Appointment of trustees and appointors ? the importance of getting the nominations & changes correct

The NSW Court of Appeal case of El Sayed v El Hawach [2015] NSWCA 26 concerned a familiar form discretionary trust where it was argued that the appointor had exercised his powers inconsistently. The case is interesting, as it considered the circumstances in which beneficiaries have standing to bring derivative actions and the scope of fiduciary duties owed where a beneficiary, who also acts as the trust’s solicitor, becomes the appointor.

Facts

The Brady Street Developments Trust held various property developments. The trust deed distinguished between named beneficiaries and eligible beneficiaries (who were defined by reference to the named beneficiaries).  The original appointor executed two inconsistent deeds in 2011 and 2012. Under the first, the original appointor resigned and appointed the trust’s solicitor (who was an eligible beneficiary and the husband of the sole director and shareholder of the trustee company (“the controller of the trust”)), in his place. By the second, the original appointor appointed the first and second appellants (a different individual and a trustee company), who were eligible beneficiaries, as appointor and trustee respectively. 

The main issue was whether there was a breach of fiduciary duty by the trust’s solicitor due to him being the trust’s solicitor and an eligible beneficiary.  The primary judge held that there was and set aside the appointment of the new appointor under the first deed, but confirmed the effectiveness of the original appointor’s resignation, with the result that the second deed was ineffective.   

One of the eligible beneficiaries and the new trustee company appealed contending that the 2011 deed was wholly ineffective, with the result that the 2012 deed was effective.   The trust’s solicitor and the controller of the trust appealed challenging the finding of breach of fiduciary duty, and the standing of the appellants.  They argued they did not have standing as discretionary objects to bring proceedings against a third party where a trustee is unwilling or unable to do so, even if special circumstances apply, contrary to the Court of Appeal’s decision in Lewis v Condon [2013] NSWCA 204, which they sought leave to challenge.

Court of Appeal decision

The Court of Appeal dismissed the appeal and allowed the cross-appeal, holding that:

• following Lewis v Condon, a discretionary object might, in special circumstances, bring a derivative proceeding against a third party;
• where proceedings had been brought against eligible beneficiaries and where eligible beneficiaries claimed to have become trustee and appointor but the trustee company was unwilling to bring proceedings against the first respondent, such beneficiaries had standing for the court to determine whether their claimed status as appointor and trustee was valid. However, if they were merely eligible beneficiaries, rather than also claiming that the breach of fiduciary duty entitled them to be the trustee and appointor, it was unlikely that they would have had standing;
• considering the scope of fiduciary obligations, that the rule that a person in a fiduciary position is not, unless otherwise expressly provided, allowed to put themselves in a position where interest and duty conflict, is flexible;
• a solicitor’s fiduciary obligation derives from the terms of their retainer (rather than their status), which must be carefully examined to establish whether a conflict exists;
• the controller of the trust was entitled to be able to cause the trustee to act in a way that favoured her personal interests and there was also no suggestion that the appointor’s powers were ever in fact exercised; and 
• in these circumstances where the trustee could act self-interestedly, even assuming the appointor owed fiduciary duties, there was no breach of duty in the solicitor becoming the appointor.

Implications

The case is useful in demonstrating:

•  the special circumstances in which a discretionary object might bring derivative proceedings against a third party;
• how changes in appointors and trustees can be legally ineffective and are not always straightforward, so it is prudent to obtain professional advice about nominating and changing appointors and trustees; and
• the potential conflicts which can arise and the fiduciary duties owed by an appointor where the controller of a trust is personally interested in the change of appointor and the proposed appointor may have also provided legal advice to the trustee. 

This publication is intended as a source of information only. No reader should act on any matter without first obtaining professional advice.

Author: James Whiley, Senior Associate