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Cases, Relationship Property, Removal of trustees, Trustees, Trusts

Going it alone

Following the end of a relationship “going it alone” is a practical reality.  However, where a trust was settled during the relationship, the extent to which one can “go it alone” needs to be carefully assessed.  This reality, and the consequences of failing to address it are highlighted in the High Court decision in Nichols v Racy Construction Limited.

The facts of the case can be summarised as follows:

  • Mr and Mrs Nichols settled the Eungella Trust (“the Trust”) in 1996
  • Mr and Mrs Nichols were beneficiaries of the Trust
  • In 2004 Mr and Mrs Nichols were appointed the sole trustees (not withstanding a clause in the deed of trust that provided that the trustees had no discretionary powers when there was no independent trustee)
  • the terms of the Trust required that all decisions should be unanimous
  • in 2007 the trustees acquired a loan advance from a bank
  • the loan advance was paid to the Nichols’ specified bank account, it s not clear from the decision whether this was a personal account of an account held as trustees of the Trust

Mrs Nichols then filed proceedings in her capacity as a trustee of the Trust to recover the sum of $359,120 together with accrued interest of $163,300, on grounds that the principal sum was a loan advanced by the Trust that has not been repaid.

The matter was defended on the basis that there was no relationship at any material point in time between the defendants and the plaintiff and secondly, the nature of the transaction was not a loan advance but instead a direct investment by the Trust in a property development (for reasons that will be clear, this aspect of the defence was not determined).

Mr Nichols was not joined to the proceedings as he did not agree to the proceedings being filed.

The requirement for unanimity was not met.

Although it is not necessary for all trustees to be plaintiffs in a proceeding brought on behalf of a Trust, any trustee who does not participate, must consent to the proceeding.  See Visini v Cadman where the Court of Appeal notes at [17] that:

“The flaw in Mr Lawn’s argument is that it proceeds on a premise which equates the existence of Mr Wood’s consent to the proceeding with a requirement that he be joined as a party. As Mr Steele concedes, trustees must agree unanimously to issue a proceeding. Mr Wood has now given his express consent to the Cadmans’ decision to issue the proceeding. The judgment of Romilly MR in Messeena v Carr is settled authority for the proposition that one trustee can subsequently approve another trustee’s exercise of a discretion. Mr Wood’s retrospective consent confirms the trustees’ unanimous decision to issue the proceeding. …”

Accordingly, unless the proceedings could be amended so that Mrs Nichols sued in her personal capacity, the proceedings were not validly commenced.  The practical difficulty that arose her, as noted by the court was that Mrs Nichols was seeking to be the sole plaintiff in her personal capacity, which was entirely at odds with the evidence and the documentary record (all references being to the trustees borrowing funds and making the loan advance on behalf of the Trust).

Trustees have personal liability to account to beneficiaries for actions taken in breach of trust.  However, it does not follow that a person, who is a trustee in breach (as alleged by Mrs Nichols), derives (as a result) a personal right of action against third parties in relation to a claim trustees could otherwise make.

In this regards, see Waller LJ of the English Court of Appeal stated in Montrose Investments Ltd v Orion Nominees Ltd (No 2):

“I cannot see save on some ground of public policy which has not been suggested why a breach of trust as between beneficiary A and trustee B, precludes B from enforcing such trust obligations as may arise between B and a transferee of the trust property C. Indeed, it seems to me that where it is the very transfer of the trust property from B to C which constitutes the breach of trust, public policy positively requires that B should be in a position to assert a claim for the recovery of the trust property or its proceeds from C.”

Accordingly, the proceedings were dismissed.

The writer has some sympathy for the position Mrs Nichols finds herself in (and many other trustees when a relationship that includes fiduciary and personal roles ends).  However, given the trustees disagreement, and the fact that an independent trustee is required for either trustee to exercise any discretion, a better course of action might have been to seek the removal of both trustees and the appointment of an independent trustee who could have (but might not have of course) pursued the matter.

References:

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