In Cohen & Ors v Amberley Corporation Australia Pty Ltd [2016] VSC 140 Derham AsJ considered an application for discovery in relation to the administration by a trustee of a discretionary trust. What started out as a consideration of the plaintiff’s application concluded with part of the statement of claim being struck out. It is a very useful decision in the practical side of pleading breach of trust, which can be quite complicated.

FACTS

The plaintiffs are the children of Harold Campbell-Pretty (‘Harold’) and Kerry Ainley Watkins (‘Kerry’). After 2 divorces he ultimately  married Krystyna Campbell-Pretty (‘Krystyna’) [3].  On 27 March 1975, the Campbell-Pretty Family Trust was established by a deed of settlement (‘Trust’ or ‘Trust Deed’). Under its terms Harold was specified as the Appointor and each of the plaintiffs were specified as Primary Beneficiaries [4].  

There were two variations to the Trust Deed:

• on 29 December 1987 the defendant was appointed Trustee in place of the previous Trustee. From about December 1986, Krystyna and Harold were the directors of the defendant. On 29 December 1987, Krystyna was appointed as an additional member of the class of General Beneficiaries under the Trust [5];
• on  8 July 2005, the defendant as Trustee of the Trust purported to exercise a power given by clause 20 of the Trust Deed declaring that the plaintiffs were ‘deleted’ as Primary Beneficiaries under the Trust. Harold, as Appointor, consented to the variation [6].

Harold died on 25 May 2014.  Krystyna was his executrix.  The plaintiffs received nothing.

Breach of trust claim

The plaintiffs pleaded, at paragraph 14 of the Statement of Claim, that the exercise by the defendant of the power under clause 20 of the Trust Deed to remove the plaintiffs as Primary Beneficiaries was a breach of fiduciary duty because such exercise of power:

(a) was not made in good faith in the conduct and execution of the Trust;

(b) was not made impartially as between the beneficiaries under the Trust;

(c) was not made in the best interests of the Trust and did not give proper effect to the terms of the Trust; and

(d) was made for an improper purpose, namely to deprive the plaintiffs as Primary Beneficiaries of their interest in the Trust [13].

with the particulars providing, at [14]:

The purported removal of the plaintiffs as Primary Beneficiaries of the Trust by the 2005 Deed of Variation was for the sole purpose of removing the natural children of Harold Pretty as potential beneficiaries under the Trust in favour of Krystyna Campbell-Pretty and her daughter (from another relationship).

The plaintiffs allege that the 2005 variation constitutes:

• equitable fraud on the power under clause 20 of the Trust Deed,
• was a breach of trust; and
• was invalid

and as a consequence the plaintiffs are entitled to declarations to that effect and that they be reinstated as a part of the class of Primary Beneficiaries [15].

Not surprisingly the defendant denied the allegations in paragraph 14 claiming:

• they are improper
• they lack any properly pleaded basis in law or fact
• that the conclusions pleaded are not supported by any proper or responsive particulars and are based upon mere unsubstantiated speculation; and
• they are baseless and misconceived [16].

Claim for discovery

The plaintiffs claimed that  documents relating to the defendant’s purported exercise of the powers under clause 20 of the Trust Deed to remove the plaintiffs as Primary Beneficiaries were discoverable because it was a breach of trust.  As such it was appropriate for the Court to examine whether the trustees have failed to give real and genuine consideration to the exercise of discretion.  As part of that exercise  it was relevant to look at evidence of the inquiries which were made by the trustees, the information they had and the reasons for, and manner of, exercising their discretion [19].

The defendant’s position argued  that

• it was not open for the plaintiffs to look at the evidence of the inquiries which were made by the trustees, the information they had and the reasons for, and manner of, their exercise of the discretion for the independent purpose of impugning the exercise of discretion [20]
• the allegation in paragraph 14 of the statement of claim was baseless and that the discovery sought amounted to fishing in support of that baseless claim and that under  s 55(2)(b) of the Civil Procedure Act (“CPA”) the defendant should not be obliged  to give discovery in relation to those allegations or that discovery should be narrowed under s 55(2)(c) [21]

DECISION

His Honour summarised the duties of trustees of a discretionary trust as being to:

(a) act honestly and in good faith. There is no distinction between these concepts and mere carelessness or honest blundering will not negative good faith;

(b) act upon genuine consideration. This means the trustees must take an informed view of whether or not to exercise their discretion and not to act irresponsibly, capriciously or wantonly. Trustees are not, however, required to observe the rules of natural justice, and may exercise a power to the disadvantage of a beneficiary without seeking that beneficiaries views; and

(c) exercise the power with due consideration for the purpose for which it was conferred and not for some ulterior purpose [24]

Acting honestly and good faith involves not acting in bad faith which includes acts comprising:

• fraud;
• a refusal to recognise that the discretion exists;
• a refusal to make an informed decision;
• a decision made for an ulterior purpose;
• taking into account irrelevant considerations;
• failing to take into account relevant considerations [25].

