The Full Federal Court decision in Advanced Holdings Pty Limited as Trustee for The Demian Trust v FCT [2021] FCAFC 135 highlights important principles of trust deed interpretation and the limitations of statutory provisions concerning the evidentiary force of company records.
It also serves as a “sobering bookkeeping reminder” to directors of small companies and corporate trustees to keep good records, and as always, read the trust deed!
The decision was an appeal from the Federal Court (discussed here).
First issue: the Principal’s power to remove and replace the trustee
Mr Demian was the “Principal” of a discretionary trust (Demian Trust) with that role being the same as, or like, the Appointor in many trust deeds.
The Court confirmed that the Principal’s power to appoint a new trustee under the trust deed for the Demian Trust could not be exercised without first removing the existing trustee.
Consequentially, the deed (Deed) executed by the Principal that purported to appoint Advanced Holdings Pty Ltd (Advanced Holdings) as the trustee of the Demian Trust, without a reference to removing the current trustee (Demian Holdings), was ineffective.
The taxpayer sought to rely on High Court authority (Fell v Fell (1922) 31 CLR 268) that the Deed should be construed to impliedly remove Demian Holdings as the trustee and to effect the appointment of Advanced Holdings, having regard to the objective intention of the parties and ensuring the operation of the Demian Trust was advanced.
The taxpayer’s contentions were rejected because:
The essential words pertaining to a straightforward concept of replacing Demian Holdings as trustee of the Damian Trust were simply not present. The Deed did not purport to remove Demian Holdings, it only sought to appoint Advanced Holdings as trustee, but not as the “new” trustee for the Demian Trust. There was no ambiguity.
Fell’s case confirmed that the Court “cannot give effect to any intention which is not expressed or plainly implied in the language” of the document in question. The Deed lacked the necessary specificity, and any finding to the contrary would be to engage impermissibly in a “gratuitous, groundless and fanciful” exercise.
Second issue: the Trustee resignation power
The Court also confirmed that the minutes of meetings of the directors of Demian Holdings and Advanced Holdings (Minutes) were insufficient to substantiate the removal and appointment of the trustee of the Demian Trust. This insufficiency could not be displaced by provisions in the Evidence Act 1995 (Evidence Act) or the Corporations Act 2001 (Corporations Act).
In relation to the Evidence Act, the taxpayer argued that under the business records exception to the hearsay rule, the Minutes were evidence of the truth of the matters represented. The Court rejected this contention because the Minutes did not contain any representations as to the form, contents or efficacy of underlying documents referred to in the Minutes (being a “Deed of Retirement and Appointment of Trustee”, and “Resignation Notice” which were never adduced by the taxpayer).
The Court’s reasoning was potentially influenced by the particulars of the Demian Trust deed (which required that the trustee provide two months written notice of its resignation) and the inconsistencies in the Minutes which provided that the trustee’s written notice of resignation was “effective immediately.”
In relation to the Corporations Act, the taxpayer claimed that as a result of sections 251A(1) and 251A(6) the Minutes are evidence of what is stated in them unless the contrary is proven. However, the Court held that those provisions did not apply to the taxpayer because there was no evidence that the Minutes had been recorded in the corporate trustees’ minute books’ within one month of the meeting (as is required under section 251A(6)).
Furthermore, because section 251A was the more relevant provision on these facts, the taxpayer was precluded from relying on the more general provisions under section 1305, which provides that company minutes are prima facie evidence of any matters stated or recorded in those minutes.
The court also noted that, even if the taxpayer had succeeded in enlivening the provisions of the Evidence Act or Corporations Act, this does not prevent the Court from challenging the veracity of the Minutes. This was particularly so in this instance where the surrounding facts indicated poor corporate management and the taxpayer’s credibility had already been questioned in light of conflicting statements in cross examination:
“A court may be entitled to accept at face value for all purposes, including the underlying transactions, those documents admitted under the statutory provisions. But it is not obliged to do so. In circumstances where there are factors which may mitigate against the prima facie acceptance of such records as, for example, where there are other findings of fact firmly adverse to the quality of corporate management by a sole director (as there were in this case), a court is not obliged to accept at face value and for all purposes, the existence and efficacy of challenged underlying transactions referred to in a company minute.”
In summary
Because the Court held that Advanced Holdings was not the trustee of the Demian Trust, Advanced Holdings was the legal and beneficial owner of units in a unit trust. That is, Advanced Holdings held the units in its personal capacity rather than in its capacity as trustee of the Demian Trust.
How could this outcome have been avoided?
Read the trust deed carefully and ensure that the terms of the deed, including any protocols under the deed, are complied with.
Prepare detailed company minutes and trust resolutions and, when referring to documents in the minutes or resolutions, outline what those underlying documents purport to do.
Keep detailed records, including the decision-making process behind those records.
Seek specialist advice if you are unsure.
For more information please contact:
Edward Hennebry
Senior Associate
M +61 405 847 261 | T +61 3 9611 0113
E ehennebry@sladen.com.au
Neil Brydges
Principal Lawyer | Accredited Specialist in Tax Law
M +61 407 821 157 | T +61 3 9611 0176
E nbrydges@sladen.com.au
Daniel Smedley
Principal | Accredited Specialist in Tax Law
M +61 411 319 327| T +61 3 9611 0105
E dsmedley@sladen.com.au
