Jumana Khan is the daughter of Salman and Huma. Until they retired, Salman and Huma operated a successful business in Melbourne importing engineering components from Karachi. Thirty years ago, Salman and Huma’s accountant advised them that they should set up a discretionary trust for tax purposes, which they did. This trust is now the subject of a dispute between Jumana and her brother Hamdan. The terms of the trust are set out below.
In 1992, once the trust was established, Salman and Huma transferred to the trustees (themselves jointly with their friend Barnabas as in the terms below) their holiday home in North Portsea and all their shares in the company through which they operated their business. The trustees were to hold this property on the terms of the trust as per clause 1(b). Salman and Huma gave a letter of wishes to themselves and Barnabas as trustees expressing their wishes for the trust. In it they said that the purpose of the trust was to look after themselves first, and second, to provide a flexible way to give benefits to their children and relations. The trustees paid income to Salman and Huma whenever they wanted it and they used the holiday house whenever they wanted.
Hamdan worked in his parents’ business continuously after completing a commerce degree at La Trobe in 2002. In 2012 he was appointed managing director of the company by the trustees. In 2017, sadly Huma died, and Salman retired from the business. This left Hamdan as sole director. Under his management the business has continued to grow at a modest pace. Hamdan is paid a reasonable salary for his role.
In 2018, after her mother’s death, Jumana returned to Melbourne permanently to be near her father for the last years of his life. She had been living in London where she had an important role as a corporate takeover lawyer. After she returned, she frustrated Hamdan immensely as every couple of weeks she would give him unsolicited advice on how to run the family business.
Hamdan felt threatened by his sister’s return and did not want her interfering with the business, which he felt entitled to receive as his inheritance. In 2020, Hamdan asked his father to make him a trustee of the trust. Salman agreed he was having trouble remembering to have trustee meetings so added Hamdan as an additional trustee alongside himself and Barnabas. In 2021, Hamdan persuaded Salman to make Hamdan an additional Protector of the trust in case Salman developed Alzheimer’s disease. Hamdan convinced Salman that Jumana was too busy with setting up her legal business in Melbourne to be interested, and Salman forgot to ask Jumana if she wanted to be a Protector too.
In January 2022, Salman died. This left Hamdan as the sole Protector of the trust. Hamdan removed Barnabas and himself as trustees and appointed a new company he had set up to be the sole trustee. Hamdan is the sole shareholder and sole director of the corporate trustee.
When Jumana went to discuss winding up their parents’ affairs with her brother, he told her about the changes to the Protectorship and Trusteeship for the first time. Jumana was furious.
Jumana seeks your advice on what claims she might have against Hamdan directly. Jumana thinks that Hamdan’s appointment of a company he controls and removal of the independent trustee are wrongful.
1) Advise whether Hamdan’s role as Protector involves a fiduciary relationship with Jumana
The theory of equity was founded on the understanding that some social challenges are difficult to resolve in a legal setting. The imposition of common laws demanded that they be implemented precisely and exactly, which can result in injustices and unfair judgment in some circumstances. The establishment of another significant part of non-statutory law, the trust, was prepared by equity. A trust is a legal relationship or an agreement in which trustee/ trustees hold and administers property for the benefit of other beneficiaries as specified in the trust deed (trust instrument).
The trustee is the legal owner of the trust properties, but the deed's restrictions bind them. The trust created by Salman and Huma was an Inferred Trust as the Trust deed clearly states the intention for which the trust is created by impliedly stating the words to infer such intention. A trust was created as a private Trust and not Public Trust because it intended to benefit one or more people instead of benefiting for a charitable purpose. And the mechanism used to create trust was by Transfer as Salman and Huma made the transfer to the trustee who is the essential requirement of this mechanism.
So, it can be made very clear from the abovementioned facts that Salman and Huma created the trust. To answer the question further, we need first to understand what a fiduciary relationship at first instance is. Finn said that a “fiduciary relationship is one in which the law as a matter, of course, characterizes one party’s purpose as being to act in the interests of the other, or their joint interests, to the exclusion of his own several interests.”
Equity recognises cases where a party places trust/confidence in another, these relationships are protected by equity and are called fiduciary relationships.
In the Breen case, Justice Dawson and Toohey quoted this passage and Mason J in Hospital Products Ltd v United States Surgical Corp: “The critical feature of these relationships is that the fiduciary undertakes or agrees to act for or on behalf of or in the interests of another person in the exercise of a power or discretion which will affect the interests of that other person in a legal or practical sense.” Based on this principle in the given case no undertaking was made or agreed upon by Hamdan being into the role of protector; therefore, no fiduciary relationship was involved between Hamdan and Jumana.
Justice Gaudron and McHugh held that “fiduciary obligations arise because a person has come under an obligation to act in another’s interests.”
Gummow J said: “Fiduciary obligations arise (albeit perhaps not exclusively) in various situations where it may be seen that one person is under an obligation to act in the interests of another.”
Hence, Hamdan's role as protector does not build a fiduciary relationship with Jumana, whereas, as the children of primary beneficiaries of the trust, they become potential beneficiaries; hence, a relationship can be established.
2) Advise if Hamdan is a fiduciary, whether Jumana is likely to succeed in having him removed as Protector for breach of duty or otherwise.
Jumana being the Potential Beneficiary of the original trust deed created by Salman and Huma and after the death of Salman, Hamdan was the sole protector of the trust and, under that power became the only trustee also by removing Barnabas from the position by exercising his power granted to him as a sole Protector under the trust deed. This becomes fiduciary and establishes a trust relationship between trustees and beneficiaries.
The legal status of a trust protector is still a matter of developing law in Australian
“If there is a breakdown in the relationship between the trust's beneficiaries and the protector, the beneficiaries may wish to consider whether it is possible to remove the protector from office. It is necessary to consider whether there is an express power of removal contained in the trust deed in such circumstances. As with the power to appoint, the power of removal is likely to be a fiduciary power if the protector acts in a fiduciary capacity.” So, in our case, no such power is expressly stated in the deed with respect to the relation of beneficiary and protector. In contrast, the protector can remove a trustee or number of trustees under clause 3(3)(c) of the Trust Deed. “The mere fact that they may disagree with the way in which the protector exercises their powers is unlikely to be sufficient to give rise to grounds for removal. The court is more likely to order removal if the continuation of the protector in their role would harm the welfare of the beneficiaries or negatively impact the proper administration of the trust.” A review of the latest judgment also clarifies that it is unlikely sufficient to remove the protector merely on the ground of breach of the duty by as protector.
“A beneficiary does not have the legal right to trust property until it is formally transferred to them. The beneficiary, on the other hand, has an "equitable claim" to any property held in trust for them. This means that if a trustee fails to fulfil an obligation due to a beneficiary, the beneficiary may file an "equity law" action to seek one or more of the following remedies: