The Removal of a Trustee

BY Hearsay

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The West Australian Court of Appeal – comprising Buss P, Murphy and Mitchell JJA – in a decision of the Court handed down on 9 November 2023 in CARDACI -v- CARDACI [2023] WASCA 158 (9 November 2023) considered the law relating to the removal of a trustee.

Relevantly, the Court of Appeal said:

Scope of the court’s power to remove a trustee

For the following reasons, we do not accept the appellants’ submission that the court’s jurisdiction to remove the trustee of a discretionary trust only arises where there is a finding of bad faith, improper purpose, misconduct or a failure or refusal to consider the exercise of powers in favour of an eligible object.
First, the appellants’ submission finds no foothold in, and is inconsistent with, the statutory text of s 77 of the Trustees Act.
Section 77(1) is in the following terms:

The Court may, whenever it is expedient to appoint a new trustee or new trustees, and it is inexpedient, difficult or impracticable so to do without the assistance of the Court, make an order for the appointment of a new trustee or new trustees, either in substitution for, or in addition to, any existing trustee or trustees, or although there is no existing trustee.
The only conditions to the existence of the power set out in s 77 is that ‘it is expedient to appoint a new trustee’ and that it is ‘inexpedient, difficult or impracticable to do so without the assistance of the Court’. The discretionary power arises ‘whenever’ those conditions are satisfied. That broad language is inconsistent with the limitation on the existence of the court’s statutory jurisdiction for which the appellants contend.
Section 77(2) refers to particular instances in which the court may make an order appointing a new trustee in substitution for a trustee. Those instances include where a trustee has been held by the court ‘to have misconducted himself in the administration of the trust’.[188] However, the instances are not confined to cases involving some form of misconduct. They extend to cases where the willingness or capacity of the trustee to administer the trust is impugned, such as where the trustee ‘desires to be discharged’ or is ‘a person of unsound mind’ or is a corporation that ‘has ceased to carry on business, or is in liquidation, or has been dissolved’. They also extend to cases where, although there may have been no dereliction in the administration of the trust, some feature (a conviction of an indictable offence or bankruptcy) gives rise to a lack of confidence in the trustee to administer the trust. Further, the particular instances in s 77(2) are expressly given ‘without limiting the generality of’ s 77(1) of the Trustees Act.
Second, the appellants’ submissions are inconsistent with the way in which the equitable jurisdiction to remove a trustee has been expressed in various cases.
In Letterstedt v Broers,[189] Lord Blackburn, delivering the judgment of the Privy Council, noted that in cases of positive misconduct courts of equity had no difficulty in removing trustees who have abused their trust. However, that was not the extent of the jurisdiction, and in a case where the court was not satisfied that charges of misconduct were made out, his Lordship stated:[190]

[Y]et if satisfied that the continuance of the trustee would prevent the trusts being properly executed, the trustee might be removed. It must always be borne in mind that trustees exist for the benefit of those to whom the creator of the trust has given the trust estate.
Lord Blackburn observed:[191]

In exercising so delicate a jurisdiction as that of removing trustees, their Lordships do not venture to lay down any general rule beyond the very broad principle above enunciated, that their main guide must be the welfare of the beneficiaries. Probably it is not possible to lay down any more definite rule in a matter so essentially dependent on details often of great nicety.
The question in Letterstedt was later characterised as being ‘whether, in view of the future welfare of the trust estate, it is expedient that the Board should remain trustees’. In answering that question, Lord Blackburn said:[192]

It is quite true that friction or hostility between trustees and the immediate possessor of the trust estate is not of itself a reason for the removal of the trustees. But where the hostility is grounded on the mode in which the trust has been administered, where it has been caused wholly or partially by substantial overcharges against the trust estate, it is certainly not to be disregarded.

Looking therefore at the whole circumstances of this very peculiar case, the complete change of position, the unfortunate hostility that has arisen, and the difficult and delicate duties that may yet have to be performed, their Lordships can come to no other conclusion than that it is necessary, for the welfare of the beneficiaries, that the Board should no longer be trustees.
Letterstedt was applied by Latham CJ and Starke J in Miller v Cameron.[193] In that case, the sole remaining trustee of a trust, vested with various discretions, had entered into a compromise with his creditors and engaged in other conduct which, although not in breach of trust, led the beneficiaries of the trust to seek his removal. Referring to Letterstedt, Latham CJ described the removal power in the following terms:[194]

It has long been settled that, in determining whether or not it is proper to remove a trustee, the Court will regard the welfare of the beneficiaries as the dominant consideration. Perhaps the principal element in the welfare of the beneficiaries is to be found in the safety of the trust estate. Accordingly, even though he has been guilty of no misconduct, if a trustee is in a position so impecunious that he would be subject to a particularly strong temptation to misapply the trust funds, the Court may properly remove him from his office as trustee. (citation omitted)
Starke J said, with reference to Letterstedt:[195]

