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1 of 10 DOCUMENTS: Unreported Judgments Vic 22 Paragraphs

ANTOINETTA CALDERONE v PERPETUAL TRUSTEES VICTORIA LTD - BC200808362


Supreme Court of Victoria -- Common Law Division Beach J 5886 of 2007 18, 19, 25 September 2008 Calderone v Perpetual Trustees Victoria Limited [2008] VSC 373
AGREEMENT -- No intention to create legal relations -- No estate of a life tenant in possession -Claimed interest as tenant in possession under s 42(2)(e) of the Transfer of Land Act 1958 -- Real property -- Section 42(2)(e) Transfer of Land Act 1958.

Beach J.
Introduction [1] Sixty-three Euston Rd, Hughesdale ("the property") is the matrimonial home of Mr and Mrs Calderone. They have lived there since approximately September 1991. During this period, a company controlled by Mr Calderone, Seventh Asteroid Pty Ltd, owned the property until it transferred the property to an unrelated company, Australvic Property Management Pty Ltd ("Australvic"), on 21 July 2006. Australvic held the property as trustee for the benefit of Seventh Asteroid pursuant to a declaration of trust. [2] By a mortgage dated 21 July 2006, Australvic mortgaged the property to Perpetual Trustees Victoria Ltd (the defendant) as security for a loan of $960,000. Perpetual became registered as first mortgagee of the property on 18 August 2006. Australvic defaulted on the mortgage and the defendant obtained a judgment for possession of the property on 26 February 2007. [3] In this proceeding, Mrs Calderone seeks, inter alia, an order that Perpetual be permanently restrained from exercising any rights it may have as mortgagee to take possession of the property. Mrs Calderone puts her claim on the basis that she is a tenant in possession of the property and/or she has a life interest and is therefore protected by the operation of s 42(2)(e) of the Transfer of Land Act 1958.1 [4] Alternative claims for relief in the nature of declarations are also sought by Mrs Calderone. The basis upon which the alternative orders are sought is identical to the basis upon which the injunction is sought. For the reasons given below, Mrs Calderone's claim must fail. The facts [5] Mrs Calderone gave evidence as follows:

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1a)

1b) 1c)

1d)

1e)

1f)

Mrs Calderone met Mr Calderone in the early 1980s. They became friendly and, in early to mid 1985, began dating each other. By November 1985, they were talking about a long-term future together, including getting married and having children together. At a time that Mrs Calderone can no longer remember, Mr Calderone told her that he had put in an offer to buy the property and, shortly after, he told her that the owner had agreed to sell it to him. In or about early 1990, Mr Calderone said to Mrs Calderone that the property was going to be for the family they were going to have and they would be living in the property after it was renovated. She told him that was what she wanted. Mrs Calderone understood Mr Calderone to be a businessman and knew that he had a number of business interests. However, she never saw it as her role to ask him about his businesses or how things were going. Both of them agreed on what she described as a "relatively traditional Italian relationship where he looked after the finances and [she] would stay at home and look after the children". They became engaged in February 1990. At that time, Mrs Calderone wanted to be reassured that the property was going to be their home and that it would never be used in his businesses. Mrs Calderone recalls that Mr Calderone said to her that "it would be safe and that I need not worry about it, because the property will be used for living and raising our family". She told him that was fine and that was what she wanted, and they planned their wedding for 22 July 1990. Notwithstanding their agreement, Mrs Calderone "wanted to have something in writing about it" and asked Mr Calderone to put it in writing. She recalls that Mr Calderone wrote down something which she recalls reading at about the time of their wedding. However, Mrs Calderone cannot remember whether what she read was read by her very shortly after the wedding or in the period leading up to the wedding. She did not see Mr Calderone write the document she read. He showed it to her later. The document she read was the pencilled handwritten annotation on the back of the copy of Seventh Asteroid's Certificate of Incorporation. The annotation is headed "July 1990". Beneath the heading, the following appears:
This confirms that you Antoinette being my wife and as this is our matrimonial home this house is yours to live in for the rest of your life.

The annotation is then signed "Your loving Rocky", beneath which Mr Calderone's signature appears. [6] Mr Calderone gave evidence that largely corroborated Mrs Calderone's evidence concerning the conversations they had about the property and the fact that he wrote the annotation on the back of a copy of Seventh Asteroid's Certificate of Incorporation. A central issue in this case is whether or not the handwritten annotation is genuine. Mr Calderone was cross-examined closely by senior counsel for Perpetual to the effect that the annotation was not made in 1990 but was made much later (April 2007) when the sheriff was threatening to take possession of the property. [7] A number of matters were put both in cross-examination and during the course of final submissions by Perpetual which were designed to show the improbability of the annotation having been made in 1990 as asserted by the Calderones. Those matters may be summarised as follows:

2a) 2b)

First, it was said that it is a strange thing for a couple about to be married (involving a relationship based on love and trust) to make such a note and that to ask someone to commit a position in writing is usually the product of distrust. Secondly, it was said that if Mrs Calderone was so concerned about her position, then why did she not keep the piece of paper instead of it being kept by Mr Calderone in one of his files.

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2c) 2d)

2e)

2f)

1g) 1h)

1i)

Thirdly, the fact that the note was written in pencil and "inconspicuously on the back of another piece of paper".2 Fourthly, if Mrs Calderone was so concerned about her position and Mr Calderone was seeking to allay her concerns, then why not put the property in Mrs Calderone's name or their names or make her a joint tenant with Seventh Asteroid or prepare a proper and effective (and registrable) document giving her a lease or life estate. Fifthly, an examination of the events leading up to 27 April 2007 is said to show a telling absence of any assertion of a tenancy. This point relates to the failure by Mr Calderone to have the note referred to in the caveat lodged on his instructions on behalf of Mrs Calderone on 29 January 2007 and the failure to refer to the note at any time thereafter until the sheriff was about to take possession on 27 April 2007. To put it in the words of counsel for Perpetual: "The note suddenly 'turns up' ... on the evening of 26 April, the day before the eviction". Sixthly, the facsimile line on a copy of the note that was exhibited to an affidavit of Mrs Calderone3 is said to be suspicious. This suspicion is said to be heightened by Mr Calderone's evidence that he faxed the note from his friend, Mr Neicho's facsimile machine because he did not have a fax at home -- whereas Mrs Calderone gave evidence that they did have a fax machine at home in April 2007.4 Seventhly, neither discovery nor a subpoena to Seventh Asteroid produced any evidence that Seventh Asteroid acknowledged or was aware of (let alone authorised) a grant of a tenancy or any other interest in the property to Mrs Calderone. Eighthly, it is said that the available documentary evidence is inconsistent with Mrs Calderone's claim. For example, in 1996 and 1997, both Mr and Mrs Calderone signed mortgages over the property on behalf of Seventh Asteroid to National Mutual which contained express representations and warranties that the property was free of encumbrances of the kind now claimed by Mrs Calderone. Ninthly, the reliability of Mr Calderone's evidence was put in issue by reference to various documents he had signed, including affidavits sworn for different purposes in different proceedings. For example, in a proceeding that concerned 58 Euston Rd,5 Mr Calderone swore6 that 58 Euston Rd was a house with "sentimental value to my family" which "[m]y wife wants to make ... our family home". This assertion is contrary to Mrs Calderone's intentions as disclosed in this proceeding. Further, in that affidavit, Mr Calderone swore that he was authorised to make the affidavit by Mrs Calderone -- a matter which Mrs Calderone denied in cross-examination.

[8] Mrs Calderone gave her evidence in a forthright and convincing manner. She was prepared in crossexamination to make concessions and when given an opportunity to embellish her case she did not do so. I formed a favourable impression of Mrs Calderone and accept her as an honest witness who was at all times doing her best to give an honest account of the circumstances as she knew them to be. I find that the discussions and circumstances that she says occurred in 1990 occurred, broadly speaking, as she has described them. I accept that Mr Calderone wrote words on a piece of paper the substance of which is contained in Ex "A" as the handwritten annotation. I am less certain that the handwritten annotation is the document Mrs Calderone saw for the first time 18 years ago in 1990. However, Mr Calderone's evidence was more positive in this regard. He positively identified the handwritten annotation as the document he wrote in 1990 and which remained in a file from that time until April 2007. [9] I have some reservations about the evidence of Mr Calderone. His affidavit in respect of 58 Euston Rd (referred to above) does him little credit. However, I do not think that the handwritten annotation is a document that only came into existence on or shortly prior to 26 April 2007. In the end, I see nothing improbable in the fact that the document was written in 1990 at a time when it was important to Mrs Calderone, but that during the ensuing 17 years of marriage, its existence faded from memory to a point where Mr Calderone did not recall its existence until April 2007, notwithstanding the need for a caveat to be lodged on 29 January 2007. Whilst the matters raised by Perpetual (to which I have referred in para 7

Page 5 above) are not without substance, they do not amount to a sufficient cause (either individually or collectively) to reject the evidence of Mr and Mrs Calderone that the document was written in 1990. I find that the document was written in 1990 and read by Mrs Calderone at or about the time of the marriage in July 1990. [10] Two further factual issues need to be resolved. First, at some points in her evidence, Mrs Calderone appeared to be asserting that the property was hers to live in to the exclusion of Mr Calderone. However, when the matter was raised with her, Mrs Calderone fairly conceded that, notwithstanding some of the language that might have been used in her affidavits,7 the agreement as she understood it was that the property would be the matrimonial home of both of them.8 [11] Secondly, whatever may have been the "agreement" between Mr and Mrs Calderone, an issue arises as to whether Seventh Asteroid (the former owner of the property) entered into any agreement with Mrs Calderone or confirmed subsequently any such agreement. The case as originally pleaded was that there was an agreement between Mr and Mrs Calderone in February 1990 which Mr Calderone, as a director of Seventh Asteroid, confirmed on behalf of Seventh Asteroid in July 1990. As subsequently pleaded, the February 1990 agreement was said to be made between Mrs Calderone and Mr Calderone as a director and shareholder and acting for and on behalf of Seventh Asteroid. That agreement was then said to be confirmed in July 1990 by the handwritten annotation being made on the back of the copy of Seventh Asteroid's Certificate of Incorporation by Mr Calderone as a director and shareholder and on behalf of Seventh Asteroid. Mrs Calderone gave no specific evidence on the point. This was perhaps understandably because, at all times, she thought that Mr Calderone owned the property. Indeed, Mrs Calderone had been told at about the time the property was purchased that the previous owner had agreed to sell it to Mr Calderone. [12] There is nothing in the books or records of Seventh Asteroid that confirms any agreement previously made between the Calderones or that discloses the existence of an agreement between Seventh Asteroid and Mrs Calderone or the existence of any interest Mrs Calderone had or has in the property. So far as Seventh Asteroid is concerned, the highest at which Mrs Calderone's case can be put is that the annotation was written on the back of a copy of Seventh Asteroid's Certificate of Incorporation and Mr Calderone appears to have treated Seventh Asteroid's assets as his own. Mr Calderone gave no evidence of ever acting on behalf of Seventh Asteroid so far as the agreement was concerned and gave no evidence of Seventh Asteroid confirming the agreement (either through his actions alone or otherwise) 9. [13] The question of whether Seventh Asteroid confirmed any relevant agreement between Mr and Mrs Calderone in 1990 was made more complex during final addresses. Whilst the language of the pleadings and the evidence was all in terms of an "agreement" between Mr and Mrs Calderone which was confirmed by Seventh Asteroid, in response to an argument that there was no intention to create legal relations between Mr and Mrs Calderone and thus there could be no agreement upon which Mrs Calderone's case could be built, counsel for Mrs Calderone contended that the interest given in the property to Mrs Calderone in 1990 was alternatively given by way of a gift. Whilst the purpose of this submission was obviously to deal with Perpetual's submission that there was no intention to create legal relations, the submission itself highlights the underlying difficulty in Mrs Calderone's case. It is clear from the evidence of Mr and Mrs Calderone that the assurances given by Mr Calderone in July 1990 were never meant to be taken as contractual promises or assurances upon which legal proceedings might be brought in respect of a breach thereof. As Mrs Calderone described it, "It wasn't a business deal".10 Further, it was not a legal agreement to sue Mr Calderone on if he broke his promise.11 Neither Mr nor Mrs Calderone regarded the discussions as giving rise to a tenancy in her favour.12 I find that in the course of the discussions between Mr and Mrs Calderone in 1990 concerning the property there was no intention to create legal relations or to do anything which would give rise to legal consequences. Mr and Mrs Calderone did no more than discuss and concur in a proposal that the property be the matrimonial home and not part of Mr Calderone's business.13 [14] As for the allegation that the handwritten annotation and underlying conversations constituted the gifting of an interest in the property to Mrs Calderone, all that needs to be said is that this does not accord with the evidence. Neither Mr Calderone nor Mrs Calderone gave any evidence that Mrs Calderone was

Page 6 being given any interest in the property in 1990. Properly understood, Mrs Calderone was seeking an assurance that the house that they were both very keen on would remain the matrimonial home and be outside Mr Calderone's business interests. Mr Calderone was prepared to give that assurance and to put that assurance in writing. To use his words14 "The family home was never meant to be touched". This also explains the lack of any record of any interest granted to Mrs Calderone in the property in the records of Seventh Asteroid. Such a record was unnecessary because it was the common intention of Mr and Mrs Calderone to live in the property as their matrimonial home throughout their marriage and that the home would not be used for business purposes. In those circumstances and with Mr Calderone having effective control of Seventh Asteroid, it was not necessary in Mr Calderone's mind to have Seventh Asteroid "confirm" any agreement or arrangement he had with Mrs Calderone. [15] In advancing his case in relation to the involvement of Seventh Asteroid and the binding of it in respect of the 1990 conversations and the handwritten annotation, counsel for Mrs Calderone attempted to place reliance upon the doctrine of unanimous assent.15 However, in my opinion the doctrine has no application in this case for the following reasons:

3a)

3b)

3c)

3d)

First, there is no evidence that Mrs Calderone, a shareholder who held one of the two shares at the relevant time, assented in any decision as shareholder of Seventh Asteroid. Indeed, it is clear from her evidence that during 1990 she was not even aware of the fact that she was a director and shareholder of Seventh Asteroid. Secondly, there is no evidence that any decision made granting Mrs Calderone an interest in the property was either within power or for a proper purpose. No evidence was led that the disposal of an interest in the property to Mrs Calderone was one which was in the interests of Seventh Asteroid. Thirdly, unlike the unanimous assent cases, the present case was not one where there was an actual unanimous assent of all of the shareholders in a transaction being entered into by the company. The argument put as to unanimous assent was no more than an attempt to treat Mr Calderone (a 50% shareholder and a director) as the equivalent to the company. That is, an attempt to lift the corporate veil. In giving the assurances he gave, Mr Calderone cannot be treated as the equivalent to the members of Seventh Asteroid in a meeting. Fourthly, the fact that Mrs Calderone might have assented to Seventh Asteroid making a decision in her favour had she known that she was a shareholder at the time does not take the matter further because the doctrine of unanimous assent requires actual assent and not merely "potential assent".

[16] The fact that Seventh Asteroid never confirmed the agreement entered into between Mr and Mrs Calderone in 1990 is made even clearer by the fact that it entered into the 1996 and 1997 mortgages with National Mutual which contained express representations and warranties that the land was free from any encumbrance of the kind now claimed by Mrs Calderone. Indeed, the fixed and floating debenture charge given by Seventh Asteroid to National Mutual dated 13 June 1997 also contains such an express representation and warranty.16 Further, Seventh Asteroid's dealing with and transfer to Australvic also demonstrates that, so far as Seventh Asteroid was concerned, no interest in the property had been granted by it to Mrs Calderone. Does s 42(2)(e) of the Transfer of Land Actprotect Mrs Calderone? [17] Section 42 of the Transfer of Land Act provides as follows:
42. Estate of registered proprietor paramount

1)

Notwithstanding the existence in any other person of any estate or interest ... which but for this Act might be held to be paramount or to have priority, the registered proprietor of land shall, except in case of fraud, hold such land subject to such encumbrances as are recorded on the

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relevant folio of the Register but absolutely free from all other encumbrances whatsoever, except --

1. 1. 1 1) 2

the estate or interest of a proprietor claiming the same land under a prior folio of the Register; as regards any portion of the land that by wrong description of parcels or boundaries is included in the folio of the Register or instrument evidencing the title of such proprietor not being a purchaser for valuable consideration or deriving from or through such a purchaser.

Notwithstanding anything in the foregoing the land which is included in any folio of the Register or registered instrument shall be subject to -- ...

1.

the interest (but excluding any option to purchase) of a tenant in possession of the land;

[18] Counsel for Mrs Calderone relied principally upon the decisions of Barba v Gas and Fuel Corporation,17 Burke v Dawes18 and the cases in that line of authority.19 In Barba, Gibbs ACJ said:20
In Burke v Dawes ((1938) 59 CLR 1, at pp 17-18 ), Dixon J discussed as follows the effect of an earlier Victorian statutory provision which corresponded to s 42(2)(e) : In Victoria these words have received an interpretation and an application as a result of which any person in actual occupation of the land obtains as against any inconsistent registered dealing protection and priority for any equitable interest to which his occupation is incident, provided that at law his occupation is referrable to a tenancy of some sort, whether at will or for years. Thus, a purchaser under a contract of sale, who at law is in possession as tenant at will of the vendor, has been held protected in respect of his equitable ownership as purchaser (Robertson v Keith(; Sandhurst Mutual Permanent Investment Building Society v Gissing ( (1889) 15 VLR 329)), a lessee in respect of an option to purchase contained in his lease (McMahon v Swan( [1924] VLR 397)) and a wife in respect of an equitable life interest claimed under an unsigned separation agreement made with her husband ( Black v Poole((1895) 16 A.L.T. 155)). a'Beckett J decided the last named case in deference to previous decisions and against his own opinion, which he stated to be that 'those words were intended to refer to a tenancy as ordinarily understood arising out of an agreement under which the person in possession was allowed to occupy in consideration of some kind of rent or service of which the proprietor was to have the benefit.' The cases are collected and criticised by the late Dr Donald Kerr in his work on the Australian Lands Titles (Torrens) System (1927), at pp 75 et seq. But the interpretation has stood for nearly seventy years, and it would, I think, be most undesirable now to undertake the re-examination of its correctness. Similar views were expressed by Latham CJ and by Evatt J. McTiernan J agreed with the remarks of Dixon J. The fifth member of the Court, Starke J was perhaps not so definite in the expression of his opinion but he did not disagree with what the majority of the Court said on this point. This question should therefore be regarded as settled.