A trustee’s exercise of discretion can be impugned on the basis that:

(a) that it was exercised in bad faith, arbitrarily, capriciously, wantonly, irresponsibly, mischievously or irrelevantly to any sensible expectation of the settlor; and

(b) without giving a real or genuine consideration to the exercise of the discretion [26].

In that context the Court stated:

• there may be an examination as to whether trustees have exercised their discretion on real and genuine consideration;
• in the absence of a statement of reasons, it is generally not possible to conclude that the trustee has taken into account irrelevant matters or has failed to consider relevant matters;
• the soundness of the exercise of a discretion can only be examined where reasons have been given; and
• trustees are not bound to disclose or explain their reasons for exercising a discretion in a particular manner [27]

In reviewing the power to review the actions of a trustee the Court summarised the findings of McGarvie J in Karger as:

(a) the court can’t examine and review a trustee’s exercise of that discretion if the discretion is exercised by the trustees:

– in good faith,

– upon real and genuine consideration; and

– in accordance with the purposes for which the discretion was conferred.

(b) the validity of the trustees’ reasons will be examined and reviewed if the trustees choose to state their reasons for their exercise of discretion provided unless at trial the trustee gives in evidence an account of its reasons as it would defeat the policy which underlies the principle if beneficiaries, by alleging lack of good faith against the trustee in an action and for practical purposes, thus virtually obliging it to disclose in evidence the way they went about exercising the discretion, obtain a right to examination and review of the discretion which they otherwise would not have. and

(c) where there is a specific allegation of breach of trust the Court can examine the evidence to decide whether there has been a failure by the Trustees to exercise the discretion in good faith, upon genuine consideration and in accordance with the appropriate purpose. That includes the inquiries made by the Trustees, the information they had and their reasons for, and the manner of, their exercise of the discretion. It does not  go to  impugning the exercise of the discretion because  the enquiries were inadequate, the appreciation of the facts was wrong or the decision was unwise.

(d) the Court examines whether the discretion was exercised but it does not examine how it was exercised [28]

His Honour, at [29], quoted Macaulay J in Mandie regarding right of beneficiaries which are:

(a) ..broadly speaking a trustee has a duty to provide beneficiaries with accurate information concerning the administration of the trust and to permit examination of documents that relate to the trust and its administration.

(b) The source of the trustee’s duty..in recent times .. has been viewed as an aspect or manifestation of the court’s jurisdiction to supervise and, where appropriate to intervene in, the administration of trusts.

(c) The duty and the correlative right extends beyond the provision of information in documentary form to information of a non-documentary kind.

(d) ..beneficiaries cannot pursue disclosure of the reasons why a trustee exercised an absolute discretion.. outside of an action brought by the beneficiaries for breach of trust or mala fides …

(e) The protection afforded to trustees against having to disclose their reasons extends to protecting the disclosure of evidence of the trustees’ deliberations and the material upon which the trustees’ reasons were or might have been based…

(f) A trustee’s immunity from giving reasons for the exercise of a discretion is founded upon (1) the irrelevance of those reasons because, absent a breach of trust, a court will simply not interfere; (2) the essentially confidential nature of the trustee’s task, serving the interests of the beneficiaries as a whole; and (3) the avoidance of making the task of a discretionary trustee intolerable.

(g) An exception to that principle of immunity exists where a trustee has volunteered the reasons for exercising the discretion and thereby waived the immunity.

(h) In any conflict between the application of the two principles ..the principle of the trustees’ immunity is generally to prevail.

(i) Even in an action brought against the trustee alleging breach of trust in the exercise of discretion..the trustee’s reasons are only examinable to ascertain whether the discretion has been exercised (ie. honestly, for a proper purpose and on fair consideration), not how it was exercised.

