Court affirms fiduciary duties are not discretionary – Lessons for directors, trustees and professional advisors

In 2015/2016 it was recorded that there were nearly 850,000 trusts used in Australia holding more than $3 trillion worth of assets. But, how many people really understand trusts, and the obligations that go with them.

Twigg v Twigg (No 4); Lambert v Twigg Investments Pty Ltd (No 3) [2020] NSWSC 1159 is an example of the dangers of not knowing or understanding what it means to have an interest in, or a role to play in a trust.

The case

The case concerns the sale of a family trust owned business, for $155.8 million. After the death of the patriarch, William Twigg (William), control of the family trust was transferred to William’s son, Maxwell James Twigg (Max). Although the trust deed was established for the potential benefit of the whole family which included his mother and his two sisters, Max unilaterally “gifted” them $5m following the sale of the family business, claiming the balance for his own benefit.

A key concept to appreciate is that unlike personally owned assets, control or management of a trust does not equate to ownership.

The court decided that the transfer of assets to himself (without the knowledge of his mother, a co-director) was contrary to Max’s fiduciary duties as a director and trustee.

Problems arose when Max’s sisters raised concerns about undistributed entitlements, after incurring capital gains tax (CGT) liabilities. They discovered that the trust did not have sufficient funds to pay out their beneficial entitlements.

The Court held that, regardless of whether money was paid to Max personally or entities controlled by him, as a director of the trustee, Max did not have power to unilaterally determine how to deal with trust assets. In law that money was held on trust for the beneficiaries, as a constructive trustee. The payment of money without proper procedure and consent involved a breach of duty and intermeddling in the affairs of the relevant trusts.

Following the tracing of the proceeds of sale and assets held by Max and entities controlled by him, the Court determined that the beneficiaries of the trusts were entitled to equitable compensation in respect to his breach of fiduciary duties.

Lessons

There are a number of lessons that should be learned from the Twigg case.

1. Trust structures

This case involved a complex web of trust structures, interrelationships between the structures and the individuals involved. Whilst this in itself is not an issue, it is a reminder to ensure structures are established and managed in a transparent and prudent manner to avoid any ambiguity, dispute and legal proceedings. There is a clear distinction between management, control and ownership.

2. Directors Duties

The case confirms that a lack of interest in or knowledge of a business and legal matters does not absolve a director of responsibilities. It also emphasises the importance of directors complying with the constitution of a company and any purported delegation of powers must be permissible by the constitution. Rights to power and delegations of power cannot be implied. Directors should ensure any delegations are in writing. The Court will be reluctant to make an order to rectify any irregularities under s 1322(4) of the Corporations Act where a purported passing of a resolution involved something more than a procedural issue and particularly if there has been a failure to act honestly. Similarly, Trustees must be aware of their fiduciary duties.

3. Independent Advisors

The case should act as a warning for independent advisors to be exactly that, independent. Advisors must remain impartial, know who their client is and only act upon valid instructions. They should not be the ‘driving force’ for a specific outcome or for the drafting of legal documents. The case is also a reminder for advisors to maintain detailed and accurate file notes to mitigate the risk of proceedings, and to serve as credible evidence.

4. Powers of Attorney

The use of powers of attorney to justify decisions and act as a quasi-instrument of delegation of powers was rejected in this case. The Court also confirmed powers of attorney executed in a personal capacity do not apply to responsibilities as a director. This case is a timely reminder to ensure powers of attorney are drafted by an expert and that advice is sought as to the intentions of the document rather than a one size fits all approach.

5. Preparation of Legal Documents

Professional advisors (lawyers and accountants) must remember that the quality and veracity of evidence will be tested. Documents should only be prepared on clearly expressed instructions, and not in legalistic/technical language that clients do not understand.

The judge in this case was critical in respect to:

  1. An affidavit that contained evidence that went beyond what the witness could really remember or understand;
  2. The preparation of an affidavit by a financial advisor that was tailored to support one client’s case, but found to contain information for which he had no actual recollection;
  3. The drafting of or providing instructions for the preparation of a Will by a financial advisor potentially on the instructions of another party and not the testator.

The consequences of the above not only go to credibility of the witnesses but may result in evidence not being accepted.

Whilst trusts are used widely, and with good reason, the rights and obligations of the parties who have a stake in either ownership, management, or control must be taken seriously.

If you would like advice on your trust structures or have a trust dispute, contact Henry Kalus or Kimi Shah.