The Metropolitan Gas Case

Legal Principles

The power to amend the terms of a trust must be used to promote the purpose of the trust and not for an improper or ulterior motive.This is the equitable doctrine of a “Fraud on a Power” also known as the doctrine of an “improper exercise” of a power.

The Case

(Sir) Robert Menzies appeared before the High Court of Australia when he was the Victorian Attorney-General in Metropolitan Gas Company v FCT [1932] HCA 58.

Gas Case

The Federal Commissioner of Taxation was concerned that the pension fund for the employees of the Metropolitan Gas Company of Melbourne could be used as a means of tax avoidance.

The company was able to make contribution to the fund and then make a deduction from the company’s assessable income.

The Power of Amendment

Clause 37 provided a power to amend the terms of the pension fund.

“The directors of the Company may from time to time with the approval in writing of the trustees make rules prescribing all matters required or permitted to be prescribed or necessary or convenient to be prescribed for the carrying out or giving effect to these presents and in particular may make rules altering all or any of the regula­tions contained in these presents for the time being relating to the fund and may make new rules or regulations to the exclusion of or in addition to all or any of the rules or regulations for the time being relating to the fund and the rules or regulations so made and for the time being in force shall be deemed to be regulations in relation to the fund of the same validity as if they had originally been contained in these presents and shall be subject in like manner to be altered or modified by any subsequent rules similarly made.”

 

Gavan Duffy CJ and Starke J stated at {47 CLR 632}:

“Clause 37 contains a power for the directors of the Company, with the approval in writing of the trustees under the instrument, to make and alter rules, including the rules relating to investment, scales of contributions, and the grant of benefits. Some such provision is necessary, but the objection is that the power is given to the Company, and that the trustees of the fund are the chairman and secretary of the Company. The trustees are, of course, in a fiduciary position under the trust instrument, and must exercise their powers honestly and reasonably in the interest of the contributors. Otherwise, we apprehend, they would be controlled by a Court of competent jurisdiction.”

Rich J stated at {47 CLR 635}:

“The Commissioner appears to have apprehended that under this clause the directors might, with the approval of the trustees, abrogate the substantive right of a contributor or a class of contributors. This view is founded upon an erroneous interpretation of the provision which, in point of law, confers no such power (Hole v. Garnsey (1930 A.C. at p500). It is not the purpose of the provision to enable the destruction of any substantive right to pensions, and an exercise such as is apprehended would be not unlike a fraud on a power (Vatcher. Paull (1915 A.C. 372 at p. 378)”

This case was cited in Lock v Westpac Banking Corporation (1991) 25 NSWLR 593 at 609F:

Clearly enough, in exercising their power to consent to the amendment to the deed the Trustees were obliged to act honestly and in good faith, to act in what they consider to be in the interests of the members, and to act for proper purposes and upon relevant considerations. In Metropolitan Gas Co V FCT (1932) 47 CLR 621 at 633, Gavan Duffy CJ and Starke J said that the Trustees of a pension scheme “are, of course, in a fiduciary position under the trust instrument, and must exercise their powers honestly and reasonably in the interests of the contributors. Otherwise, we apprehend, they would be controlled by a Court of competent jurisdiction”. These remarks were directed to the power of Trustees to consent to the exercise by the company of its power to alter the rules.”

This case is referred to in Equity & Trusts {3rd Edition} M. Evans & B.Jones at [24.3]:

“In the Metropolitan Gas Case, the Commissioner of Taxation challenged the entitlement of a superannuation fund to tax benefits, on the grounds that the deed gave the directors of the employer, with the consent of the trustees, wide powers of amendment, including power to determine the disposal of any surplus in the fund on winding up. The High Court held that the deed was suitable for the purpose, pointing out that the company held its power of amendment subject to fiduciary duties and could not divert to itself benefits secured to members of the fund. That decision did not mean that the company could not amend the deed to provide the refund for itself. In that respect it could be said to have retained a general power of appointment in respect to the surplus. However, the company could not exercise that power to revoke any accrued benefits in favour of members. The general power of appointment did not extent to the whole of the fund.”


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