Commercial Litigation

Are beneficiary's always entitled to access trust documents?

Trust documents are commonly understood to include ‘those which evidence or record the nature, value and condition of trust assets.’ Relevantly, trust documents have been distinguished from those which are merely prepared by the trustee for their own purposes, with Hartigan Nominees deeming that documents which disclose deliberations about how the trustee should exercise their discretionary powers, are not trust documents. Similarly, certain correspondence between trustees does not constitute trust documents.

While beneficiaries of a trust have a prima facie right to inspect trust documents, disputes between the beneficiaries of a trust and Trustees, regarding access to documents and information are commonly encountered, with case law offering competing perspectives as to the circumstances which give rise to the provision of trust documents to beneficiaries.

In Re Londonderry’s Settlement, the Court held that as trust documents are property of the trust, the beneficiaries retain a proprietary interest in them. In doing so, it noted that this interest in trust property gives rise to the right to access trust documents.

Conversely, in Schmidt v Rosewood Trust, the court held that a beneficiary does not have an equitable interest that gives rise to an inherent right to view trust documents and that a trustee may therefore refuse a beneficiary’s request to inspect trust documents. However, as the Court retains an inherent jurisdiction to oversee the correct administration of trusts, a beneficiary may seek that the Court compel the trustee to enable inspection by the beneficiary.

Although the High Court is yet to make an explicit ruling as to the preferred approach, it relied on Schmidt in the 2017 decision of Palmer v Ayres to support the Court’s authority to compel the provision of information. Schmidt has also been followed in recent cases in the both the Federal Court and the New South Wales Supreme Court, whilst the Victorian Supreme Court relied on the Londonderry approach in the 2016 decision of Duetsch v Trumble.

In circumstances where the Court has adopted the Schmidt approach, it has relied on the following considerations to determine whether disclosure is warranted to safeguard the proper administration of the trust:

1. Scope of requested documents

The Courts have traditionally been less inclined to grant access where the beneficiary seeks a wide scope of documents. Relevantly, requests for access to all documents have typically been perceived as a ‘fishing expedition’, with the Court instead favouring access in circumstances where select documents are sought to address a specific issue in the administration of the trust.

2. Documents already disclosed

The disclosure of trust documents serves to ensure the beneficiary has sufficient information to evaluate the proper administration of the trust. As such, if a Court deems that the trustee has already made genuine attempts to provide appropriate information, it will likely determine that no further disclosure is required.

3. Confidentiality

Trustees have traditionally been entitled to reject access to trust documents containing confidential information on the basis that disclosure is not in the best interest of all beneficiaries. Although there exists debate over whether confidentiality remains a full defence to disclosure, Justice Hammerschalg in Silkman posited that is nevertheless remains a necessary consideration.

4. Secrecy

In some circumstances a trust deed may contain a provision which mandates that the details of the trust remain secret from its beneficiaries. Although the courts are yet to consider whether such a provision inhibits disclosure, the existence of a secrecy provision will likely be a relevant consideration of the Court in determining whether to exercise its discretion.

5. Necessity

As the Court’s jurisdiction to intervene in trust matters serves to ensure proper administration of the trust, access will only be granted where beneficiaries ought to be privy to the documents. As such, if the requested documents will not cure a deficiency in the trust, the court is unlikely to exercise its discretion to order disclosure. To date, case law fails to signal a clear precedent as to how a court will determine a beneficiary’s request to access to trust documents, however, it does appear that the limited approach contained in Schmidt is being preferred by courts over the expansive approach contained in Londonderry.

by James Conomos Lawyers

High Court clarifies definition of ‘officer’ under Corporations Act

In Australian Securities and Investments Commission v King [2020] HCA 4, the High Court of Australia recently examined the scope of the definition of the term “officer of a corporation” in section 9 of the Corporations Act 2001 (Cth). The Court unanimously held that there is no requirement that a person be a named officer of the corporation to be captured by the definition. The test to establish whether a specific individual is an officer is whether they have the capacity to “significantly affect the financial standing of the company”.

Case Facts

Mr King, was the CEO and executive director of MFS Ltd, the parent company of the MFS Group of companies. The MFS Group was involved in funds management and financial services.

The Premium Income Fund (PIF) was a managed investment scheme operated by the MFS Group with an entity known as MFS Investment Management Pty Ltd (MFSIM) acting as the responsible entity. In June 2007, MFSIM entered into a $200 million loan facility with the Royal Bank of Scotland to be applied solely to the PIF. On 27 November 2007, MFSIM and senior personnel in the MFS Group arranged for $150 million to be drawn down from the loan facility. $147.5 million was disbursed by MFSIM to pay the debts of other companies in the MFS Group.

While two disbursements were made, only one was ultimately relevant to the High Court. A disbursement of $130 million was made on 30 November 2007 to an entity known as MFS Administration that acted as the treasury company of the MFS Group. On the same day the funds were received, MFS Administration paid $103 million to Fortress Credit Corporation (Australia) II Pty Ltd (Fortress). This money was paid in satisfaction of a short-term loan made to another MFS Group entity that was due to be repaid on that same date.