No general rule can be laid down for the removal of trustees from their office. The only guide is the welfare of the beneficiaries, and a trustee may be removed if the court is satisfied that his continuance in office would be detrimental to their interest. (citation omitted)
Dixon J, with whom Evatt J and McTiernan J agreed, described the court’s removal power as follows:[196]

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 deciding 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. A trustee is not to be removed unless circumstances exist which afford ground upon which the jurisdiction may be exercised.
Dixon J concluded that the facts of Miller entitled the court to inquire into the circumstances of the trustee’s financial failure ‘and to consider how far they may impair the confidence felt in his administration of the trusts’. His Honour concluded that ‘a sufficient foundation’ appeared to remove the trustee.[197]
This court has applied the statements of principle in Miller and Letterstedt. In Blenkinsop v Herbert,[198] this court summarised the equitable principles in the following terms:

The court’s principal duty is to see that trusts are properly executed. Under the general law, and subject to exceptional circumstances, the primary rule is that the business of a court is to execute trusts, but not alter them. While, under a discretionary trust, a member of a class of beneficiaries the subject of the discretion generally does not have a proprietary interest in the trust property, such a person has a right to seek the intervention of the court of equity to exercise its inherent jurisdiction to supervise and, if necessary, intervene in the administration of the trust.

… [T]he protection to which the object of a discretion under a discretionary trust is entitled, and the circumstances in which they may seek protection, will depend upon the court’s discretion. In exercising its powers to enforce due execution of a trust, for example by removing a trustee, the court forms a broad judgment as to the beneficiaries’ best interests having regard to all the circumstances of the case. In other words, the court has power to remove a trustee as an aspect of its broad power to enforce due execution of a trust.

The principles we have stated underline the breadth of the court’s jurisdiction in relation to the administration of trusts. (citations omitted)
The principles in Miller were also applied by the Victorian Court of Appeal in Wareham v Marsella.[199] In that case, trustees of a superannuation fund exercised a discretionary power of appointment to pay a death benefit to one of the trustees (the deceased’s daughter). The trustees were found to have misunderstood their duties and, on that basis, failed to give real and genuine consideration to the personal claims of one of the objects of the power of appointment (the deceased’s former husband). The Victorian Court of Appeal held that the trial judge’s exercise of discretion to remove the trustees based on that finding did not miscarry. In doing so, after citing the passage in Miller referred to at [194] above, the cou[200]observed:200

The trustees made a decision, based on a failure to give the matter real and genuine consideration, which they have since defended both at trial and in this Court. The trustee or trustees who will re-exercise the discretion must, in order to give the matter real and genuine consideration, admit of the possibility of a different outcome. There is a real risk, at the least, that even with correct legal advice the interests of all potential beneficiaries may not be given that consideration by the present trustees, but that they may instead simply act to reinstate the decision, made in their own favour, which they have fought to uphold. In the circumstances, it has not been shown that the judge’s discretion miscarried.
The above authorities indicate that a breach of duty by a trustee may be neither necessary nor sufficient to justify the exercise of the court’s power in equity to remove a trustee. It may not be necessary because there may be factors other than a breach of trust which sufficiently impair the confidence of the court in the trustee’s future administration of the trust as to lead to the conclusion that the welfare of the beneficiaries or objects of a trust is opposed to the trustee’s continuation in office. On the other hand, an established past breach of trust will not necessarily impair the court’s confidence in the future administration of the trust.
Most importantly, for present purposes, these authorities emphasise that the court has a broad discretion to be 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. The authorities are inconsistent with a view that the court’s power to remove the trustee of a discretionary trust is constrained by an imperative for the court to find bad faith, improper purpose, misconduct or a failure or refusal to consider the exercise of powers in favour of an eligible object.
Third, the broad nature of the court’s power to remove a trustee is consistent with the principles as to the limits of the court’s review of the exercise of a special power of appointment explained in Karger.
In Karger there was a challenge by a person in whom assets of a testamentary trust would otherwise have vested, to the exercise by the trustees of an ‘absolute and unfettered discretion’ to transfer trust assets out of the trust. The plaintiff in Karger sought to impugn the exercise of the power rather than remove and replace the trustees. McGarvie J stated the following general principle:[201]

In my opinion the effect of the authorities is that, with one exception, the exercise of a discretion in these terms will not be examined or reviewed by the courts so long as the essential component parts of the exercise of the particular discretion are present. Those essential component parts are present if the discretion is exercised by the trustees in good faith, upon real and genuine consideration and in accordance with the purposes for which the discretion was conferred. The exception is that the validity of the trustees’ reasons will be examined and reviewed if the trustees choose to state their reasons for their exercise of discretion.
Later, McGarvie J said:[202]

