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.

  1. 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.

  1. 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.

  1. 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.

  1. 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.

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.

Does an employee owe a fiduciary duty for credit limit increases?

Employees owe certain fiduciary duties to their employers. Generally, this means an employee cannot do either of the following things:

  • Make or pursue a personal gain in circumstances in which there is a real and substantial possibility of a conflict of interest arising between the personal interests of the employee and the interests of the employer (the no conflict duty); and
  • Make or pursue a personal gain based by using his or her position as an employee or by using information or opportunities received in the course of his or her employment (the duty of trust).

As these duties are quite broad in scope a variety of circumstances could constitute a breach of either duty. A recent case in the Queensland Court of Appeal examined whether an employee owed a fiduciary duty to his employer in regard to providing a credit limit increase to a customer.

In Metal Manufactures Limited v Johnston & Anor [2020] QCA 42, a company was permitted to purchase goods on credit up to an amount of $20,000 which was later extended to $50,000. However, the company was unable to keep within this agreed credit limit and, with the assistance of an employee of its supplier, was ultimately able to purchase goods up to an amount of $325,797.50.

The supplier sought to recover this owing account; however, the company was wound up in insolvency prior to trial leaving no possibility of recovery. A case was instead bought against the company’s director and the employee of the supplier.

The supplier alleged a breach of fiduciary duty on the part of their employee for allowing the company to purchase goods beyond their credit limit in contravention of section 182(2) of the Corporations Act 2001 (Cth). The case against the director was that he had knowingly, or ought to have know, assisted the employee in breaching his duty. The case was accordingly dependant on successfully proving a breach of duty by the employee.

There is a long line of authority establishing that employees owe a fiduciary duty to their employers. This is also expressly indicated in section 182(2) of the Corporations Act. Not all employees will owe a fiduciary duty however and accordingly it must be established that a particular employee owes by looking at all circumstances of the case.

In this case the Court did not find that a fiduciary duty was established. Whilst the employee was a store manager, he was not a senior employee in the overall context of the business, did not have discretionary power to allow a customer credit beyond what was already agreed. On this basis the employee was not deemed to be in a position of special trust or confidence.

Even if a fiduciary duty had been established, the claim still may not have succeeded. While the Court was willing to accept that the employee had deliberately allowed unauthorised supply beyond the credit limit which was “consciously wrongful” and took deliberate steps to conceal the conduct, the Court was not willing to label the conduct dishonest in the sense of impropriety.

The basis for this finding was an absence of evidence demonstrating the employee received some personal benefit, either from his employer in terms of commission, salary increase or promotion; or from the company or director in the form of a bribe.[iv]

Whilst a fiduciary duty could not be established on these particular facts, it may still be possible for an employee of a similar position or standing to be considered a fiduciary of their employer. Additionally, further causes of action may be pleaded against an employee; simply not being in a fiduciary relationship will not be sufficient to avoid liability.

Corporate Law and COVID-19

Treasurer Josh Frydenburg has announced a series of potential temporary economic measures in response to the fluid COVID-19 situation. This temporary package has implications for bankruptcy, insolvency and corporate law.

We have summarised the proposed measures below.

Bankruptcy changes

  • Increase in the minimum debt threshold for a creditor-initiated bankruptcy procedure from $5000 - $20,000;
  • The time to respond to a bankruptcy notice increased from 21 days to 6 months;
  • An extension of the protection period for individual’s declaring an intention to present a debtor’s petition extended from 21 days to 6 months.

Insolvency Changes

  • Increase in minimum amount for a statutory demand from $2000 - $20,000;
  • Increase in time to respond to a statutory demand from 21 days to 6 months;
  • Temporary suspension of directors’ personal liability for insolvent trading for six months (egregious cases of dishonesty will still attract criminal liability);
  • Insertion of s 588GAAA which provides an additional temporary safe harbour provision during the six-month period.

According to the Bill, the amendments to times for compliance will only apply to procedures commenced on or after the commencement of the amending Schedule. The temporary increase in the monetary threshold will be repealed at the end of the six-month period which starts on the date of commencement.

In addition to the above relief, the Australian Investment and Securities Commission has announced it has adopted a ‘no-action’ position in regard to company AGM’s including:

  • a two-month ‘no-action’ position in regard to entities with a financial year end of 31 December that have not held an AGM by 31 March 2020;
  • the holding of virtual AGM’s;
  • sending supplementary notices of AGM electronically;
  • non-compliance with section 249J of the Corporations Act.

ASIC encourages the use of technology to facilitate virtual AGMs and electronic communication, however the company constitution will determine whether or not this is possible. ASIC cannot amend the constitution to allow this, however irregularities may be addressed via other methods.

No changes to financial reporting obligations have been announced yet, however ASIC is monitoring the situation.

