Please enable JavaScript.
Coggle requires JavaScript to display documents.
Week 6 Beneficiaries Rights and Remedies - Coggle Diagram
Week 6 Beneficiaries Rights and Remedies
Objects of a trust: beneficiaries
Nature of Beneficial Interests
Fixed Trusts
equitable proprietary interest
Discretionary trusts and 'eligible objects'
Insolvency and beneficiaries of discretionary trusts
Family Law and discretionary trusts
In
Kennon v Spry
(2008) 238 CLR 366 (Kennon v Spry) the court found that various rights in relation to a discretionary trust held by Dr Spry and Mrs Spry amounted to property for the purposes of the Family Law Act 1975 (Cth). You will find a summary of the facts in Radan and Stewart [27.33]-[27.36].
Under the Family Law Act 1975 (Cth) ‘property’ is defined broadly (section 4): In the Marriage of Ashton (1986) 11 Fam LR 457;
Kennon v Spry
(2008) 238 CLR 366.
Taxation
whether a beneficiary holds a ‘beneficial interest’ or ‘beneficial entitlement’. If the answer to that question is ‘yes’, the interest may be subject to tax or other forms of duty.
Pharmos Nominees Pty Ltd v Commissioner of State Taxation
[2012] SASCFC 89, a trustee who held substantial commercial properties for a discretionary trust transferred ownership of the trust property to Pharmos. As part of the deal, Pharmos received rights that provided assets and income to the value of $3 million. The Full Court of the South Australian Court found that the transfer removed the trustee’s discretion as to payment of income and capital. Therefore, Pharmos’ interest was a proprietary interest, and thus subject to tax:
Commissioner of State Revenue v Serena Pty Ltd
(2008) 36 WAR 251, trust property was transferred from one discretionary trust to another. As the beneficiaries ‘did not hold a proprietary right in the trust property no beneficial interest had passed’:
Social Security and discretionary trusts
Social Security Act 1991 (Cth) considers interests held under
If a beneficiary holds 50% of the beneficial interest under a trust, she is deemed to control the trust. In these circumstances, the assets will be ‘taken into account in the calculation of social security benefits’
In S
ecretary, Department of Families, Housing, Community Services and Indigenous Affairs v Elliot
(2009) 174 FCR 387, 394, beneficiaries of a discretionary trust did not have a right to income or capital until chosen by the trustee. The court found that there was no beneficial/equitable interest for the purpose of the statute.
Exhaustive v non-exhaustive trusts
exhaustive trust requires the trustee to distribute income to the beneficiaries
Under a discretionary trust that is exhaustive and has a closed class of beneficiaries, it may be possible to ascertain the ‘collective interests of the beneficiaries in relation to the capital’: Secretary, D
epartment of Families, Housing, Community Services and Indigenous Affairs v Elliot
(2009) 174 FCR 387, 394.
non-exhaustive trust, the trustee has the option of accumulating the trust income.
To be considered by trustee:
Lutheran Church of Australia v Farmers Co-operative
(1970) 121 CKR 628, 652 (Windeyer J)
Rights of beneficiaries
Pursuing third Parties
Beneficiaries
Right to pursue third parties: Need exceptional circumstances, e.g.:
If trustee refuses to perform her duty to protect the trust property or beneficiaries’ interests, the beneficiaries can pursue a third party: Hilliard v Eiffe (1874) LR 7 HL 39
Trustee declared insolvent or bankrupt: Commonwealth Bank of Australia v Iinvest Pty Ltd (in liq) [2014] NSWSC 1257 [34].
See the excerpt from
Deutsch v Deutsch
[2012] VSC 227 [40]
in Radan and Stewart [27.53]-[27.54] for examples of ‘exceptional circumstances’.
Generally, a
trustee
has a right to pursue third parties who ‘have caused damage to the trust property’:
Alexander v Perpetual Trustees
WA Ltd (2003) 216 CLR 109.
Other beneficiary rights
Right to information
Arises from the trustee’s fiduciary duties.
● Apply to court to remove offending trustees;
● Seek an order to inspect trust documents or accounts; and
● Seek a declaration to resolve whether specific conduct is or will be in breach of trust.
Compel performance
Private express trust
Ask court to review acts, omissions, or decisions on the part of the trustee: Trusts Act 1973 (Qld) s 8, see also s 98, 80, 82, 90
Beneficiaries (solely or collectively) may seek the assistance of a court to compel performance of the trust:
Bartlett v Bartlett
(1847) 67 ER 800.
includes the right to take action for a breach of trust and to apply to the court for an injunction against a threatened breach of trust:
Howden v Yorkshire Miners Association
[1905] AC 256.
Right to terminate the trust
The Rule in Saunders v Vautier (1841) 49 ER 282
Sole beneficiary;
Sui juris
(of full age and capacity);
Legally capable; and
Absolutely entitled.
applies only to a fixed trust
Gosling v Gosling (1859) 70 ER 423
More than one beneficiary,
All
sui juris
;
Legally capable; and
Beneficiaries agree unanimously to distribution of trust property.
Terminating the Trust: Not all beneficiaries sui juris or capable
Whakatane Paper Mills Ltd v Public Trustee
(1939) SR (NSW) 426
Rule in Saunders v Vautier allows a beneficiary to take his or her proportionate share of the trust property.
