The start of the NSW Supreme Court battle over the Hancock/Rinehart family trust has cast a spotlight on the issue of removing trustees from their office.
What are the relevant principles when a beneficiary seeks to remove a trustee?
Power conferred by the trust instrument
The first place to look is the trust instrument. Beneficiaries may have an express power to remove a trustee, as commonly appears in unit trust deeds. If the beneficiary is unable to remove the trustee under an express power (for example because the unit holder only holds a minority interest), the Court may be able to assist.
Statutory power to remove a trustee
Courts are given statutory powers to remove trustees by each State and Territory’s Trustee Act (but in Queensland named the Trusts Act 1973, and in Western Australia called the Trustees Act 1962).
These powers allow the court to intervene when it is ‘expedient’ to appoint a new trustee but ‘inexpedient, difficult or impracticable to do so without the assistance of the Court’. The wording varies slightly by jurisdiction but is broadly to the same effect.
Inherent jurisdiction to remove a trustee
Superior Courts administering the rules of equity also have inherent jurisdiction to remove trustees. A set of considerations – apparently broader than the statutory criteria on the Trustee Acts – was adopted by Dixon J in Miller v Cameron (with whom Evatt and McTiernan JJ agreed):
The jurisdiction to remove a trustee is exercised with a view to the interests of the beneficiaries, to the security of the trust property and to an efficient and satisfactory execution of the trusts and a faithful and sound exercise of the powers conferred upon the trustee. In decision to remove a trustee the Court forms a judgment based upon considerations, possibly large in number and varied in character, which combine to show that the welfare of the beneficiaries is opposed to his continued occupation of the office. Such a judgment must be largely discretionary.
But as Ball J held in Crowle Foundation v NSW Trustee and Guardian, the differences between the statutory and equitable considerations for the exercise of the power are more apparent than real. Measuring ‘expedience’ can only happen in its context, which will by necessity take into account the factors pointed to by Dixon J.
If the trustee has engaged in misconduct or failed to perform his or her duties, that is a good basis to seek removal. But the jurisdiction to remove is protective, not punitive, so the focus of the application should be on protection of the beneficiaries and the trust assets.
The removal power can be exercised when there is no blame to be placed on the trustee, or where one trustee is removed to eliminate a conflict for which two trustees were equally responsible.
In Tomasevic v Jovetic, Sifris J recognised that acrimonious disputes between trustees (four trustees, divided two against two) made it unlikely that they would collectively be able to manage the trust effectively and efficiently. He deliberately refrained from making adverse findings against any of the trustees, but removed one of four trustees, to allow the trust to be managed effectively. The deadlock was broken, leaving one faction with a majority.
His Honour granted liberty to apply in case that constitution of trustees did not work, and also gave a stern warning about the proper performance of their duties, which could apply equally to any trustee where the possibility of conflict arises:
Given the importance of the office of Trustee and the conduct of all parties I urge the three remaining trustees to seek legal advice and any required clarification as to their duties and responsibilities. The office of trustee is a relatively unforgiving office. Equity is very protective of beneficiaries. I have not found it necessary or desirable to make critical comments against one or more of the trustees. It is to be hoped that this case is a wake up call so far as the conduct of the trustees is concerned.
A successful application
In summary, a successful application to remove a trustee should be supported by evidence showing as many of the following factors as possible:
- the replacement of the trustee is necessary to protect the beneficiaries and secure the trust assets
- the current trustee(s) is unable or unwilling to carry out the necessary obligations of the office of trustee
- the trustee has exercised powers in a manner unfair or prejudicial to the beneficiaries or some of them.
You should also consider who the replacement trustee (if any) will be, and what that might cost the assets of the trust, for example if a professional trustee is appointed.