While ASIC is entitled to indicate that it will not exercise its regulatory powers in a certain way, this does not prevent third parties from taking action against a company or a Court ruling that conduct has breached legislation. It is highly advisable to seek legal advice prior to undertaking a course of action.

Fugitive sentenced to 3 years jail for $200k tax fraud

A 56-year-old man has been sentenced to three years and three months in jail and ordered to pay over $150k in reparations after he fraudulently obtained and attempted to obtain more than $200,000 from the ATO.

Peter Garven appeared before the Sydney District Court on 30 May 2019, which heard that between October 2002 and July 2004, Mr Garven lodged three income tax returns in which he fraudulently obtained $102,504 in refunds and attempted to obtain a further $41,758. In doing so, Mr Garven claimed to have received more than $150,000 in salary and wages from the University of New South Wales, despite the university having no record of such payments.

The court also heard that between August 2002 and July 2004, Mr Garven fraudulently obtained $51,684 in GST refunds in his capacity as the sole director of Peter Garven Consulting and Garven Resources.

The hearing follows a tumultuous series of events which ensued after Mr Garven admitted his claims were false and vowed to lodge amendments in 2004. Namely, the ATO commenced an audit after the amended returns were never received. Mr Garven then failed to appear for his trial in March 2009, with a warrant later issued for his arrest. Mr Garven subsequently went into hiding and was registered on the missing persons list, before being arrested in 2017 in the Watagan Mountains.

Ultimately, the decision serves as an important reminder of the implications of failing to comply with tax obligations.

Close but no cigar: taxpayer jailed after creating fake business to obtain $1.5M tax refund

A 39-year-old South Australian man has been sentenced to 2 years and 4 months imprisonment after he attempted to obtain almost $1.5 million in tax refunds.

On 31 July 2019, Adam Hamshere appeared before the Adelaide District Court which heard that in January 2016, Mr Hamshere registered a fake business which purported to sell cigars. In doing so, Mr Hamshere obtained an ABN and later registered for GST and Wine Equalisation Tax (WET), backdating the GST registration to commence in January 2015.

In March 2016, Mr Hamshere lodged five business activity statements (BAS) in which he claimed an entitlement to $1,444,069 in GST and WET refunds.

After becoming the subject of an ATO audit, Mr Hamshere frequently phoned the ATO demanding immediate payment of the refund and claiming that his paper and electronic records had been stolen. However, despite thorough investigations into Mr Hamshere’s affairs, the ATO found no evidence to substantiate his business activity or his claims that his records had been stolen.

Ultimately, Judge Muscat found that Mr Hamshere had attempted to dishonestly obtain a financial advantage from the Commonwealth, pursuant to sections 11.1 and 134.2(1) of the Criminal Code 1995.

Acting ATO Assistant Commissioner David Mendoza asserted that the strong sentence is a timely reminder of penalties facing those who attempt to cheat the tax system. In doing so, he asserted that “those people who try to evade or cheat the tax and super system will get caught and we will take firm action. We will not tolerate this type of behaviour.”

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. 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.

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.

Legal professional privilege doesn’t apply where privileged material obtained by unauthorised means

Legal professional privilege (LPP) is a fundamental aspect of the lawyer-client relationship. The purpose of the privilege is to protect the confidential character of communications or documents created when a client seeks legal advice. The scope of applicability has been well defined for some time, however a recent case before the High Court has provided further guidance as to whether LPP can be enforced as a cause of action.

The case of Glencore International AG v Commissioner of Taxation [2019] HCA 26 concerned global mining group Glencore which had obtained legal advice from a firm based in Bermuda in relation to a restructure of its Australian operations. The documents created as a result were stolen from the firm’s electronic file management system and provided to the International Consortium of Investigative Journalists. These documents, amongst many others, formed what was known as the “Paradise Papers”. The Commissioner of Taxation subsequently came into possession of a copy of these documents.

Upon discovering the Commissioner’s possession of the documents, Glencore asserted LPP and requested the Commissioner return the documents and provide an undertaking that they would not be referred to or relied upon. The Commissioner declined these requests. Glencore subsequently brought proceedings seeking:

  • An injunction in equity restraining the use of the documents; and
  • An order for the return of the documents.

The Commissioner argued LPP did not extend to an actionable right by Glencore to bring proceedings for injunctive relief. Alternatively, the Commissioner argued he was not refrained from using the documents and was entitled and obliged by section 166 of the Income Tax Assessment Act 1936 (Cth) to use the documents in his possession. The matter was settled on the first basis and it was unnecessary to consider the alternative argument.

The High Court unanimously dismissed Glencore’s claim. The High Court acknowledged that while LPP is an important immunity it is not a legal right on which a cause of action can be based. In effect, LPP is a shield not a sword.

