Trustees beware! Apply trust funds strictly in accordance with the terms of the trust, mere substantive compliance can expose a trustee to the risk of having to replenish the trust

In Equity Trustees Ltd (as trustee of the Sir Colin and Lady MacKenzie Trust) v Attorney-General for the State of Victoria & Anor [2019] VSC 834 (17 December 2019)

In Equity Trustees Ltd (as trustee of the Sir Colin and Lady MacKenzie Trust) v Attorney-General for the State of Victoria & Anor (No 2) [2020] VSC 335 (5 June 2020)

These cases also emphasize the importance of a timely application for judicial guidance and the consequence that can follow where a name changes, but a variant continues.

Background

The cases concerned a trust created by the will of Lady MacKenzie called the Sir Colin and Lady MacKenzie Trust. It provided that one third of the income from the trust was to be paid to the Sir Colin MacKenzie Sanctuary and two thirds to another fund created to support comparative anatomy. Sir Colin, who died before his wife, had established an institute in Healesville, Victoria that became known as the Sir Colin MacKenzie Sanctuary and later colloquially, the Healesville Sanctuary.

However, the Will said that if the sanctuary’s name was ever altered from the Sir Colin MacKenzie Sanctuary, then the one third amount could no longer be paid to that body but should be paid to the other fund.

Over time, the sanctuary became known by a variety of names however the business name registration of Sir Colin MacKenzie Sanctuary continued until registration lapsed in June 2002. Annual payments to the sanctuary continued and it was only In September 2009 that the trustee commenced investigations about the name to be advised that the sanctuary was now known as the Sir Colin MacKenzie Zoological Park. However annual payments continued.

Then in 2012, further investigations occurred resulting in the cessation of payments. Legal advice was also obtained at that time but an application for judicial guidance was not issued by the trustee until August 2019.

On 17 December 2019, Justice McMillan handed down a judgment finding that the words of the gift were clear and with the lapsing of the business name registration, the gift had failed and that given there was a gift over provision in the will, from that point all the income should have gone to the other fund.

Application for Exoneration

The trustee then applied for exoneration by the Court and in a 5 June 2020 judgment, Justice McMillan exonerated the trustee for the period between June 2002 to September 2009, when it was put on notice of the change of name but not respecting 3 subsequent payments. Therefore, the trustee has become prima facie liable to make good the trust for those payments with this issue now in the hand of the Attorney General as protector of charities.

The test for exoneration  pursuant to s 47 of the Trustee Act is whether the trustee “..has acted honestly and reasonably, and ought fairly be excused for the breach of trust and for omitting to obtain the directions of the Court…”

Justice McMillan of the Supreme Court of Victoria was especially critical of evidence from an officer of the plaintiff, a professional trustee company, that “where there appears to be substantial compliance with the condition stipulated in the trust deed or will, [the trustee]’s general practice is not to cease distributions until the uncertainty had been resolved” saying:

“It is not the role of the trustee to determine whether or not the gift has lapsed based upon its perception of ‘substantial’ compliance”((No2)[40]).

And then:

“A ‘general practice’ of the plaintiff to continue payments where it perceives there to be ‘substantial compliance’ with a condition is not reasonable” ((No2)[43]).

The judge also said that the trustee should have applied to the Court for judicial guidance in 2012 when it had received legal advice to this effect.

On costs, ultimately, despite a discomfort regarding the delay in making the application, Justice McMillan allowed the trustee to be indemnified out of the trust for a percentage of its costs reflecting the period for which it was entitled to exoneration but not for the balance that it had to pay personally.

Take Aways

1. Trustees and executors of wills creating trusts must apply funds strictly in accordance with the terms of the trust or gift.
2. In drafting trust terms, where there is significance in the name of an intended beneficiary, careful instructions should be taken regarding the settlor’s intentions and what consequences should follow should strict compliance no longer be possible but a variant of the name continues.
3. Where doubt arises regarding either the construction of the terms of a trust or will or whether the terms can be complied with, application to the Court should be made in a timely manner for judicial guidance.
4. Trustees will not be exonerated if they continue to make payments after doubt arises.