This series of events culminated in ASIC bringing enforcement proceedings against MFSIM and several of its officers for breaches of the Corporations Act. MFSIM was held to have contravened subsections 601FC(1) and (5) in relation to its duties as the responsible entity of PIF, and had breached section 208(1) by providing a financial benefit to a related party. Ay trial and on appeal to the Queensland Court of Appeal, Mr King was found to been knowingly involved in MFSIM’s contraventions and by consequence of section 79(c), was also held to have contravened sections 601FC(5) and 209(2).

Legal Issues

ASIC further contended Mr King was liable under s 601FC as an officer of MFSIM despite the fact he had ceased being a director on 27 February 2007 some nine months prior to the events. The Queensland Court of Appeal had held that Mr King was not an officer in the sense of having capacity to “affect significantly the corporation’s financial standing”. The Court deemed it was necessary for AISC to show Mr King had acted in an office of MFSIM in order to fall within the definition of s 9(b)(ii). ASIC appealed this finding contending that the Court had misconstrued the definition of “officer” by requiring ASIC

High Court Findings

The High Court unanimously found that the Court of Appeal erred in ruling that ASIC was required to prove Mr King had acted in an office of MFSIM in the sense of being in a ‘recognised position with rights and duties attached to it’. The Court adopted a literal interpretation of s 9, stating that subsection (b)(ii) required an inquiry into the role the person in question plays in the corporation. Such an inquiry is made on a case by case basis, considering the entire facts and circumstances of the individual and corporation including: the role of a person; what they did or not do to fulfil that role; and the relationship between their actions or inaction and the financial standing of the corporation.

Mr King was involved in the management of MSFIM and had not only the capacity to affect the financial standing of the entity, but actively intervened in its management. Accordingly, Mr King was held to be an officer of MSFIM despite not holding a formal executive role at the time of transaction.

JCL Comment

Importantly this decision makes it clear that individuals who hold a named office in a corporation will be captured by paragraph (a) of the s 9 definition, individuals who do not hold a named office may be captured by paragraph (b). This reasoning is consistent with the ‘shadow director’ regime which similarly provides that individuals that do not hold the office of director may still be considered a director where they have the capacity and custom of being able to affect the company.

This case is also important as it was made in the context of a group of companies. The Court expressly noted that corporate structure would not assist in avoiding liability for breaches of statutory prohibitions.

by James Conomos Lawyers

10 tips for effective settlement agreements

When parties to a dispute reach a compromise, it is important that the terms of the compromise are recorded in writing and that the settlement agreement is binding.

A settlement agreement recognises that the parties to a dispute have formulated a resolution and signals the end of the dispute. The agreement may be entered into at any time before a proceeding commences, and if proceedings have commenced, at any time before judgment is handed down.

Important Considerations

In drafting a settlement agreement, it is important to have regard to some key considerations:

1. 1. The agreement should clearly state the terms of settlement;
   2. The agreement should clearly state and identify the parties to the agreement, to ensure the person executing the agreement has authority to execute. This is particularly so where a party is a company or a Trustee of a trust;
   3. Any conditions to the settlement that are required to be met prior to either payment of the settlement sum or the proceedings being discontinued;
   4. The timing of the payment of a settlement sum and also the consequences of non-payment;
   5. Where a settlement sum is being paid, tax implications may arise and need to be considered;
   6. Generally settlement agreements include a unilateral release of claims from both parties and it should state the extent of the releases given;
   7. If proceedings are on foot, the settlement agreement should include clear terms on the discontinuance of the proceedings including whether there will be any order as to costs;
   8. The agreement should be clear on which party is bearing the cost of preparing the agreement. Generally, each party bears their own costs;
   9. Commonly, settlement agreements include an obligation that the parties must keep the terms of the agreement confidential, except for limited disclosure purposes;
   10. The settlement agreement should contain a term with respect to the governing law of the agreement should a dispute/breach arise.

by James Conomos Lawyers

Effective Settlement Negotiations

Here at JCL, we strive to understand our client’s needs and provide the best overall solution. We encourage mediation and compromise. If the parties to a dispute can reach a compromise and avoid the costs, time, and stress of having to go to court, this is always the best result. All parties should feel comfortable with the outcome however, compromise is based on give and take.

Settlement negotiations can be daunting and overwhelming. Here are some practical tips for effective settlement negotiations.

Before entering into settlement negotiations:

1. Have an understanding of the outcome you or your client are hoping to accomplish. What is the most optimistic result that realistically could be achieved? Also importantly, what is your “bottom line”. Identifying these two positions will give you a direction and focus and will enable you to negotiate towards a specific goal;
2. Be prepared. Know your case;
3. Take into consideration the interests and goals of the other party and what outcome they are trying to achieve. This will assist in negotiating a resolution.

During settlement negotiations:

1. Do not get personal. Focus on resolving the problem;
2. Ask questions and understand the other party’s position. There may be valid reasons limiting the other side’s ability to reach an agreement. There may be other issues hindering a resolution which once known, can be discussed and resolved;
3. Explore alternatives to a monetary only resolution;
4. Do not leave the room until the agreement is recorded in writing. You will likely not have enough time to prepare a settlement agreement, but have the parties sign a document that sets out the general terms that have been agreed.

by James Conomos Lawyers