[19] Whilst it is correct, as counsel for Mrs Calderone submits, to say that s 42(2)(e) should be interpreted widely so that any person in actual occupation of the property obtains as against any inconsistent registered dealing protection and priority for any equitable interest to which her occupation is incident, in order for Mrs Calderone to succeed at law, her occupation must be referable to a tenancy of some sort. It is common ground that Mrs Calderone is not claiming that a lease exists (at least not as commonly understood). The interest she claims is that of a life tenant in possession as protected under s 42(2)(e). For the reasons given above, I have already concluded that no interest or estate in the property was granted to Mrs Calderone in 1990 either by Mr Calderone or by Seventh Asteroid. All that occurred in 1990 was that Mrs Calderone sought an assurance from her husband that the property would be the matrimonial home and that he would not use it in his business. There was no intention that the assurances (and the written annotation) would constitute an agreement which could be enforced at the suit of Mrs Calderone and there was no intention to give her any interest in the property over and above that which she would have enjoyed as Mr Calderone's wife and the mother of his children. Further, the then owner of the property, Seventh Asteroid, did not grant Mrs Calderone any interest or estate in the property. [20] I should deal with one further argument put by counsel for Mrs Calderone. He submitted that the

Page 8 question of whether the written annotation constituted a contractual promise or a gift did not need to be resolved and that the question of whether the interest or estate of a life tenant in possession was given to Mrs Calderone by the handwritten annotation fell to be determined by construing the annotation. He further submitted that the words "is yours to live in for the rest of your life" told in favour of a life estate, rather than a mere personal right to reside on the property for life. [21] The construction of the written annotation is a question which turns on the words of the document read in the context of the circumstances. It has been held that a right to "reside" or "live" on land confers a personal right only, since it must be exercised in person.21 On the other hand, it has been held that a right to "use and occupy" a property points to a life estate since "use" or "occupation" may not only be exercised by the person to whom it is conferred in person but also may be exercised through another.22 The use of the words "to live in" in the annotation of itself suggests a mere personal right to reside on the property. The context in which the assurances were given by Mr Calderone and the mutual intention of the Calderones to use the property as a matrimonial home further confirms this construction. Whilst counsel for Mrs Calderone attempted to place reliance upon Black v Poole23 as a case showing that the words "for life" can be held to grant a life estate, rather than a mere personal right to reside for life, the circumstances of that case were very different from the circumstances of the present case. In that case, what was given by the husband to his wife was given in consideration of her withdrawing certain legal proceedings which she had taken against him by reason of his desertion of her. Further, whilst the judgment records that the husband said that he would assign the relevant allotment to the wife for her life, the judgment does not record whether words like "to live in" or "to use" were used. Black v Poole does not add anything to the debate so far as the construction of the handwritten annotation in this case is concerned. If anything, Black v Poole does not assist Mrs Calderone because in the judgment it is recorded that the wife's possession "should be held to have been under the agreement which entitled her to hold for her life". An agreement which entitled the person seeking the protection of s 42(2)(e) to "hold" for life is little different from one that entitles a person to "use" for life. In the circumstances, I remain of the view that, properly construed, the handwritten annotation did not grant the interest or estate of a life tenant in possession. Conclusion [22] It follows from what I have said above that the plaintiff's claim must be dismissed. The injunction granted by Williams J on 18 May 200724 must be dissolved. I will hear counsel on the precise form of the order and on the question of costs. Order Orders accordingly Counsel for the plaintiff: Mr A Trichardt Counsel for the defendant: Mr N Muktar QC with Mr P Noonan Solicitors for the plaintiff: Altus Lawyers Solicitors for the defendant: Russell Kennedy

1 In her pleadings and during the course of evidence, Mrs Calderone put her claim on an alternative basis that Perpetual's interest in the property was subject to a constructive trust in her favour. However, in final addresses, counsel for Mrs Calderone abandoned this argument. 2 Paragraph 40 of "The Defendant's Case"

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3 Sworn 27 April 2007 4 T62.8 -- This evidence was given in re-examination 5 Supreme Court proceeding number 4876/00 6 In an affidavit sworn 7 September 2000 7 The bulk of Mrs Calderone's evidence-in-chief was given by affidavit 8 See T28.7, T28.18, T28.20 and T30.2 9 A historical company extract for Seventh Asteroid that was tendered as part of defendant's Ex "1" discloses that Seventh Asteroid had three directors in 1990, Mr and Mrs Calderone and one John Stanley McLean 10 T30.10 11 T42.22 12 See Mrs Calderone's evidence at T28.11 and Mr Calderone's evidence at T75.10 13 See generally Balfour v Balfour [1919] 2 KB 571; Cohen v Cohen (1929) 42 CLR 91; and Pettitt v Pettitt [1970] AC 777 14 T91.30 15 See generally Re Duomatic Ltd [1969] 2 Ch 365; Brick and Pipe Industries Ltd v Occidental Life Nominees Pty Ltd [1992] 2 VR 279; Herrman v Simon (1990) 4 ASCR 81; Poliwka v Heven Holdings Pty Ltd (No 2) (1992) 8 ACSR 747; and Swiss Screens (Australia) Pty Ltd v Burgess (1987) 11 ACLR 756 16 See cl 8.1(h) 17 (1976) 136 CLR 120 18 (1937) 59 CLR 1 19 Which include Skospels v Perpetual Trustees of Victoria Ltd [2004] VSC 336; ASIC v Money for Living (Australia) Pty Ltd (No 2) (2006) 155 FCR 349; and Black v Poole (1895) 16 ALT 155 20 At CLR 140 21 See Re Keenan (1913) 30 WN (NSW) 214 at 215 22 See Batey v Potts (2004) 61 NSWLR 274 at [25] 23 (1895) 16 ALT 155 24 Williams J granted an interlocutory injunction restraining the defendant from exercising any rights it may have to take possession of the property until further order.

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2 of 10 DOCUMENTS: Unreported Judgments WA 144 Paragraphs

VERSTEEG v VERSTEEG - BC200806543


Supreme Court of Western Australia -- In Chambers Simmonds J CIV 1797 of 2007 13, 14 May, 16 July 2008 Versteeg v Versteeg [2008] WASC 142
WILLS AND ESTATES -- Questions to be answered on construction of will and distribution of assets. WILLS AND ESTATES -- Question as to asset of estate subject to mortgage -- Real property forming part of residuary estate subject to mortgage to secure liability under guarantee and indemnity of liability of a company one of the family businesses -- Company in liquidation -- Specific legacy of family businesses -- Whether liability secured should be borne primarily by real property or by assets of remaining family business. WILLS AND ESTATES -- Question as to conditional gift -- First charge on residuary estate if chargee has first transferred interest in certain real property 'to me' pursuant to letter from testator to chargee -- Transfer after the testator's death -- Whether condition met. WILLS AND ESTATES -- Questions as to payment of costs and expenses of getting in assets and general costs of administration, availability to trustees of proceeds of sale of real property mortgaged to secure liability under guarantee and indemnity, cash as part of the residuary estate and payment of gifts of capital to the life tenant under the will. (WA) Administration Act 1903 s 45 (CTH) Administration Act 1969 (NZ), 34 (CTH) Property Law Act 1952 (NZ), 149(1), 149(2) (WA) Trustees Act 1962 s 92 (WA) Wills Act 1970 ss 26(1), 28(1), 28(2) Abbott v Middleton (1858) 7 HLC 68; Bathhurst v Errington (1877) 2 App Cas 698; Blight v Hartnoll (1883) 23 Ch D 218; Court v National Australia Bank (Unreported, WASC, Library No 8585, 11 November 1990); Haimes v Goode (1932) 33 SR (NSW) 1; In re Birmingham [1959] Ch 523; In re Nicholson [1923] WN 251; In re Rhagg (deceased) [1938] Ch 828; Morton v Mitchell Products [1996] FCA 828; Nangus Pty Ltd v Charles Donovan Pty Ltd (in liq) [1989] VR 184; Official Assignee v Crooks [1986] 2 NZLR 322; Re Burton, Danby v Burton [1901] 1 WN 202; Re Fegan [1928] Ch 45;

Page 12 Re Freeman; Hope v Freeman [1910] 1 Ch 681; Re Horton (deceased) [1969] NZLR 598; Re Jackson; Jackson v Duncan (1964) 82 WN (NSW) 62; Re James's Will Trusts [1962] Ch 226 at 234; Re Morgan, Brown v Jones (1927) 71 Sol Jo 650; Re Smith (1890) 45 Ch D 632; Re White [1958] Ch 762; Versteeg v Court in his Capacity as Liquidator of Versteeg Contractors Pty Ltd (Unreported, WASC, Library No 920370, 17 July 1992), referred

Simmonds J.
Introduction [1] These are proceedings on an originating summons dated 8 August 2007 seeking directions and orders with respect to certain questions that have arisen in relation to the proper construction of a will and the distribution of the assets of the estate. The application is under Administration Act 1903 (WA) s 45 and Trustees Act 1962 (WA) s 92 and Rules of the Supreme Court 1971 (WA) O 58 r 2. [2] The questions for the court have undergone some change since the originating summons. In order to understand them in their present form, it is necessary to set out the following background. That background first sets out a chronology of events for the most part as they appear from the schedule of agreed facts filed for the purposes of the hearing before me. There were certain clarifications of that schedule accepted by the parties at that hearing which are incorporated into that background. After setting out that chronology, I set out the principal terms of the will so far as they concern me. [3] After setting out the background including those terms, I will list the questions for the court. I will then refer to a preliminary issue, as to the appearance before me of senior counsel for one of the plaintiffs in that plaintiff's capacity as a beneficiary under the will. I then deal with each of the questions. Chronology of events [4] The late Joseph Versteeg (the testator) was married to Caroline Versteeg (Mrs Versteeg) and had five sons. They were the first named first plaintiff (Giuseppe), and the four defendants (respectively, Johanis, Enrico, Umberto and Edward). I should note that Johanis was also known within the family as Hans. [5] The testator operated or controlled two family businesses. One was J Versteeg & Sons, the other was Versteeg Contractors Pty Ltd J Versteeg & Sons was a plant hire business which the testator owned as a sole proprietor. Versteeg Contractors Pty Ltd was an earth moving contractor of which, as I understand it, the testator had a controlling shareholding interest and was a director. [6] Both businesses operated from property situate at 90 McDowell St in Welshpool (the McDowell St property). The McDowell St property had been acquired in 1977 in the names of the testator, Johanis and Mrs Versteeg, as joint tenants. By a declaration of trust dated 14 March 1978 Johanis declared he held his one-third interest in trust for the testator. On 3 June 1982 the testator, Johanis and Mrs Versteeg ceased to hold the McDowell Street property as joint tenants, and instead became owners of it as tenants in common. [7] In 1984 disputes arose between the testator and Johanis as to the latter's one-third interest in the McDowell St property as well as monies he was said to have taken from building society accounts of the testator. [8] By a letter dated 3 May 1984 (the 3 May 1984 letter) the testator demanded that Johanis transfer his one-third interest in the McDowell St property to the testator pursuant to the declaration of trust dated 15 March 1978. In view of its importance to one of the questions before me I set that letter out in full text:
This letter has been prepared for me by my solicitors at my request, but I want you to understand that this is a personal demand from me to you. I do not propose to go into the matters which have occurred to date in detail however I am sure you know that both your mother and I are extremely disappointed to your conduct. It is my sincere hope that your severance from the family business can be achieved on a friendly basis and you

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know that I wish you well in the future. It is my hope that time will heal the wounds and that the family can remain on friendly terms as a family should. My main reason for writing is in relation to the [McDowell Street property]. As you are aware this property was purchased by myself and registered in your name as to a one third share in common as trustee for me in the context of my Will in the event that I died. As you are aware you evidenced your declaration of trust by letter dated the 15th of March 1978 a copy of which is enclosed. I have instructed my solicitors to prepare a Transfer of Land to effect a transfer by you of your interest to me and I would request that you execute the Transfer where indicated and return it to me immediately. I shall of course meet all costs in the matter of the Transfer. I would stress however that this is now most urgent and if you do not honour your undertaking to transfer the land back to me then I will have no alternative other than to instruct my solicitors to take action. I sincerely hope this will not be necessary and look forward to your early response.

[9] There is some issue as to whether or not Johanis received the 3 May 1984 letter on or about its date. However, it is not in dispute that, by correspondence dated 5 June 1984 solicitors for the testator supplied Johanis with a copy of the 3 May 1984 letter. [10] On 31 May 1984 the testator executed his will (the will). I will return to the principal terms of the will for my purposes. For now it is sufficient to note that, subject to Mrs Versteeg taking a life interest in the estate of the testator, and to a pecuniary and specific legacies to certain of the five sons, the residuary estate was given to all five sons. The testator appointed Enrico and James Halbert Stuart Macdonald (Mr Macdonald) as the executors and trustees of the will. [11] It is not in dispute that at least Johanis was not aware of the terms of the will during the testator's lifetime. [12] In June 1984 further correspondence passed between the solicitors for the testator and the solicitors for Johanis in relation to the disputes that had arisen between Johanis and his father. This correspondence concerned, among other things, a claim that Johanis was indebted to the testator in the sum of $220,000 in addition to the claim that Johanis held his one-third interest in the McDowell St property in trust for the testator. [13] On 12 September 1984 the testator executed a codicil to his will (the codicil). The codicil removed Enrico as one of the executors and trustees of the will and replaced him with Giuseppe. The codicil made no amendments to the dispositive or other substantive provisions of the will. [14] On 21 December 1984 Versteeg Contractors Pty Ltd was placed in receivership, and on 6 March 1985 this court wound the company up. [15] In or about January 1985 Enrico by himself or through a company of his, Versteeg Plant Hire Pty Ltd, took possession of a number of the chattels of the business of J Versteeg & Sons and converted them to his own use. [16] On 20 July 1985 the testator died. By that date, J Versteeg & Sons had ceased operating various items of plant and equipment of that business, at least some of which had been taken by Enrico. [17] As at the date of the death of the testator, the position of his estate was as follows. [18] Virtually all of his personal assets were represented by his interest in the business J Versteeg & Sons, which then had assets comprising cash at hand of $429,128, debtors of $22,300, the debt owed under the October 1985 deed then estimated at $205,664, a debt of $518,740 owed by Versteeg Contractors, a debt of $87,196 owed by Mrs Versteeg and an amount held by Citicorp as a deposit pending settlement of a dispute in respect of a bulldozer, less current liabilities of $287,903. His shares in Versteeg Contractors had no value. His remaining personalty, being personal effects, was nominally valued at $1,000. [19] The testator's interests in real property included his interest in the McDowell St property. The McDowell St property was subject to a mortgage in favour of Citicorp to secure debts of Versteeg Contractors to it with a face value of $650,000, debts which were also secured by a charge on assets of the company. The McDowell St property was sold with settlement occurring on or about 28 March 1988:

Page 14 Citicorp took no portion of the proceeds. [20] The testator also had interests in or ownership of three other properties. [21] One was Lot 4, Douglas Rd in Martin (the Douglas Rd property), in which the testator had a half interest as tenant in common with Johanis. On 19 December 1988 the estate of the testator sold the Douglas Rd property. [22] Another was Lot 65, Brook Rd in Welshpool (the Brook Rd property), in which the testator had a quarter interest as tenant in common. On 16 June 1989 the estate of the testator sold the Brook Rd property. [23] The third property other than the McDowell St property in which the testator had an interest at his death was farming property at the corner of Feldt Rd and Douglas Rd, Martin (the Feldt Rd properties). The Feldt Rd properties were wholly owned by the testator and valued at $590,000. However, the Feldt Rd properties were mortgaged to secure certain liabilities of the testator (and others) to the National Australia Bank (NAB) as guarantors and indemnitors of obligations to NAB of Versteeg Contractors Pty Ltd The guarantee and indemnity was under a guarantee and indemnity dated 5 October 1984 and thus was dated after the date of the codicil, and showed as guarantors the testator, Enrico, Giuseppe and Umberto, although only the first three executed the document (Ex 1) (the NAB guarantee and indemnity). [24] I note that the NAB guarantee and indemnity and liability makes no reference at any point to J Versteeg & Son or any business associated with the testator (or the other guarantors and indemnitors) other than Versteeg Contractors. [25] The guarantee and indemnity extended at crystallisation in part to a liability to NAB of $39,802 on an 'in reduction account' (the 'in reduction account' NAB liability) as well as other liabilities to the bank. The liabilities crystallised at $1,004,620 in all (the final NAB liability). [26] At the date of death of the testator, on 20 July 1985, his liabilities comprised (apart from the liabilities of J Versteeg & Sons) a contingent liability under a bill of sale to Citicorp with a face value of $650,000 given as security on behalf of Versteeg Contractors the liability under which was estimated to be nil; a contingent liability under the NAB guarantee and indemnity; a contingent liability to the State Taxation Department for payroll tax of Versteeg Contractors with a face value of $33,000; and a contingent liability under a guarantee to the Commonwealth Trading Bank for debts of Versteeg Contractors with a face value of $20,000. The contingent liability to Citicorp never fell in, while the estate of the testator met the contingent liability under the NAB guarantee and indemnity and to the State Taxation Department. [27] Following the date of the death of the testator, and by an agreement by deed dated 1 October 1985 (the October 1985 deed), Enrico and his company, Versteeg Plant Hire acknowledged a debt of $314,000 to the estate. Of this amount, it was accepted that 7.9% was in respect of his taking of non-business monies, while the remaining 92.1% was in respect of plant and equipment of J Versteeg & Sons. The October 1985 deed provided for payment of that sum by instalments with interest. By 1988 after a series of payments the principal sum remaining due under the October 1985 deed was $206,000. Following Enrico's declaration of bankruptcy on 20 May 1991, by a deed dated 22 September 1992 his official trustee in bankruptcy and the trustees of the estate of the testator agreed that the estate's claim against Enrico under the October 1985 deed would be set-off against Enrico's entitlements under the will. [28] Over the period October 1985 to January 1986 the trustees of the estate of the testator continued the claim against Johanis for the monies allegedly appropriated from the building society accounts of the testator and for the transfer of the one-third interest in the McDowell St property. [29] On 8 January 1986 probate of the will was granted to Giuseppe and Mr Macdonald. [30] In January 1986 the trustees of the estate of the testator commenced proceedings in Supreme Court action CIV 1083 of 1986 against Johanis and a related company of his, Hanscon Holdings Pty Ltd, as well as against Enrico and his related companies. Johanis in turn claimed some share of the family business of the testator. [31] By agreement dated 12 February 1986 (the 1986 agreement) the parties to CIV 1083 of 1986 settled

Page 15 that litigation. The terms included that Hanscon would, subject to a condition that was subsequently met, purchase certain plant and equipment of J Versteeg & Sons for $750,000 payable in certain instalments and secured by a charge over the assets of Hanscon and the provision of a guarantee by Johanis and a related company of his, Malavoca Pty Ltd That company and Versteeg Plant Hire would pay $30,000 for the use of the equipment between the period 1 October 1985 and 31 November 1985. Johanis expressly acknowledged he held his one-third interest in the McDowell St property in trust for the testator, and he agreed to execute a transfer of that interest to the estate. Johanis agreed to account to the estate for monies had and received or converted by him, in the amount of $220,000, reducible in certain circumstances to $90,000, repayable on demand by the trustees of the estate of the testator following the death of Mrs Versteeg. Johanis as security for all of his obligations under the 1986 agreement charged his entire interest in the estate of the testator and the 'common assets' as defined in the 1986 agreement. [32] On 19 December 1989 the estate of the testator sold the Feldt St properties for a net sum of $779,456. Those proceeds were applied first in satisfaction of the 'in reduction account' liability to NAB, which then stood at $88,000. The balance of the proceeds were held in escrow to abide the outcome of an action between the liquidator of Versteeg Contractors and NAB (Court v National Australia Bank (Unreported, WASC, Library No 8585, 11 November 1990)). Following judgment in that action, the balance was also paid to NAB, under the NAB guarantee and indemnity, on or about 1 July 1991, in respect of the final NAB liability. At the same time the estate of the testator paid the balance of $214,521.67 of the final NAB liability to NAB. I note in passing that on the figures I have the total of the proceeds of the sale of the Feldt Rd properties and the payment of that last amount is somewhat less than the amount of the final NAB liability. However, it was common ground before me that the final NAB liability was satisfied without any other material payment from the estate of the testator. [33] In December 1989 the estate of the testator purchased for $304,803 land and buildings in Cannington, and a further $3,000 was expended on preliminary plans and feasibility studies for the development of residential units on the Cannington land. Over the period 13 May 1995 to December 1995 the Cannington land was developed at a cost of about $1 million, using funds principally but not exclusively realised from the business of J Versteeg & Sons. The development was ultimately sold between January 2007 and April 2007 for a total of $3,110,000. [34] On 23 August 2002 the second named plaintiff was appointed in place of Mr Macdonald as one of the trustees of the will. [35] On 8 July 2006 Mrs Versteeg died. [36] The net assets of the estate of the testator appear on the materials before me to be worth significantly over $2 million. [37] I turn now to the material provisions of the will. The material provisions of the will [38] The will provided (in cl 2) that the trustees were to call in and dispose of all of the testator's real and personal estate and were directed to pay his just debts and funeral and testamentary expenses. The provision went on in material part that the trustees:
shall stand possessed of the residue of such moneys property or interests as the case may be, PROVIDED ALWAYS that the power hereinbefore vested in my Trustees to sell and convert any item of my real and personal estate shall be expressly subject to the Trusts hereinafter AND where the Trusts hereinafter provide that any specific item of my real or personal estate shall be transferred made over and delivered to any one or more beneficiary then in that event my Trustees shall have no discretion to sell or convert that item of my real or personal estate into money but shall hold the same in situ for delivery to my beneficiary in accordance with the Trusts hereinafter subject only to the capacity of my Trustees do so within the financial circumstances relating to my estate at the time of my death and in the event that financial circumstances shall necessitate the liquidation of any one or more items of my real and personal estate to permit the equitable discharge by my Trustees of the Trusts hereinafter then in that event my Trustees shall have a sole and exclusive discretion in that regard absolutely (hereinafter called 'my residuary estate').