Discovery issue

The Plaintiff’s submissions on discovery were, not surprisingly that:

1. the underlying purpose of the creation of the Trust was to provide for the plaintiffs;
2. the power of amendment must not be used to alter or defeat the main purpose or purposes of the Trust;
3. the power to vary a trust deed does not extend to a variation which would alter the underlying purpose of the trust;
4. a trustee exercising a power of amendment is under an implied obligation to act in good faith; [30]
5. as the claim was clearly based on an allegation of mala fides, breach of fiduciary duties and an improper exercise of the power under clause 20 of the Trust Deed, the defendant cannot properly resist discovery and production of documents relevant to whether the defendant exercised that power in good faith and upon a real and genuine consideration and in accordance with the purpose for which the power was conferred [44]

In that context documents the subject of a discovery application would include:

•  resolutions of directors before or at the same time as executing the 2005 Deed of Variation [37]
•  correspondence between officers of the defendant, its directors, and solicitors engaged to draw the Deed of Variation [37].
• advice in relation to the exercise of the power under clause 20 to exclude the plaintiffs as Primary Beneficiaries [38] which can be disclosed in a rolled up form and not to identify individual documents [39]

The defendant’s submissions were that:

1. the application is devoid of merit and constitutes a fishing expedition [45];
2. the statement of claim is grossly deficient as it is a farrago of speculative and baseless allegations of bad faith, breach of trust and equitable fraud with no supporting  proper particulars
3. the pursuit of the proceeding is contrary to the overarching obligations to which the plaintiffs are subject under the CPA, including those is ss 16, 18, 19, 20, 23 and 24 [46].
4. there was no evidentiary basis advanced by the plaintiffs beyond bare assertion to suppose that the affidavit is incomplete [47].
5. the proceeding was a thinly veiled attempt to circumvent the restriction on beneficiaries having material relating to the reasoning of trustees in the exercise of their discretion [49]
6. as the  pleaded case upon which the further discovery was sought was untenable the offending part of the pleading should be struck out [50]
7. even if the allegations in paragraph 14 of the statement of claim remained, the plaintiffs were not entitled to discovery of documents revealing the reasoning of the Trustee or the basis on which it acted [52]

the effect of s 26(3)(b) of the CPA is to preserve the position of trustees to resist the disclosure of reasons

[53]

The Court noted that the scope of the discovery is set out in:

• r 29.01.01(3), [31],
• s 26(1) of the CPA  providing that there is an overarching obligation to disclose the existence of documents that are, or have been, in the person’s possession, custody or control of which he is aware and which the person considers, or ought reasonably consider which are critical to the resolution of the dispute [32] and
• s. 55 of the CPA to make any order or give any direction in relation to discovery that it considers necessary or appropriate [33].

The court was concerned about whether paragraph 14 of the statement of claim was intended to allege that the terms of clause 20 did not allow the removal of the Primary Beneficiaries. The Plaintiff stated that it did encompass a claim that the power in clause 20 does not extend to enable the Trustees to remove the Primary Beneficiaries. Not surprisingly the defendant argued this was not the meaning attributable to the pleading[56].

The court found that the pleading in paragraph 14 was deficient as it did not show an improper purpose, a lack of good faith or a lack of impartiality to state  that the effect of the 2005 Deed of Variation was undertaken for the sole purpose of removing the plaintiffs [58] & [59] because primarily the particulars say nothing about the purpose of the the Deed of Variation, only the effect and and as a such :

That cannot be a particular of bad faith or improper purpose.  An intention by a Trustee or an appointor to obtain an improper end is not necessarily to be inferred because the effect of an appointment is consistent with there having been an improper purpose in the making of the appointment. On the face of the particulars, they do not show a lack of impartiality in the exercise of a discretion, assuming impartiality to be required.

The court found that the appropriate course was to strike out paragraph 14 of the statement of claim following the approach of  Judd J in the Timbercorp proceeding.  This had been mooted in the defendant’s submissions and the Court has power of its own motion to strike out a pleading that offends the rules of pleading [61].

The court noted that if it can be properly alleged that the Trustee has:

• acted otherwise than in good faith,
• failed to give real and genuine consideration to the exercise of the discretion,
• not acted in accordance with the purposes for which the discretion was conferred

then particular discovery under r 29.08 will be available [66].

Where the discretion  not described as “absolute” or ‘uncontrollable’the Court will intervene if the discretion has been exercised in a way which is perverse, arbitrary, capricious, wanton, irresponsible, mischievous or irrelevant to any sensible expectation of the settlor [66].

ISSUE

Pleadings matter.  They define the controversy and the scope of discovery.  Trust pleadings are difficult and alleging bad faith can be very difficult.  Alleging effect, in other words pleading conclusions, can result in severe difficulties when parties seek discovery based on such pleadings.

The decision is both a salient lesson in pleading but also a very useful synthesis of the rights of trustees and the nature of challenges that can be made in relation to the exercise of discretion.  And the limitations.