By John Wojtowicz (Director - Law Central Legal)

The position of an appointor in a unit trust is unusual and rare. However, occasionally, such a position exists in a unit trust. The recent case of Baba v Sheehan highlights the importance of this position in a unit trust when a dispute between unit holders occurs.

The Appointor Position

The term “appointor” is defined in the trust deed. Sometimes this position is given another name in the trust deed – ie “protector”.

The courts have usually held this position to denote a person or entity trusted by the settlor to protect the trust.

The appointor normally has the power to remove the trustee of the trust and appoint another on minimal notice. Its powers and its ability to remove and appoint trustees is defined by the terms of the trust deed. In some cases the appointor may have additional powers to those of just replacing the trustee. For instance, the trustee may first require the appointor’s approval before certain transactions are undertaken.

The appointor in a family trust is usually the father/mother of the family unit for whom the trust was established for. The role of the appointor in a family trust will be discussed in future newsletters.

In a unit trust the unusual role of appointor may be filled by parties associated with the unit holders or by an independent person/entity appointed for the purpose of providing independent oversight.

Unit Trusts- Are Appointors Necessary?

Small scale unit trusts do not normally have an appointor position. This is because the unit holders in the trust normally have a fixed interest in the income and capital of the trust as opposed to a family trust where each beneficiary has no defined interest in the trust fund. Each unit holder normally has one vote per unit to be exercised at a unit holders meeting.

The unit holders in most unit trusts have the power to remove a trustee. Unit holders that are dismayed with the trustee’s performance or behaviour can call a unit holders meeting to pass a resolution to remove and replace the trustee. This is normally by way of an ordinary resolution of 50% of the unit holders by way of voting rights or by another percentage – eg 100%. There is no hard and fast rule as to what percentage of unit holders should be required to effect the change of trustee. Most unit trust deeds have 50%, 75% or 100% as the minimum number of unit holder votes required. Professional advice should be sought on this point prior to establishing the trust to avoid unsatisfactory outcomes down the track.

Why have an appointor in a unit trust? This would normally be the case so that the power to remove the trustee and appoint another is not in the hands of the unit holders, but in the hands of a third person /entity. This third party would take an independent view as to whether the removal of the trustee and the appointment of another was warranted. This may protect unit holders with minority positions in the trust from majority unit holders forcing the removal of the trustee or forcing another agenda in their favour. The independent appointor could also provide an oversight role in the trust - see our platinum section for more detail on this point.

(We further note that should the appointor in a unit trust have other powers - ie the ability to amend the trust deed to change a unit holder’s interest in the trust, then this may the cause the Commissioner of Taxation to hold the view that the trust is a “non fixed trust” pursuant to example 1 in paragraph 16 of PCG 2016/16 which may result in adverse tax consequences for the unit holders.)

Baba v Sheehan

This case concerns the validity of the removal of a trustee in the Smart Street Optical Unit Trust (“the Trust”) by the appointor.

The appointor of the Trust was Mr Sheehan. The appointor under clause 2 of the Trust deed had power to remove the trustee.

As stated in paragraph 27 of the judgment:

Rijalu is a company controlled by Mr Sheehan, the appointor.

A dispute arose between the unitholders. “Mr Sheehan said that he became concerned that he was being kept out of the affairs of the Trust.” (at [35])

On the 26 October 2016 Mr Sheehan, as the appointor, by email, removed the trustee of the Trust and appointed a new trustee being a company, “Silktote […], the directors of which are Paul and Dianne Sheehan.” The email further stated that “[a]s trustee, Silktote […] will seek to administer the trust solely in the interests of Unit holders.”: (at [40])

The appellants, Mr and Mrs Baba, in court proceedings instigated by them “complained that the removal of the trustee and appointment of Silktote Pty Limited was void as a fraud on the power conferred upon Mr Sheehan”.

The primary judge “dismissed their claim. His Honour was satisfied that Mr Sheehan had legitimate questions about the affairs of the trust and that he was not properly informed about certain dealings. Accordingly, Mr Sheehan validly exercised the power as he was not merely motivated to gain control of the trust. He acted to protect the interests of a unitholder.” (from the Headnote to judgment). Mr and Mrs Baba appealed the decision.

The Court of Appeal of the Supreme Court of NSW dismissed the appeal by Mr and Mrs Baba.

The Court of Appeal held:

“1.   The doctrine of “fraud on a power” constrains the power to appoint trustees. An exercise of the power will be avoided if exercised for a purpose, or with an intention, beyond the scope of, or not justified by, the instrument creating the power”.

“2.   The primary judge made an assessment of the credibility and reliability of Mr Sheehan’s evidence as to his motives in exercising his power. The appellants advanced no basis to justify a conclusion that the primary judge erred in assessing that evidence.”

Brereton JA in his judgment when addressing the “power of appointment” stated that
“[a]lthough there are cases that hold that a power of the present kind is also fiduciary in nature, this is open to serious doubt, at least as a general rule, and it is clear that the appointment of the appointor himself or herself as trustee, or a company controlled by the appointor, is not necessarily prohibited, although many of the cases turn on the terms of the particular trust deed.”

Takeaway

The point that must be stressed is that due attention must be paid to the terms of the trust prior to its establishment. Each party in a unit trust may have different interests and requirements that require the trust deed to be tailored in a particular way.

Granting a person or entity a power in the trust deed allows that person to exercise the power for a bona fide purpose for which it was conferred.

On the flip side depriving or not stating that a person or entity has certain powers can deprive that person from taking certain actions to protect his position in the trust on a later date.

Platinum members please continue on to read our platinum section where we discuss possible scenarios where an appointor may be required for a unit trust.

Disclaimer: The content of this Bulletin is general information only. It is not legal advice. Law Central Legal recommends you seek professional advice before taking any action based on the content of this Bulletin.