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Can’t Trust This

Published on December 13, 2016 by Selwyn BlackSelwyn Black

Mercanti v Mercanti [2016] WASCA 206 is a reminder of the need to carefully consider decisions that involve a trust, and in particular transactions which affect control over the trust.

The Key Facts

1. Michael Mercanti (Michael) ran a successful shoe repair business.
2. The M Mercanti Family Trust (MMF Trust) was created by a deed dated 1 June 1979 (Deed).
3. Michael Mercanti (Michael) was the initial guardian and appointor of the MMF Trust. The appointor of the MMF Trust had the power to appoint and replace the trustee of the MMF Trust.
4. The first trustee of the MMF Trust was Slondia Nominees Pty Ltd (Slondia). Michael and his wife were the shareholders and directors of Slondia at all relevant times.
5. For taxation reasons, the MMF Trust acquired Michael’s shoe repair business.
6. In about 1996, Michael appointed his son Tyrone Mercanti (Tyrone) as general manager of the business. Michael’s involvement in the business diminished.
7. In 2001, Tyrone was appointed a director of Slondia.
8. In 2004, Michael ceased full time work. He appointed Tyrone as managing director of Slondia.
9. A deed of variation (Deed of Variation) was executed in 2004 by Slondia as trustee of the MMF Trust to remove Michael as the guardian and appointor of the MMF Trust and substituted Tyrone as the new guardian and appointor.
10. Until late 2012, there was a close relationship between Tyrone and his parents. This changed, when Michael wanted to receive more income from the business of the MMF Trust but Tyrone did not wish to do so.
11. On 30 July 2013 the conflict came to a head when Michael and his wife, as shareholders of Slondia, removed Tyrone as a director of Slondia, and entered and took control of the business and business premises of the MMF Trust while Tyrone was in China.
12. A notice (Notice) dated 31 July 2013 was executed on 31 July 2013 by Tyrone, in his capacity as appointor, and Parradele Pty Ltd (Parradele) which removed Slondia as trustee and appointed Parradele as trustee. Parradele is a company controlled by Tyrone.

The dispute before the primary judge and Court of Appeal

13. The dispute between the parties centred around whether the Deed of Variation and Notice were legally effective in what they purported to do.
14. The primary judge found that both the Deed of Variation and Notice were legally effective.
15. The Court of Appeal also subsequently found in favour of Tyrone, rejecting the submissions of the appellants.
16. This meant that Tyrone controlled the MMF Trust, including how its assets were distributed. Michael effectively lost the business that he had created and built up over 25 years, as well as the four pieces of real estate in the MMF Trust.

Conclusion

Interestingly, it may have been possible for Michael to avoid this situation by having Slondia reverse the changes made to the Deed by the Deed of Variation on 30 July 2013. Tyrone then would not have been able to replace Slondia as trustee of the trust on the following day.

This case highlights the power that the appointor of a trust holds. It is crucial for the appointor of a trust, and any mechanism to change an appointor, to be carefully selected.

For further information, contact Selwyn Black, email: sblack@codea.com.au, phone: (+612) 8226 7359.