Despite this, a party may be able to rely upon LPP when seeking an injunction to restrain a breach of an obligation of confidentiality. This line of argument was not open to Glencore as the documents were already in the public domain as a result of the leak. This does give rise to the unfortunate inference that stolen documents may in some cases be admissible in court. The High Court acknowledged this inconsistency but did not address how this would be remedied. This will likely be reconciled with reference to established laws of evidence; however, it remains a live issue for now.

Director reprimanded for failing to comply with PAYGW obligations

In the matter of Deputy Commission of Taxation v Thomas Wilson [2018] NSWDC 302, the New South Wales District Court found against a company director for failing to comply with his duties. In doing so, Mahoney SC DCJ refused to mitigate on the basis of the director’s ‘difficult’ co-directors, asserting that there is no reprieve available to directors who fail to uphold their obligations.

In April 2015, Global Piling Contractors Pty Ltd was incorporated, with Mr Wilson, Mr Wheatley and Mrs Wheatley appointed as directors. Mr Wilson and Mr Wheatley each owned a 50% share in the company.

According to Mr Wilson, it was agreed at the time of incorporation that the directors were not employees of the company and thus would not receive salaries. Rather, they would draw money by way of dividends. In fact, the company was to have no employees, but would instead engage the services of contractors as required.

However, in 2015 the company withheld monies due to the Deputy Commissioner of Taxation on two occasions, before lodging Business Activity Statements which identified two amounts withheld for PAYG tax on employee salaries. The PAYG tax was never paid. Accordingly, in February 2016, Mr Wilson was issued with a Director Penalty Notice (DPN) for failing to remit PAYGW to the value of $111,798 to the ATO.

At trial, Mr Wilson submitted that from the time of incorporation until he received the DPN, he believed the company had systems in place to ensure it complied with its taxation obligations and remitted all amounts due to the ATO. He asserted that he thought those sums would be limited to GST and upon receiving the DPN, he did not understand that the amounts claimed were on account of taxes withheld by the company for wages paid to employees.

Moreover, Mr Wilson submitted that upon receiving the DPN, he phoned Mrs Wheatley who informed him that the amounts claimed in the DPN were on account of taxes withheld from wages paid to workers and not remitted to the ATO. Mr Wilson was also informed that Mr Wheatley had been hiring employees, rather than engaging contractors - a decision which he submitted he had not previously been made aware of. Further, Mr Wilson was informed that both Mr and Mrs Wheatley had also received a DPN and that ATB Partners would be engaged to formulate a payment plan with the ATO.

On 22 February 2016, at Mr Wilson’s request, a meeting of the company was held to discuss the outstanding taxation liability and the company’s ability to pay it. With no involvement in the day-to-day running of the company, and concerned that the company was insolvent, Mr Wilson was apprehensive about his exposure as a Director under the DPN. He subsequently moved a resolution that the company enter into voluntary administration. However, Mr and Mrs Wheatley contended that the company was simply experiencing a ‘temporary lack of liquidity’, and consequently dismissed the motion. They also rejected a secondary resolution by Mr Wilson that the directors convene a general meeting of the members of the company for the purpose of appointing a liquidator.

Mr Wilson subsequently sought legal advice on how to put the company into administration or cause the company to be wound up to avoid liability under the DPN. Mr Wilson was informed that he alone could not put the company into the administration, and that in order to avoid liability under the DPN, the company would need to pay its outstanding taxation liabilities. Mr Wilson was also advised that he could apply to the court for a winding up order but that it would be a difficult process and that by the time an application was heard in court, the time for compliance with the DPN would likely have expired.
In August 2016, Mr and Mrs Wheatley agreed to appoint an administrator, who the court subsequently appointed as a liquidator.

In September 2018, the matter was brought before Mahoney DCJ, with the Deputy Commissioner of Taxation alleging that pursuant to section 255-45 of the Taxation Administration Act, it had a prima facie entitlement to the debt due by virtue of an evidentiary certificate. However, Mr Wilson relied on the statutory defence under s 269-35. Accordingly, the court was required to determine whether Mr Wilson had taken “all steps which were reasonable, having regard to the circumstances of which the defendant, acting reasonably, knew or ought to have known, to ensure that the directors complied with the section.”

Having considered the test in Saunig, the court held that the Mr Wilson had failed to take all reasonable steps, concluding that he “failed to inform himself of the way in which the company was being managed and operated.” In doing so, Mahoney DCJ held that Mr Wilson ought to have known that the company was incurring a tax liability by way of PAYGW. His Honour also concluded that there were further steps available to Mr Wilson, including calling another meeting to persuade his co-directors to appoint an administrator or to have brought an application for leave to wind up the company. Mr Wilson was therefore ordered to pay the debt in the amount of $111,798 plus interest, pursuant to section 100 of the Civil Procedure Act 2005.

Ultimately, this case serves as a warning to other directors that they cannot claim ignorance to satisfy the objective test and absolve their duties as a director.