Trustee de son tort – Director of corporate trustee caused trust funds to be distributed to himself
This case demonstrates the risks of not understanding what it means to have an interest in, or play a role in a trust. A director of a corporate trustee used money borrowed on security over the corporate trustee’s assets to acquire properties and also caused trust funds to be distributed to himself. The plaintiffs sought to recover those funds disbursed in breach of fiduciary duty and in breach of trust, including tracing the misappropriated proceeds in excess of 10 years after the event.
- Whether a director breached fiduciary duties by purchasing property using borrowed funds secured over company assets.
- Whether a director breached fiduciary duties by distributing proceeds from the sale of company assets to himself (or entities under his control).
Prior to April 2007, the Corporate plaintiffs carried on a waste disposal business (the Twigg Group Business). The Corporate plaintiffs were trustees of various discretionary trusts with the beneficiaries of those trusts being Diane Twigg (Mrs Twigg) and her three children, Frances, Max and Elizabeth. From 1996 (following the death of Mrs Twigg’s husband who was the founder of the Twigg Group Business):
- Max became responsible for the daily management of the Twigg Group Business;
- Mrs Twigg became the sole shareholder of the Corporate plaintiffs; and
- Max and Mrs Twigg became the two directors of the Corporate plaintiffs.
On 2 April 2007, Mrs Twigg and Max signed a contract for the sale of the Twigg Group Business to Cleanaway, for the sum of $155.8 million (the Sale Proceeds). The Sale Proceeds comprised approximately $40,000,000 in Cleanaway shares (paid to entities controlled by Max) and approximately $113 million in cash, paid into an account of one of the Corporate plaintiffs.
Pursuant to various company resolutions signed by Max in his capacity as director of the Corporate plaintiffs, the Sale Proceeds were distributed. In particular, $5 million was paid to each of Mrs Twigg, Frances and Elizabeth with the balance distributed to entities controlled by Max. Importantly, the relevant company resolutions were not signed (or sighted) by Mrs Twigg.
The decision at trial
His Honour concluded that:
- Max breached fiduciary duties owed to the Corporate plaintiffs by using assets owned by the Corporate plaintiffs as security to purchase property for his own benefit; and
- Max also breached fiduciary duties owed to the Corporate plaintiffs by distributing the Sale Proceeds to himself (or at least entities controlled by him) when he had no authority to do so.
In relation to the first element of the claim, Max conceded in final submissions that his conduct constituted a breach of his fiduciary duties but submitted that the breach was innocent. However, his Honour rejected that submission.
In relation to the second element of the claim, Max contended that he was authorised to distribute the Sale Proceeds as he did on the basis that:
- In 2001, Mrs Twigg had delegated her decision making functions as co-director of the Corporate plaintiffs to Max;
- In 2001, Mrs Twigg had otherwise agreed to Max taking full control of the Corporate plaintiffs;
- Max was authorised to do anything that Mrs Twigg was authorised to do by virtue of an Enduring Power of Attorney signed by Mrs Twigg in favour of Max.
The Court rejected each of the above submissions on various grounds and concluded that the company resolutions signed by Max authorising the distribution of the Sale Proceeds were not valid.
As a consequence of the above breaches, the Sale Proceeds paid to Max (or entities that he controlled) were deemed to be held on constructive trust for the Corporate plaintiffs and Mrs Twigg. Alternatively, Max was a trustee de son tort in circumstances where he did not have authority to deal with trust assets (that authority rested with the Corporate Plaintiffs) but nonetheless chose to do so.
Max relied on a number of defences which were largely rejected. However, his Honour concluded that the defence of laches was available in respect of any personal claim against Max to pay equitable compensation. That was because, over an extended period of time, Mrs Twigg had permitted Max to deal with the Sale Proceeds as if they were his own. In fact, during that period, Max had entered into a final property settlement with his ex-wife on the basis that he was entitled to the Sale Proceeds. However, his Honour concluded that the defence of laches was not available in respect of the claim to recover what remained of the trust assets.
Having established breach, the Sale Proceeds were then traced to various assets owned by Max (or entities under his control). On that basis, his Honour ordered that the traceable property was held on trust for the Corporate plaintiffs and Mrs Twigg.
Implications for you
This case is a timely reminder to ensure complex trust structures are well established and appropriately managed to ensure there is a clear distinction between the management, control and ownership of the trust to avoid ambiguity and legal disputes. Further, this case reaffirms the importance of directors knowing and understanding their rights, duties and powers, which flow from their appointment. Similarly, trustees must be aware of their fiduciary duties and obligations.