24 Jan 2017

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.

Note: This decision is the subject of a pending application for special leave to appeal to the High Court of Australia.  In her order of 5 January 2017, Justice Kiefel (now Chief Justice Kiefel) gave the parties additional time to file amended documents within 21 days) and restrained the respondents from certain actions until further order.  Further updates to follow.

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:

a.         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;

b.         any power that did exist was not exercised correctly, because the deed of variation was not executed correctly by the corporate trustee;

c.         the amendment of the MMF Trust deed constituted a fraud of the power to amend the deed and breached the trustee’s fiduciary duty;

d.         Mr Mercanti only executed the deed of variation as a result of equitable fraud or the undue influence of Tyrone Mercanti over his father;

e.         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

f.          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.

 

 

100 years of Supporting West Australians

"My family law experience with Mary Roubos has restored my faith in solicitors in general. She not only demonstrated her legal expertise and flair, but also showed a compassionate and understanding nature during the lengthy process. I felt that Mary went above and beyond her obligations as my solicitor, and really listened to me. I would highly recommend Mary and her assistant Debra Wilson, who also demonstrated professionalism and excellence on all levels."

Renee Frangiosa

"Always fast and thorough service. Thank you"

Sitka Pil

"I found Ben most helpful and always prompt to let me know where things were at. Will definately use Ben again and will recommend to others."

Gerrit and Mary Van Bralal

"We wish to express our thanks for your help in attending to our mother/ wife's will - Mrs Grace Margaret Vessey. Aimee was extremely helpful and easy to deal with. We are greatful for your help with our affairs."

Ms Rosalyn Norman, Mr Stephen Vessey

"Thank you ever so much for all your hard work on my case Nicole, I really appreciate everything you did for me."

Workers Compensation Client

"Thank you for such great assistance with the transaction of Flying Domestics on behalf of Lorna Good. It has been such such a pleasure to work with the HHG Legal Group and I look forward to working with you in the future."

Jim Goodwin

"Simon Creek and his team were at all times empathic, professional and confident.  My matter needed to be addressed within a pressing time frame, and their availability at short notice and contact after hours was much appreciated.  It caused me considerable stress, but having such a thoroughly reliable and competent team to call on helped me to feel in control. Although I hope not to need their services again in future, I would be confident in doing so!"

Dr Lana Bell

"A good outcome is what we can expect.  A great outcome is a sign of a company which does the very best for their clients. A very big thank you to Daniel Morris for showing empathy towards my small and much needed legal action.

To HHG Legal Group, thank you for a great outcome.  I would recommend your company to anyone seeking legal services."

Jan Atkinson

"Your support this morning was amazingly kind, not to mention your totally reassuring competence, knowledge and wisdom that you used on my behalf.  It was extremely reassuring to have your knowledgeable support, and I particularly appreciated your real and obvious kindness to me. It means so much at a very difficult time. I'm so grateful to you."

Family Law Client

"I highly recommend the services of HHG Legal Group for both personal and business needs. HHG is very up to date with legal advice and are in tune with the evolution of business."

Robert Forgione

"Sue and myself would like to thank HHG for the way in which our dispute was resolved. It is good to know that people who do not have an understanding of the legal system can rely on people like yourself and the company you represent. Without the assistance of HHG we could not have resolved the problems we were facing, not only have we resolved the issue but the outcome was more favourable then we would have thought possible. Thank-you and please pass on our thanks to all those who worked behind the scenes to achieve this outcome."

Rick and Sue Ashton

"Janene was very professional and we established a good rapport quickly. The subject of death and wills can be quite confronting to deal with, however Janene's approach was soft and accommodating."

Lynette Livesey

"A big thank you to HHG for their professional service, continued support, and wide range of legal knowledge. Our clients have given us nothing but kind words regarding HHG Legal Group and so we have no hesitation in referring and recommending Simon Creek and HHG Legal Group for their outstanding services and legal expertise."

Nigel Plowman, Director at McKinley Plowman & Associates

"Simon is a friendly and practical legal advisor. I have received great feedback from the clients I have referred to him and his team at HHG Legal Group."

Richard Beal, Director at BDO

"Over the last few years, I have been impressed by Simon’s legal ability, management skills, entrepreneurial spirit, personal integrity and people skills. He appears to be that rare breed of lawyer – both knowledgeable and commercial."

Michael Malone, Founder of iiNet

"Our family has been a client of HHG Legal Group over many years and most recently in 2013 and February 2014.  Business has included drawing up of wills for three generations and preparing of probate for my father in law.

I would have no hesitation in recommending HHG Legal Group to anyone requiring such services."

Bernice Climie

"You should be congratulated for the manner in which your staff address clients and we found our dealings with your company, once again a very pleasant experience and we would like to truly thank you for your efforts."

Steve Harvey and Jane Powell

"HHG Legal were absolutely fantastic. Extremely responsive and brought calm to our chaotic family situation through their knowledge and caring attitude. Extremely professional from our very first contact with them and they expertly guided our family though the required legal process over almost a 12 month period."

Amanda Williamson

"Fantastic team! They really care about their client. Tim Colcutt is a 'go that extra mile' guy who gives his client his all. I can't recommend HHG and Tim enough."

Kerry Samson

"Anne Hurley has been such a valuable resource of information and advice, her wealth of knowledge is truly impressive and her ability to explain things in a way that makes them easily understood is very much appreciated. Anne and the wider HHG Legal Group are always a pleasure to work with."

Giorgia Parham

"I had a fantastic lawyer in Anne Hurley. She helped me out a great deal with good, sound advice in a friendly , professional manner. First class, thanks Anne"

Graeme Hammond

"Marine Plant Systems has been working with HHG Legal Group for a few years now and they continually provide first class service. Their professional advice has been invaluable to our company."

Carolin Grimm

"We were kept up to date at all times. Pricing was always updated over the time period so we remained "in budget". Personal access to someone whenever I had questions. All in all a great experience without too much fuss."

Rosslyn Tasker - COO AltusQ Pty Ltd

"Good service you can count on."

Miles Lee

"HHG Legal Group have provided outstanding support as I have taken the journey of buying a business, their professionalism is beyound reproach. Their assistance throughout the Due Diligernce process have been invaluable, I would fully recommend them."

Mark Armitage

"I have experienced how good the HHG Legal Group team are over the last 6 years and highly recommend them."

Lyn Hawkins

"Very friendly and efficient service - what a pleasure working with Anne."

Jacques Taylor

"I highly recommend Daniel from HHG Legal Mandurah. When dealing with a complicated legal property matter recently I was extremely impressed by Daniel's honesty and integrity and the legal advice I received. I am very happy with the service from HHG Legal."

Tony Walker