Federal Court stresses the Importance of Trust Deed Interpretation
Background
A recent decision handed down by the Full Federal Court in Advanced Holdings Pty Limited as Trustee for the Demian Trust v FCT [2021] FCAFC 135 emphasises the important principles of trust deed interpretation and the limitations of statutory provisions concerning the evidentiary force of company records. The decision also serves as a valuable reminder for directors of small companies and corporate trustees to maintain good records.
Issue one – the Principal’s power to remove and replace the trustee
Mr Demian was the ‘Principal’ of a discretionary trust (Demian Trust).
Mr Demian sought to appoint a new trustee of the Demian Trust. The Court confirmed that the Principal’s power to appoint a new trustee under the trust deed could not be exercised without first removing the existing trustee.
Subsequently, the deed (Deed) executed by Mr Demian, which intended to appoint Advanced Holdings Pty Ltd (Advanced Holdings) as the trustee of the Demian Trust (without first removing the current trustee (Demian Holdings)), was determined to be ineffective.
The taxpayer sought to rely on the High Court authority in Fell v Fell (1922) 31 CLR 268 (Fell), asserting that the Deed should be construed to impliedly remove Demian Holdings as the trustee and therefore effect the appointment of Advanced Holdings, having regard to the objective intention of the parties and to ensure the operation of the Demian Trust was advanced.
The taxpayer’s assertions were denied for the following reasons:
The words relating to the simple concept of replacing Demian Holdings as trustee of the Demian Trust were simply absent. The Deed did not purport to remove Demian Holdings. Rather, it only sought to appoint Advanced Holdings as trustee, but not as the ‘new’ trustee.
Further, Fell confirmed that the Court ‘cannot give effect to any intention which is not expressed or plainly implied in the language’ of the document in question. In this regard, the Deed lacked the necessary specificity, and the Court held that any finding to the contrary would be to participate impermissibly in a ‘gratuitous, groundless and fanciful’ exercise.
Issue two – the trustee resignation power and insufficient documentation
The Court also held that the minutes of meetings of the directors of Demian Holdings and Advanced Holdings (Minutes) were inadequate to validate the removal and appointment of the trustee of the Demian Trust. This insufficiency could not be displaced by the Evidence Act 1995 (Evidence Act) or the Corporations Act 2001 (Cth) (Corporations Act).
The taxpayer contended that under the business records exception to the hearsay rule (outlined in the Evidence Act), the Minutes were evidence of the truth of the matters represented. The Court rejected this argument, stating that the Minutes did not contain any representations as to the ‘form, contents or efficacy’ of the underlying documents which had been referenced in the Minutes. In particular, a Deed of Retirement and Appointment of Trustee, and a Resignation Notice, which were never adduced by the taxpayer.
A factor that likely influenced the Court’s reasoning is the particulars of the Demian Trust deed, which required that the trustee provide two months written notice of its resignation. However, the Minutes provided in the trustee’s written notice of resignation were ‘effective immediately’ and hence, inconsistent with the deed.
In respect of the Corporations Act, the taxpayer claimed that as a result of sections 251A(1) and 251A(6), the Minutes were evidence of what was stated in them, unless the contrary is proven. However, the Court determined that those provisions were not applicable to the taxpayer as there was no evidence to suggest that the Minutes had been recorded in the corporate trustees’ minute books within one month of the meeting – a requirement under section 251A(6). Further, given that s 251A was the more relevant provision in relation to the facts, the taxpayer was precluded from relying on the more general provisions under section 1305, which provides that company minutes are prima facie evidence of the matters stated or recorded in those minutes.
The Court emphasised that even if the taxpayer had succeeded in enlivening the relevant provisions of the Evidence Act or the Corporations Act, it did not prevent the Court from challenging the accuracy of the Minutes. This was particularly relevant given that the surrounding facts indicated inadequate corporate management and the taxpayer’s credibility had already been questioned in light of conflicting cross examinations statements.
Key takeaways
Given the Court held that Advanced Holdings was not the trustee of the Demian Trust, Advanced Holdings was therefore the legal and beneficial owner of units in a unit trust. In other words, Advanced Holdings held the units in its personal capacity rather than in its capacity as trustee of the Demian Trust.
To avoid this outcome, it is important to:
read the trust deed meticulously to ensure that the terms of the deed, including any protocols under the deed are complied with;
prepare detailed company minutes and trust resolutions and ensure when referring to documents in minutes or resolutions, the intention of the underlying documents are specified;
maintain detailed records, including the decision-making process behind those records; and
seek specialist legal advice where any uncertainties arise.
If you would like advice regarding trust deeds or corporate governance, please contact:
Alasdair Woodford
Special Counsel
T: 03 5225 5217
M: 0436 456 144
E: awoodford@ha.legal
Rob Warnock
Principal Lawyer
T: 03 5226 8541
M: 0419 892 115
E: rwarnock@ha.legal
This article was prepared with the assistance of India Smith, research assistant