Page 16

[39] The 'trusts' upon which the residuary estate was to be held were first (cl 2(a)) to apply the income of the residuary estate for the benefit of Mrs Versteeg with power in the trustees' 'sole discretion to apply from time to time part of the capital of my residuary estate for the maintenance of [Mrs Versteeg] should the need arise'. [40] Then the trusts upon which the residuary estate was to be held were set out, as follows (cl 2(b)(i) -(iv), excluding a proviso to (iv) which did not in the event obtain):

2i)

1ii)

1iii)

1iv)

To make over and deliver to my son [Johanis] the sum of SEVEN HUNDRED AND FIFTY THOUSAND DOLLARS ($750,000) as a first charge upon my residuary estate to his sole and exclusive benefit absolutely the said bequest to be paid to [Johanis] on that day being two years next following the date of my death or the death of my dear wife [Mrs Versteeg] whichever is the latter PROVIDED my Trustees shall have the sole an exclusive discretion to apply part of the whole of the said bequest to my son [Johanis] prior the due date for delivery of the said bequest PROVIDED this bequest is subject to my said son [Johanis] having first transferred and delivered to me that one third interest in common held by my said son in trust in [the McDowell St Property] pursuant to my demand in that regard of the 3rd of May 1984. To transfer make over and deliver to such of sons [Giuseppe, Enrico] and UMBERO PETERS VERSTEEG as shall survive me and if more than one then as tenants in common in equal shares for their sole and exclusive benefit absolutely all that my interest at death in [the McDowell St Property] and being the property upon which the family business is conducted (or such further or other property in substitution therefor or in addition thereto as at the date of my death). To transfer make over and deliver to such of my sons [Giuseppe, Enrico] and UMBERO PETERS VERSTEEG as shall survive me and if more than one as tenants in common in equal shares all that my interest at death in the family business or businesses including without limitation that business conducted by me as 'J VERSTEEG & SONS' and that company 'VERSTEEG CONTRACTORS PTY LTD' (and or any other or further business or business interest and whether held personally or by shareholding or by beneficial entitlement pursuant to a unit holding in a unit trust or otherwise as the case may be in addition to or in substitution therefor as at the date of my death) for their sole and exclusive use and benefit absolutely AND I HEREBY FORGIVE AND DISCHARGE absolutely all debts standing in the books or records of financial account of the family business or businesses to my credit effective as of the date of my death to the intent and effect that the family business or businesses shall not be deprived of the working capital represented by any debts standing to my credit in the books of accounts of the family business or businesses as at the date of my death. To transfer make over and deliver the whole of the balance of my residuary estate of whatsoever kind and wheresoever situate to such of my sons [Giuseppe, Enrico], UMBERO PETERS VERSTEEG, [Edward and Johanis] as shall survive me and if more than one then as tenants in common in equal shares for their sole and exclusive benefit absolutely ...

[41] I call the trusts in each of cl 2(b)(i), (ii), (iii) and (iv) respectively 'the cl 2(b)(i) trust', 'the cl 2(b)(ii) trust', 'the cl 2(b)(iii) trust' and 'the cl 2(b)(iv) trust'. As I understand it, in the law of wills and estates, the cl 2(b)(i) trust provides for a general legacy in the nature of a pecuniary legacy, the cl 2(b)(ii) trust provides for a specific devise, the cl 2(b)(iii) trust provides for a specific legacy and the cl 2(b)(iv) trust provides for a residuary gift. See Hutley, Woodman & Wood, Cases and Materials on Succession (2nd ed, 1975) 523524; and Blight v Hartnoll (1883) 23 Ch D 218 at 222. [42] It is common ground that in cl 2(b)(ii), (iii) and (iv) 'Umbero Peters Versteeg' is Umberto, the third named defendant.

Page 17 [43] Further, I was told by senior counsel for the plaintiff that 'Caroline Versteeg' (Mrs Versteeg) appeared in some other documents as Carolina Versteeg, while senior counsel for Johanis indicated to me that his name may have been misspelt. [44] It will be noted that the three beneficiaries of the cl 2(b)(ii) trust (for the property on which as has been seen the family businesses of J Versteeg & Sons and Versteeg Contractors were conducted) are also the beneficiaries of the cl 2(b)(iii) trust (for the family business or businesses). It will also be noted that those beneficiaries, with the testator, are the three named guarantors and indemnitors under the NAB guarantee and indemnity. The questions before me [45] By orders for directions by Acting Master Chapman in chambers of 1 February 2008, the following questions are to be determined, with a refinement in the first question agreed by counsel appearing before me and incorporated into that question:

4a) 4b) 4c) 4d) 3e) 3f)

Whether [the final NAB liability] paid by the Estate should be treated as payable out of the proceeds of the sale of [the Feldts Rd Properties], or should it be treated as payable out of the [Testator's] interest in the business of J Versteeg & Sons? Are the costs of getting in the assets of the estate and the general costs and expenses of the estate to be paid first from the residuary estate, namely [the cl 2(b)(iv) Trust]? Were any of the proceeds from the sale of [the Feldt Rd Properties] ever available to the trustees of the estate? Save for 7.9% of the cash received from second named defendant [Enrico] or companies controlled by him, did any of the cash at bank at 30 June 1986 belong to the residuary estate? Are gifts of capital to the life tenant ([Mrs Versteeg]) to be first paid from the residuary estate? Has the gift to the first named defendant in cl 2(b)(i) of the will of the deceased failed?

[46] Before I reach those questions, I should refer to the following aspect of the learned Acting Master's orders, in another provision of them. Although that aspect was not a live issue before me, reference to it enables me to provide an account of the participation of the parties in the hearing before me. The instruction of senior counsel to represent the interests of Giuseppe and Umberto [47] The trustees of the will arranged for an opinion to be obtained from Mr Graeme Murphy SC in relation to a number of questions on the construction of the will and the distribution of the estate of the testator. His opinion, dated 18 June 2007, addressed a range of questions including but not limited to matters subsumed by the questions above (the Murphy opinion). The Murphy opinion may be seen to favour the interests of Giuseppe, Enrico and Umberto, the beneficiaries of the cl 2(b)(iii) trust, and to be against those of Johanis and Edward, who were not such beneficiaries. [48] Giuseppe and Umberto were represented at the hearing before me by Mr Murphy. The plaintiffs had, on the advice of their solicitors, instructed Mr Murphy to represent the interests of Giuseppe and Umberto pursuant to the leave given by the orders of Acting Master Chapman on 1 February 2008. [49] A memorandum of appearance for Enrico had been entered by solicitors acting for him. However, by a notice of cease acting for him, he has become self-represented in these proceedings. So far as the information I have indicates, he has never taken an active part in them, either through his former solicitors, or by himself. [50] The plaintiffs in their capacity as trustees were represented at the hearing before me through their solicitors. [51] Johanis was represented by senior counsel, Mr Matthew Zilko QC.

Page 18 [52] Edward has not entered an appearance in these proceedings. [53] The orders of Acting Master Chapman included the following:

1.

The plaintiffs have leave to instruct Graeme Murphy SC to represent the interests of the first named plaintiff Giuseppe Vincenzo Versteeg and the third named defendant Umberto Peters Versteeg as beneficiaries under [the Will]. ... Any party has liberty to apply to vary the order in paragraph 1 above should a conflict arise as a consequence thereof.

1.

[54] There is, of course, a principle commending the separate representation of trustees from that of beneficiaries to give the court the assistance of separate counsel: Re Burton, Danby v Burton [1901] 1 WN 202; Re Morgan, Brown v Jones (1927) 71 Sol Jo 650 at 651 (Clauson J); and Morton v Mitchell Products[ 1996] FCA 828. Here such separate representation was secured. [55] At the same time separate representation should not be at the expense of the creation of a situation of conflict or potential conflict: see Nangus Pty Ltd v Charles Donovan Pty Ltd (in liq) [1989] VR 184 at 185. I understood this latter to be the principle underling O 3. [56] However, all of those appearing before me confirmed no application had been made pursuant to the liberty to apply in O 3. Therefore I need say no more about the present aspect of the learned Acting Master's orders. The questions: (a) [57] It was common ground that the starting point in the consideration of this question is Wills Act 1970 (WA) s 28(1) and (2), which read at all material times as follows:

1)

1)

Where by his will a testator disposes of any property that at the time of his death is charged with the payment of money whether by way of mortgage, charge, lien (including a lien for unpaid purchase money) or otherwise and the testator has not by the will or by a deed or other document signified a contrary or other intention the property so charged is, as between the different persons claiming through the testator, primarily liable for payment of the money secured by the charge, and every part of such property according to its value shall bear a proportionate part of the charge on the whole. Such contrary or other intention is not deemed to be signified -1. by a general direction for the payment of the debts, or of all the debts of the testator out of his personal estate, or out of his residuary real and personal estate, or out of his residuary real estate; or 1. by a charge of debts on any such estates, unless such intention is further signified by words expressly or by necessary implication referring to all or some part of the charge.

1
[58] These provisions are the counterparts in this state of Locke-King's Act, which changed the common law that mortgage debts were paid out of the testator's personal estate unless the real estate was devised cum onere or the personalty was otherwise exonerated. See Official Assignee v Crooks [1986] 2 NZLR 322 at 324-325 (Henry J). The provisions have had counterparts in New Zealand also, as I will indicate. [59] As I understand the written submissions and oral argument before me, it is common ground that if a contrary or other intention has not been signified by the testator as s 28(1) provides, the answer to question (a) is that the final NAB liability must be borne first from the proceeds of the sale of the Feldt Rd properties

Page 19 and to the extent those proceeds are insufficient by the residuary estate. [60] On the assumption indicated the latter part of the answer follows in my view from the proviso to the prefatory words in cl 2 of the will, which removes the 'discretion' to sell or convert 'any item of my real or personal estate into money' (subject to the qualification for financial incapacity, which was not engaged in this case) where 'the Trusts hereinafter provide that [such item] shall be transferred made over and delivered to any one of more beneficiary'. Those last trusts were the specific devise (by the cl 2(b)(ii) trust) and the specific legacy (by the cl 2(b)(iii) trust). [61] Before me it was contended for Johanis that there was a 'contrary or other contention' signified by the will. This signification was to be found in the specific legacy by the cl 2(b)(iii) trust. When the terms of the cl 2(b)(iii) trust were considered with the nature of the obligation secured by the mortgage on the Feldt Rd properties, it was evident, it was put, that it was intended the assets of the 'family business or businesses' the subject of that specific legacy, and not the proceeds of the sale of the Feldt Rd properties, were to be primarily liable for the payment of the final NAB liability. That is because it was evident the liabilities of the businesses should be borne by their assets. [62] Was there a 'contrary or other intention' signified within Wills Acts s 28(1)? [63] There is a body of authority that to qualify as a 'contrary or other intention' in a provision like Wills Act s 28(1) the signification of that intention should disclose how the debt is to be borne as between the beneficiaries in the will; and the statutory incidence will not be lightly displaced. One such authority that was cited to me is Re Horton (deceased) [1969] NZLR 598. There, the testator had devised a share in certain land free of all duty and his residuary estate after the payment of debts and expenses was to be held on certain trusts. At the date of the death of the testator, the land was subject to a mortgage to secure a debt payable to an insurance company. Prior to the grant of the mortgage the insurance company had issued to the testator an endowment insurance policy payable at a certain date which had not by the date of decision in Horton arrived. Under the terms of the policy the sum assured, which was in the amount of the debt payable to the insurance company, or the surrender value of the policy if the policy had been surrendered, was to be applied in or towards payment of the mortgage moneys. [64] The court held that the policy did not disclose a contrary or other intention for the purposes of Property Law Act 1952 (NZ) s 149 (PL Act 1952), the then counterpart of Locke-King's Act, which as reproduced in the judgment (599) as to s 149(1) and (2) was as follows:

2)

2)

Where a person dies seised of or entitled to any land that is at the time of his death charged with the payment of any sum or sums of money by way of mortgage, and that person has not by his will or by deed or other document signified any contrary or other intention, the devisee or other person to or on whom the land is devised or devolves shall not be entitled to have the mortgage debt discharged or satisfied out of the personal estate or any other real estate of that person, but the land so charged shall, as between the different persons claiming through or under the deceased, be primarily liable to the payment of all mortgage debts with which the same is charged, every part thereof according to its value bearing a proportionate part of the mortgage debts charged on the whole thereof. A general direction in a will that the debts or that all the debts of the testator be paid out of his personal estate, or out of his residuary real and personal estate, or out of his residuary real estate, shall not be deemed to signify an intention contrary to or other than the rule hereby established, but such an intention must be further signified by words expressly or by necessary implication referring to all or some of the testator's debts charged by way of mortgage on any part of his land.

[65] It will be observed that those provisions are very similar to if not identical with Wills Act s 28(1) and (2). [66] The court also noted that there was nothing in the will to signify a contrary or other intention for the purpose of PL Act 1952 s 149(1).

Page 20 [67] The Court considered the English authorities of In re Nicholson [1923] WN 251; Re Wakefield [1943] 2 All ER 29; and In re Birmingham [1959] Ch 523, and said this (601-602, Richmond J):
Mr Chilwell, on the other hand, adopted as part of his submissions, and as correctly stating the law, the following editorial note to the case of Re Wakefield(above):

A devisee takes property subject to the charges upon it unless the testator has expressed a contrary intention. In order that a contrary intention may be shown, it is not enough that the testator has clearly ear-marked certain money for that payment in his life. That shows no intention how he intended the charge to be borne after his death as between the specific devisee and his residuary estate. The facts which are relied upon as showing a contrary intention must specifically refer to the manner in which the charge has to be borne after his death and as between the parties entitled under his will.

In my opinion, the foregoing note does correctly state the law. The cases of In re Nicholson, Re Wakefield, and In re Birmingham (above) clearly support the proposition that the will or other documents must disclose an intention as to what is to happen after the death of the testator. The other requirement referred to in the note is that the intention thus disclosed must be one which specifically refers to the manner in which the charge has to be borne as between the parties entitled under the will. This second requirement finds support in a passage from the judgment of Russell J. in In re Nicholson (at p 251) wherein the learned Judge referred to a letter written by the testatrix in her lifetime as showing 'no intention of any sort or kind that, as between the specific legatee and the residuary legatee, the debt should be borne by the latter'. This passage was referred to by Lord Greene M R in Re Wakefield(above) at p 31. Quite apart from authority, however, it is apparent that s 149 of the Property Law Act is concerned with the incidence of a debt as between the different beneficiaries in the estate of the testator. It is not concerned with the responsibility for payment of such debt as between the estate and the secured creditor. It follows that the contrary intention signified by the testator must relate to the incidence of the debt as between the parties entitled under the will. In the present case, as I have already said, it seems to me that the testator, when he made the arrangements which he did with the life insurance company, must have contemplated that those arrangements could well carry on after his death. The documents show that the testator was providing a fund which, as between himself (or his personal representatives after his death) and the insurance company, was intended to be used in repayment of the mortgage. I can, however, find nothing in these documents to disclose any intention on the part of the testator, one way or the other, as to the manner in which the mortgage debt should be borne as between the devisee and the residuary estate. Mr Chilwell referred me to In re Campbell [1893] 2 Ch 206 at 215 where Kekewich J. spoke of finding 'a tolerably plain indication' by the testator of a contrary intention. He also referred me to Brown v Abbott (1881) 7 VLR 121 (Eq) where Williams J. said: 'The intention must, I think, be signified (which, it will be observed, is the word used in the statute) -- 'I do not say by express words, but by something amounting almost to necessary inference or necessary implication' (ibid, 132). To these authorities may be added the remarks made by Stanton J. in In re Bain [1949] NZLR 726 at 730 to the effect that 'a statutory incidence of duty or debt cannot be lightly displaced'. In the present case I am left in a position where I can only conjecture as to the intention if any, of the testator regarding the incidence of the mortgage debt as between the beneficiaries under his will.

[68] In respect of Horton I also note Official Assignee v Crooks where Horton was distinguished. In that case, on the successor provision, Administration Act 1969 (NZ) s 34, to the provision considered in Horton, a mortgage over real property jointly owned by a husband and wife also extended over an insurance policy on the life of the husband, and both forms of mortgage collateral were to secure a liability to the mortgagee insurer. The mortgage provided that (326-327)
if during the continuance of this security any moneys become payable under any policy subject to this mortgage it shall be lawful for the mortgagee to receive and retain the same ... and to apply such moneys in or towards satisfaction of the moneys owing upon or secured hereby ...

