Review of Trustee's discretion: Marsella’s case gives some guidance

It is a longstanding general principle that where a trustee discloses reasons for the exercise of a discretion, the validity of the trustee’s reasons are open to examination and reviewed by a court. However, where a trustee does not disclose reasons, the trustee’s discretion is only examinable as to good faith, real and genuine consideration and in accordance with the purposes for which the discretion was conferred (Karger v Paul [1984] VicRp 13; [1984] VR 161).

In Re Marsella; Marsella v Wareham (No 2) [2019] VSC 65, the Supreme Court held that, even in the absence of reasons for a trustee’s discretion, that discretion was exercised in bad faith and without real and genuine consideration to the interests of the dependents of the fund in question and the discretion was therefore set aside.

Marsella concerned a dispute over the estate of Helen Marsella, and relates to a superannuation fund by which, prior to her death, the deceased managed her retirement funds. The deceased was survived by her husband, who was the plaintiff in the proceeding, and her two children, one of whom was the first defendant. The second defendant was the first defendant’s husband. When the fund was established, the deceased and the first defendant were appointed trustees and the deceased was the sole member and founder. The death benefit payable from the fund was estimated to be $450,416. Following her mother’s death, the first defendant resolved as surviving trustee of the fund to appoint the second defendant as a trustee of the fund and the trustees resolved to distribute the entire benefit of the fund to the first defendant.

The court concluded there was a lack of real and genuine consideration based upon, amongst other factors, the outcome of the defendants’ exercise of discretion which was to distribute the entire proceeds of the fund to the first defendant. In this regard, the court noted that where the outcome of the exercise of discretion by a trustee is “grotesquely unreasonable”, this may form evidence that the discretion was not properly exercised or was exercised in bad faith.

Further relevant factors for a court to consider are “the intention of the deceased as the settlor of the fund, the relationship between the deceased and the dependant, and the financial circumstances and needs of the dependants”. The court was partly informed of these factors in Marsella in an earlier and separate proceeding (the plaintiff sought further provision pursuant to Part IV of the Administration and Probate Act 1958) which gave the court notice of the relationship between the parties and their financial circumstances.

In considering the evidence, the court drew an inference that in distributing the fund, the first defendant “acted arbitrarily…with ignorance of, or insolence toward, her duties” and further, it was held the first defendant “acted in the context of uncertainty, misapprehensions as to the identity of a beneficiary, her duties as trustee, and her position of conflict”. Accordingly, the court held the first defendant did not give real and genuine consideration to the interest of the dependents of the fund, which the court said was supported by the outcome of the exercise of the discretion.

Further, in light of the court’s finding of improper exercise of the discretion, not only was the decision set aside, but the defendants were also removed as trustees.

Marsella is an example of a trustees’ decision being successfully overturned despite the absence of reasons for the exercise of the discretion. In these circumstances, trustees must be aware that even where there is an absolute and unfettered discretion, that discretion is examinable by the court as to good faith, real and genuine consideration and the absence of an ulterior purpose.

For more information contact:

Ali Erskine
Principal
Harwood Andrews
T: 03 5226 8524
E: aerskine@ha.legal