The Bundle of Rights Doctrine: Is it good law? (Part 2)

In my first article on the Bundle of Rights doctrine (29.10.09) I referred to some cases where the Courts have held that “a right or interest” under a Trust is not “property”.  If rights or interests in a Trust are not “property” they will not fall within the definition of “relationship property” and be available for division between former partners/spouses.

I said that the law on this topic was not straightforward and that there was a contrary line of authority on this topic.

This week’s article is on a different aspect of the Bundle of Rights doctrine.  It is concerned with the “self-dealing” rule that applies to Trusts.

The rule is usually cited in relation to purchases by a trustee of Trust property but the rule is broader than that.  As Hart J said in Public Trustee v Cooper [2001] WTLR 901 at 933 a “beneficiary is entitled to require that the decision [of trustees] is made independently of any private interest or competing duty of any of [them].”

In this article I use the term “self-dealing” to refer not only to the conduct of Trustees in their management of a Trust but also to the fiduciary constraints that will often apply to them when they have a conflict of interest.

The self-dealing rule can be circumvented by a number of different drafting techniques.  These are the two main ones.

   (a)      The first is to permit a trustee to vote in favour of a decision that would otherwise infringe the self-dealing rule.

   (b)      The second is to authorise the remaining trustee(s) to pass a valid resolution that will favour an abstaining trustee.

If a Trust does not contain a circumventing mechanism, a conflicted trustee should abstain from voting. 

I suspect that there are many trustees who are not aware of what I am about to say next. 

If the remaining trustee or trustees proceed to pass a resolution that benefits the abstaining trustee, it will transgress the rule that all decisions of trustees must be unanimous - unless the requirement for unanimity is modified by the Deed of Trust.  (Readers who are interested to see the inter-play between the “self-dealing” rule and the “unanimity” rule will find the recent decision of Dobson J in Dever v Knobloch & Others, Napier CIV-2008-441-000537, 29.10.09 of interest.)

Although the Bundle of Rights doctrine has not been described in much detail, it is logical to assume that it is based on an assumption that a trustee (usually a husband or wife) or appointor can via various powers and entitlements in a Trust, vote in favour of resolutions that will provide him or her with a financial benefit.

So how does the Bundle of Rights doctrine sit with the “self-dealing” rule which prohibits such a person from participating in a decision from which he or she will benefit?

Before answering that question, I have two observations.  The first is that I suspect many decisions that are made by trustees of family Trusts are invalid because they infringe either the “self-dealing” rule or the “unanimity” rule.  This has the potential to create havoc with the unwinding of invalid resolutions.

The second observation is that the Bundle of Rights doctrine is not to be belittled.  The Court of Appeal has twice ruled in its favour.  It is, I believe, based on an assumption that most Trusts are so “insincere” that it can be assumed that the settlor or the possessor-of-powers, has effective control over the Trust’s assets and can do with them as he or she likes.  Where this is correct, the doctrine deserves respect.

In this context, I continue to be amazed at the way many so-called “Trusts” are operated and I support the suggestion that Kirby J made a couple of years go for the Courts to be much more expansive in their definition of “shams”.

But the laws relating to Trusts cannot be ignored and the prohibition on self-dealing must surely have an impact on the application of the Bundle of Rights doctrine.  How can there be a general rule that the possession of “rights and interests” will automatically invoke the Bundle of Rights doctrine without regard being had to the precise terms of a Trust, to see whether a trustee can in fact vote in favour of a resolution that will financially benefit him or her?

In the case of Trusts where self-dealing is prohibited and the unanimity rule will prevent the remaining trustee or trustees from passing a resolution that will benefit the abstaining trustee, surely those facts ought to be relevant when deciding whether the possession of various rights and interests can be converted into personal gain?

As people become more aware of the inter-play between the “self-dealing” rule and the “unanimity” rule, I expect that greater attention will be given to an analysis of the legitimacy of historic resolutions of trustees. 

I also expect that a greater effort will be made by trustees of what I will call “genuine” Trusts to show that the rights and interests that they possess cannot in fact be converted into the value that the Bundle of Rights doctrine dictates.