[69] The court in Crooks (327) distinguished Horton on the basis that a contrary or other intention was signified by the permissive provision in the mortgage, which necessarily in respect of the life insurance

Page 21 policy operated on the death of the insured, and thus in respect of the estate of the insured signified that if the mortgagee so determined then another source than that represented by the land would bear the burden of the liability. [70] In this case it was not contended that the NAB guarantee and indemnity was a document that signified a contrary or other intention in that way or indeed otherwise, except as it might be read with the will. Nor could any such contention succeed, in my view. The guarantee was not expressed in terms of how, at the death of the testator, as between any property of the testator which was the subject of collateral security given for the obligation guaranteed and his other property, the obligation should be borne. At most as a result of the right of indemnity available to a guarantor or indemnitor there was an implied intention that as between the testator and Versteeg Contractors the latter would bear the burden of that obligation, to which the death of the testator was neither expressly nor impliedly made relevant. [71] There is authority that a contrary intention may be signified by the designation in the will of a special fund for payment of the testator's debts which is not a fund referred to in a provision like Wills Act s 28(2): Re Fegan [1928] Ch 45 at 49 (Tomlin J). There is also authority that a contrary intention may be signified where the will states that mortgaged property should be held for the specific devisees of it 'absolutely free and clear of any charge or deduction whatsoever', even if no special fund is created for the payment of debt secured: Haimes v Goode (1932) 33 SR (NSW) 1 at 2. [72] Here there was no express designation of a special fund for the payment of the contingent liability secured by the mortgage of the Feldt Rd properties, nor was there an express indication that they were to be taken free and clear of the mortgage. However, senior counsel for the defendant contended there was a sufficient signification by the will that the assets of the family business or businesses were primarily to bear all the business liabilities. As the liability secured by the mortgage was a business liability, that represented a signification that there was a special fund (the business assets) that had been recognised in the will to primarily bear that business liability. [73] The signification contended for was by the proviso in the will cl 2, to the power to call in the estate of the testator to pay his debts, more particularly in that proviso's reference to the cl 2(b)(iii) trust. That reference, it was put to me, should be read with the authority that a gift of an interest in an unincorporated business carries with it implicitly a gift of its assets less its liabilities: In re Rhagg (deceased) [1938] Ch 828 at 836; Re White [1958] Ch 762 at 772-774. [74] I was also referred to the words in the cl 2(b)(iii) trust, referring to the deceased's 'interest at death', as signifying a contrary intention. However, I do not consider this adds anything of significance to the preceding point from Rhagg and White. [75] True it was that the contingent liability secured by the mortgage of the Feldt Rd properties was not expressly (as I have indicated) a liability of either J Versteeg & Sons or Versteeg Contractors. However, the NAB guarantee and indemnity was one entered into at the request and for the benefit of Versteeg Contractors, as had been held in Versteeg v Court in his Capacity as Liquidator of Versteeg Contractors Pty Ltd (Unreported, WASC, Library No 920370, 17 July 1992) (White J) 13-14 where the court recognised the entitlement of the testator to an indemnity from the company in respect of the discharge by the estate of the contingent liability under the NAB guarantee and indemnity. Further, the testator had in the terms of the cl 2(b)(iii) trust forgiven and discharged all debts standing to his credit in the books of financial accounts of the family business or businesses as at the date of his death. [76] It appears to have been put to me I should take from this that the taking of the proceeds of the sale of the Feldt Rd properties by NAB for application towards satisfying the final NAB liability should be treated as if it was the taking of assets of the family business or businesses, which, given the insolvent liquidation of Versteeg Contractors, were the assets of the other components of that business or businesses represented by the business of J Versteeg & Sons. [77] It was further put to me that having the burden of discharge of an obligation incurred for the benefit of the components of the family business represented by Versteeg Contractors in respect of its liabilities borne by personal assets of the testator was a capricious outcome inconsistent with the testator's intentions. I will

Page 22 return, in the context of question (e) below, to the principle of construction of a will to avoid capricious outcomes. [78] Senior counsel for Giuseppe and Umberto put to me that a clearer signification of a contrary intention than that was required for the purposes of Wills Act s 28(1) on the terms of s 28(2) and the authorities of Horton, Fegan and Haimes. Only express words or something approaching a necessary implication of the sort referred to in Horton would do. [79] Further, there could be no reliance on the provision in the terms of the cl 2(b)(iii) trust for the forgiveness of debts owed to the testator, as that provision had no operation in the events that had happened by the date of death. Those events included that Versteeg Contractors had been wound up. The 'intent and effect' referred to in that provision, that the family business or businesses not be deprived of 'the working capital' represented by the debts could thus have no operation, and so the provision did not operate in respect of debts owed by Versteeg Contractors to the testator. [80] As to the first submission, it is not altogether clear to me on Crooks, on which I was not addressed by either counsel, that the standard the implication must reach is so high as not to admit that implication for which senior counsel for Johanis contended. [81] As to the second submission, while I am inclined to agree with it, I do not consider I have to determine the point. [82] That is because there is no indication to which I was taken from any document in this case that the contingent liability secured by the mortgage on the Feldt Rd properties was to be regarded as one primarily to be borne by other assets. That contingent liability was of the testator, whose capacity in undertaking it nowhere appears from the NAB guarantee and indemnity as I have indicated. [83] True it is the testator was the sole proprietor of the family business represented by J Versteeg & Sons, which carried on business from the same premises, the McDowell St property, as the other components of the family business or businesses, represented by Versteeg Contractors. True it is also that, on the evidence of the cl 2(b)(ii) trust and the cl 2(b)(iii) trust all those Versteeg family members involved in the family business or businesses were named as guarantors and indemnitors in the NAB guarantee and indemnity. [84] However, no reference was made in the NAB guarantee and indemnity to the capacity in which they were assuming their obligations under it. Further, the testator was also the owner of the Feldt Rd properties, which were not on the evidence before me assets of any family business or businesses, and which was the property mortgaged to secure the contingent liability under the NAB guarantee and indemnity. [85] As to the capricious outcome previously referred to, I do not consider any such is made out. I note the provision in cl 2(b)(iii) for forgiveness of debts standing to the testator's credit in the books of financial accounts of the family business or businesses. Whether or not that provision applied in the events that happened, it seems to me that the testator has thereby indicated a clear intention to support that business or businesses from his personal assets, in certain circumstances. The mortgage of the Feldt Rd properties is a similar indication. [86] Thus, it is not clear to me why it should be seen to be capricious for him do this in respect of the Feldt Rd properties. Further, any liability of the Feldt Rd properties would, of course, be subject to any right to an indemnity under the NAB guarantee and indemnity, as qualified, perhaps, by the provision in the cl 2(b) (iii) trust for forgiveness of debts. [87] There is in my view no clear or indeed other indication in the NAB guarantee and indemnity or the will that the contingent liability of the testator (or any of the other guarantors and indemnitors) was treated by the testator as a liability of the family business considered as a group of enterprises and thus one that should be treated as primarily to be borne by the assets of the family business or businesses. Absent an indication of such treatment, it does not appear to me there is a foundation on which to rest the submissions for Johanis. [88] Further, I note the provision in the will cl 2, opening words, to which senior counsel for Giuseppe and Umberto drew my attention, that qualify the absence of any discretion in the trustees to sell or convert any

Page 23 item of the testator's real or personal property. That qualification, which allows such sale or conversion, is where 'financial circumstances shall necessitate' such a dealing. [89] However, I do not consider this meets the argument for Johanis that the contingent liability under the NAB guarantee and indemnity was intended under the will to be treated as a business liability, not a personal liability, of the testator. [90] At the same time, I would reject that argument for Johanis for the reasons I have set out. It follows in my view that the answer to question (a) is as I first described it above. The questions: (b) [91] There were no written or other submissions directed to this question, concerning whether or not the costs of getting in the assets of the estate and the general costs and expenses of the estate were to be paid first from the residuary estate, namely the cl 2(b)(iv) trust, from any of the parties except for Giuseppe and Umberto. For them, their senior counsel directed me to the Murphy opinion. [92] The Murphy opinion is to the effect that the answer to the question is yes. I agree. [93] As the Murphy opinion indicates, the duties of an executor include getting the assets of an estate, and so the costs of administering the estate include those costs: Woodman, Administration of Assets (2nd ed, 1978) 10. [94] As the Murphy opinion also indicates, and as I have indicated, the proviso in cl 2 previously quoted makes the power to get in the assets of the estate for the payment among other things of 'testamentary expenses' subject to the trusts for specific items of property. The cl 2(b)(ii) trust and the cl 2(b)(iii) trust represent those trusts. They qualify the 'residuary estate', the subject of the trust for Mrs Versteeg as life tenant for whom the 'whole of the residuary estate' is to be held, and the cl 2(b)(iv) trust for the 'residuary estate', on which the cl 2(b)(i) trust is a first charge. The effect of the cl 2(b)(ii) trust and the cl 2(b)(iii) trust is that the costs of getting in the assets of the estate as well as the other testamentary expenses referred to in question (b) are to be first paid from the 'residuary estate'. The questions: (c) [95] Again, as with question (b), there were no written or other submissions directed to this question, from any of the parties except for Giuseppe and Umberto. Question (c), it will be recalled, was whether or not any of the proceeds from the sale of the Feldt Rd properties were ever available to the trustees of the estate. [96] Senior counsel for Giuseppe and Umberto put to me that on the facts of the payment of the proceeds to the NAB the answer to the question is no. I agree. Those proceeds were applied as determined by NAB and were wholly devoted to payment of the final NAB liability. The questions: (d) [97] Again, as with questions (b) and (c), there were no written or other submissions directed to this question from any of the parties, except for Giuseppe and Umberto. Question (d), it will be recalled, was whether or not, save for 7.9% of the cash received from second named defendant [Enrico] or companies controlled by him, any of the cash at bank at 30 June 1986 belongs to the residuary estate. [98] It was common ground that as at 30 June 1986 the assets of the residuary estate comprised the Douglas Rd property, the Brook Rd property and the Feldt Rd properties, that portion (7.9%) of the receivable from Enrico under the October 1985 deed representing the non-business portion of the total and the contingent receivable of $220,000 payable by Johanis under the 1986 agreement. It was further common ground that as at 30 June 1986 the only money received by the estate of the testator on account of receivables was Enrico's payment of $48,000 out of the total of $314,000 under the October 1985 deed. [99] It was put to me that it followed that that as at 30 June 1986 the only cash held by the estate of the testator belonging to the residuary estate was 7.9% of the amount of $48,000. I agree that this does follow

Page 24 and is the answer to question (d). The questions: (e) [100] Again, as with questions (b), (c) and (d), there were no written or other submissions directed to this question from any of the parties, except for Giuseppe and Umberto. Question (e), it will be recalled, was whether gifts of capital to the life tenant Mrs Versteeg were taken to be first paid from the residuary estate. For the answer to that question, senior counsel for Giuseppe and Umberto directed me to the Murphy opinion. However, the portion of the Murphy opinion to which I was directed did not in fact expressly address this question. Nor could I find any other part of the Murphy opinion that did so. [101] However, it seems to me the wording of the will is quite clear. It will be recalled that cl 2(a) empowers the trustees at their 'sole discretion to apply from time to time part of the capital of my residuary estate for the maintenance and benefit of [Mrs Versteeg] should the need arise'. This language in my view directly answers question (e). Thus the answer to question (e) is yes. The questions: (f) [102] This question, it will be recalled, is whether or not the gift to the first named defendant (Johanis) in cl 2(b)(i) of the will of the deceased had failed. [103] A suitable starting point is Wills Act s 26(1)(a) and (b), which are as follows:
Unless the contrary intention appears by the will --

1a) 1b)

the will is to be construed, with reference to the property comprised in it, to speak and take effect as if it has been executed immediately before the death of the testator; property that is the subject of a disposition, other than the exercise of a power of appointment, that is void or fails to take effect is to be included in any residuary disposition contained in the will; ...

[104] It is not suggested that there was any 'contrary intention' for the purposes of s 26(1)(a). Further, it is accepted that, if the gift to Johanis in cl 2(b)(i) of the will has failed, the residuary estate is not burdened by the first charge referred to in the clause. [105] The answer to the question is then one of construction of the will, in accordance with the principles for construction from the general law, there being no further provisions of the Wills Act to which my attention was drawn, or which appear to me to be relevant. [106] The following principles appear not to be in contest. [107] In construing a will the object of the court is to ascertain the intention of the testator as expressed in the will, from the words used in the will. Prima facie the words used in the will are to be given their ordinary meaning. However, the will must be read as a whole, in the light of the surrounding circumstances, and in relation to those circumstances the 'arm chair principle' is relevant. That principle permits the court to receive evidence of the state of the testator's family, his property, his friends and acquaintances, in order that a court may read the will from the position of the testator, as if sitting in the testator's 'arm chair'. See Hardingham I J, Neave M A and Ford H A J, Wills and Intestacy in Australia and New Zealand (2nd ed, 1989) [1102], [1103]. [108] If a will is republished by a codicil, the effect of republication upon construction is to make a gift in the will operate in the same way in which it would have operated if the words of the will had been contained in the codicil, unless the contrary intention appears. A codicil republishes a will if there is to be found in the codicil matter from which the inference can be drawn that when making and executing it the testator 'considered the will as his will' (Re Smith (1890) 45 Ch D 632 at 639). See Hardingham et al [712][714]. It is not in contest here that the doctrine of republication applied to the codicil.

Page 25 [109] In relation to the general legacy by way of pecuniary legacy in cl 2(b)(i) it was not in contest that the provision is one for a conditional bequest. This was accepted to be the effect of the words in cl 2(b)(i) as follows:
PROVIDED this bequest is subject to my said son [Johanis] having first transferred and delivered to me that one third interest in common held by my said son in trust in [the McDowell Street property] pursuant to my demand in that regard of the 3rd of May 1984.

[110] Further, it appears to be common ground this was a condition precedent. Thus, there is no scope for the application of the rule for conditions subsequent that, because they may work a forfeiture, they should be expressed in precise and direct terms: see on that principle Clark J B and Ross Martyn J G, Theobald on Wills (15th ed, 1993) 643. [111] It seems to me that the bequest should be construed as one requiring for its satisfaction that as a matter of urgency and in any event during the lifetime of the testator Johanis transfer the interest in the McDowell St to the testator. This it seems to me follows on two considerations. [112] One consideration is the ordinary meaning of the words used in cl 2(b)(i). It seems to me that the words 'to me' in their ordinary meaning require the transfer of the interest to the testator during his lifetime. [113] Further, the reference to that transfer occurring 'pursuant to' the 3 May 1984 letter in my view clearly permits recourse to that letter for the purpose of the 'arm chair principle'. That letter shows that the testator was requiring Johanis to transfer the interest on a transfer form which he was to execute and return to the testator 'immediately', and indicating to Johanis that the 'matter was now most urgent'. The letter was on its terms written in the context of Johanis' 'severance from the family business' and the testator had indicated in it that if the demand were not met he would have 'no alternative' but to instruct solicitors to take legal action. The letter in my view indicates the urgency of the matter so far as the testator was concerned. [114] However, senior counsel for Johanis put to me that the construction I have described was inapt for a number of reasons. [115] First, that construction could lead to arbitrary or capricious results. The example was given of the testator's death shortly after the will was executed or shortly after the codicil was executed. There is a principle for the construction of wills that is addressed to the avoidance of capricious results, as I will indicate. [116] Second, the construction did not allow for the fact that Johanis would not necessarily during the testator's lifetime have the opportunity to become aware of the will's terms. Indeed, he had not become aware of those terms until after the testator's death. Thus, he would not (and did not) know of the condition he was (on the construction I have referred to) to meet to qualify for the bequest. As I understand the submission, the testator would have been aware of this, and should not be taken to have intended to establish a condition in such terms. [117] Third, the construction failed to take proper account of the doctrine of republication. That doctrine in this case would have the provisions as to the bequest speak as from a time, 12 September 1984, when the immediacy in the 3 May 1984 letter had ceased to have any meaningful application. Indeed this can be seen even earlier, as at the date of the will, 31 May 1984. Thus, as I understood the submission, the testator should not be taken to have attached any urgency to the meeting of the condition. [118] All three of these matters would be addressed by the construction of the condition in cl 2(b)(i) senior counsel for Johanis submitted was that which should be preferred. The construction advanced was that the transfer of the interest in the McDowell St property should take place either to the testator before his death or to his personal representatives after his death, but in no event later than the latest date the bequest could fall in. That date was two years after the date of the death of the testator or of Mrs Versteeg, whichever came later. I was particularly referred to the opening words of cl 2(b)(i) providing for the bequest to be made over and delivered to Johanis:

Page 26

on that day being two years next following the date of my death or the death of my dear wife [Mrs Versteeg].

[119] It is not in contest on the construction I first described, the gift to Johanis in the will cl 2(b)(i) failed, but on the construction advanced by his senior counsel that gift did not fail. [120] I deal with each of the submissions of senior counsel for Johanis in turn. [121] There is a principle of construction of wills by which the presumption that the words used in the will are used in their ordinary meaning may be rebutted and a meaning preferred that would avoid capricious results. I was referred to the following, from Theobald on Wills, 205-206, referring to Re James's Will Trusts [1962] Ch 226 at 234; Bathhurst v Errington (1877) 2 App Cas 698, and Abbott v Middleton (1858) 7 HLC 68 at 69, as follows (footnotes omitted; page numbers and citation inserted):
Ordinary meaning prevails unless rebutted. If the presumption raised by the ordinary meaning rule is not rebutted, the ordinary meaning of a word or phrase prevails even though it may produce results which appear capricious. To quote Buckley J in Re James's Will Trusts[234]:

... a testator is entitled to be capricious or eccentric in his testamentary dispositions if he chooses ... , and the fact that the terms of his will, when interpreted according to their ordinary and apparent meaning, may produce odd results is not alone a ground for constructing his language in some other sense which it is less apt to bear: nor is the fact that he may have failed to think out how the scheme of his will might operate in all possible or probable circumstances, for to infer from the fact that the language may not appropriately fit all the possible or probable circumstances that the testator used such language in some sense other than its natural meaning assumes that the testator did the very thing which it seems he failed to do, namely, consider the appropriateness of his will to all possible or probable contingencies. One likely explanation may be that he meant his words to bear their normal meaning and failed to appreciate the consequences.

But the position is different if the presumption raised by the ordinary meaning rule is not applicable and the court is faced with a choice between two or more possible meanings. This may occur because a word or phrase has more than one ordinary meaning or (alternatively) more than one secondary meaning, the ordinary meaning not being applicable because it does not make sense. In deciding between possible meanings the court may properly prefer the meaning which does not produce capricious results. [Bathurst v Errington (1877) 2 App Cas 698 at 709-711]. In Abbott v Middleton [69] Lord Cranworth expressed the rule thus:

Where by acting on one interpretation of the words used we are driven to the conclusion, that the person using them is acting capriciously, without any intelligible motive, contrary to the ordinary mode in which men in general act in similar cases, there, if the language admits of two constructions, we may reasonably and properly adopt that which avoids these anomalies, even though the construction adopted is not the most obvious, or the most grammatically accurate. But if the words used are unambiguous, they cannot be departed from merely because they lead to consequences which we consider capricious, or even harsh and unreasonable.

[122] I leave aside for the moment the question whether or not there is a 'secondary meaning' to which resort may be had as senior counsel for Johanis contends. [123] In assessing whether or not a result is capricious, or arbitrary, it seems to me to be necessary to consider the circumstances. They may indicate that what at first sight might appear to be arbitrary or capricious is not so. [124] Those circumstances include a demand in the 3 May 1984 letter which had been communicated to Johanis, if not necessarily on then about its date, and which had never been withdrawn.

