Read the Deed Too

While the recent case of Perry v Nicholson, that we mentioned in September’s Acis All Areas, may be the latest instalment in a series of legal rulings, it sadly is by no means the last.

We are seeing a series of challenges to decisions made by advisers and trustees that fall outside the rules set out in their trust deeds. And, frustratingly, it’s often quite simply a case of reading the deed before deciding on a course of action.

The Perry v Nicholson back story

Mr Maurice established a self managed superannuation fund in 2009 with himself and his daughter, Ms Perry, as trustees.

In 2015 Mr Maurice’s accountants prepared documents to remove Ms Perry and appoint Mr Maurice’s de facto spouse, Ms Nicholson, as trustee. Those documents were:

• trustee’s minutes – these were signed by Mr Maurice, Ms Perry and Ms Nicholson;
• resignation as trustee signed by Ms Perry;
• membership application signed by Ms Nicholson; and
• consent to appointment as trustee signed by Ms Nicholson.

Mr Maurice subsequently signed a binding death benefit nomination leaving 100% of his benefits to Ms Nicholson.

After Mr Maurice’s death, Ms Perry challenged her removal as trustee and the validity of Ms Nicholson’s appointment. She also challenged the validity of the BDBN on the basis that the BDBN had not been provided to the correct trustee.

The challenge was based on a failure of the documents mentioned above to comply strictly with the terms of the trust deed.

The provision of the trust deed dealing with the removal and appointment of trustees said:

The trustee will determine who acts as trustee in accordance with this deed and superannuation law for the fund to continue as a self managed superannuation fund and will take the necessary steps to appoint or remove the persons or body to or from the office of trustee. The trustee may accept the trustee’s resignation in writing for this purpose.

• The appointment or removal of a trustee must be in writing and must immediately be advised to any other trustee.
• Where the trustee is unable or unwilling to determine who will act as trustee then the majority of members of the fund will determine who will act as trustee. If there are no members in the fund, the former members of the fund (or their legal personal representatives) will determine who acts as trustee of the fund.

Given that the trust deed also required any BDBN to comply with Regulation 6.17A of the Superannuation Industry (Supervision) Regulations, an essential part of making a valid BDBN is to provide it to the trustee. The Court is yet to rule on whether this requirement has been satisfied; however, the trustee’s identity was critical to determining whether the BDBN was correctly provided.

The Court ruling

In its judgement, the Court determined that:

• there was no evidence of the acceptance of Ms Perry’s resignation by the other trustee;
• conversely, the trustee’s minutes refer to Ms Perry’s removal as a trustee;
• there was no formal removal document and no written notice to Ms Perry of her removal as trustee;
• there was no document advising the other trustee of Ms Perry’s removal;
• there was no formal appointment document which effected the appointment of Ms Nicholson as trustee;
• regardless of these procedural defects, the trustee’s minutes of the meeting were sufficient to remove Ms Perry and to appoint Ms Nicholson. The signature of the minutes by all parties was enough to establish that each of them had been advised of the removal and appointment as was required by the trust deed.

Perry v Nicholson is a timely reminder to strictly follow the terms of a trust deed when making changes to the trust structure – whether it be a change of trustee or any other alteration. Had the changes in this case been properly documented in accordance with the deed, the time and considerable expense incurred in litigation could have been avoided.

It is also worth pointing out that ultimately, the court chose to apply a substance over form approach. Had the court followed some earlier cases and used a literal approach the result could have been very different.

Lessons learnt

The Perry v Nicholson case, plus other legal challenges, broadly offer four major lessons for both advisers and trustees:

• Read the deed before deciding on a course of action.
• Have your documentation prepared by appropriate professionals to remove your risk as the adviser.
• Any changes contemplated must be carried out strictly in accordance with the trust deed – the deed will dictate how a change must be carried out.
• Failing to read and follow the trust deed opens up opportunities for a legal challenge.

 Please call us on 1800 773 477 or email Legal Services if you would like further insight or assistance with your trust deeds.