Have you heard the one about a capital-only trust, a church trustee and a parishioner who walked into a Court…

A recent Victorian case^[1] serves as a constructive lesson for trustees to make sure that they read and understand the trust instrument and abide by its terms or face the consequences. It is a long and complex case, but we have extracted the core contentions.

The Gore Charitable Trust (Trust) was established by the will as a perpetual charitable trust for religious purposes.

The Trust directed that the income was to be directed to the Uniting Church in Australia Property Trust (Victoria) (Property Trust) to be applied for the purpose of the Wesley Uniting Church Box Hill Parish (Parish).

The Property Trust is the statutory body corporate which holds property in Victoria for the Uniting Church. The Parish, along with other components or ‘councils’ of the Uniting Church established by the Basis of Union, Constitution and Regulations are not separately incorporated. This creates an inter-conciliar model of Uniting Church governance that means the ethos of its governance is relatively decentralised.

Between 2012 and 2018 withdrawals were made from the Trust by authorised officers of the Parish.

In 2017 there was a substantial turnover of Parish officers, and since 2018 disputes have arisen between members of that congregation and other bodies in the Uniting Church about the management of the Trust. T here were claims that the Property Trust had breached its trustee duties in permitting the Parish Officers to mismanage trust assets, or in failing to supervise them. The Court did not consider the nature of the payments, but they were not made dishonestly and that many of the disagreements about appropriate recipients were ‘largely theological’.

The current Parish Office holders claimed that over $545,000 of capital was withdrawn from the Trust and applied by the Parish whereas the Trust was able only to distribute income.

While the terms of the will were ambiguous in relation to capital distributions, in 2016, the Property Trust’s lawyers advised that only income distribution was permitted. This was confirmed by the opinion of King’s Counsel in 2018 and of another counsel in 2020.

In 2018 the Property Trust placed a hold on withdrawals until the affairs of the Trust could be regularised.

In 2019, the Property Trust resolved to restore to the Trust the capital mistakenly paid out. It claimed that this was based on essentially theological and non-legal considerations, rather than a legal obligation.

In 2020 a member of the Parish brought an action as a beneficiary to replace the trustee of the Trust and other orders (Jennifer Sheppard^[2] ), but the Court found that the statement of claim failed to disclose a reasonable cause of action as a charitable trust has no beneficiaries, and that failure could not be rectified.

The Parish member alleged the Property Trust committed breaches of the Trust by:

• freezing the Trust’s accounts in 2018 and impermissibly accumulating income;
• failing to supervise the Parish closely after the 2015 report;
• improper delegations by the Property Trust to the Parish;
• failing to maintain adequate trust accounts;
• failing to invest the capital in a diversified portfolio; and
• allowing distributions from the Trust to external charities that were not within ‘the purpose of the Wesley Uniting Church Box Hill Parish’.

After that action, the Property Trust, the Attorney-General, and a member of the Parish was joined in a proceeding where the Property Trust sought the assistance of the Court in relation to various issues and whether the Property Trust could be excused under the Trustee Act 1958 (Vic) (Trustee Act) for certain actual or potential breaches of trust.

All parties agreed, and so did the Court, that the terms of the Trust did not permit the payment of capital, and that the Property Trust had committed a breach of the Trust.

Although the Property Trust had made the decision to repay the capital to the Trust, the Court considered whether the Property Trust was obliged by law to do this.

The Court decided that:

• the Property Trust was not legally obliged to restore the capital to the Trust mistakenly withdrawn before it knew of the issues in 2015;
• the Property Trust was required to restore to the Trust capital amounts mistakenly withdrawn after that date.

The rationale for requiring the restoration of capital withdrawn after 2015 was to ensure that charitable trustees performed their duties with appropriate diligence, rather than compensation in the conventional sense.

Another factor the Court considered was that the source of restoration of capital would be another charitable trust, that is, the Property Trust.

The Court granted the Property Trust relief from some but not all of the breaches of trust.

The Court found that it was reasonable for the Property Trust to freeze the investment account on becoming aware of the Parish’s capital distributions and then the threat of actual litigation, despite potentially committing a breach of trust in doing so. Relief was granted.

The Property Trust’s failure to supervise the local Church Council more closely after 2015 was unreasonable, and therefore it was liable to restore capital distributions made after that date, but it should not incur any additional liability for those supervision failures during the relevant period. Relief was granted.

The Court found that the Property Trust was not in breach of trust by the mere act of delegating authority for management of the Gore Charitable Trust to the Parish, as this was contemplated in the Church’s Act and regulations.

The Court advised the Parish representative in considering whether to take further action that the sum involved prior to 2015 was relatively modest, the payments were not made dishonestly and that many of the disagreements about appropriate recipients were ‘largely theological’, which would render litigation an inappropriate resolution mechanism.

Lessons

It is critical that trustees carefully examine the trust instrument and bear its terms in mind when acting.

It would be prudent for a close reading of any trust instrument upon receiving it, seeking legal advice where necessary and for thorough handover procedures when there is a change of trustees or administrators to avoid breaches.

Denominational churches and other long-standing charities, such as universities and hospitals, often have hundreds of individual trusts created by wills of donors, and care needs to be taken in their administration.

Rectification of errors requires Court approval after engaging with the Attorney-General as protector of charities which is not only an expense but a distraction from the mission.

[1] The Uniting Church in Australia Property Trust (Vic) -v- Attorney-General (Vic) [2022] VSC610

[2] Jennifer Sheppard v The Uniting Church In Australia Property Trust (Victoria) [2020] VSC 12

Article by:

Myles McGregor-Lowndes
Consultant
Email Myles