Page 27 [125] Further, I note the reference in the 3 May 1984 letter to the McDowell St property as 'business property'. [126] In the context represented by those two elements, in my view it would not be capricious for the bequest to Johanis to be one dependent on urgent resolution during the testator's lifetime, by transfer to him of that interest, of the matter of Johanis' interest in the McDowell St property. This would be so that the matter would have been resolved by the testator's death, for the benefit of his trustees. [127] The importance to the testator of the business or businesses conducted on the McDowell St property may be seen in the NAB guarantee and indemnity dated 5 October 1984, as well as in the provisions for the McDowell St property and for the family business or businesses in the cl 2(b)(ii) trust and the cl 2(b)(iii) trust, respectively. I note, as senior counsel for Johanis reminded me, that those two legacies did not require resolution of the matter before the later of the death of the testator and Mrs Versteeg. However, I also note that there is not the two year period provided for in relation to those legacies falling in as is a part of the construction contended for by senior counsel. [128] Senior counsel for the plaintiff put to me that resolution of the matter by the death of the testator might also be have been seen by him to be significant for the purposes of the life interest for Mrs Versteeg. On the construction that I first referred to, the matter would be resolved by the time that life interest fell in. [129] I consider that that consideration adds some weight to the view that the result to which the senior counsel for Johanis drew my attention was not capricious. However, assessing the weight of that consideration is difficult in the absence of evidence as to what the testator knew of the condition of the business or businesses conducted from the McDowell St property at the date of republication of the will by the codicil. I was not directed to any such evidence, and I could find none. However, that the consideration has some weight is to be seen in the provisions in the will for the McDowell St property and the family business or businesses as I have indicated. I have previously referred to the provision in the cl 2(b)(iii) trust indicating the testator's expectation that the business or businesses would require working capital. [130] True it is that the McDowell St property was sold by the trustees under the will less than three years after the date of the testator's death, and during the lifetime of Mrs Versteeg. However, in my view that does not have any significant bearing on the matter as it would have presented itself to the testator on 12 September 1984, the date of the codicil. This is given the provisions of the will republished then having to do with the McDowell St property and the family business or business that I have referred to, and the lack of evidence that at that time there was no question of the family business or businesses not continuing to operate from the McDowell St properties. [131] It follows I do not consider that there is a reason to apply the principle of construction of wills to avoid capricious results to which I have referred. [132] However, I should add that I am not convinced that there is a secondary meaning of the words as contended for by senior counsel for Johanis. It will be recalled that the principle does not apply if no such secondary meaning is to be seen. In my view the words 'to me' are clear and have no secondary meaning, as is confirmed by their use in the 3 May 1984 letter, which itself was not of course a testamentary instrument. [133] Therefore I do not consider there is scope for the application of the principle, to which I was referred by senior counsel of Johanis, that 'if the words of the will clearly confer an interest upon a beneficiary, subsequent ambiguous words contained in the same or a later clause ... will not cut down that interest': Hardingham et al [1119]; see also Re Freeman; ; Hope v Freeman [1910] 1 Ch 681 at 691 (Buckley LJ). [134] Further, the extended time period allowed for meeting the condition under the meaning contended for by senior counsel for Johanis is both difficult to extract from the terms of the cl 2(b)(i) trust, and in my view impossible to square with the language there of 'pursuant to' the 3 May 1984 letter. [135] The consideration that from the testator's viewpoint Johanis would not necessarily have become aware of the terms of the cl 2(b)(i) trust is in my view met by the provision to him, if not on its date, of the 3 May 1984 letter. [136] This takes me to the final consideration put against the construction to which I first referred, that

Page 28 based upon the doctrine of republication. At the date of the codicil, 12 September 1984, it is impossible to see how the literal terms of the 3 May 1984 letter, which called for execution and delivery of the transfer 'immediately', could be complied with. This might be taken to indicate that such delivery could take place without regard to those terms, at least in that respect. [137] In my view, the submission does not meet the use of the words 'to me' in both the cl 2(b)(i) trust and the 3 May 1984 letter. [138] Further, it seems to me that the difficulty referred to does not entail that the tone of urgency in the 3 May 1984 letter should be ignored, and in particular it should be ignored in favour of the construction put forward for Johanis. [139] I note there is authority that where at the date of republication of a will the testator was aware that a condition in it could not be strictly complied with the will should be construed to allow for that. I particularly note from Hardingham et al [719] Re Jackson; ; Jackson v Duncan (1964) 82 WN (NSW) 62. [140] In Jackson a testator had by his will made in 1949 given his son, Bruce Stear Jackson, the right, after the death of the testator's wife, to purchase a property on giving a notice within one year of her death. The wife died in 1956, and in 1957 the testator made a codicil by which he revoked the appointments of the executors in the will and made a further appointment of an alternative executor. [141] In Jackson 64 (McLelland CJ in Eq) the following appears:
The gift of the right to purchase remained and the testator must have intended that it should be a benefit to Bruce Stear Jackson. When he made the codicil the testator knew that his wife had died many years [sic] before and could not have intended that the right to purchase could only have been exercised at a time long since past. I am of opinion that, upon the true construction of the will and codicil, the right to purchase could be exercised within a reasonable time after the death of the testator.

[142] In my view Jackson supports the conclusion that 'immediately' in the 3 May 1984 letter could not be part of the condition. However, it also seems to me that allowing for that as well as the terms of the letter the construction I first indicated is to be preferred. [143] It follows that the answer to question (f) is yes. Orders [144] I will hear from the parties as to the orders to be made to give effect to these reasons, including orders as to costs. Order Questions answered No appearance for the second named defendant. No appearance for the fourth named defendant. Counsel for the first and second named plaintiff: Mr G H Murphy SC and Mr M S Macdonald Counsel for the first named defendant: Mr M H Zilko SC Solicitors for the first and second named plaintiff: Macdonald Rudder Solicitors for the first named defendant: Jarman McKenna

Page 29

Page 30 3 of 10 DOCUMENTS: CaseBase Cases

Murdoch v Commissioner of Taxation


2008 ATC 20-031; (2008) 68 ATR 490; [2008] FCAFC 86; BC200803866 Court: FCA Judges: Lindgren, Stone and Jacobson JJ Judgment Date: 28/5/2008

Catchwords & Digest

Taxation and revenue -- Income tax -- Lump sum payment -- Characterisation Appeal against decision of Administrative Appeals Tribunal (AAT) finding payment of lump sum constituted income within meaning of (CTH) Income Tax Assessment Act 1936 (Act) s 25(1). Respondent commissioner of taxation considered lump sum as capital gain under Act Pt IIIA. Appellant submitted AAT erred in characterising lump sum as compensation for lost income. Appellant denied giving up claim entitled to as life tenant. Appellant submitted right relinquished was right to account for benefit for third party trustee's breach of trust. Respondent submitted capital nature of source of payment of lump sum irrelevant to characterisation. Whether AAT erred in characterising lump sum as compensation for lost income. Held: Appeal allowed. AAT erred in characterising because lump sum derived from accounting for capital profit due to trustee's breach of trust. Litigation History Annotations: All Cases Sort by: Judgment Date (Latest First) Annotation Case Name Citations 2007 ATC 2570; (2007) Murdoch v Federal 68 ATR 317; [2007] Reversed Commissioner of Taxation AATA 1791; BC200708229 Cases considered by this case Annotations: All Cases Sort by: Judgment Date (Latest First) Annotation Case Name Citations (1997) 188 CLR 449; (1997) 144 ALR 729; (1997) 71 ALJR 781; Maguire & Tansey v [1997] 10 Leg Rep 17; Cited Makaronis (1997) Q ConvR 54498; (1997) V ConvR 54-571; [1997] HCA 23; BC9702653 Cited Warman International Ltd v (1995) 182 CLR 544;

Court AATA

Date 21/9/2007

Signal

Court

Date

Signal

HCA

25/6/1997

HCA

23/3/1995

Page 31 Dwyer Allied Mills Industries Pty Ltd v Federal Commissioner of Taxation (1995) 128 ALR 201; (1995) 69 ALJR 362; [1995] HCA 18; BC9506414 (1989) 20 FCR 288; (1989) 93 ALR 157; (1989) 89 ATC 4365; (1989) 20 ATR 457 (1984) 154 CLR 178; (1984) 53 ALR 417; (1984) 58 ALJR 353; [1983-84] ANZ ConvR 691; [1984] HCA 36; BC8400496 (1977) 15 ALR 449; (1977) 34 FLR 375; (1977) 77 ATC 4255; (1977) 7 ATR 519 (1975) 132 CLR 373; (1975) 5 ALR 231; (1975) 49 ALJR 74; BC7500014 [1967] 2 AC 46; [1966] 3 All ER 721; [1966] 3 WLR 1009 [1967] 2 AC 134; [1942] 1 All ER 378 (1803) 8 Ves 337; (1803) 32 ER 385 (1726) 2 White & Tud LC 706; [1558-1774] All ER Rep 230; (1726) Cas temp King 61; (1726) 2 Eq Cas Abr 741; (1726) 25 ER 223

Cited

FCA

12/4/1989

Considered

Chan v Zacharia

HCA

7/6/1984

Cited

Federal Coke Co Pty Ltd v Federal Commissioner of Taxation Consul Development Pty Ltd v DPC Estates Pty Ltd Boardman v Phipps Regal (Hastings) Ltd v Gulliver (note) James, Ex parte

FCA

20/6/1977

Cited

HCA

26/2/1975

Considered Considered Considered

UKHL UKHL -

3/11/1966 20/2/1942 9/4/1803

Considered

Keech v Sandford

31/10/1726

Legislation considered by this case Legislation Name & Jurisdiction Income Tax Assessment Act 1936 (Cth)

Provisions s 25(1)

Page 32

Page 33

4 of 10 DOCUMENTS: Unreported Judgments Federal Court of Australia 28 Paragraphs

MURDOCH v CMR OF TAXATION - BC200803866


Federal Court of Australia Lindgren, Stone and Jacobson JJ NSD 1959 OF 2007 5, 28 May 2008 Murdoch v Commissioner of Taxation [2008] FCAFC 86
INCOME TAX -- lump sum paid to life tenant for a release by her of a claim of breach of fiduciary duty by trustees -- claim that trustees had pursued investment policy that favoured remainderman who was also a trustee -- allegation of great increase in value of corpus of trust without any exceptional increase in income, although risk to life tenant -- claim by life tenant that remainderman was liable to account for profit he had made -- whether lump sum paid to life tenant in settlement of her claim was income derived by her according to ordinary concepts.

Lindgren, Stone and Jacobson JJ


INTRODUCTION [1] The issue in this appeal from the Administrative Appeals Tribunal (Tribunal) is whether the Tribunal erred in law in deciding that a payment of $85,087,176 (Lump Sum) to the applicant in the year ended 30 June 1995 (1995 year) pursuant to a Deed of Release and Agreement dated 28 November 1994 (Settlement Deed) constituted income of the applicant within the meaning of s 25(1) of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936) so as to form part of her assessable income for the 1995 year. [2] According to a notice of contention, the respondent (Commissioner) contended that if the Court should find in favour of the applicant on that issue, it should hold that the Lump Sum was included in the applicant's assessable income because it was a capital gain under Pt IIIA of the ITAA 1936, and was included in her assessable income by s 160ZO of that Act. In view of its decision in favour of the Commissioner under s 25(1), the Tribunal did not consider that issue. In the event, the Commissioner did not press the contention before us. FACTS [3] The primary facts are not in dispute. The following account of them is taken from the applicant's submissions (the submissions wrongly use "appellant" and we have substituted "applicant"):

3)

In 1936 and 1937, the applicant's late husband, Sir Keith Murdoch, established eight inter vivos settlements for his eldest three children being Helen, Mr Rupert Murdoch (Rupert Murdoch) and Anne. Sir Keith Murdoch provided for his youngest child, Janet, by a testamentary trust which is not presently relevant. Under each of these trusts (the Trusts), the applicant was either the sole income beneficiary for her life or was one of several income

Page 34 beneficiaries (the others being her children) for her life. The remainder interest was held by either one or more of the applicant's children or their issue. The gift of income under each of the Trusts was in substantially the same form. In the case of the Trust created by the Deed of Settlement dated 15 February 1936 under which the applicant was a life tenant and Rupert Murdoch the remainderman, the gift of income was as follows :
THE Trustees shall hold the trust fund IN TRUST to pay the income arising therefrom to the wife for life for her own use and benefit absolutely and upon the death of the wife IN TRUST as to both the capital and income of the Trust Fund for the son conditionally upon his attaining the age of twenty-five years.

3)

1)

1)

1)

1)

1)

1)

Until 1983, The Trustees Executors and Agency Co Ltd was the trustee of each of the Trusts. In that year it was replaced as trustee by the applicant, Rupert Murdoch and Jack Kennedy. In 1991 the applicant and Jack Kennedy were replaced as trustee by Actraint No 119 Pty Ltd (a company the shareholders and directors of which at all material times were the applicant and Jack Kennedy). Throughout the period from the death of Sir Keith Murdoch in 1952 to the date of execution of the Reorganisation Agreement referred to below, the principal assets of each of the Trusts were shares in Cruden Investments Pty Ltd (Cruden Investments), which in turn held shares in News Ltd, and from 1979, The News Corporation Ltd (News) when it became the ultimate holding company of News Ltd Rupert Murdoch has at all material times been the Chief Executive Officer of the News group of companies. On 8 November 1991 a Reorganisation Agreement was entered into between, among others, the applicant, Actraint No 119 Pty Ltd and Rupert Murdoch, under which the applicant surrendered her life interests under each of the Trusts except for four of the trusts in which Rupert Murdoch held the remainder interest (the Subject Trusts). In around April 1994, Mr Atanaskovic was asked to advise on whether the applicant may have a valid claim against Rupert Murdoch and the other trustees of the Trusts as a result of the investment policy adopted by them in their capacity as trustees of the Trusts. Mr Atanaskovic sought advice from Mr D. Heydon QC (as he then was) and the Wyatt Co Pty Ltd, a firm of consulting actuaries (Wyatt). On or about 7 June 1994 Mr Heydon provided a written opinion (first opinion) regarding the nature of a potential claim by the applicant against the trustees of the Trusts based upon his instructions that the applicant had derived much less income by virtue of her life interest than if the trust fund had not been invested in News shares because the dividend yield on News shares had been very low relatively to the earnings of blue chip shares in industrial companies quoted on the Stock Exchange, though there had been a considerable rise in the value of the News shares. It subsequently became apparent that the instructions concerning the income derived by the applicant on which Mr Heydon had advised were incorrect. In July 1994, Wyatt provided a report which concluded that "in all periods the accumulated value of the actual gross income received from [the Trusts] is well in excess of the gross income we estimate could have been received had a 'typical' investment policy been applied since mid 1952 instead of the actual investment policy". This was because despite the relatively low dividend yield on News shares over the period since 1952, there was substantial growth in dividend income due to the increase in the number of shares on issue resulting from bonus or new shares issues. On 10 October 1994, Wyatt provided a further report which dealt only with the Subject Trusts (Wyatt Report) and concluded that the relative interest of the applicant as tenant for life under the Subject Trusts, compared to that of Rupert Murdoch as the remainderman, was significantly less than could be expected at various dates had a more "typical" investment policy been followed by the trustees of the trusts.

Page 35

1)

On 11 October 1994 Mr Heydon provided a further written opinion (second opinion) in which he advised on the likelihood of success of a claim by the applicant in light of the analysis contained in the Wyatt Report. Mr Heydon advised that: 2. "the disparity now appearing between the relative position of the income beneficiary under the actual [investment] policy and the relative position of the income beneficiary under the notional [investment] policy, if it resulted wholly or partly from breaches of trust by the trustees, can be described as analogous to overpayment of one beneficiary at the expense of another within the principles discussed on pp 2021 of [the first opinion]"; 2. the problem referred to in para (a) " is also a problem which may be the result of the trustee/remainderman having had goals which made investment policy adopted desirable, and having persuaded the other trustees (at least since 1983 and perhaps earlier) of the merits of that policy, or having not intervened with them to change it"; 1. if the evidence in contested litigation supported this view, the principles discussed on pp 22-23 of the first opinion "may operate not merely to permit an action for breach of trust against the trustees, but to create a charge in the nature of a constructive trust over the interest of the remainderman in the capital, being a charge capable of being enforced by sale"; 1. there was "a real possibility that the adoption of the [investment] policy was at various points a breach of trust induced by the remainderman" with the consequence that it would need to be "accounted for by him and held by him in trust for the other beneficiaries, even though the gain could not have been made by lawful means, and even though the conduct in question has caused the other beneficiaries to be better off than they otherwise would have been: Phipps v Boardman [1967] 2 AC 46"; 1. the analysis in the Wyatt Report "shows that the gain made by the trustee/remainderman is, on his assumptions, $193m for the first two [Subject Trusts] and $83m for the other two"; 1. in the circumstances it would not be unreasonable for the applicant to seek to settle the potential dispute in relation to the Subject Trusts on terms involving a payment to the applicant of $85 million or a transfer of assets of that value in consideration for her giving a release of all claims against the trustee/remainderman for the past breaches of trust and consenting to the maintenance by the trustees of the current investment policy. The applicant was subsequently advised, on the basis of the opinions provided by Mr Heydon and the Wyatt report, that she had "an entitlement to make a claim on the capital of the trust" but was not advised at any time that she had "any right to claim for loss of income" and "did not believe that any decision of the trustees caused me to lose income". On 28 November 1994, the applicant and the persons who were or had been trustees of the Subject Trusts since 1983 (being Rupert Murdoch, Mr Kennedy and Actraint No 119 Pty Ltd) entered into the Settlement Deed and the applicant was paid the lump sum on the same day by cheque. As contemplated by the Settlement Deed , the trustees funded the payment of the lump sum by the realisation of shares in Cruden Investments forming part of the corpus of the Subject Trusts. This was done pursuant to a court approved reduction of capital. The shares, which were the very assets which Mr Heydon advised that the applicant may have an interest in, were assets acquired by the trustees in the Subject Trusts before 20 September 1985.

2 10)

11)

12)

THE SETTLEMENT DEED [4] The Settlement Deed contained, inter alia, the following recitals:

Page 36

1.

1.

The trustees of the Trusts from time to time since the death of the Settlor have followed an investment policy of investing the funds the subject of the Trusts almost exclusively in shares in companies, Cruden Investments Pty Ltd ("Cruden Investments") and Cruden Holdings Pty Ltd, which are not authorised trustee investments under Australian legislation relating to trustees (such investment policy being referred to below as the "Investment Policy"). Dame Elisabeth has claimed that: 1. the pursuit of the Investment Policy by the trustees of the Trusts: 1. has not given rise to any exceptional increase in income of the Trusts but has greatly increased the value of the corpus of the Trusts; and 2. involved significant risk for the beneficiaries of the Trusts, which risk was not properly rewarded in the case of Dame Elisabeth to the extent that she only had an income interest under the Trusts;

1. 1. 1.

1.

in pursuing the Investment Policy, the trustees of the Trusts from time to time have since the death of the Settlor breached their trust duties to Dame Elisabeth as a life tenant; Mr Murdoch, a man generally regarded as being of outstanding ability and force of personality with an extraordinary record of business success, as a trustee of the Trusts and holder of the whole of the remainder interest in the Subject Trusts, had substantial responsibility for such breaches of trust since May 1983 because he was pursuing goals not properly goals of the Trusts, but which goals required the Investment Policy to be pursued and inter alia had the effect of improving Mr Murdoch's financial position as beneficiary in remainder under the Subject Trusts; and that in the premises, a constructive trust has arisen in respect of eighty per cent or more of the beneficial interest in the assets of the Subject Trusts, constituting the advantage to Mr Murdoch of the Investment Policy having been pursued in lieu of a more appropriate investment policy, and/or Dame Elisabeth has the benefit of a charge over the assets of the Subject Trusts which Dame Elisabeth is not entitled to be paid as income of the Subject Trusts accompanied by a right to have sufficient of the corpus of the Subject Trusts sold to compensate Dame Elisabeth for the breach of trust and/or to ensure that the benefit of such advantage is made over to her and does not flow to Mr Murdoch.

3 1.

1.

The Current Trustees (including Mr Murdoch) and Mr Kennedy do not, and Mr Murdoch as beneficiary in remainder under the Subject Trusts does not, admit any such breach of trust or the existence of any such constructive trust, or charge, or right of sale. With a view to avoiding unnecessary disputation and any need for litigation, however, the Current Trustees (including Mr Murdoch) and Mr Murdoch as such beneficiary in remainder are desirous of compromising the claims made by Dame Elisabeth. It has therefore been agreed that Dame Elisabeth, as the life tenant under the Subject Trusts, having shared in the risk of investing in the investments of the Subject Trusts, and in consideration of her releasing: 2. The Current Trustees and any former trustees under the Trusts from any claims by her against them for breach of trust or otherwise in relation to following the Investment Policy in relation to the investments of the funds of the Subject Trusts and of the other of the Trusts; and

Page 37

2.

The assets of the Subject Trusts and the other of the Trusts (being assets which Dame Elisabeth is not entitled to be paid as income of the Trusts) from any claims Dame Elisabeth has or may have upon or in respect of them other than her right to be paid a proportion of the undistributed current income and the future income of the Subject Trusts and any interest she may have in the capital and income of the other of the Trusts,
should be entitled to the following:

4 1. 1. 1
[5] The operative provisions of the Settlement Deed contained the following provisions:
that the ordinary shares in Cruden Investments (the "Cruden Investments Shares") comprising the assets of the Subject Trusts should be in whole or in part realised (by way of sale of some of such shares or partial return of capital on all of such shares) to raise $85,087,176 in Australian currency; and that such $85,087,176 be paid to Dame Elisabeth or as she may direct as the absolute property of Dame Elisabeth to deal with as she in her full and complete discretion may determine.

1.

LIFE TENANT RELEASES, AUTHORITIES AND REQUESTS

1.

