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Shaky Ground

Grand View Private Trust Company Ltd v Wong considers whether the exercise of a power to add a beneficiary (subsequent to which the entirety of the trust’s significant assets were transferred to that beneficiary) is valid.

By way of background, the former individual beneficiaries of a substantial private discretionary trust sought to a challenge the trustee’s decision to appoint the Wang Family Trust (a perpetual purpose trust) as a new beneficiary, and to then transfer the entire trust assets (valued at in excess of US$560 million) to it. The beneficiaries as originally defined in the trust were the children and remoter issue of the Wang brothers (founders of the Formosa Plastics Group, a Taiwanese conglomerate).

On an application for summary judgment, the former beneficiaries argued that the change of beneficiaries and transfer of assets was void on the basis that replacement of individual discretionary and default beneficiaries combined with the resettlement of trust assets for the benefit of a perpetual purpose trust were transactions beyond the scope of the trustee’s powers that represented a fraud upon a power.

The former beneficiaries argued that it is a fundamental principle of the law of trusts that discretionary powers of amendment, even when stated to be uncontrolled and absolute, cannot be used to change or alter the “substratum” of the trust.

The Court of Appeal rejected this argument holding that there is no distinct rule of law prohibiting powers of amendment from being exercised in a manner that alters the “substratum” of a trust. Rather, the key questions (see Pitt v Holt) are whether:

  • the exercise of the power is within the terms of the trust instrument (this is a question of construction)
  • the trustee has given adequate deliberation to the exercise of the power; and
  • the power has been used for an improper purpose (this requires wider considerations that may involve the trustees’ subjective intention)

Importantly the Court of Appeal was of the view that there was no presumption that the power to add or exclude beneficiaries had to be used in the interests of the existing beneficiaries. Although the existing beneficiaries were children and descendants of the Wang brothers, that was not an immutable feature of the trust. The Court of Appeal was of the view, that in the circumstances as presented, the trustee had acted within the scope of its powers and for a proper purpose.

Importantly the power in question was an intermediate power, that is a fiduciary power to benefit anyone but the trustee; rather than a general power exercisable in favour of anyone or a specific power in favour of a specified class.  See Re Manisty’s Settlement. 

Note that the Court of Appeal was not supporting the premise of a bargain between the appointor and the appointee by which some person who is not an object of the power is to obtain a benefit.  See Vacher v Paul.  However, as stated at [184]:

“We should apply, as the settlors, both actual and economic, would be entitled to expect, the ordinary rules of construction to the terms of the declaration of trust which was made. Under those rules, most recently expounded in Arnold v Britton and Wood v Capita Insurance Services Ltd [2017] UKSC 24, the meaning of the words is plain. The GRT Trustee can join or remove any beneficiary; as the settlor must be presumed to have intended. As Smellie J observed in Re Z “any” means “any”. There is, in my view, no sound basis upon which (reading the deed as a whole and in its overall context) to imply any restriction on “any.”   Any such restriction is neither obvious nor necessary and its scope would be unclear. The addition of Grand View, as trustee of the Wang Family Trust was, in my judgment, within the scope of the power.”

In coming to this view the Court of Appeal rejected the arguments put forward that if the a power was used in a manner that was destructive of the substratum (whatever precisely that means) this was fundamentally inconsistent with the purpose of the trust.

The court specifically rejected “the proposition that there is some absolute rule which, whatever the terms of the power or the circumstances of the trust, [that] prohibits the exercise of specific powers of addition and exclusion of beneficiaries from altering the substratum of the trust – a metaphorical term the characteristics of which it may be difficult to define, and which may not necessarily exist.”

Note that leave to appeal has been granted.



One thought on “Shaky Ground

  1. This substratum concept seems to have come out of a Victorian Full Court decision (about a fund to set up a Melbourne orchestra), where one judge used the word “substratum”. The word was picked up in Ball, in England, and got some head of steam there. It turned up in an unreported decision in Queensland, causing chaos – and another judge just declined to go there on a rather thin basis distinguishing the trust deed. The concept caused chaos in the 1990s and 2000s with ATO, where the ATO had a fantasy that there was a “substratum” of all trusts (but could not tell us how to discern it). This is a useless concept, and is well buried. Thanks for the link to the decision that will do just that.

    Posted by davidwmarks | October 3, 2020, 9:44 pm

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