A falling out and a terminated trust: do unitholders owe each other fiduciary duties?
When trust breaks down, can the trust survive? In a recent dispute between unitholders, one party employed the nuclear option: it terminated the trust altogether. What followed was a legal battle over power, rights and control.
If you are diving into a new group project, such as a property development, a unit trust could be a useful structure to adopt. A unitholder can hold an interest in a unit trust proportionate to their contribution to the project. Each unitholder will have their own expectations for how the project will run, and given the inevitable twists and turns of developments, it is not unusual for disagreements to arise. This is what happened in Re Lingamaneni Momentum Melbourne Unit Trust [2025] VSC 40 (Lingamaneni).
Key takeaways
- a trustee owes fiduciary duties to the unitholders. Unitholders do not owe each other fiduciary duties;
- unitholders should regularly exercise their right to access certain information about the trust and stay informed of the trust’s performance;
- when establishing a unit trust, unitholders should ask themselves:
- who is in control? Consider the identity of the trustee and, in the case of a corporate trustee, who is a director of that trustee;
- who has power? Consider the kind of power that is afforded by each clause;
- is there a nuclear option? Consider including in the deed some safeguards against any unitholder taking unilateral action that would have detrimental consequences;
- unitholders can incorporate procedures via a unitholder agreement to rectify any deficiencies in a trust deed.
- a unitholder who is concerned about the management of the trust should take steps to protect their position as soon as possible. These steps will probably look different for each unit trust, so it’s important to seek legal advice.
The facts
Lingamaneni concerned a unit trust that was established to undertake a property development project (Project) (Trust). There were three sets of unitholders (the Parties) involved in this dispute:
- entities associated with Graham Gniel (Gniel) (Gniel Unitholders);
- entities associated with Tony Boniello (Boniello) (Boniello Unitholders); and
- Sexton Pty Ltd, of which Paul Huggins (Huggins) was the director, secretary and sole shareholder (Sexton).
Huggins was also the director of the Former Trustee and managed the Project on a day-to-day basis.
The Trust deed included an uncommon clause allowing any of the unitholders to terminate the Trust. On termination of the Trust, the trustee would be required to liquidate the trust assets and distribute the net cash to the unitholders proportionate to their holdings. It would be a drastic step for any unitholder to terminate a unit trust under such a clause; the nuclear option.
The dispute
In 2020, the relationship between Gniel and Boniello, on the one hand, and Huggins, on the other hand, deteriorated. Gniel and Boniello were concerned about Huggins’ conduct and the Former Trustee’s management of the Trust, including actions taken without their knowledge or consent. This included variations to the Trust deed, an overpayment of a capital contribution to Sexton, the transfer of a property in the Project to Sexton, the direction of rent from unsold apartments in the Project to Sexton and Huggins receiving assets from the Trust over and above his agreed management fee.
The Gniel and Boniello Unitholders commenced a proceeding seeking the appointment of a new trustee. A Replacement Trustee was appointed by court order in 2022.
Soon after his appointment, the Replacement Trustee wrote to Sexton demanding that it repay over $650,000 to the Trust. Sexton disputed the amount owing.
In 2023, the Replacement Trustee:
- determined that the Trust had a net asset deficiency;
- advised he was not willing to incur the cost of further investigations into the Trust’s assets and liabilities; and
- applied to the Supreme Court of Victoria for orders appointing a receiver and manager to the Trust and giving them certain broad powers prescribed by the Corporations Act 2001 (Cth) (including the power to enforce payment of unpaid debts) (Application).
The nuclear option
The day before the hearing of the Application, Sexton issued a notice to the unitholders informing them that it was terminating the Trust. This meant that, in seven days, there would be no Trust left for a receiver to manage and investigate.
The Gniel and Boniello Unitholders challenged Sexton’s termination of the Trust in the Supreme Court of Victoria.
The decision
The Court held that Sexton’s termination of the Trust was valid.
Do unitholders owe fiduciary duties to each other?
The Court found that Sexton did not owe fiduciary duties to its fellow unitholders, for many reasons including:
- The relationship between unitholders does not fall within one of the established categories of fiduciary relationships recognised by law. Fiduciary relationships are typically seen between trustees and beneficiaries, companies and their directors, and between partners.
- This was not a situation where the unitholders were forced to trust Huggins. This is contrary to an established fiduciary relationship, where there is vulnerability, and one party must trust the other.[1]
- Gniel and Boniello were concerned about the conduct of Huggins and the Former Trustee. Even if Gniel and Boniello had relied on Huggins for information, this does not mean that the company Huggins controlled owed them fiduciary obligations.[2]
- Gniel and Boniello, as ‘experienced businessmen’, could have done more to protect their investment, and the Trust deed provided them with options to do so.
- The Trust deed explicitly stated that the parties weren’t in a partnership or agency relationship. This suggested they did not want to create a fiduciary relationship between the unitholders.[3]
- The Trust deed allowed any unitholder to terminate the Trust, without considering the interests of any other unitholders.
The Court made it clear that the Gniel and Boniello Unitholders could sue the Former Trustee for breach of trust and try to recover Trust property from anyone who received it as a result of a breach.
If you are concerned about the management of a unit trust, or you are planning to establish a unit trust and would like to put your best foot forward, please reach out to us.
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