The Trustee's Conflict and the Variation of Trust
A family trust established in 2005 holds a commercial property in Parramatta. The trustee is a company whose sole director, Margaret, is also a beneficiary. The trust deed permits variation with the consent of the trustee and the appointor. Margaret wishes to vary the deed to allow the trustee to lend trust funds to a company she controls at 2% interest, well below market rates. The other beneficiaries, Margaret's two siblings, object and seek an injunction. The appointor, their elderly father, has not been consulted and lacks capacity. The trust deed is silent on conflicts of interest and on lending to related parties. The property is the trust's only substantial asset and is subject to a mortgage.
1. Advise whether the proposed variation is valid and whether Margaret's conflict of interest affects it.
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A trustee's power to vary a trust deed depends on the terms of the deed and the general law. The variation must be authorised by the deed and exercised in good faith, for the benefit of the trust, and not for an improper purpose. Margaret's conflict of interest is significant because she is both director of the trustee and a beneficiary, and the proposed variation benefits a company she controls. Under the general law, a trustee must avoid conflicts between duty and interest, and a trustee cannot use trust property for personal advantage without fully informed consent or express authorisation in the deed. Since the deed is silent, the variation is likely invalid unless the court approves it. The court may approve a variation under s 81 of the Trustee Act 1925 (NSW) if satisfied it is for the benefit of the trust, but the conflict and the below-market interest rate suggest the variation is not for the beneficiaries' benefit. The appointor's lack of capacity means consent cannot be validly given, and the court may need to appoint a substitute appointor or approve the variation under its inherent jurisdiction.
2. What remedies are available to the objecting beneficiaries and what must they prove?
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The objecting beneficiaries may seek an injunction restraining the trustee from implementing the variation, a declaration that the variation is invalid, and an order removing Margaret as director or appointing a substitute trustee under s 70 of the Trustee Act 1925 (NSW). They may also seek an account of profits or equitable compensation if trust funds have already been misapplied. To obtain an injunction, they must show a serious question to be tried and that the balance of convenience favours the injunction. They must prove the trustee's conflict of interest and that the variation is not for the benefit of the trust. The beneficiaries may also seek an order under s 81 of the Trustee Act for the court to approve a variation in the trust's interests, or an order under s 63 of the Trustee Act for the court's advice on the trustee's powers. The court will consider the interests of all beneficiaries, including the elderly appointor, and may appoint a separate representative for him.