The recent decision upheld by the Western Australian Court of Appeal Blenkinsop v Herbert [2017] WASCA 87 (Blenkinsop) outlines the importance of understanding the terms of a discretionary trust deed. More significantly, the case focussed on the nature of the Guardian’s powers and the Court’s jurisdiction to remove the Guardian.

1.     What is a discretionary trust deed?

A discretionary trust is a common vehicle for operating businesses as they offer a number of potential tax benefits. It is essentially an agreement where a person or company (the Trustee) agrees to hold assets for the benefit of others (the Beneficiaries). As stated in Blenkinsop, “a trust is a creature of equity”.

2.     Who is the Guardian?

More modern trust deeds have done away with Guardians; however, in older trusts, they still play a vital role. A Guardian is historically considered to be the “protector” of the trust. Under trust law, the concept of a Guardian does not have a fixed meaning but is defined by the trust deed itself.[1] The concept of Guardian may refer to any person, distinct from the Trustee, upon whom powers are conferred under a trust deed. It enables some form of participation in the administration of the trust or disposition of the trust property. The rights and duties of a Guardian will be greatly influenced by the functions and powers conferred on them, as well as by the terms of the trust instrument.[2] Simply put, the usual role of the Guardian is to consent to (or veto) significant decisions made by the Trustee.

3.     How to remove a Guardian?

The power to remove a Guardian is governed strictly by the terms of the trust deed. Many trust deeds allow the Guardian to resign, or to vacate the office, if the Guardian becomes bankrupt, loses capacity or dies. However, most older trust deeds envisaged that if the original Guardian could not continue to act, then the office would become vacant.

Ordinarily, there are two common methods for successor Guardians to be appointed under a trust deed. They are:

  • in accordance with an express power already included in the trust deed; or
  • by way of the trustee exercising the power of variation to add alter the trust deed to appoint a successor Guardian.

Care needs to be taken when using the variation power as not all trust deeds have a sufficiently broad power of variation.

If neither of the above options is available, then the position of Guardian remains vacant which can lead to problems of dealing with assets and making distributions. At this point, the standard position would be to apply to the Supreme Court to vary the trust deed to rectify the problem. However, the Court in Blenkinsop has indicated that it may not have jurisdiction to resolve any disputes.

The Blenkinsop case is authority for the proposition that the Court’s primary duty, subject to exceptional circumstances, is to ensure trusts are properly executed but not to alter them.

4.     Background of Blenkinsop

Blenkinsop v Herbert as Trustee for The Blenkinsop Family Trust [No 2] [2016] WASC 61 (Blenkinsop No 2) was the primary decision. This case outlines the importance of understanding the various powers under a trust deed and, in particular, the consequences of not understanding such powers.

In this case, the parents, Fred Blenkinsop (Fred) and Judith Blenkinsop (Judith), established a trust to run their family business. Fred and Judith were appointed as the institute Guardians. Shortly after Fred’s death, a decision was made to appoint their five children, together with Judith, as joint Guardians of the trust. As there was no express power of appointment, the deed was varied to name them as Guardians.[3] The variation stated that the Guardians must act “JOINTLY AND UNANIMOUSLY”[4]. The trust deed did not have a dispute resolution clause nor was one included when it was varied.

After a number of years, significant conflicts arose between the family members. This resulted in the trust no longer functioning properly, as many decisions required joint and unanimous Guardian consent.

As there was no clause providing a mechanism for resolving disputes, the family applied to the Supreme Court for the removal of the Guardians. At the commencement of the application, “there did not appear to be any Australian case where the court had removed a person appointed to exercise powers under a trust deed other than the trustee.”[5] In this case, the Court looked at a series of decisions made by the Courts of the Isle of Man, Jersey and the Channel Islands to provide guidance.

The case hinged on one issue which was summarised as follows:

…where a person holds office and exercises powers under a trust that are of a fiduciary nature, the court may remove the person from office on similar principles to those applicable to removal of a trustee. The decisive issue is whether the protector owed fiduciary duties to the beneficiaries as a whole.[6]

The primary judge concluded that the present case turned on the proper construction of the trust deed. His Honour identified two critical questions to resolve this application:

  1. did the Settlor objectively intend the powers of the Guardian to be fiduciary in the sense that they must be exercised for the benefit of the beneficiaries?; and
  2. did the Settlor intend that the trust might operate without a Guardian, having regard to the identity of the Guardians and the obligation that they act jointly and unanimously?

A.    Did the Settlor objectively intend the powers of the Guardian to be fiduciary?

To answer this question, the primary judge accepted that this question of interpretation must be decided in light of the circumstances existing when the power was conferred. However, his Honour observed “the present Guardians were not appointed by Fred or Judith, but rather were directly appointed, and their powers conferred by amendment to the trusts.” Fundamentally, the deed of variation changed the identity of the Guardian and the new Guardians were given the powers that had been conferred on their predecessor. The variation did not alter the character of the powers of the Guardian.

