Reviewing the exercise of trustee discretion
Statutory review of trustees
(1) A new mandatory (non-excludable) statutory review procedure should replace section 68. Under the new provision there would be a two stage process:
(a)an applicant would be required to put forward evidence that raises an issue as to whether or not a trustee has exercised a power lawfully or that shows reasonable grounds to anticipate an issue as to whether or not a trustee would exercise a power lawfully (first stage);
(b)the court would then review the exercise of the trustee’s power, with the onus on the trustee to substantiate and uphold the grounds of the act, omission or decision that is being reviewed (second stage).
(2) The ground on which the court may review a trustee’s act, omission or decision under the provision would be whether it was one that was not reasonably open to the trustee in the circumstances.
(3) In the second stage of the procedure, the trustee can be required to appear before the court to substantiate his or her decision.
(4) A trustee’s act, omission or decision under a power either in the new Act or the trust deed would be subject to review.
(5) An “applicant” would include:
(a)any beneficiary, including anyone who might potentially, at some time, benefit under the terms of a trust or anyone who is the object of a power of appointment;
(b)any personal representative of a beneficiary who lacks capacity (such as a parent or guardian of a minor beneficiary, and a property manager or holder of an enduring power of attorney for an incapacitated beneficiary); and
(6) Where the court finds the trustee’s act, omission or decision was one that was not reasonably open to the trustee, the court may make any orders it considers necessary in the circumstances, except that the court may not disturb any distribution of trust property that has been made without a breach of trust before the trustee was aware of the application to the court. The court may not affect any right acquired by a person in good faith and for value.
Please give us your views on this proposal.
10.2Section 68 permits a beneficiary aggrieved by an act, omission or decision of a trustee to apply to the High Court to review that act, omission or decision. A beneficiary may also apply if he or she has reasonable grounds to anticipate that an act, omission or decision of a trustee will aggrieve the beneficiary. The court may require the trustee to appear before it and substantiate the trustee’s decision. The court may make any orders as are necessary in the circumstances except that the court may not disturb any distribution of trust property that has been made without a breach of trust before the trustee was aware of the application to the court. The court also may not affect any right acquired by any person in good faith and for value.
10.3The statutory jurisdiction under section 68 can only be invoked by a person who is beneficially interested in the trust property. In addition, it is limited to acts, omissions or decisions of a trustee in the exercise of a power conferred by the Act. Trustees’ powers conferred by trust deed or by another statute fall beyond the jurisdiction of section 68, as do powers conferred by court order.
10.4Section 68 is silent about whether it gives the court a greater ability to interfere with a trustee’s decision than under the court’s inherent jurisdiction to supervise the exercise of discretionary powers by trustees.
10.5In relation to the courts’ inherent jurisdiction to supervise trustees, Jeff Kenny has noted that there are difficulties framing and interpreting the grounds on which the court will intervene in the exercise of discretionary powers. He says that the courts have employed a wide range of terms in different cases when describing conduct by trustees and this has not assisted in developing a clear test for intervention. The courts have, for example used the terms “arbitrarily or unreasonably”, “capriciously”, “improperly or unreasonably”, “mischievously or ruinously”, and “wantonly and capriciously” in different cases. On occasion attempts have been made to set out in a more comprehensive way the grounds for intervention. In Dundee General Hospitals Board of Management v Walker Lord Reid said:
If it can be shown that the trustees considered the wrong question, or that, although they purported to consider the right question they did not really apply their minds to it or perversely shut their eyes to the facts or that they did not act honestly or in good faith, then there is no true decision and the court will intervene.
10.6In New Zealand the most comprehensive outline of the grounds for intervention is in the decision of Fisher J in Wrightson Ltd v Fletcher Challenge Nominees Ltd. In summary court will set aside the trustee’s decision only where the trustee has:
- acted in bad faith or for an improper motive;
- failed to exercise the discretion by considering the wrong question or misinterpreting the trust deed;
- considered irrelevant considerations;
- failed to consider relevant considerations; or
- reached a decision that is perverse or capricious.
10.7A further ground for intervention that has been discussed in some cases is that the trustee must not have acted unreasonably in the exercise of the power or discretion. The rationale, here being that the donor of the power has given trustees their powers on the implicit basis that they will exercise them reasonably. In Wrightson Ltd v Fletcher Challenge Nominees Ltd Fisher J said that “unreasonableness is a notoriously vague concept in any context”. He agreed with the obiter comments of Tipping J in Craddock v Crowhen that in this context a trustee’s decision would not be regarded as unreasonable unless it was one which “no reasonable trustee could rationally have made in all the circumstances”. Later in Gailey v Gordon O’Regan J declined to further develop any grounds for intervention around unreasonableness saying that “the potential for the Court to intervene in the exercise of discretion by trustees where the discretion has been exercised unreasonably involves some extension of the Court’s supervisory role”. He considered that the question should be left for a superior court.
10.8The question of whether the court can only interfere under section 68 with a decision of a trustee if one of the established grounds for intervention can be shown has not been fully resolved. The Supreme Court of Western Australia in Wendt v Orr, when considering the Western Australian equivalent of section 68, was not prepared to limit itself in that way. It considered that while the established grounds for intervention would allow the court to intervene, there may be other grounds as well. In one of the very few cases on the provision, Rossiter v Wrigley & Alves, the High Court quoting from Garrow and Kelly Law of Trusts and Trustees seemed to consider that section 68 “would seem to give the Court a wide power to interpose its guiding, or restraining, hand on the exercise by trustees of their powers and discretions … where the power is one conferred by the Trustee Act 1956”.
10.9However, given the paucity of case law on section 68, this matter remains unresolved. There is a compelling argument that the settlor has given the discretion to the trustees and not the court, so the court should be as reluctant under section 68 to interfere with the trustee’s decision as it is under its general equitable jurisdiction. The role of the court should be a supervisory one ensuring that discretions and powers entrusted to trustees are properly exercised by them.
10.10Section 68 allows a beneficiary to apply to the court to have the trustee appear before the court and substantiate the grounds for a decision. The court may then require trustees to disclose their reasons to the court. In Rossiter v Wrigley & Alves the court required the applicant to do no more than satisfy the standing requirement before requiring the trustee to show that he had not breached a duty or standard. In the recent case of Jaspers v Greenwood, the court considered that Rossiter was not authority generally for the proposition that, on a section 68 application, the onus lies on the defendant trustees to justify his or her actions as prior orders to that effect had been made in Rossiter. The court in Jaspers disagreed with Rossiter in finding that section 68 does not alter the ordinary incidence of the onus lying on the applicant for review under section 68.
10.11In Queensland, where there have been a number of cases under a similarly worded provision, the courts have placed more onus on the applicant beneficiary to show that the trustee has breached the appropriate standard of conduct required of trustees before they have required a trustee to appear to defend his or her actions.
Need for a statutory review procedure
10.12We considered whether or not a statutory review procedure should be retained. We agree with submitters who considered that it would be confusing to repeal section 68 and leave review to the courts’ inherent jurisdiction. We propose including a provision in new legislation to replace section 68. The discussions below address the questions raised on the scope and nature of a new provision in the Fifth Issues Paper.