Subject to the other provisions of this deed, Dame Elisabeth, in her capacity as the Life Tenant, hereby releases and discharges each other party hereto from any claims, proceedings, obligations to account and other liabilities for or in relation to (including without limitation any loss arising to or profit of or other benefit to any other party hereto in respect of) any or all of the following which, had this deed not been entered into, such party would have had against such other party or such other party may have had against such party as the case may be:

1. 1. 1. 1.

the pursuit of the Investment Policy in relation to the investment of the funds of the Trusts and the failure of the Trustees at any time and from time to time to consider pursuing to pursue another policy or otherwise to realise, convert and reinvest the funds of the subject of the Trusts or to consider doing so; any breach by the Trustees of the duties owed by the Trustees to the beneficiaries under the Trusts; any right of action, whether at law or in equity, Dame Elisabeth has or may have against Mr Murdoch as a beneficiary of any of the Trusts in relation to any of above; and any right of action Dame Elisabeth has or may have upon or in respect of the Trust assets other than her right to be paid a proportion of the undistributed current income and the future income of the Subject Trusts and any interest she has or may have in the corpus or income of the other of the Trusts according to the express terms of the documents creating or recording the terms of the Trust.

1. 1. 3 2.

Dame Elisabeth hereby authorises and requests the Trustees to continue to carry on the Investment Policy and undertakes not to bring any claims or proceedings against any of the Trustees in respect thereof.

TRUSTEE UNDERTAKINGS The Current Trustees hereby undertake:

2. 2. 4

promptly to raise the Settlement Amount by selling some of the Cruden Investments shares or participating in a reduction and return of capital by Cruden Investments on and in respect of the Cruden Investments Shares; and to pay to Dame Elisabeth the Settlement Sum on the Settlement Date.

Page 38

1.

REMAINDERMAN REQUEST AND AUTHORITY Mr Murdoch, as beneficiary in remainder under the Subject Trusts, requests and authorises the Current Trustees to observe and perform their undertakings in clause 3 hereof.

The expression "Settlement Amount" was defined in the Settlement Deed to mean $85,087,176 in Australian currency, that is to say, the Lump Sum. THE REASONS OF THE TRIBUNAL [6] Under the heading "Governing principles", the Tribunal stated:

1. 1.

Whether a receipt of money is income or capital is determined by the character of the receipt in the hands of the taxpayer (Scott v Federal Commissioner of Taxation (1966) 117 CLR 514 at 526 per Windeyer J; GP International Pipecoaters Pty Ltd v Federal Commissioner of Taxation (1990) 170 CLR 124 at 136-137). Where a taxpayer provides consideration, "the consideration will ordinarily supply the touchstone for ascertaining whether the receipt is on revenue account or not" ( Federal Coke Co Pty Ltd v Federal Commissioner of Taxation (1977) 15 ALR 449 at 472 per Brennan J). Where the consideration is discharging a cause of action, the character of the cause of action determines the character of the receipt (Federal Coke at 472; Allied Mills Industries Pty Ltd v Federal Commissioner of Taxation (1989) 20 FCR 288 at 309). Compensation or damages generally acquire the character of that for which it compensates (Federal Commissioner of Taxation v Dixon (1952) 86 CLR 540). In determining the nature of a payment under an agreement, both the agreement itself and the circumstances surrounding its execution, its operation and the receipt of the money in question must be examined (Federal Coke at 460 per Bowen CJ; Allied Mills at 309-310). If a payment is received on revenue account, the position will not be altered merely because the source of the payment is capital, including the capital of a trust (Tindal v Federal Commissioner of Taxation (1946) 72 CLR 608, especially at 627 per Dixon J).

10. 1.

[7] The Tribunal concluded that the lump sum was income on the basis that it was "compensation for lost income". The learned President stated (at [1]):
Although the lump sum was paid out of capital, I have decided that it was received as income. The only entitlement of the taxpayer was an entitlement to income and the payment remained income, or compensation for lost income, though paid out of capital.

His Honour also stated (at [9]):


I have concluded that the taxpayer's claim must fail and that the receipt of the lump sum was correctly assessed as income. The taxpayer's only entitlement under the trusts was to income. Any charge or constructive trust arising out of any failure of the trustees to properly administer the trust could only be compensation for lost income. This must be so, even if the amount of the lump sum was calculated by reference to the swelling of the capital value of the trusts' investments and not by reference to income not paid. Accordingly, the lump sum was received as income and not as capital.

and (at [35]):


The passages in the Queen's Counsel's first opinion suggest that any remedy for breach of trust flowing from improper exercise of the power of investment would reflect lost income. In that I think he was right. As compensation for breach of trust, the lump sum payment can only reflect lost income. Accordingly, the payment was received by the taxpayer on income or revenue account.

Page 39

[8] In support of his conclusion that the Lump Sum was a substitute for income, the learned President referred to the following matters:

5a)

5b) 5c)

The consideration supplied by the applicant for the Lump Sum was described in the recitals and specified in the operative provisions of the Settlement Deed, and was said to be supplied by her "in her capacity as the Life Tenant", and the only claims she might have had in that capacity were claims in respect of the obligations owed to her in relation to her entitlement to income (at [24]); The two opinions of Mr Heydon QC, while they provided some evidence of the circumstances surrounding the execution of the Settlement Deed, were of little relevance (at [17]); The decision in Phipps v Boardman [1967] 2 AC 46, relied on by Mr Heydon QC (as his Honour then was) in his second opinion, did not assist the applicant for two reasons: first, the conduct giving rise to the charge or trust was quite different in that case; and, second, no question of a charge or trust directly in favour of a beneficiary arose in that case (at [33]).

THE PARTIES' SUBMISSIONS ON THE APPEAL [9] The applicant did not challenge the correctness of the passages set out at [6] above as general statements of principle. Rather, she challenges the Tribunal's application of them. [10] It is common ground that the Lump Sum is not assessable under s 26(b) and Div 6 of Pt III of the ITAA 1936. The only question is whether the Lump Sum formed part of the applicant's income according to ordinary concepts and therefore formed part of her assessable income within s 25(1) of the ITAA 1936. The applicant submits that the Tribunal wrongly characterised the Lump Sum as compensation for lost income. She submits that according to the Settlement Deed, and the surrounding circumstances consisting of the content of the second opinion of Mr Heydon QC and the Wyatt Report, she was not making, and did not give up, a claim in respect of a shortfall in the income to which she was entitled as Life Tenant. Rather, the claim that she was making and gave up was a " Phipps v Boardman claim", being a claim that Rupert Murdoch, as trustee/remainderman, account to her for a benefit he had obtained in breach of trust, and a consequential claim that she was entitled to the benefit of a constructive trust or charge over the assets constituting the trust estate. [11] The Commissioner, on the other hand, defends the Tribunal's reasoning. The Commissioner emphasises that the capital nature of the source of the payment of the Lump Sum is irrelevant to its characterisation in the applicant's hands. The Commissioner submits that whether or not Mr Heydon QC was correct to conclude that the applicant had the benefit of a constructive trust by way of charge on Mr Murdoch's interest in the corpus of the trust estate, the applicant did not become, and the Lump Sum was not paid to her as, a corpus beneficiary. Rather, with the assent of the corpus beneficiary, monies for which the trustees (of whom the corpus beneficiary was one) were accountable to him were applied to discharge the in personam obligations of the trustees to the applicant. Those obligations were in respect of income. CONSIDERATION [12] It is important to note that:

1 2 3

the Commissioner does not contend that the bargain expressed in the Settlement Deed was illusory or a sham; the case is not one of a determination by the Commissioner under Pt IVA of the ITAA 1936; and it is common ground that where a taxpayer provides consideration in the form of a release of a claim, the consideration, that is to say, the release, "will ordinarily supply the touchstone

Page 40 for ascertaining whether the receipt is on revenue account or not": Federal Coke Co Pty Ltd v Federal Commissioner of Taxation (1977) 15 ALR 449 at 472 per Brennan J; Allied Mills Industries Pty Ltd v Federal Commissioner of Taxation (1989) 20 FCR 288 at 309. [13] With respect, we do not think that the Lump Sum was compensation for the release of a claimed entitlement to that which would have been assessable income: cf Federal Commissioner of Taxation v Dixon (1952) 86 CLR 540; Federal Commissioner of Taxation v Myer Emporium Ltd (1987) 163 CLR 199; Federal Commissioner of Taxation v Rowe (1997) 187 CLR 266 at 276. [14] The claim made by the applicant appears in recital J and cl 2.1 of the Settlement Deed (set out at [4] and [5] above, respectively). We think it fair to characterise the claim given up as a Phipps v Boardman claim. [15] In Phipps v Boardman, the House of Lords applied a principle that it had recognised in Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378 (Regal (Hastings) Ltd v Gulliver is reported as a note to Phipps v Boardman [1967] 2 AC 134) following a line of cases perhaps led by Keech v Sandford (1726) Sel Cas T King 61 (25 ER 223). In summary, that line of authority is to the effect that a trustee or other fiduciary is accountable for a profit he or she has made from a breach of fiduciary duty, even though the profit is one that the beneficiary to whom the trustee or other fiduciary is liable to account could not have made. [16] In Keech v Sandford a lease of the profits of a market was held by a trustee for the benefit of an infant. Before the expiration of the term, the trustee sought a renewal of the lease for the benefit of the infant. The renewal was refused. The trustee then sought and obtained a lease in favour of himself. Lord Chancellor King held that the trustee held the lease upon trust for the infant. His Lordship ordered that the trustee assign the lease to the infant and account to the infant for the profits made since the lease had been granted to the trustee, and that the trustee be "indemnified from any covenants comprised in the lease" (at 62 (ER 224)). The ground of the decision was the general public interest in the strict enforcement of the duties of trustees. The Lord Chancellor said (at 62 (ER 223)):
Though I do not say there is a fraud in this case, yet he should rather have let it run out, than to have had the lease to himself. This may seem hard, that the trustee is the only person of all mankind who might not have the lease: but it is very proper that the rule should be strictly pursued, and not in the least relaxed ...

[17] Similarly, in Ex parte James (1803) 8 Ves Jun 337 (32 ER 385), a solicitor to the Commission of Bankruptcy purchased an estate of a bankrupt from the surviving assignee. Lord Chancellor Eldon stated (at 345 (ER 388)):
This doctrine as to purchases by trustees, assignees, and persons having a confidential character, stands much more upon general principle than upon the circumstances of any individual case. It rests upon this: that the purchase is not permitted in any case, however honest the circumstances; the general interests of justice requiring it to be destroyed in every instance; as no court is equal to the examination and ascertainment of the truth in much the greater number of cases.

The solicitor and the assignee were held to be not entitled to buy for their own use dividends forming part of the estate in bankruptcy. Lord Eldon LC referred to Keech v Sandford (although not by name). [18] In Regal (Hastings) Ltd v Gulliver, Regal (Hastings) Ltd (Regal) sued five former directors (and its former solicitor, Garton) of Regal for an amount representing profits made by them upon their acquisition and sale of shares in Regal's subsidiary, Hastings Amalgamated Cinemas Ltd (Hastings). Regal was successful (except against Garton, who was held to have acted with the knowledge and consent of Regal, and one of the directors, Gulliver, referred to below, who did not himself make any profit) even though it could not itself have made those profits. [19] The reason Regal could not have made the profits was that essential to the making of them was the

Page 41 finding of funds to enable leases of two cinemas to be taken by Hastings. Regal could see its way clear to subscribe only 2,000 for shares in Hastings. However, it was agreed that each of four of the directors and Garton would apply for 500 worth of shares in Hastings, and that the fifth director, Gulliver, would "find" people to take up 500 worth of shares, thereby enabling Hastings to take the leases. This enured to the benefit of both Regal, the four directors (that is, the directors other than Gulliver) and Garton. It enabled the shares held by the four directors and Garton in both Regal and Hastings to be sold at a profit. It was when Regal was under the control of a new board of directors that it sued the five former directors and Garton. [20] We come now to Phipps v Boardman. The facts are complex and we need not summarise them in detail. The case concerned a fully administered deceased estate. The trustees held shares upon trust to pay an annuity to the deceased's widow and the residuary estate for his children in specified proportions. Boardman was the solicitor for the trustees. Thomas ("Tom") Edward Phipps was one of the children. Boardman and Tom Phipps, using information that Boardman had obtained in the course of representing the trustees, acquired some of the shares with the consent of the other residuary beneficiaries (the widow had died). The result was that Boardman and Tom Phipps made a substantial profit. But so did the trust, since the trustees remained shareholders too. [21] The plaintiff, John Anthony Phipps, was entitled to 5/18ths of the trust assets. He sought a declaration that Boardman and Tom Phipps held the shares which they had acquired as constructive trustees, as to 5/18ths for him, and an order for an account of the profits they had derived from the transaction. He succeeded before the primary Judge, the Court of Appeal and the House of Lords (by a 3:2 majority), although Boardman and Tom Phipps were entitled to payment on a liberal scale for their work and skill. [22] The following passage from the speech of Lord Cohen captures the view that prevailed (at 104):
I desire to repeat that the integrity of the appellants is not in doubt. They acted with complete honesty throughout and the respondent is a fortunate man in that the rigour of equity enables him to participate in the profits which have accrued as the result of the action taken by the appellants in March 1959, in purchasing the shares at their own risk. As the last paragraph of his judgment clearly shows, the trial judge evidently shared this view. He directed an inquiry as to what sum is proper to be allowed to the appellants or either of them in respect of his work and skill in obtaining the said shares and the profits in respect thereof. The trial judge concluded by expressing the opinion that payment should be on a liberal scale. With that observation I respectfully agree.

Lord Hodson, also in the majority, stated (at 112):


I agree with the decision of the learned judge and with that of the Court of Appeal which, in my opinion, involves a finding that there was a potential conflict between Boardman's position as solicitor to the trustees and his own interest in applying for the shares. He was in a fiduciary position vis--vis the trustees and through them vis--vis the beneficiaries. For these reasons in my opinion the appeal should be dismissed; but I should add that I am in agreement with the learned judge that payment should be allowed on a liberal scale in respect of the work and skill employed in obtaining the shares and the profits therefrom.

[23] The rule recognised in Phipps v Boardman has been accepted as forming part of the law in Australia. After referring to, inter alia, Phipps v Boardman, Deane J said in Chan v Zacharia (1984) 154 CLR 178 at 199:
Stated comprehensively in terms of the liability to account, the principle of equity is that a person who is under a fiduciary obligation must account to the person to whom the obligation is owed for any benefit or gain (i) which has been obtained or received in circumstances where a conflict or significant possibility of conflict existed between his fiduciary duty and his personal interest in the pursuit or possible receipt of such a benefit or gain or (ii) which was obtained or received by use or by reason of his fiduciary position or of opportunity or knowledge resulting from it. Any such benefit or gain is held by the fiduciary as constructive trustee: see Keith Henry & Co Pty Ltd v Stuart Walker & Co Pty Ltd (1958) 100 CLR 324 at 350]. That constructive trust arises from the fact that a personal benefit or gain has been so obtained or received and it is immaterial that there was no absence of good faith or damage to the person to whom the fiduciary obligation was owed.

Page 42 (See also Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373 at 392-395 per Gibbs J; Warman International Ltd v Dwyer (1995) 182 CLR 544 at 556-562; and Maguire v Makaronis (1997) 188 CLR 449 at 468-469.) [24] In his second opinion, Mr Heydon QC thought the principle recognised in Phipps v Boardman was arguably applicable to the circumstances of Mr Murdoch's dealings with the trust estate. Mr Murdoch clearly stood in a fiduciary relationship to the applicant. If the applicant could prove the matters recited in paras (i), (ii) and (iii) of Recital J of the Settlement Deed (see [4] above), a Phipps v Boardman claim for an accounting would be made out. It may be that there would have to be a substantial allowance to Mr Murdoch, as there was to Mr Boardman and Tom Phipps. [25] The Commissioner relies on the reference to the applicant's status as Life Tenant in the Settlement Deed but we do not think this is to the point. That reference merely explains the basis of the existence of the fiduciary duty. What the applicant would have received would have been a sum representing the profit or gain made by Mr Murdoch, notwithstanding that she would have had no entitlement to it under the terms of the trust. [26] We say nothing about the likelihood of success of the claim that the applicant made: it is not disputed that she made it, and it is not disputed that it is the character of that claim and its notional fruits that determine whether the Lump Sum (being the consideration for release of that claim) was income derived by the applicant. [27] In our respectful opinion, the Tribunal erred in failing to characterise properly the character of the claim that the applicant gave up and, therefore, the character (income or not) of the Lump Sum that she received for giving it up. The applicant's claim was to an accounting for a capital profit or gain made by Mr Murdoch and to an entitlement to a constructive trust over the assets of the trust estate, and she was paid the Lump Sum in satisfaction of those claims. The Lump Sum was not income. CONCLUSION [28] For the above reasons, the appeal should be allowed and the orders sought in the application should be made. Order

1 1 1 1

The appeal be allowed. The decision of the Administrative Appeals Tribunal given on 21 September 2007 be set aside. In lieu of the decision referred to in O 2 above, the applicant's objection to the respondent's assessment for the year ended 30 June 1995 in respect of the applicant be remitted to the respondent for amendment in accordance with the reasons for judgment of the Court. The respondent pay the applicant's costs of the proceeding.

Note: Settlement and entry of orders is dealt with in O 36 of the Federal Court Rules. Counsel for the applicant: T F Bathurst QC, J W De Wijn QC and M Richmond Counsel for the respondent: A H Slater QC and J Hmelnitsky Solicitors for the applicant: Minter Ellison Solicitors for the respondent: Australian Government Solicitor

Page 43

Page 44 5 of 10 DOCUMENTS: CaseBase Cases

Jarrett v Perpetual Trustee Co Ltd


(2007) 64 ACSR 552; [2007] NSWSC 1231; BC200709856 Court: NSWSC Judges: Hall J Judgment Date: 14/11/2007

Catchwords & Digest

Corporations -- Shares and shareholders -- Dividends -- Distribution Application for declaration and orders. Applicants sought declaration disputed dividends invalid and order against respondent executor of deceased estate for payment of monies. Deceased life tenant of settlement trust and director of second to fourth applicant companies. Deceased sole beneficiary of trusts entitled to all income arising from trusts' shareholdings in second to fourth companies during lifetime. Applicants claimed disputed dividends totalling approximately $22.9m declared and paid by companies. Applicants claimed no valid declaration or payment of dividends. Applicants claimed deceased impermissibly drew on companies' funds and obliged to reimburse monies with interest. Applicants claimed disputed dividends not regularly made in accordance with second and fourth applicant companies' constitutions. Applicants alternatively claimed no valid and effective payment of dividends. Applicants claimed account entries mere book entries and not effective payments in law. Applicants relied on absence of minutes of meetings of trustee companies as evidencing absence of agreement by trustee companies with dividend distribution procedure employed for making of payments to or on deceased's behalf. Applicants claimed wrongful distribution of second and fourth applicant companies' funds to deceased instead of trustees. Applicants claimed respondent liable for monies as mistaken payment to deceased's loan accounts. Applicants claimed deceased owed duties to first applicant and as director of companies. Applicants claimed mere crediting of loan accounts did not give rise to liability of second or fourth applicant companies to deceased. Applicants claimed credits intended to reflect payment of dividends by book entry in circumstances where not effective at law to effect payment. Applicants claimed where company wished to effectuate payment by book entry, evidence required that book entry eliminated cross-liabilities in equal amounts mutually established as agreed set-off. Applicants claimed no evidence trustee companies made decision effective to establish set-off arrangement. Applicant claimed neither deceased or trustees owed liability to second or fourth applicant companies against which they could set-off liability to pay particular dividend. Whether deceased breached directors duties to companies. Whether declaration of dividends intra vires of companies. Whether account entries mere book entries and not effective payments. Whether dividends made in accordance with companies' constitutions.

