29/04/2020

The recent Victorian case of Wareham v Marsella [2020] VSCA 92 aptly highlights the distinction between a Court’s ability to invalidate a trustee’s decision and a Court’s inability to determine a trustee’s decision as invalid.

It is one of the most famous (and hilarious) questions ever asked in an Australian civil case.  Rugby League player Andrew Ettingshausen was suing a newspaper for publishing a photo of him in the dressing room showers where his, um, manhood could be seen.  When his barrister, Tom Hughes QC, asked the journalist who authorised the photo to identify the relevant object in the photo she said she didn’t know what it was.  Unperturbed Hughes then suggested they narrow down the possibilities – “is it a duck?”.  The Court erupted in laughter, including the learned Judge.

Generally it is much easier to work out what something isn’t, than what it is. In the Victorian Appeal Court’s decision in Wareham v Marsella the Court had to decide whether it was entitled to identify the thing itself or whether it was limited to simply checking that the trustee had acted reasonably in deciding what the thing was.

Helen Swanson established a self managed superannuation fund in 2003. Mrs Swanson was the sole member and one of two trustees, the other being her daughter from her first marriage, Carol Wareham.

Mrs Swanson passed away in 2016, leaving her second husband Riccardo Marsella as the executor of her estate.

Mrs Swanson had left no valid binding death benefit nomination, leaving her almost $500,000 death benefit to be distributed to a specific class of beneficiaries pursuant to the trustees’ discretion.

This class of beneficiaries was not defined by the common law definition of beneficiary, but by the trust deed’s definition of ‘Beneficiary’. This distinction caused material confusion between the parties’ solicitors.

Mrs Wareham sought independent financial advice. This advice noted that the superannuation death benefit should be paid out as soon as practically possible, and generally within six months of death, to avoid losing certain tax benefits and incurring administrative penalties.

Mrs Wareham was eager to rectify the situation quickly. Her solicitors identified an ambiguity in the trust deed: it was unclear whether there needed to be more than one trustee appointed before death benefits could be distributed.

As a result, Mrs Wareham signed two sets of minutes. The first were signed in her capacity as sole trustee and paid the entire death benefit to herself. Mrs Wareham then validly appointed her husband as a trustee of the fund, and together they executed a second set of minutes, also paying Mrs Wareham the entirety of the death benefit.

In doing so, they believed that their bases had been covered and that regardless of how the ambiguous clause was interpreted, the death benefit had validly been paid.

Mr Marsella asked the Court for:
(1) orders removing Mr and Mrs Wareham as trustees and appointing a substitute trustee;
(2) an injunction restraining distribution of the fund; and
(3) orders requiring Mrs Wareham to repay any sum already distributed.

The trial judge held that, although the trustees had an unfettered discretion as to whom they could pay the death benefit, and that they were under no obligation to give their reasons to do so, that these clauses were not sufficient to negate Mrs Wareham’s requirement to act in good faith.

The trial judge felt that Mrs Wareham had not acted in good faith:
-    she had distributed the entire death benefit to herself, not just a significant portion;
-    she had ignored Mr Marsella’s marriage to Mrs Swanson;
-    she had not sought sufficiently specialist advice, as had been recommended; and
-    the tone of her solicitors’ correspondence was clearly antagonistic.

Although Mrs Wareham had written to her financial advisor that she had given careful consideration to all the dependants, this was not sufficient to outweigh the totality of the evidence. In short, the trial judge found that Mrs Wareham:

‘acted arbitrarily in distributing the fund, with ignorance of, or insolence toward, her duties. She acted in the context of uncertainty, misapprehensions as to the identity of a beneficiary, her duties as trustee, and her position of conflict. As such, she was not in a position to give real and genuine consideration to the interests of the dependants. This conclusion is supported by the outcome of the exercise of discretion’

Mr and Mrs Wareham appealed, submitting that the trial judge was wrong when finding that Mrs Wareham acted without giving real and genuine consideration to the interests of those who might potentially benefit from the exercise of the discretion regarding payment of the death benefit.

The Court of Appeal held that although the trial judge’s reasoning was flawed, the decision was sound.

It is not the role of the Court to consider fairness or reasonableness of the outcome of the exercise of discretion. It is not the role of the Court to usurp the role of the trustee. However, it is entirely appropriate for the Court to ensure that a trustee properly exercise their discretion.

The distinction is nuanced; the Court cannot hold that an outcome is unreasonable, but rather that the decision-making process was unreasonable.

In the present case, a substitute trustee will be appointed. It is entirely possible (though perhaps unlikely) that the substitute trustee may come to the same decision through a correct exercise of their discretion, provided that they can demonstrate that they took the relevant considerations into account.

Trustees have obligations to act in good faith. A Court cannot say that an outcome is not in good faith, because this goes beyond their power. A Court can, however, look to an outcome that is grotesquely unreasonable as indicating a breach of good faith, and will interpret the trustee’s discretion accordingly.

Although it might look like a duck and quack like a duck, the trustee’s determination that it is a duck still requires that the trustee act in good faith when reaching that conclusion.

For further information, please contact Townsends Business & Corporate Lawyers on (02) 8296 6222 or email info@townsendslaw.com.au to see how we can assist.