In my view, in this case it is open to the Court to examine the evidence to decide whether there has been a failure by the trustees to exercise the discretion in good faith, upon real and genuine consideration and in accordance with the purposes for which the discretion was conferred. As part of the process of, and solely for the purpose of, ascertaining whether there has been any such failure, it is relevant to look at evidence of the inquiries which were made by the trustees, the information they had and the reasons for, and manner of, their exercising their discretion. However, it is not open to the Court to look at those things for the independent purpose of impugning the exercise of discretion on the grounds that their inquiries, information or reasons or the manner of exercise of the discretion, fell short of what was appropriate and sufficient. Nor is it open to the Court to look at the factual situation established by the evidence, for the independent purpose of impugning the exercise of the discretion on the grounds the trustees were wrong in their appreciation of the facts or made an unwise or unjustified exercise of discretion in the circumstances. The issues which are examinable by the Court are limited to whether there has been a failure to exercise the discretion in good faith, upon real and genuine consideration and in accordance with the purposes for which the discretion was conferred. In short, the Court examines whether the discretion was exercised but does not examine how it was exercised.
The principles explained in Karger have been cited with approval on many occasions, including by the High Court in Attorney-General (Cth) v Breckler[203] and Finch v Telstra Super Pty Ltd,[204]and by the Victorian Court of Appeal in Wareham.[205]
However, the principles stated in Karger govern the circumstances in which the courts will review the past purported exercise of a special power of appointment in a discretionary trust. They do not confine the jurisdiction to remove a trustee. As noted above at [198], a past breach of trust in the exercise of a special power of appointment is neither necessary nor sufficient to justify the exercise of the court’s power to remove a trustee.
If the grounds for removal are or include an alleged past failure to properly exercise the power, then the court will review the exercise of the power having regard to the principles set out in Karger. In applying those principles, the court may conclude that there has been a breach of trust in the past exercise of or failure to exercise the power. However, if the court reaches that conclusion, it will still ordinarily be necessary for the court to consider whether that past breach of trust so impairs the court’s confidence in the future administration of the trust as to lead to the conclusion that the welfare of the beneficiaries or objects of a trust is opposed to the trustee’s continuation in office.
Alternatively, the court, applying the principles explained in Karger, may find that there has been no breach of trust in the past exercise of or failure to exercise the power. However, even in such a case, the court may still conclude that there are reasons other than a past breach of trust in the exercise of or failure to exercise a power that justifies the trustee’s removal. It may do so where matters other than past breach of trust so impair the court’s confidence in the future administration of the trust as to lead to the conclusion that the welfare of the beneficiaries or objects of a trust is opposed to the trustee’s continuation in office.
Fourth, the appellants’ contention is inconsistent with the approach taken by this court, in Elovalis v Elovalis,[206] to the construction of the power conferred by s 77 of the Trustees Act. The court held that the power in s 77was available to be exercised:[207]

whenever it is expedient to do so, in the sense described in the cases [including cases dealing with the equitable jurisdiction], and without it being necessary to establish bad faith, misconduct, or breach of trust.
This court’s recognition that the power is available in those circumstances is inconsistent with the appellants’ proposition that the statutory power only arises where there is a finding of bad faith, improper purpose, misconduct or a failure or refusal to consider the exercise of powers in favour of an eligible object.

[188] Trustees Act s 77(2)(b).
[189] Letterstedt v Broers (1884) 9 App Cas 371.
[190] Letterstedt (386)
[191] Letterstedt (387).
[192] Letterstedt (389).
[193] Miller v Cameron [1936] HCA 13; (1936) 54 CLR 572.
[194] Miller (575).
[195] Miller (579).
[196] Miller (580 – 581).
[197] Miller (582).
[198] Blenkinsop v Herbert [2017] WASCA 87; (2017) 51 WAR 264 [72] – [74].
[199] Wareham v Marsella [2020] VSCA 92; (2020) 61 VR 262.
[200] Wareham [105].
[201] Karger (163 – 164).
[202] Karger (164).
[203] Attorney-General (Cth) v Breckler [1999] HCA 28; (1999) 197 CLR 83 [7], [58].
[204] Finch v Telstra Super Pty Ltd [2010] HCA 36; (2010) 242 CLR 254 [28], [36] – [38] (although the question of whether the principles applied without qualification to the decisions of trustees of regulated superannuation funds was referred to by the court, their general application to special powers of appointment in discretionary trusts was not doubted).
[205] Wareham [91] – [92].
[206] Elovalis v Elovalis [2008] WASCA 141.
[207] Elovalis [40] (Martin CJ, Buss & Newnes JJA agreeing).

….

The above extract refers to the decision in Karger, the case name and citation for which is: Karger v Paul [1984] VicRp 13; [1984] VR 161.

The link to the above case is at: CARDACI -v- CARDACI [2023] WASCA 158 – eCourts Portal (justice.wa.gov.au)