A recent decision of the WA Court of Appeal, related to a dispute within a successful family business, has passed a magnifying glass over the nature of a power within a discretionary trust deed to vary the trust deed, how such a power was to be exercised, and whether the power had in fact been exercised correctly and without the taint of undue influence or equitable fraud.
Background
The Court of Appeal delivered its decision on Mercanti v Mercanti [2016] WASCA 206 on 29 November 2016.
The Mercanti case was essentially a dispute within a family owned and operated business. The family business was a shoe repairs services and supplies business. Two family trusts were established by the senior Mr Mercanti to own and operate the two arms of the business.
In 2004, the trust deeds were amended by their respective corporate trustees, of which Mr Mercanti, his wife and his youngest son Tyrone were directors. The deeds of variation each amended the trust deeds by removing Mr Mercanti as Guardian and Appointer, and substituting Tyrone Mercanti as Guardian and Appointor.
The relationship between Mr Mercanti and Tyrone Mercanti deteriorated, and a dispute erupted in 2013 when the shareholders of the trustees of the family trusts, being Mr Mercanti and his wife Yvonne, removed Tyrone Mercanti as Director of both trustees. Tyrone quickly responded by appointing an alternative corporate trustee for each family trust, being a company which he controlled called Parradele Pty Ltd.
The resulting legal action focused on Tyrone's appointment as Appointor and Guardian of the family trusts back in 2004.
The Issues
The trial judge, Le Miere J, concluded that, in essence, one of the family trust deeds had been invalidly amended, but that in relation to the second family trust, the M Mercanti Family Trust (MMF Trust), the trust deed had been validly amended by a deed of variation in 2004 and that subsequently the notice of removal of the MMF Trust's corporate trustee and acceptance of appointment of Parradele was valid and of legal force and effect.
On appeal, Mr Mercanti and his older son Jason Mercanti relied upon seven grounds of appeal and effectively sought to argue that the trial judge erred in failing to conclude that:
- the MMF Trust deed had not been validly varied because either its trustee did not have power to amend the MMF Trust deed or its schedule to change the Appointor;
- any power that did exist was not exercised correctly, because the deed of variation was not executed correctly by the corporate trustee;
- the amendment of the MMF Trust deed constituted a fraud of the power to amend the deed and breached the trustee's fiduciary duty;
- Mr Mercanti only executed the deed of variation as a result of equitable fraud or the undue influence of Tyrone Mercanti over his father;
- Tyrone Mercanti's conduct in acting to appoint Parradele as trustee of the MMF Trust was a fraud on the power of the Appointor and thus a breach of duty; and
- in conclusion, the appointment of Tyrone Mercanti as the Appointor and Guardian of the MMF Trust was void or voidable or that Tyrone held such powers on constructive trust for his father, and the appointment of Parradele as trustee of the MMF Trust was void or voidable.
Amendment Powers
The Court of Appeal rejected each of the appeal grounds.
No implied power to vary
In relation to amending trust deeds, the Court of Appeal held that a trustee does not have an implied power to vary the trust deed. It therefore considered at length the law around construction of a written agreement including a trust deed in order to decide whether the trustee of the MMF Trust had a power to vary the MMF Trust deed. It considered the objective intention of the settlor of the MMF Trust deed as demonstrated in the ordinary and natural meaning of the words of the relevant clauses, within the context of the trust deed as a whole. It also considered whether variation of the appointor of the MMF Trust deed resulted in an alternation of the substratum of the trust and hence a fraud on a power.
The trust deed subjectively did confer a power to vary
The Court of Appeal found that the trial judge did not err in concluding that the MMF Trust deed contained a power for the trustee to vary the trust deed, and that this power extended to replacing the Appointor and Guardian through amending the schedule of the MMF Trust deed. The Court of Appeal's detailed analysis demonstrates the nuanced approach required when considering the powers of the trustee in respect of each individual trust deed. While this particular trust deed did confer a power to change appointor, such a power is not implied and must be very carefully assessed before its purported exercise.
No evidence of undue influence or fraud on the power
The Court of Appeal rejected any allegations of undue influence or other circumstances of equitable fraud on the basis of a lack of compelling evidence. It also rejected the appellants' assertions that Mr and Mrs Mercanti did not know what they were doing when the trustee amended the MMF Trust deed to appoint Tyrone Mercanti as Appointor and Guardian, and instead accepted the evidence led at the primary trial that the lawyers for the trustee had explained to Mr and Mrs Mercanti that, among other things, "the trustee was a mere puppet because the appointor was God and had the power to hire and fire trustees at will".
Beneficiaries' consent not required where only a right of due administration
The Court of Appeal also confirmed that a trustee of a discretionary family trust under which the beneficiaries have no more than a right of due administration is not ordinarily bound to consult with or obtain the consent of the beneficiaries of the trust before exercising their powers under the trust deed.
Lessons From This Case
The Mercanti case demonstrates the subjective nature of trusts. Each trustee is empowered and bound by specific trust deed.
If a discretionary trust structure is being considered for the purpose of succession planning, at least at some point in the future, it is vital that this is taken into account when the trust deed is drafted so that the trustee is given the necessary powers. This is only possible where a trust deed is prepared by an experienced lawyer after detailed consideration of the needs of the particular client and may also require significant input from the client's financial advisor and accountant.
Likewise, when it comes to amending a trust deed, such amendments must be considered very carefully to ensure that they are of legal force and effect. As shown in the Mercanti case, correctly identifying and exercising the powers of a trustee is essential, particularly where the trust deed may not have been drafted bespoke or where it was drafted many years earlier. Reliance upon assumptions, rather than specific advice, carries great risk.
Failure to take care in relation to drafting and amending trust deeds can have drastic consequences should the exercise of powers conferred by the trust deed become contentious in time. Amendments made during times of smooth sailing, as was the case in the Mercanti family, can suddenly become subject to scrutiny when fortunes or allegiances shift.
At HHG Legal Group, we would be pleased to assist you in planning for succession including by advising on and drafting amendments to your discretionary trust deeds. We know the value of peace of mind when it comes to securing the future of your family or your business.
This is general information only, and does not constitute specific legal advice. If you would like further information in relation to this matter or other legal matters please contact our office on Freecall 1800 609 945 or email us now.
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