Two qualifications:
only in relation to divisible property
Manfred and Maddrell (1950) 51 SR (NSW) 95.
cannot cause detriment to the remaining beneficiaries
In Re Horsnaill [1909] 1 Ch 631.
Remedies of breach of trust
Remedies based on personal liability
First principle: the trustee is personally responsible to the trust.
Equitable Compensation in the context of breach trusts
Equitable Compensation: Re Dawson (deceased) (1966) 2 NSWR 211
Interest: trustee v mercantile rates
The trustee rate: calculated based on what the trust would have earned in authorised investments: Pateman v Heyen (1993) 33 NSWLR 18. In general, the trustee rate is added to damages for breaches of a duty caused ‘by mere negligence, such as failing to invest trust moneys’: Adamson v Reid: (1880) 6 VRL (E) 164: Dal Pont (2015) 730.
The mercantile rate: higher than the trustee rate. It is sometimes calculated on commercial rates. The court will exercise its discretion.
Simple or compound interest
The decision in
Themis Holdings Pty Ltd v Canehire Pty Ltd & Anor
[2014] QSC 38 deals with the question of simple or compound interest
Account of profits
Unauthorised profit from office;
Breach of trust has allowed trustee to make personal gain.
Just allowance
Note – possibility of just allowance: P
hipps v Boardman
[1967] 2 AC 46.
Where an account of profits is ordered, the court has the power to order a defaulting trustee be paid a just allowance for their services and expenditures:
Phipps v Boardman
[1967] 2 AC 46.
Can a trustee be excluded from liability?
The trustee may find a defence in:
● the trust instrument;
In
Armitage v Nurse
[1998] Ch 241 (Armitage) ‘a beneficiary sued in reaction to breaches causing losses to the trust’: Bryan et al (2017) 323. A clause in the trust instrument excluded liability unless loss was caused by the trustee’s ‘own actual fraud’.
‘a trust instrument may exclude trustee liability for a breach of trust; however, there are limits to which liability can be excluded’
● statutory provisions;
The court may excuse a breach of trust if the trustee ‘acted honestly and reasonably and ought fairly to be excused’.
Trusts Act (Qld) and read section 76.
● general equitable defences such as laches and acquiescence.
trustee may also rely on general equitable defences such as laches and acquiescence
Consent to the breach
It is also important to note that the trustee may avoid liability if the beneficiary validly consents to a ‘breach of trust where a trustee has made full disclosure of the circumstances of the breach and of the legal consequences of committing it’:
Bryan et al
(2017) 329.
The leading Australian decision on thai point is
Spellson v George
(1992) 26 NSWLR 666
Personal claims against third parties
If beneficiaries are overpaid or third parties receive trust property, the other beneficiaries can bring a personal action
Re Diplock’s Estate
Concerned distribution of funds under a will to charitable institutions and ‘benevolent objects’.
The beneficiaries of the trust brought a personal action against recipients (third parties) of funds – they had been wrongfully paid.
The action was upheld even though the third party recipients were innocent.
All other remedies had been pursued against executors.
Beneficiaries:
personal remedies
include equitable compensation and account of profits. The plaintiff must plead for one or the other, not both:
Heathcote v Hulme
(1819) 37 ER 322.
proprietary remedies
include a declaration of a constructive trust, and tracing. We have discussed constructive trusts over the last few weeks, and we will examine constructive trusts in detail in Week 7. This week we will examine the role of tracing in equity.
Proprietary remedies
Equitable tracing
In equity, tracing allows a beneficiary to follow his or her interest, even if the property is mixed, or consumed in the production of a new item:
Brady v Stapleton
(1952) 88 CLR 322
To obtain a tracing order, a beneficiary must show
there was a breach of a trustee duty or fiduciary duty;
there was a pre-existing proprietary interest in the property before the breach of trust; and
the property is now in the hands of the defendant.
The Role of Tracing in Equity
Tracing has a role in two circumstances
:Where property is held by the trustee – subsequent to a breach; and
Where trust property has been passed from the trustee to a third party.
Tracing Property in the Hands of the Trustee
If the trustee mixes trust funds with his or her money or converts the trust property into another form or asset, tracing will protect a beneficiary’s interest.
Rule in Re Hallett’s Estate (1880) 13 Ch D 696
Source of Jurisdiction
Einstein J said that ‘the better view' was that the role of tracing is to protect property rights rather than enforce fiduciary relationships. Nonetheless, as it stands, equitable tracing is available where the person holding the property is subject to a fiduciary obligation:
Agip (Africa) Ltd v Jackson
[1991] Ch 547.
To successfully obtain a tracing order relating to property, a beneficiary must demonstrate
(i) a breach of a trustee or fiduciary duty;
(ii) a pre-existing equitable interest in the property before the breach of trust; and
(iii) the property is now in the hands of the defendant.;
Proprietary remedies: constructive trusts and equitable tracing
Trusts Act 1973 (Qld) s 113
Tracing into the Tracing Property in the Hands of the Trustee
Tracing Property in the Hands of a Third Party
With regards to third parties, the Trusts Act 1973 (Qld) s 113 is the statutory equivalent to Re Diplock