Professionally Maintain Your Family Trust or Risk Legal Proceedings

BACKGROUND

The Queensland Supreme Court’s recent decision in Onza Industries Pty Ltd v Tingalpa Tyre & Mechanical Pty Ltd [2021] QSC 1 (‘Onza v Tingalpa’) demonstrates the serious legal consequences which may arise from miscommunication between family members when purchasing joint properties under a family trust.  Further, Onza v Tingalpa concerns the importance for families to properly and professionally maintain their family trust in order to avoid expensive and unnecessary legal proceedings.

In summary, the defendant purchased a NSW property (‘Property’) in 2006 as trustee of the Family Discretionary Trust (‘Trust’).  In December 2014, the appointor of the Trust removed the defendant as trustee and appointed the plaintiff as trustee in its place. The defendant subsequently failed to do what was required to facilitate the change of trustee on the title to the property. In addition, it was argued that the defendant acted in breach of its duties as trustee by dealing with the property in a manner inconsistent with the plaintiff’s legal title (including changing the locks and advertising the property for sale or rent with its contact phone number).

In Onza v Tingalpa, the key issues the Court considered were:

1. the purchase of the Property by the defendant as trustee of the Trust and the effect of ownership over the Property;
2. whether the appointment of the plaintiff as trustee of the Trust was valid and effective, considering that the plaintiff was not incorporated until the day after the appointment of the plaintiff and the deed resolution; and
3. whether the defendant had any liability to reimburse the plaintiff for money contributed to the purchase of the property, including the initial purchase, discharge of the mortgage and renovation works.

IN WHAT CAPACITY DID THE DEFENDANT PURCHASE THE PROPERTY?

The Court found that the defendant purchased the property as trustee of the Trust.  The Court established this from the following (among other things):

(a) the Trust was originally established by the family for the sole purpose or purchasing the Property; and

(b) the description of the purchaser on the contract was the defendant as trustee of the Trust.

WAS THE APPOINTMENT OF THE PLAINTIFF AS TRUSTEE OF THE TRUST VALID?

The Court found that:

(a) the appointment of the plaintiff as trustee of the Trust was valid and effective, as the Trust deed gave the appointor of the Trust the power to remove a current trustee and appoint a new trustee;

(b) the defendant as the outgoing trustee would cease to be the trustee immediately upon the appointment of the new trustee taking effect, which was found to be upon the plaintiff’s incorporation the following day, when the plaintiff came into existence.

WHAT REIMBURSEMENT IS OWED TO THE PLAINTIFF AND / OR DEFENDANT?

Her Honour stated that there was accounting still to be completed between the parties taking into account:

(a)  monies owed to the defendant for their contribution to the acquisition and renovation of the Property; and

(b) monies owed by the defendant for the rental income received (less expenses) of the Property.

Her Honour however stated that the amounts to be paid were “beyond the scope” of the proceeding.

KEY TAKEAWAYS FOR LITIGANTS

• Before commencing or defending proceedings, litigants must identify and understand their obligations under both legislation and common law to avoid unnecessary legal proceedings, especially in relation to a family trust;
• A (future) business can be appointed as a trustee even if the business is not yet incorporated. In such circumstances, the current trustee will remain as the legal owner of the Trust property, until the incoming trustee comes into existence; and
• Trustees have legal duties which they must adhere to including (among other things):
  • to act honestly, reasonably and in good faith;
  • to act in accordance with the terms of the trust;
  • to avoid conflicts of interest;
  • to act with care and diligence;
  • to maintain proper accounting
  • to maintain and distribute income and capital as per the trust deed; and
  • to preserve the value of trust assets.

KEY TAKEAWAYS FOR BUSINESSES

As stated by Her Honour in Onza v Tingalpa, business owners and operators should be aware that a company, where possible, ought to avoid wearing “two hats”, i.e., one hat as a company in its own capacity (as the operator of a business) and another hat as the corporate trustee of the Trust.  If you are unsure of your obligations as a trustee of a Trust, it is important that you seek legal advice regarding your position as trustee.

OUR ROLE IN LITIGATION & A FAMILY TRUST

If you are looking to seek legal advice, Ramsden Lawyers are able to assist you. We are happy to arrange an initial consultation to assist you in navigating the procedures set out under the relevant legislation for your circumstances.  We have a litigation team to assist in any proceedings you wish to commence or defend; and a business team to assist you in understanding your obligations under relevant law.

The content of this article is intended to provide a general guide to the subject matter and must not be relied on as legal advice.  Specific advice should be sought about your circumstances.

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