Page 45 Whether dividends payment ratified loans granted by deceased. Whether dividends paid by mistake. Whether dividends recoverable. Whether dividends revokable. Held, dismissing the application: (i) The dividends were not paid in breach of any obligation the deceased owed as director of the companies nor as a life interest beneficiary of the settlement trusts in circumstances in which all disputed dividends were paid. (ii) The decisions made declaring dividends were intra vires of the companies and were made on the basis that in each year the dividends were to be paid from the available profits including retained profits of the companies. (iii) The applicants failed to establish that the documents including the companies' minutes of directors and annual general meetings, profit and loss statements, balance sheets and tax returns were false or sham documents or that particular information within them was false or unreliable. (iv) The documents established that the shareholders of the second and third applicant companies' approved the disputed dividends which were validly declared whether or not the constitutional requirements for the declaration of dividends were met. (v) The disputed dividends claimed by the applicants were validly determined and paid as dividends with the informed consent of the companies' directors. Those companies subsequently affirmed the dividends and ratified their payment by crediting them in the relevant accounts. The members of the respective companies also ratified the dividends and their payment. (vi) Payment of the disputed dividends, the subject of the applicants' claim was not made under a mistake. (vii) The dividends paid to the deceased during her lifetime were not recoverable by the applicants by way of action at law for money had and received or in equity. (viii) There was no power in the plaintiffs companies to revoke or rescind the disputed dividends as they were duly declared or determined and paid. Trade and commerce -- Trade practices -- Misleading and deceptive -- Representation Cross-claim by respondent against second and fourth applicant companies. Respondent succeeded first executor as executor of deceased estate. Respondent sought orders against second and fourth applicant companies in respect of dividends paid in after deceased's death. Respondent claimed dividends duly declared during deceased's lifetime. Following deceased's death monies paid and subsequently reimbursed by estate. Respondent sought order for repayment of monies. Respondent alternatively sought declaratory relief in respect of alleged interim dividends paid. Respondent claimed chartered accountant on behalf of second and fourth applicant companies made misleading or deceptive representations without reasonable basis. Respondent claimed representations material cause and played part in estate making payments consequentially causing loss. Respondent claimed payments constituted amounts held in estate account and held on trust for benefit of estate. Whether interim dividends paid. Whether monies repaid on mistaken assumption. Whether payments made as consequence of misleading or deceptive representation. Whether payments held on trust for benefit of estate. Held, cross-claim dismissed in part: (i) The evidence failed to establish that a meeting of the directors of the second and fourth applicant companies took place at which an interim dividend was declared or determined. (ii) The monies repaid by the first executor to the second and fourth applicant companies were not repaid by him upon the basis of a mistaken assumption. (iii) The evidence failed to establish that the reimbursement of monies arose as a consequence of the chartered accountant's representations. On that basis, no contraventions of the (CTH) Trade Practices Act 1974 s 52 or the (NSW) Fair Trading Act 1987 s 42 arose.

Page 46 (iv) The payments made by re-imbursement to the second and fourth applicant companies from the estate bank account were not payments of monies held on trust for the benefit of the estate. Cases referring to this case Annotations: All CasesSort by: Judgment Date (Latest First) Annotation Case Name Citations Dick v Alan Powell Holdings Pty [2009] QSC 184; Considered Ltd BC200906005 Cases considered by this case Annotations: All Cases Sort by: Judgment Date (Latest First) Annotation Case Name Citations (2007) 5 DDCR 180; (2008) Aust Contract R Cited Ormwave Pty Ltd v Smith 90-286; [2007] NSWCA 210; BC200706895 Say-Dee Pty Ltd v Farah [2005] NSWCA 309; Cited Constructions Pty Ltd BC200507416 (2004) 49 ACSR 62; Cook's Construction Pty Ltd Considered [2004] NSWCA 105; v Brown BC200401510 Challenge Charter Pty Ltd v [2004] VSC 1; Considered Curtain Bros (Qld) Pty Ltd BC200400020 Francis v South Sydney [2002] FCA 1306; Cited District Rugby League BC200206668 Football Club Ltd (2002) 55 NSWLR 558; (2002) 11 BPR 20,317; (2003) ASAL 55-095; Harkins v Butcher; Butcher v Cited (2002) ATPR (Digest) Lachlan Elder Realty Pty Ltd 46-225; [2002] NSWCA 237; BC200204907 (2002) 210 CLR 1; (2002) 67 ALD 577; Minister for Immigration and (2002) 187 ALR 574; Considered Multicultural Affairs v (2002) 76 ALJR 667; Khawar (2002) 23(6) Leg Rep 11; [2002] HCA 14; BC200201536 Willbros International Pty Ltd [2000] NSWSC 156; Cited v Emeco International Pty Ltd BC200000933 Sutherland (in his capacity as liquidator of Sydney (2000) 33 ACSR 680; Considered Applicances Pty Ltd (in liq)) [2000] NSWSC 32; v Robert Bosch (Australia) BC200000469 Pty Ltd Cited MYT Engineering Pty Ltd v (1999) 195 CLR 636; Mulcon Pty Ltd (1999) 162 ALR 441; (1999) 73 ALJR 823; (1999) 9 Leg Rep 10; (1999) 30 ACSR 705;

Court QSC

Date 23/6/20 09

Signal

Court NSWCA

Date 22/8/2007

Signal

NSWCA NSWCA VSC FCA

15/9/2005 22/3/2004 15/1/2004 8/11/2002

NSWCA

28/8/2002

HCA

11/4/2002

NSWSC

14/3/2000

NSWSC HCA

24/2/2000 13/5/1999

Page 47 (1999) 17 ACLC 861; [1999] HCA 24; BC9902256 Cited Cited Considered Considered Parras Holdings Pty Ltd v Commonwealth Bank of Australia Toyota Motor Corp Australia Ltd v Ken Morgan Motors Pty Ltd Vroon BV v Foster's Brewing Group Ltd Fabre v Arenales Temples Wholesale Flower Supplies v Federal Commissioner of Taxation Herrman v Simon Integrated Computer Services Pty Ltd v Digital Equipment Corp (Aust) Pty Ltd Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd Swiss Screens (Australia) Pty Ltd v Burgess Aborel Nominees Pty Ltd v Horsburgh Kinsela v Russell Kinsela Pty Ltd (in liq) Australian Energy Ltd v Lennard Oil NL Air Great Lakes Pty Ltd v KS Easter (Holdings) Pty Ltd Rural & Veterinary Requisites Pty Ltd (in liq), Re Compaction Systems Pty Ltd & the Companies Act, Re Duomatic Ltd, Re Harry Simpson & Co Pty Ltd (in liq), Re Associated Electronic Services Pty Ltd (in liq), Re [1997] FCA 1107; BC9705434 [1994] 2 VR 106; BC9300781 [1994] 2 VR 32; BC9300634 (1992) 27 NSWLR 437; (1992) 15 MVR 303 (1991) 29 FCR 93; (1991) 99 ALR 479; (1991) 91 ATC 4387; (1991) 21 ATR 1606; BC9103103 (1990) 4 ACSR 81; (1990) 8 ACLC 1094; BC9001777 (1988) 5 BPR 11,110; BC8801158 (1988) 18 NSWLR 540 (1987) 11 ACLR 756; (1987) 5 ACLC 1076; BC8701403 (1986) 11 ACLR 138; (1986) 4 ACLC 586; BC8600200 (1986) 4 NSWLR 722; (1986) 10 ACLR 395; (1986) 4 ACLC 215 [1986] 2 Qd R 216 (1985) 2 NSWLR 309; (1985) ASC 55-408 (1978) 3 ACLR 597; (1977-78) CLC 40-459 [1976] 2 NSWLR 477; (1976) 2 ACLR 135; (1977-78) CLC 40-313 [1969] 2 Ch 365; [1969] 1 All ER 161; [1969] 2 WLR 114 [1966] 2 NSWR 445; (1966) 84 WN (Pt 1) (NSW) 455 [1965] Qd R 36 FCA VSC VSC NSWCA 24/10/1997 10/9/1993 11/3/1993 19/6/1992

Cited

FCA

22/4/1991

Considered Considered Considered Considered Considered Considered Considered Cited Considered Considered Applied Considered Considered

NSWCA NSWCA NSWCA NSWSC VSC NSWCA QSC NSWCA QSC NSWSC EWHCC h NSWCA QSC

7/11/1990 23/12/1988 14/12/1988 1/5/1987 15/9/1986 15/4/1986 14/3/1986 20/6/1985 10/2/1978 29/11/1976 13/11/1968 11/10/1966 13/10/1964

Page 48 Considered Harry Simpson & Co Pty Ltd & Companies Act 1936, Re Federal Commissioner of Taxation v Steeves Agnew & Co (Vic) Pty Ltd Howard Smith & Co Ltd v Varawa Hussey v Horne-Payne Brogden v Metropolitan Railway Co Harmony & Montague Tin & Copper Mining Company, Re (Spargo's Case) [1964-5] NSWR 603; (1963) 81 WN (Pt 1) (NSW) 207 (1951) 82 CLR 408; [1952] ALR 29; (1951) 25 ALJR 152; (1951) 5 AITR 174; (1951) 9 ATD 259 (1907) 5 CLR 68; (1907) 14 ALR 169; [1907] HCA 38; BC0700018 (1879) 4 App Cas 311; [1874-80] All ER Rep 716 (1877) 2 App Cas 666 (1873) LR8Ch 407; (1873) LR8ChApp 407; [1861-73] All ER Rep 261; (1873) 28 LT 153 NSWSC 19/12/1963

Considered

HCA

1/6/1951

Cited

HCA

30/8/1907

Cited Considered Applied

UKHL EWHCC h

1/5/1879 16/6/1877 25/1/1873

Legislation considered by this case Legislation Name & Jurisdiction Corporations Act 2001 (Cth) Fair Trading Act 1987 (NSW) Trade Practices Act 1974 (Cth)

Provisions s 1322(4)(a) s 42 s 52

Page 49

Page 50

6 of 10 DOCUMENTS: Unreported Judgments NSW 60 Paragraphs

MCDONALD v ELLIS - BC200708266


Supreme Court of New South Wales Bryson AJ 1191/2006 05, 27 September 2007 Mcdonald v Ellis [2007] NSWSC 1068
TRUSTS AND TRUSTEES -- accounts -- entitlement of beneficiaries to accounts and to see trust documents -- authority of Schmidt v Rosewood Trust [2003] 2 AC 709 doubted. Trustee resisted beneficiary's claim for accounts and information, asserting confidentiality of income to life tenant -order for accounts. Avanes v Marshall [2007] NSWSC 191; Cook v Cook (1986) 162 CLR 376; Hartigan Nominees Pty Ltd v Rydge (1992) 29 NSWLR 405; Havyn Pty Ltd v Webster [2005] NSWCA 182; Re Arbitration between Parry and Hopkin [1900] 1 Ch 160; Re Armstrong [1899] SALR 155; Re Dartnall, Sawyer v Goddard [1895] 1 Ch 474; Re Londonderry's Settlement, Peat v Walsh [1965] 1 Ch 918; Re Tillott, Lee v Wilson [1892] 1 Ch 86; Lehmann v Haskard (SCNSW Young J 29 August 1996 unreported); O'Rourke v Darbishire [1920] AC 581; Randall v Lubrano (SCNSW Holland J 31 October 1975 unreported); Roberts v Roberts (1915) 16 SR NSW 6; Schmidt v Rosewood Trust Ltd [2003] 2 AC 709; Spellson v George (1987) 11 NSWLR 300; Walker v Symonds (1818) 3 Swanston 1, 36 ER 751; Watson v Little (1921) 38 WN NSW 143; Wilkie v Equity Trustees Executors and Agency Co Ltd [1909] VLR 277, cited

Bryson AJ.
[1] These proceedings relate to the administration of the trusts of the Will of the late Harold Wilfred Wills Baker who died on 16 December 1977. On 22 May 1978 this Court granted Probate of his last will dated 10 February 1970 to his executrices. The plaintiff is one of the granddaughters of the testator and the Will gave her a quarter share of the interest in remainder in a block of eight flats known as "Tamahine", 21 Baden St Coogee, expectant on earlier successive life interests given to the testator's widow Mrs Marie Baker (who died on 9 November 1997) and his daughter Mrs Roxane Marie Ellis, the plaintiff's mother, who is still in receipt of benefits under the Will. The express words of the trust confer no right on Mrs Baker and in succession Mrs Ellis other than the right to be paid the net annual income, but the effect of these dispositions in my opinion is to confer on them successive equitable life estates. The Will appointed the testator's widow and daughter to be executrices and trustees. Mrs Ellis is still a trustee, and she is the first defendant. After Mrs Baker died Mrs Ellis appointed her son Mr John Baker Ellis to be a new trustee by a deed which was registered and took effect on 21 August 1998. Mr Ellis is still a trustee, and he is the second defendant. The block of flats is to pass to the plaintiff and her brother and sister when Mrs Ellis' life

Page 51 ends. The litigation has been highly combative as between the plaintiff and Mr Ellis. [2] Executorial duties were completed long ago. The testator had other assets but his Will gave them to his widow and his daughter. Only the block of flats remained when Mr Ellis became a trustee. [3] Mrs Margaret Clouting is a daughter of Mrs Ellis and a sister of the plaintiff and of Mr Ellis. Her interests are involved in this litigation but she is not a party. On 7 December 2000, when Mrs Ellis still had capacity to do so, she appointed Mr Ellis and Mrs Clouting to be her attorneys under power; the deed appointing them was registered on 15 July 2005. Mr Ellis and Mrs Clouting have managed Mrs Ellis' affairs, under this power of attorney, for some years. A deed of appointment of Mrs Clouting as an additional trustee has been prepared, but Mr Ellis has not yet signed it. Such deed would take effect only upon execution and registration, which have not yet happened. [4] Mrs Ellis was diagnosed as suffering Alzheimer's Disease about 2003. She now has advanced Alzheimer's Disease, her memory is significantly impaired and she is unable to live alone or support herself. Since about November 2004 she has been a resident in an aged persons hostel. Mrs Ellis has never filed an appearance. The summons was left for her at her nursing home, but this had no real effect as she did not have sufficient understanding to give instructions to lawyers and her attorneys did not do so; no tutor has been appointed. She has an interest in the litigation in two ways, as one of the trustees of the testator's estate and also as the life tenant presently entitled to income. I see Mr Ellis' not having decided to instruct lawyers and conduct the litigation on behalf of Mrs Ellis as an aspect of the combative nature of the litigation, but not as indicating any lack of protection of Mrs Ellis' interest. He could do this under his power of attorney, but he has not chosen to do so. As sometimes happens in litigation about family property among closely related persons, there are signs that the conduct of the litigation has been influenced by conflict at a much deeper level than the issues which are before the Court for decision. There have been unseemly procedural manoeuvres but these should not in my view create difficulties for proceeding to decision. Because of the way in which Mr Ellis has conducted the litigation, and the strong positions he has taken and resistance he has offered, with legal representation, to the plaintiff's claims, I am of the view that Mrs Ellis' position and interests have been adequately protected and that it is appropriate to dispense with service of the summons on her while leaving her as a party and bound by the decision. Mr Ellis is in a position actually to maintain the interests of the estate and of all other than the plaintiff interested in it, and he has resisted the plaintiff's claim with vigour. In the circumstances it is just to treat him as representing all other than the plaintiff who are interested in the estate, and to make appropriate orders giving effect to this view. [5] It is very unfortunate that Mrs Ellis has continued to be a trustee and to be exposed to being a party to estate litigation, for some years after she became unable to fulfil her responsibilities. It was imprudent of Mr Ellis to continue as in effect a sole trustee, with a co-trustee in name only, though he had statutory power to appoint an additional trustee. This is not a responsibility which should be borne by one person alone; the Will appointed two trustees. In the situation of family conflict Mr Ellis left himself exposed to criticism and adverse inferences by acting on his own, and the difficulty in involving Mrs Ellis in the litigation (in which she was a necessary party) resulted from his inactivity. [6] The Will was not skilfully prepared. It appointed the executrices and trustees. It gave the testator's shares in three corporations to Mrs Ellis and then went on:
... I GIVE AND DEVISE AND BEQUEATH to my said Trustees the residue of my property real and personal upon the trusts and subject to the declarations and powers following that is to say upon trust to sell, call in and convert into money such part or parts which shall not consist of money with power for such period as my Trustees shall consider expedient to postpone the sale, calling in or conversion of any part or parts thereof and during the period of such postponement to manage the same and as regards my block of flats known as "Tamahine" 21 Baden Street, Coogee upon trust to pay the net annual income therefrom to my said wife MARIE KATHRYN BAKER during her life and immediately after the death of my said wife to pay the net annual income to my said daughter ROXANNE MARIE ELLIS during her life and immediately after the death of my said daughter for my grandchildren absolutely in the following shares:

Page 52

1) 1) 1)

One half share thereof to my grandson JOHN BAKER McDONALD also known as JOHN BAKER ELLIS. One quarter share to my granddaughter MARGARET BEDFORD of Belmore, and One quarter share to my granddaughter NARELLE MARIE McDONALD also known as NARELLE MARIE ELLIS

I GIVE DEVISE AND BEQUEATH all the rest and residue of my estate both real and personal of whatsoever kind and wheresoever situate to my said wife MARIE KATHRYN BAKER absolutely.

