misuse of trust funds of the Trust and sought judicial advice as to amendments to remove the reference in the Trust Deed to the ‘Discretionary Class’, identify Patrick as the sole beneficiary of the PTD Trust and make other limited consequential changes.

Issues

1. Variation of Trust Deed to remove “discretionary class of beneficiaries” and sole beneficiary being Patrick;
2. Removal of Pamela and Alice as trustees and replace them with independent trustee;
3. Removal of Pamela as appointor and replacement with independent appointor;
4. Question relating to indemnity with respect to legal costs incurred by Pamela and Alice as trustees.

Decision

The contention raised by Pamela and Alice that the assets of the trust are not Patrick’s assets but were family assets and that the trust was a family trust was not accepted by the court. It was noted that the corpus of the Trust could be readily traced to the $2.5 million paid to Patrick in the settlement proceeding in 1991. However, the court said that Pamela and Alice are not prevented from advancing claims for contributing to the purchase of properties of which PTD Nominees is the registered proprietor such that they are held wholly or partly for their benefit. It is a matter for the trustee to determine.

The court noted unauthorised withdrawals and misuse of funds from the trust bank accounts which were not expended for the sole benefit of Patrick contrary to the purpose for which the funds were released initially in terms of the order.

While exercising Court’s inherent jurisdiction under s 48(1) Trustee Act 1958 (the Act), the court removed Pamela and Alice as trustees of the trust and appointed independent trustee and appointor in their place. Further, the court exercising the power under s 63A of the Act directed the variation of the Trust Deed to order the replacement of the appointor with an independent appointor. The court noted, while following Perpetual Trustees v Barns [(2012) 34 VR 387], that the arrangement is for the benefit of the person incapable of assenting, noting the purpose of the trust, the intention of the settlor and a fair and proper arrangement overall.

With respect to the issue around costs and trustee indemnity for Pamela and Alice, the court assessed that their legal costs in defending the proceedings were both improperly and unreasonably incurred and would be unfair and unjust to Patrick as the sole beneficiary of the Trust. The court drew this conclusion on the basis that the trustees misused trust funds, unreasonably delayed the determination by opposing the application for removal, erroneously represented to the court that Patrick was the sole beneficiary of the trust and having failed in their duties and responsibilities as trustees by demonstrating a profound misconception about the nature of the Trust. Pamela and Alice were ordered to bear their own costs without indemnity from Trust.

Conclusion

The decision, in this case, reiterates the importance of acting in the best interest of beneficiaries and the potential consequences for trustees who do not fulfill their fiduciary duties. The court's decision to remove the trustees and vary the trust deed to identify the sole beneficiary serves as a reminder to trustees and appointors of their obligations to beneficiaries. Additionally, the court's refusal to grant indemnity for the legal costs of the removed trustees reinforces the expectation that trustees must act reasonably and fairly towards beneficiaries. This case underscores the need for trustees to carefully consider their actions and always act in the best interest of the beneficiaries.

For full judgment, follow the link below: https://aucc.sirsidynix.net.au//Judgments/VSC/2023/T0245.pdf