Documentation, Superannuation

Marsella appeal shows legal focus is on process

Marsella appeal

A recent appeal relating to the 2019 Marsella case has shown courts will focus on trustee obligations and processes rather than perceptions of fairness.

Beneficiaries of an SMSF considering legal action due to a dispute should be aware the courts will not consider whether a trustee’s decision was correct, but rather whether the process taken to reach that decision was consistent with the trustee’s legal obligations, according to a legal firm.

Commenting on the recent unsuccessful appeal of Marsella v Wareham (No 2) [2019] VSC 65, Townsends Business and Corporate Lawyers stated the appeal case (Wareham v Marsella [2020] VSCA 92) “highlights the distinction between a court’s ability to invalidate a trustee’s decision and a court’s inability to determine a trustee’s decision as invalid”.

“In the Victorian Appeal Court’s decision in Wareham v Marsella, the court had to decide whether it was entitled to identify the thing itself or whether it was limited to simply checking that the trustee had acted reasonably in deciding what the thing was,” the law firm said.

In a story first published by selfmanagedsuper in June 2019, Townsends Business & Corporate special counsel Michael Hallinan said the original case tested whether a trustee of an SMSF, Carol Wareham, could make a decision to pay the entire death benefit to themselves and reject any claims from the deceased’s marriage partner, Ricardo Marsella, in regards to the benefit.

Wareham was the daughter of the person who established the fund, Helen Swanson, but not the executor of her estate, a role appointed to Ricardo Marsella, who was not a trustee of the fund.

The case found that while Mrs Wareham, and her husband who was added as a trustee, had the discretion, under the SMSF’s trust deed, to make the payment to themselves, they had erred by not acting in good faith and also failing to consider the marriage relationship of the deceased trustee and the executor.

In a column published on Townsends’ website today, the legal firm stated that as part of their appeal, the Warehams claimed the trial judge erred when deciding Mrs Wareham acted without giving proper consideration to the interests of others who might benefit from more discretion around the payment of the death benefit.

“Despite this claim, the Court of Appeal held that while the trial judge’s reasoning was flawed, the decision was sound,” it stated.

“It is not the role of the court to consider fairness or reasonableness of the outcome of the exercise of discretion.

“It is not the role of the court to usurp the role of the trustee. However, it is entirely appropriate for the court to ensure that a trustee properly exercise their discretion.”

Townsends noted the distinction between these positions was nuanced and the court cannot hold that an outcome is unreasonable, but rather that the decision-making process was unreasonable.

“In the present case, a substitute trustee will be appointed. It is entirely possible – though perhaps unlikely – that the substitute trustee may come to the same decision through a correct exercise of their discretion, provided that they can demonstrate that they took the relevant considerations into account,” it said.

“Trustees have obligations to act in good faith. A court cannot say that an outcome is not in good faith, because this goes beyond their power.

“A court can, however, look to an outcome that is grotesquely unreasonable as indicating a breach of good faith, and will interpret the trustee’s discretion accordingly.”

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