The legal feud involving Australia's richest person, Gina Rinehart and her children has come to an end, at least for now. Yesterday Justice Brereton of the Supreme Court of NSW delivered his long anticipated judgment in Hancock v Rinehart  NSWSC 646.
The Court replaced Mrs Rinehart with her daughter, Bianca as the trustee of Hope Margaret Hancock Trust, set up by the late Langley Hancock in 1988, estimated to be worth $5 billion. The Court also dismissed a claim that Mrs Rinehart acted improperly in agreeing to certain amendments to the constitution of Hancock Prospecting Pty Ltd, shares of which are the Trust's only significant assets.
The case has important implications for those acting or seeking appointment as trustees of trusts.
APPOINTMENT OF TRUSTEE BY COURT
Mrs Rinehart's children, John and Bianca brought proceedings to remove Mrs Rinehart as trustee for her alleged misconduct in administration of the Trust. Mrs Rinehart agreed to be discharged as trustee shortly before the hearing. In issue at the hearing was who should be appointed as the new trustee.
The dominant consideration, as noted by Brereton J, in appointing a trustee is the welfare of the beneficiaries. The Court's task is to appoint the person best suited to administer the trust in the circumstances prevailing. The main considerations or guidelines, as set out in the judgment, are:
- the wishes of the settlor, if expressed or implicit in the trust deed;
- a trustee should not be appointed to promote the interests of some beneficiaries in opposition either to the wishes of the settlor or the interests of remaining beneficiaries. This reflects the Court's desire to avoid conflict of interest; and
- whether the appointment of the trustee would promote or impede the execution of the trust.
The parties' positions in respect of a replacement trustee, as Bereton J noted, evolved and fluctuated over the course of the proceedings. The plaintiffs, John and Bianca ultimately proposed Bianca as the trustee, whereas Mrs Rinehart proposed one of three licensed trustee companies as the managing trustee and a special purpose vehicle owned by her four children as the custodian trustee.
The advantages of appointing a licensed trustee company as the managing trustee, as proposed by Mrs Rinehart, are that the trustee will be independent, and will bring experience and professionalism to that role. Such experience and professionalism, however, were found to be limited significance as the remaining functions of the trustee were considered limited and no longer included the broad discretionary powers that the trust deed conferred in the trustee as the Trust had already vested. The Court further noted that the appointment of any such managing trustee would:
- trigger certain pre-emptive rights under a joint venture agreement, which will be adverse to the interests of the Trust - this by itself is not a determinative factor;
- subvert the purpose of the managing/ custodian trustee dichotomy (by not providing for a proper separation between them);
- require payment of substantial remuneration to the trustee, which would reduce the amount available for distribution to the beneficiaries;
- not alleviate the concern that Mrs Rinehart's may exert influence over the trustee company, and in fact, two of the trustee companies as suggested by Mrs Rinehart did not provide adequate assurance of independence from and ability to resist such influence, and there was potential for Mrs Rinehart to acquire influence in the third. In this context, the Court observed that Mrs Rinehart went to extraordinary lengths, including exerting pressure and influence, to retain, directly or indirectly, control of the Trust, and to secure the appointment of a trustee acceptable to her; and
- could not be unconditional, at least in respect of two of the trustee companies, whose consent appointment had conditions attached to them.
In contrast, the proposal for appointment of Bianca had the following advantages:
- her appointment would not trigger any pre-emptive rights prejudicial to the Trust's interest;
- she would act voluntarily and take no remuneration;
- she had demonstrated her ability to assert the rights of the Trust against Mrs Rinehart;
- her consent to act as trustee was unconditional; and
- she was prepared to accept any conditions the court might impose on her appointment.
Importantly, her appointment as trustee was supported by two of the four beneficiaries, and as to those who did not support it, one did not object to her appointment and the other gave no evidence that she would find her intolerable or obnoxious. On that basis, the Court held that the balance of the weight of the beneficiaries' wishes favoured the appointment of Bianca.
The Court further took notice that Bianca was a beneficiary of the Trust, which might give rise to a conflict of interest and duty, but in the context of this Trust and the remaining functions of the trustee, the Court considered such risks being too remote, and in any event, are capable of being sufficiently mitigated by imposing a condition that judicial advice or consent of beneficiaries be obtained before significant decisions are made. As is apparent from the decision in Michael Victor Henley; In the Estate of Hedy Jadwiga Weinstock and Leo Arie Weinstock  NSWSC 975, another recent case involving family feud over administration of a trust, the Court is ready and willing to give its advice and guidance as and when sought by the trustees facing warring beneficiaries.
The Court, having considered all these, concluded that Bianca was better-suited and appointed her to replace Mrs Rinehart as the trustee of the Trust under section 77 of the Trustee Act 1962 (equivalent provisions of which exist in legislation of other states such as section 70, Trustee Act 1925 (NSW)).
FRAUD ON POWER
One of the other, and less significant, issues in this case was whether certain amendments to the constitution of Hancock Prospecting Pty Ltd, shares of which are the Trust's most significant assets, had been improperly agreed to by Mrs Rinehart. The amendments restricted the transferability of the shares to maintain control within the Hancock family.
The Court held that a trustee must exercise its power in good faith for the purpose for which it was given, and not for an ulterior purpose - whether for the benefit of the trustee or otherwise. A "fraud on a power" is an exercise of a power for an extraneous purpose; in this context, the term "fraud" does not necessarily involve conduct which would ordinarily be described as dishonest or immoral. In determining whether a power has been exercised for an extraneous or ulterior purpose, the Court has to determine the following:
- first, as a matter of law, for what purpose or purposes the power may properly be exercised; and
- second, as a matter of fact, whether the purpose for which the power was in fact exercised was within the category of permissible purposes.
The onus of proof is on those who allege a fraud on the power.
The Court held that the evidence did not establish that Mrs Rinehart acted in breach of trust or for an improper or extraneous purpose, and so the amendments to the constitution to which she agreed remains effective and binding. Those amendments were made with a desire to ensure that the shareholding in the company was confined to Hancock family group members, so that there was no risk of triggering a change of control event under the joint venture in which the Trust had interest.
The case provides a good illustration of how the Court is likely to balance competing factors when tasked with the responsibility to replace a trustee of a family trust.
- The primary consideration is the welfare of the beneficiaries, and who the Court considers to be most suitable in terms of discharging the duties as trustee of the trust.
- The Court is keen to avoid any conflict of interests or duties, but that by itself will not preclude one of the beneficiaries being appointed as a trustee, particularly when sufficient safeguards may be put in place by requiring the trustee to get judicial advice or consent.
- Independence of the trustees and their ability to discharge duties without interference or influence of others are important considerations.
- All things being equal, in case of a choice of trustees, the Court's preference is for those who are prepared to accept unconditional appointment and not overtly expensive.
- The experience and professionalism of corporate trustees are valued, but a trust even with substantial assets does not necessarily require someone as sophisticated as them, particularly when administration of the trust does not involve exercise of broad discretion.
The Court's decision also underpins the significance of a trustee exercising its power in good faith for the purpose for which it is given, and not for any ulterior or extraneous purpose.