Ghag v. Ghag

Last month, I wrote that the courts in British Columbia are reluctant to interfere with a trustees discretion when the trust instrument gives the trustee a wide discretion to make distributions to beneficiaries.  I used the case of Re Zaleschuk as an illustration of the deference courts often show to the exercise of a discretion. But,  as you will see below, there are limits to a court's deference to trustees, especially when the trustees prefer their own interest.

In Ghag v. Ghag, 2021 BCCA 106, Madam Justice Griffin set out the principles as follows:

[47]         A trustee’s exercise of wide discretion under the express terms of a trust will rarely be interfered with by a court. Nevertheless, there are grounds that may justify the court’s interference in the exercise of a trustee’s discretion. As summarized by Professor Waters, the court may interfere in the exercise of discretion by a trustee where:

a)    the decision is so unreasonable that no honest or fair‑dealing trustee could have come to that decision;

b)    the trustees have taken into account considerations which are irrelevant to the discretionary decision they had to make; or

c)     the trustees, in having done nothing, cannot show that they gave proper consideration to whether they ought to exercise the discretion.

(Donovan W.M. Waters, Mark R. Gillen & Lionel D. Smith, Waters’ Law of Trusts in Canada, 4th ed (Toronto: Carswell, 2012))

Sukie Ghag settled a family trust for the benefit of his wife, Charmaine, and his four children, after he was diagnosed with brain cancer. 100 Class A common shares of Abby Pharmacy Ltd. were held in the trust. He appointed his son Brendan as trustee and Charmaine as the alternate trustee. The terms of the trust included the provision:

… The Trustee shall exercise the powers and discretions given to him in what he deems to be the best interests, whether monetary or otherwise, of the Beneficiaries, whether or not such exercise may have the effect of conferring an advantage on any one or more of the Beneficiaries at the expense of the other Beneficiaries ….

 [emphasis in decision.]

Brendan Ghag took $100,000 out of the trust bank account, and he distributed 55 Class A common voting shares to himself, 15 Class A shares to each of the other children, and none to Charmaine. He also caused the company to allot 150 Class B common voting shares, ranking equally with the Class A shares, to himself.

Charmaine Ghag and the other three children brought a petition to remove him as trustee and appoint Charmaine, for an accounting, and for an order voiding the transfer and allotment of shares.

While consenting at the hearing of the petition to his removal as trustee, and to an accounting, Brendan alleged that the share transactions were in furtherance to a secret agreement he had with his father. He claimed that his father intended for him to receive control of the company in a tax-efficient way, and for his mother to receive no interest in the shares or voting rights.

In the Supreme Court, at 2021 BCSC 815, Mr. Justice Tammen heard the petition and granted the relief sought including declaring the transfer and issuance of shares void. He found that by acting in accordance with the alleged secret agreement, Brendan

took into consideration irrelevant and inappropriate considerations in exercising his discretion as trustee.  In addition, his decision to apportion the majority of the trust assets to himself and to exclude entirely one of the named beneficiaries is one that no even‑handed, fair minded trustee could have made in the exercise of his discretion.

The Court of Appeal upheld Mr. Justice Tammen’s decision.