Standing to Sue - Terminated Trusts

                                                                                                                                                                                                  S Perkovic, Principal of Northfields Lawyers, 9 October 2016

Trust are sometimes terminated inadvertently, sometimes because of their high maintenance expenses and lack of funding or for other reasons.

We examine a position in Common Law, particularly Australian Law about competency of trustees of terminated trust to conduct proceedings regarding the terminated trust.

Arguable Resulting Trust

In the case of termination, The trustee is not justified in delaying distribution merely because some claims outstanding against the trust estate: he needs to a take it into account before finalising the distribution: the trustee should set aside a sum sufficient to meet any claims and distribute the balance remaining in her or his hands (Ford and Lee, Principles of the Law of Trusts, Loose-leaf edition, updated regularly).

In Common Law,  when a trust is terminated by the exercise of a power to terminate, neither the trust nor the trustee's powers are automatically brought to an end. Consequently, the surplus will result back to the contributor of the funds. As is stated in Air Jamaica v Charlton [1999] 1 WLR 1399 at 43 “Prima facie the surplus is held on a resulting trust for those who provided it.” In the USA this position is also well settled: In Matter of Thomas 254 N. Y. 292, 296, 172 N. E. 513, 514 (1930): Matter of Miller, 257 N. Y. 349, 178 N. E. 555 (1931) where it was held that the trust is at an end when the trustee has finally accounted, conveyed the property to the persons entitled to it, and been discharged.

In Davis v Richards & Wallington Ltd [1990] 1 WLR 1511 Scott J affirmed the application of this principle to superannuation fund surpluses (see also Re Canada Trust Co and Cantol Ltd (1979) 103 DLR (3rd) 109).

However, where the trust deed provides rules as to the destination of a surplus these rules must be followed. Following the decision Air Jamaica v Charlton [1999] 1 WLR 1399, very clear and unambiguous words are required for this purpose.

The trust continues for a reasonable time during which the trustee has the power to perform such acts as are necessary to the winding up of the trust and the distribution of the trust property, and as are expressly given or reasonably implied from the trust. instrument. A purpose of such powers is to enable the trustee to protect the trust property pending distribution.

It is competent for Trustees of a resulting trust to prosecute proceedings. There is the duty of a trustee to get in the trust estate for the benefit of the trust estate (Young v Murphy [1996] 1 VR 279).

Pursuant to this duty, a trustee must take proceedings against a co-trustee, a former trustee or a stranger who is liable to redress a breach of trust or otherwise owes a present liability to the trust.

This obligation is confirmed in many decisions such as Ex parte Greaves (1856) 8 De GM & G 291; 44 ER 402; Re Brogden; Billing v Brogden (1888) 38 Ch D 546 at 564-5 per Cotton LJ, at 574-5 per Lopes LJ; [1886-90] All ER Rep 927; (1888) 59 LT 650, CA; Longhurst v Waite (1920) SALR 407 at 428 per Poole J; Partridge v Equity Trustees Executors and Agency Co Ltd (1947) 75 CLR 149 at 164; [1947] ALR 552; (1947) 21 ALJ 321; BC4700380 per Starke, Dixon and Williams JJ ; Re Atkinson (dec’d) [1971] VR 612 at 616 per Gillard J.

Beneficiaries’ Standing to Sue and

If beneficiaries of a trust commence legal action the trustees have to be joined either as plaintiffs or defendants.

A beneficiary has a personal remedy in equity to enforce the trust and a proprietary in equity (HAY Ford and WA Lee, Principles of the Law of Trusts Thomson Lawbook Co  (4th loose leaf edition) updated regularly, § 1.8830 and § 1.8350.).

Circumstances noted in Young, Croft and Smith On Equity at [15.70] which enable a beneficiary to sue seriously maybe applicable. One of the circumstances expressly acknowledged at [15.70] is where the trustees have no funds and have been discharged from the trusts citing Lamru Pty Ltd v Kation Pty Ltd (1998) 44 NSWLR 432 and see per Cohen J at 436-438.

When beneficiaries are possessed of a right to sue defendants, the trustees may be disapproved to commence an action as their powers may be unneccessary if the beneficiaries do not request proceedings – see below observations from Morlea case.  

Observations in Morlea

in Morlea Professional Services Pty Ltd v Richard Walter Pty Ltd (in liq)  (1999) 96 FCR 217; 34 ACSR 371; [1999] FCA 1820 at 63); Fed C of A, Full Court, the former Trustee initiated the proceeding although it was in breach of trust and although it terminated the trust without consent of beneficiaries 10 years before commencing proceedings.  The beneficiaries did not request proceedings and were not a party to it.  The trustees commenced the action more than one decade of termination of trust and it was disapproved, however, only for the most important reason, that the beneficiaries possessed their own direct causes of action because the beneficiaries themselves were at the time possessed of a right to sue the defendant.

The court did not put any doubts to the right of trustees, even one decade after termination, to enter into the trust property however beneficiaries had own rights, so the Trustee’s powers were unnecessary. Over 10 years after termination, the Court stated, at [63]:  “If proceedings were to be initiated it was for the beneficiaries to decide this as also by whom (themselves or their former trustee) it would be brought if their decision was to sue.” 

It is also noted that in this decision, the Court considered initiating of the action by trustees to be for purpose of remedying their own faults as trustees and not ultimately for benefit of the beneficiaries.

Conclusion

When a trust is terminated, particularly in a case of inadvertent termination or when trust does not have funds, founders, trustees and beneficiaries of the trust seem to still remain entitled to standing to sue.

Disclaimer:

The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this publication is accurate at the date it is received or that it will continue to be accurate in the future. We are not responsible for the information of any source to which a link is provided or reference is made and exclude all liability in connection with use of these sources.