“Fraud on a Power”

The Trust Deed that establishes a trust will prescribe certain “duties” and “powers“.

Duties” are those things a Trustee must do, while “powers” enable a trustee to administer a trust, but which are optional in there exercise.

A “trust” imposes an obligation, or creates a duty: a “power” confers an option.

A trust is imperative, whereas a power is discretionary.

However powers are provided in a Trust Deed to promote the purpose of the trust and the powers must be used honestly and for a proper purpose.

The exercise of a power, such as a Power of Amendment, can be impugned as either:

  • an excessive exercise of a power, or
  • an improper exercise of a power.

The “improper exercise” of a power is more commonly referred to as a “Fraud on a Power“, where the term “fraud” is used in an equitable sense and not the common law sense which involves deceit.

If a trustee were to make a benefit payment to a person who was not an object of the trust (ie a member of the fund) then such a payment would be an example of an “excessive exercise” of the power to make benefit payments.

If a purported amending instrument does not comply with the conditions and restrictions imposed by the Power of Amendment, then this is another example of the “excessive exercise” of a power and the purported amending instrument will be void and ineffective.

If a Trustee has a power to consent to the amendment of the terms of the trust and does so with the intention of reducing benefit payments so as to benefit a third party, such as the sponsoring Employer, or the Trustee itself, then this would be an example of an “improper exercise” of the Power of Amendment and the purported amending instrument would be void and ineffective under the doctrine of a “Fraud on a Power“.

Geraint Thomas in “Thomas on Powers” notes at [9-48A]:

“The doctrine of fraud on a power applies equally to powers and discretions conferred under occupational pension schemes (and other “commercial trusts“). The exercise of ┬áscheme powers by the trustees or by employers for an “ulterior” or “foreign” or “collateral purpose” will be fraudulent and void.”

Thomas cites Re Courage Group’s Pension Scheme {1987] 1 W.L.R. 495 in support of this proposition which is quite ironic since this case also involved Elders IXl Limited, which is the employer sponsor involved in Australia’s Largest Pension Fund Fraud.

More details of this important case which also involves Elders IXL Limited and a pension scheme can be found here.

A leading reference text on powers and their proper exercise is “Thomas on Powers” (Editions I & II) by Geraint Thomas {Sweet and Maxwell}.

Chapter 8 covers “The Excessive Execution of a Power

Chapter 9 covers “Fraud on a Power

Chapter 14 covers “Powers of Amendment

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This tab updated on 15 March 2015