His Honour concluded that the trust deeds, as varied, did not objectively intend the powers of the Guardian to be fiduciary. He listed five points that supported his view[7]:

  • The powers are conferred by a deed of trust and for the execution of the trusts.
  • The Guardian’s powers are not conferred on the Trustee. The Guardian’s role is supervisory. The Guardian has no power to initiate anything but only to grant or withhold consent where the Trustee would otherwise have an absolute unexaminable exercise of discretion.
  • With the exception of the power to change the proper law of the trust, the powers conferred on the Trustee that require consent of the Guardian, broadly speaking, are powers under which the Trustee may prefer one or more of the beneficiaries to the exclusion of others.
  • The Guardians are all beneficiaries.
  • Any decision of the Guardians to grant or withhold consent to a particular action of the Trustee will affect one or more of the Guardians in their capacity as beneficiaries. The intention of the deeds as varied is that a preference for one or more of the beneficiaries can only be with the consent of them all.

 

B.    Did the Settlor intend that the trust might operate without a Guardian?

The decision to remove a Guardian from a trust would be regarded as a significant amendment of the trusts under a deed. In the Blenkinsop trust, some of the Trustee’s discretions were subject to the consent of the Guardian. The Court considered that, to remove the Guardian, on the ground that they could not act jointly and unanimously, “would be to disregard the intention of the deeds, the intention being to fetter the discretion of the Trustee in this way”[8]. His Honour held:

Self-interest of one or more of the Guardians may hinder the Trustee in administering the trusts, at considerable cost to the estate and, ultimately, to the detriment of all beneficiaries. However, his Honour found that, for the reasons he had given, that was how the trust was intended to operate.[9]

The primary judge concluded that the Court did not have jurisdiction to remove the Guardians of the trust.

5.     The Appeal

In Blenkinsop, all the parties accepted that under the circumstances of this case, if the primary judge’s construction of the Guardians’ powers as not fiduciary is correct, then the appeal must fail.

The Court observed that on a proper construction of the trust deed, if the donee of the power is:

  1. entitled to exercise the power for their own advantage or benefit and without regard to the interests of others, then the exercise of the power is personal, and not attended by any fiduciary duty;[10] or
  2. obliged to act only in the interests of, and for the benefit of, one or more others, then the power will be fiduciary.[11]

The Court stated that “it is objectively unlikely that the Settlor intended that the Guardian would have fiduciary duties superimposed on the effectual exercise of the discretionary powers conferred on the Trustee without, at the least, similar protections and immunities of the kind available to the Trustee”.[12]

The Court made the following comments stating that the powers of the Guardian were not fiduciary:

  1. The powers of the Guardians, pursuant to the trust deed, are permissive rather than mandatory. There is no occasion for the Guardians to exercise their power of consent unless and until the Trustee makes a decision where the Guardian’s consent applies. They are effectively powers of veto;[13]
  2. The language used by the Settlor does not objectively reveal an intention that the Guardian has a duty to consider, from time to time, whether or not to exercise those powers. Nor are the powers expressed in terms of consent not being ‘unreasonably’ withheld, or consent being subject to the Guardian being ‘satisfied’ or having formed an ‘opinion’ as to a state of affairs;[14]
  3. The object of the provisions gives the Guardian the opportunity, without the obligation, to exercise a measure of control over the otherwise very broad, and largely unchallengeable, discretions of the trustee;[15]
  4. The trust deed allows for the Guardian to resign without appointing a successor Guardian. Once a Guardian has resigned, he has no further power to appoint a new Guardian. Thus, resignation of the Guardian would bring to an end the role of the Guardian. The Court asserted that this element, is a further indication that the position of Guardian is not in the nature of an office, and that the powers of the Guardian are not fiduciary.[16]

Dismissing the application, the Court made the following final conclusions:

  1. The Court lacked power because the Guardian was not a fiduciary;
  2. It would be inappropriate to remove the Guardian because to do so would be an impermissibly substantial departure from the terms of the trust that would amount to amending the trust;
  3. The Court’s role in relation to trusts is to execute the trust, not to alter it; and
  4. In effect, to remove the Guardians would be to amend the trusts under the deed.

This decision highlights the importance of understanding the terms of a trust deed before making any amendments. As a trust deed is a creature of equity, making amendments can result in harsh implications that cannot be easily rectified by way of another variation or via the Court system.

If you would like your trust deeds reviewed, please contact Rob Durey or Kimi Shah at Ryan & Durey Solicitors on 08 6166 9000 or kimi@ryandurey.com.

 

[1] Blenkinsop v Herbert [2017] WASCA 87 at [70].

[2] Ibid.

[3] A conservative view of the variation power would be that the power was not broad enough to vary the deed in this way. However, there was no challenge to the validity of the variation before the primary judge or on appeal. See paragraph [28].

[4] Above n 1 at [26].

[5] Ibid at [46].

[6] Ibid at [47].

[7] Ibid at [51].

[8] Ibid at [55].

[9] Ibid at [56].

[10] Ibid at [97].

[11] Ibid.

[12] Ibid at [124].

[13] Ibid at [122].

[14] Ibid.

[15] Ibid at [123].

[16] Ibid at [134].