[7] Several aspects of these provisions appear rather strange. There are two residuary gifts, being the gift to the trustees and the gift of residue to Mrs Baker absolutely in the last words of the Will. The gift of the block of flats is made in the middle of these residuary gifts, so that read completely literally the Will appears to include the block of flats in the trust to convert all the residue into money with power to postpone the sale and to manage the property during the period of postponement. The provisions dealing specifically with the block of flats create a series of interests in the block of flats altogether different to the interest created by the final residuary gift to the testator's widow. There are specific dispositions of the block of flats, as of the shares in several corporations, so the block of flats cannot have been part of the residue dealt with at two different places. [8] Although on a literal reading the trust for conversion into money could be read as applying to the block of flats, when the Will is taken as a whole I am of opinion that there is no trust for conversion of the block of flats and that the Will means that the trustees are to retain the block of flats during the lifetimes of Mrs Baker and Mrs Ellis and then transfer the block of flats itself (and not the proceeds of its conversion) in shares to the grandchildren. The trust relating to the block of flats is inconsistent with the trust for conversion. Converting the block of flats into money would serve no purpose and would be inconsistent with the scheme of disposition made specifically for the block of flats. The trustees were impliedly given continuing responsibilities relating to the block of flats, implied from the trust to pay the net annual income to Mrs Baker and Mrs Ellis successively. Overall the provisions of the Will can only work harmoniously if the direction for conversion into money with power of postponement relates only to the residue which was given to Mrs Baker. It was out of that residue, and not out of the block of flats of which there was a specific gift, that funeral and testamentary expenses and debts were payable. The provisions relating to the block of flats come later than the provision relating to conversion, and in the resolution of inconsistent provisions in a will this is a minor but not insignificant element favouring primacy for the later dispositions. While the language is not completely clear, I am of opinion that the better reading of the Will and the better view of the testator's intention is that the provisions relating to the block of flats are not affected by the provisions relating to the property which was to be converted into money. [9] The continuing powers and responsibilities of the trustees under the Will with respect to the block of flats are not based on the express power to manage property while conversion into money is postponed, however by implication the trustees have management powers and responsibilities for the block of flats. The implication arises from the continuing nature of the trust dispositions dealing specifically with the block of flats, which would take more than two lifetimes to work out and could be expected to continue for many years (as they have). The trust to pay the net annual income to the persons named could not be carried out without exercising management responsibilities so as to produce income, or without attending to outgoings and liabilities so as to produce net annual income; necessarily this would involve decisions about what liabilities and charges should be set against gross income to produce net annual income. [10] During argument I expressed the idea that the trust to pay the net annual income may mean that the trustees were not authorised to retain any reserves for long-term capital expenditure which should not be accommodated within the ordinary recurring expenditures appropriately dealt with out of the income of each year. This is not a final view. It tends against this view that the reference to the net annual income shows that some charges are to be set against the gross income, and it is open to consideration whether those charges are limited to actual expenditures and outgoings; it is often a responsibility of trustees to hold a fair balance between life tenants and remaindermen, and this may involve creating reserves or borrowing money so as to maintain the capital value of the trust property and the interests of the remaindermen as well

Page 53 as of the life tenant. [11] Retaining funds for use over a longer period and not just in the current year is an ordinary aspect of the responsibilities of trustees where there are both life tenants and remaindermen, and is an ordinary aspect of the conduct of business necessarily involved in owning a block of eight flats, letting them out and collecting the rent. The Will does not give the trustees power to borrow money or mortgage the property, which they could only do under some statutory power or by obtaining authority from the Court, or with the authority of all beneficiaries. [12] The trust is not a bare trust in which trustees are authorised or required simply to hand the block of flats over to the life tenant for the time being for the life tenant to manage as she thinks fit. What the express terms of the Will require the trustees to do for the life tenant is to pay her the net annual income, and there is a clear inference that the trustees are to do all necessary things to realise the income, and they are to make any necessary decisions which bear on ascertaining the net annual income. [13] It is in my view fairly arguable that the trustees should keep the building in an appropriate state of repair including undertaking renovations as well as effecting routinely occurring repairs, and that they are either authorised or required to act prudently to provide for renovations, to set aside money out of rental income before ascertaining the net annual income, and to carry out the renovations when required. [14] On the other hand it is also fairly arguable that what the terms of the Will require is that the trustees should deal only with affairs in the course of each year, collect the rent, pay the expenses which present themselves during that period, and pay the net annual income to the life tenant. Even if this is the correct view, the remaindermen still have an interest in knowing what is being done in the management of the property. In their own interests they may decide to provide money for renovations themselves. [15] I was referred to a number of judicial decisions which bear on the position of trustees in holding a fair balance between life tenants whose interest is in the best available present income and remaindermen whose interest is in maintaining the value of the income-producing property. Decisions on such questions are largely affected by the express or implied terms of the trust in question. I am not called on when deciding claim 1 in the summons to decide whether it is the duty of the trustees to make provision, by reserves out of income or in some other way, for repairs or renovations which are not part of the ordinary flow of expenses incurred in each year; still less am I called on to decide whether Mr Ellis or the trustees have incurred any liability to the plaintiff. Counsel referred extensively to case law on the position of trustees in holding the balance between life tenants and remaindermen. Although no conclusion can be based on them I will set out observations on these submissions. [16] Counsel for Mr Ellis referred to Lehmann v Haskard (SCNSW Young J 29 August 1996 unreported). That case related to the construction of a will which the testator prepared and wrote out himself. He appointed trustees, and he gave a life interest in a house to his divorced wife in a provision which said "The property must be maintained and fully insured". The will did not give the trustees powers of management or a duty to manage the property and Young J held, " ... [t]here is sufficient to throw the burden of effecting maintenance, that is, remedying defects, onto the life tenant." His Honour considered the duties and powers of trustees who are not given active powers of management. In this connection he referred to case law including Wilkie v Equity Trustees Executors and Agency Co Ltd [1909] VLR 277. In Wilkie the Full Court of the Supreme Court of Victoria made a clear statement of the powers of trustees who have powers of management of income-earning property and should adjust the entitlements of life tenants and remaindermen on a fair basis when they exercise their powers of management to effect repairs. Even if there is a bare trust with no powers, the Full Court contemplated (at 280) that corpus may be applied to effect repairs where the estate is in jeopardy, " ... ie, that a case of salvage has arisen, in that expenditure is necessary to keep the property in existence for the remaindermen." The Full Court considered and ruled on a number of questions about specific items of repair, and also made general statements about the manner in which repairs should be charged (at 280-282). The Full Court distinguished between recurring ordinary repairs, structural repairs essentially appertaining to the remainderman's interest and structural repairs which would benefit both. Provisions set aside in advance for future repairs, did not receive the Full Court's consideration, and sinking funds to pay off borrowing after repairs have been carried out were considered

Page 54 briefly and not approved of (at 282). The judgment leaves a great deal to the discretion of trustees where costs should be borne in due proportion by income and corpus. [17] It is significant that Wilkie's case related to what may and should be done by trustees who have powers of management. A life tenant of a legal estate, or of an equitable estate where there are bare trustees without active duties to perform is under no liability to repair the property; the life tenant may repair the property or put up with disrepair if he chooses. (Actively causing waste involves a different principle.) Counsel referred to In re Arbitration between Parry and Hopkin [1900] 1 Ch 160 which vividly illustrates the immunity from liability of a tenant for life of the legal estate. I see no room for a contention that the life tenant has a duty to maintain, and debate could relate only to acts or omission of the trustee. In Lehmann v Haskard the life tenant had a responsibility higher than this because she was bound by a provision of the will which said "The property must be maintained and fully insured". [18] Wilkie was followed and applied in New South Wales in Roberts v Roberts (1915) 16 SR NSW 6 (A.H. Simpson CJ in Eq). In that case the terms of the will created difficulty in deciding whether the trustees had active duties to perform. The will was a difficult one and clearly gave powers of management to the trustees during the lifetime of the widow; but she had died and the dispute related to one of a number of trusts which took effect after her lifetime; the will directed trustees after the deceased and his wife "to receive the rents and profits and to pay the same to his son H.F. Roberts during his life with remainder to his children ... " (at 7). A.H. Simpson CJ in Eq decided that this gave the trustees active duties to perform and applied the law laid down in Wilkie. [19] The kind of adjustment which the Court in Wilkie said was left to discretion of trustees was made by the Court in Watson v Little (1921) 38 WN NSW 143. [20] Counsel's submissions on the effect of Wilkie claimed the benefit of passages relating to a bare trust with no powers of management; but in my opinion this is not such a case. The conclusion counsel sought to draw was to the effect that the plaintiff's rights cannot be affected by the state of repair or dilapidation of the property. In my opinion this conclusion is incorrect and is not available on the facts. The trustees have an implied power of management which includes maintaining the property, it is conceivable that some need for repair or renovation may exist which may have some implication for the plaintiff's rights, and she is entitled to obtain whatever information the trustees have. Whether or not she has any ground of complaint about the way the property has been managed and repairs have been carried out or left unattended to is not part of my consideration, and cannot be considered unless some manner of complaint or question to be decided is first formulated in a clear way. [21] The plaintiff's counsel referred me to Havyn Pty Ltd v Webster [2005] NSWCA 182 where it was decided to the effect that the sale of a building containing six flats which was let out to earn income through management agents in a businesslike way was an event in trade and commerce for the purpose of fair trading legislation. I find little assistance in this decision. [22] I was also referred to In re Armstrong [1899] SALR 155. In my opinion the problem addressed in that case is remote from any matter now relevant. A capital loss incurred, and the life tenants were not required to make any contributions to relieve the burden of that capital loss on the remaindermen. Presumably the capital loss reduced the corpus available to yield income to the life tenants. The grounds of the decision are obscure, particularly the grounds given by Boucaut J. [23] The plaintiff herself made adverse observations in evidence about the state of maintenance and repair of the building, and illustrated this by some photographs which show aspects of the building where maintenance work appears to be necessary. Her evidence does not establish that overall the building is in need of renovations, or show whether or not the shortcomings which her photographs appear to illustrate can or should be dealt with in the ordinary course of routine maintenance or on the other hand that there is a need for extensive works or renovations of a capital nature. Mr Ellis's evidence shows that with the managing agents he has given consideration to repair or renovation projects, particularly for the southfacing windows, but that no decision has been made. Without a capital fund there is little he could do; borrowing for capital works could happen only with the authority of all four persons who have interests in the property, or with authority obtained from the Court. The powers conferred on trustees by the will do not

Page 55 extend so far. [24] In correspondence extending over some years the plaintiff has not been able to obtain accounts or any substantial information about the trust's affairs but has been refused them. The first claim in the summons as amended is:

4)

An Order that the Defendants forthwith provide to the Plaintiff accounts for the years ended 30 June 1998 to 30 June 2005 of all moneys received and disbursed by on his or his or their behalf in respect of the property comprised in respect of the trust established by Will of Harold Wilfred Wills Baker (Deceased);

[25] There are a number of other claims, including claim 2 for a reference to take the estate accounts and enquire into a number of matters relating to dealings with estate assets, claim 3 for payment of any balance found to be due and claims for consequential and procedural orders. However at the hearing before me the plaintiff's counsel pressed only for order 1 on the basis that the plaintiff is entitled to see the accounts and have information, so as to know whether there is any further matter on which to press for remedies. This was obviously an appropriate position to take. [26] Mr Ellis' evidence shows clearly that he has not yet kept estate accounts and has not prepared any other documents, such as income tax returns, which may show estate affairs. The only documents which exist now and can be produced are copies of the monthly statements prepared by Taylors First National Real Estate, Randwick, the managing agents. These are Ex A. These usually take the form of showing the rents collected, the expenses occurred such as for repairs, rates and commission, leading to a balance which is deposited in Mrs Ellis' bank account. There is no estate bank account. The managing agents' statements are in form addressed to Mrs Ellis, although they were at some times posted to Mr Ellis and at other times to Mrs Clouting, and Mr Ellis has received copies of them by email. Mr Ellis did not produce these, either before or at the hearing; they were produced to the Court on subpoena by the managing agents, who said they had records only from September 2000, and were tendered by the plaintiff; the tender was objected to on grounds which included a claim for their confidentiality in the interests of Mrs Ellis. I was not prepared to treat the claim of confidentiality as a ground for rejecting the tender, because the statements were plainly relevant. [27] Mr Ellis' evidence shows that there are no other documents which should be regarded as estate accounts; there are no annual accounts showing how net annual income is derived; there is no statement of receipts and expenditure. No money has been set aside in the nature of a sinking fund or reserve for repairs, maintenance or renovations; these are dealt with, insofar as they are dealt with, by payments out of the rental income each month. No funds are set aside for future needs, and, as aforementioned, there is no estate bank account. [28] The administration of the trust is the responsibility of Mrs Ellis as a trustee. If records of hers show how the net annual income is calculated or derived, she is obliged in her character as trustee to make those records available to beneficiaries. Mrs Ellis participated in trust affairs in two capacities, as a trustee and also as a beneficiary. It could be said that when income is paid to her, it does not pass out of the hands of the trustees; she is a trustee and (although it is unauthorised that one trustee and not both should hold trust funds) the funds in her hands remain within the Court's control. The possibility is clear that Mrs Ellis, or attorneys acting on her behalf under power, may have documents relating to the trust property and its management. Mr Ellis referred in evidence to tax returns on behalf of Mrs Ellis which show the income, which raises the possibility that there may be lists of repair expenditures and depreciation schedules in those tax returns. As she is one of the trustees, such documents are within the range of documents to inspection of which the plaintiff is entitled. [29] It is the duty of trustees to keep accounts and be in a position to produce them, and the defendants and particularly Mr Ellis have not done this. The need to prepare estate accounts on a proper basis is not something arising out of the plaintiff's claim, nor is it something to be undertaken only to satisfy her; preparing accounts is an ordinary duty of trustees to which the trustees and particularly Mr Ellis should have attended in the past. In a relatively small and uncomplicated trust where all interested are closely

Page 56 related and there is no conflict, informality might cause no concern and the trouble and expense of preparing accounts might be thought of as unwarranted. In the present case, where the plaintiff has in effect been claiming a right to see accounts for years and her claim has been disputed, it has been rash of Mr Ellis not to prepare and retain estate accounts. At one point I thought that it may still be possible to avoid the trouble and expense of preparing estate accounts if the plaintiff should regard the information in the managing agents' statements as sufficient to answer her enquiries and concerns; I sought during argument to promote some such arrangement but I had no success as Mr Ellis' counsel maintained the position that these documents were confidential and the plaintiff should not see them. [30] The principal basis on which the plaintiff's claim was resisted was that the way in which estate affairs are conducted and the net annual income is derived are not matters in which the plaintiff as a remainderman has any interest. In the development of this argument it was contended to the effect that the plaintiff has no interest in the trust under which the trustees now pay net annual income to Mrs Ellis; that the trust for the remaindermen including the plaintiff is a different trust. This is not a correct view of the dispositions in the Will; when dealing with the block of flats the Will creates one trust of the block of flats with successive interests, and the remaindermen including the plaintiff now have present interests in the block of flats, vested in interest although not in possession. The remaindermen have at the present time an economic interest in the state of repair of the block of flats. Whether it is in or out of repair, whether some need for renovation at a future time is coming into being and whether there are any reserves or provisions, are factors affecting the money value of rights which the remaindermen now own. [31] There is no discretionary trust. The interests of the plaintiff and of other beneficiaries do not depend on any discretion of the trustees, or of anybody else. This sets to one side, as unimportant for disposition of this case, case law and principles relating to the protection of the discretionary decisions of trustees from disclosure. Decisions of trustees exercising choices in the performance of management duties, such as a decisions whether or not to carry out some repair or other, or whether or not to make a provision for a class of repairs in the future, are not the discretions to which that body of case law relates. [32] Until recently judicial authority established in a clear way that a beneficiary with a vested interest in trust property, even though that interest was not yet vested in possession, had a right to information about the estate property, including a right to see estate accounts and the right to inspect the property. This apparently clear position was disturbed by observations in the judgment of the Privy Council delivered by Lord Walker of Gestingthorpe in Schmidt v Rosewood Trust Ltd [2003] 2 AC 709 at 734-735. [33] The Judicial Committee's concluded view is indicated at two passages, the first at 729:

Their Lordships consider that the more principled and correct approach is to regard the right to seek disclosure of trust documents as one aspect of the court's inherent jurisdiction to supervise, and if necessary to intervene in, the administration of trusts. The right to seek the court's intervention does not depend on entitlement to a fixed and transmissible beneficial interest. The object of a discretion (including a mere power) may also be entitled to protection from a court of equity, although the circumstances in which he may seek protection, and the nature of the protection he may expect to obtain, will depend on the court's discretion ... (and their Lordships referred to authority).

[34] At 734-735 their Lordships said:

Their Lordships have already indicated their view that a beneficiary's right to seek disclosure of trust documents, although sometimes not inappropriately described as a proprietary right, is best approached as one aspect of the court's inherent jurisdiction to supervise, and where appropriate intervene in, the administration of trusts. There is therefore in their Lordships' view no reason to draw any bright dividing line either between transmissible and non-transmissible (that is, discretionary) interests, or between the rights of an object of a discretionary trust and those of the object of a mere power (of a fiduciary character). The differences in this context between trusts

Page 57
and powers are (as Lord Wilberforce demonstrated In re Baden [1971] AC 424 at 448-449 a good deal less significant than the similarities. The tide of Commonwealth authority, although not entirely uniform, appears to be flowing in that direction.

However the recent cases also confirm (as had been stated as long ago as in re Cowin 33 Ch D 179 in 1886 that no beneficiary (and least of all a discretionary object) has any entitlement as of right to disclosure of anything which can plausibly be described as a trust document. Especially when there are issues as to personal or commercial confidentiality, the court may have to balance the competing interests of different beneficiaries, the trustees themselves and third parties. Disclosure may have to be limited and safeguards may have to be put in place. Evaluation of the claims of a beneficiary (and especially of a discretionary object) may be an important part of the balancing exercise which the court has to perform on the materials placed before it. In many cases the court may have no difficulty in concluding that an applicant with no more than a theoretical possibility of benefit ought not to be granted any relief.

[35] When considering the case law it is important to bear in mind something I have already alluded to, that the plaintiff in the present case has a vested interest in the trust property and is not in the position of the object of a discretionary trust who may or may not, according to some future decision or contingency, come to have an interest. This is a basal consideration because the claim of a person with a vested interest is related to property rights and is a claim to information about the person's own property. This is no less so because the title of the property is equitable. A claim by the object of a discretionary trust has a less clear and compelling basis. If their Lordships' conclusions were followed, it would be necessary to depart from the state of opinion which I regard as clearly established in New South Wales and to do so for reasons which do not touch on the case of a beneficiary with a vested interest making a claim for documents the characterisation of which as trust documents cannot be doubted. [36] The clarity of the position existing prior to Schmidt v Rosewood Trust Ltd is borne out by an analysis of earlier authority. The first case to which counsel referred me was Walker v Symonds (1818) 3 Swanston 1 at 36 ER 751. This complex case related to liability of trustees for default by a co-trustee; the facts included a release given by the beneficiary without adequate information. In the course of argument Lord Eldon LC said (Swanston 58, ER 772):
It is the duty of trustees to afford to their cestui que trust accurate information of the disposition of the trust-fund; all the information of which they are, or ought to be, in possession: a trustee may involve himself in serious difficulty, by want of the information which it was his duty to obtain.

[37] In In re Tillott, Lee v Wilson [1892] 1 Ch 86 Chitty J said at 88: "The general rule, then, is what I have stated, that the trustee must give information to his cestui que trust as to the investment of the trust estate." His Lordship made orders under which the trustee was required to give the beneficiary authority for the bank in which the trust fund was deposited to tell the beneficiary whether the trust fund was encumbered. In that case the beneficiary held a vested interest in a share of the trust estate contingently on the death of his mother; his interest was not discretionary. [38] In In re Dartnall, Sawyer v Goddard [1895] 1 Ch 474 the English Court of Appeal directed trustees to give a beneficiary a list of investments of the testator's estate. The beneficiary was entitled to share of a fund expectant on the death of a tenant for life. Most judicial attention was given to costs questions. In the course of decision Lord Halsbury said (at 478): "In the first instance the application made on behalf of the Plaintiff for particulars of the trust estate and the investment thereof was, in my opinion, a just and proper one, and ought to have been granted. I see no reason why the trustees should not have granted it." Lindley LJ said at 479: "... in strict right the Plaintiff was entitled to the further information which she asked for." [39] O'Rourke v Darbishire [1920] AC 581 relates to discovery, but two Law Lords made obiter dicta expressing in general terms what by then was clearly understood to be the right of beneficiaries with respect to trust documents. These dicta, cited in In re Londonderry's Settlement, Peat v Walsh [1965] 1 Ch 918 at 932 by Harman LJ, appear to contemplate a beneficiary with a vested interest. Lord Wrenbury, in O'Rourke v Darbishire, spoke at 626-7 of the right of access to documents as a property right and said, "The beneficiary is entitled to see all the trust documents because they are trust documents and because he

Page 58 is a beneficiary. They are in this sense his own. Action or no action, he is entitled to access to them. This has nothing to do with discovery. The right to discovery is a right to see someone else's documents. The proprietary right is a right to access to documents which are your own." [40] The entitlement of a beneficiary to see trust documents was considered in much greater detail by the Court of Appeal in In re Londonderry's Settlement. The Court of Appeal variously considered the effect of the beneficiary's entitlement's being discretionary; what documents are trust documents for this purpose; and the influence both of confidentiality and of the exemption of trustees from disclosure of their consideration of discretions. (The conflict of principles was stated by Harman LJ at 928-99.) Harman LJ also referred (at 931) to the difficulty of defining the obligations of trustees "in the air" and not in relation to a particular document which the Court has seen. His Lordship pointed out (at 933) the shortcomings of general observations such as those in O'Rourke v Darbishire. He treated (again at 933) a right to disclosure of trust documents as the ordinary rule and the principle which protects trustees' discretionary deliberations from disclosure as overriding the ordinary rule, stating that, "In my opinion such documents are not trust documents in the proper sense at all." Danckwerts LJ and Salmon LJ reached the same conclusion for reasons separately stated. At 938 Salmon LJ stated common characteristics of trust documents, without a comprehensive definition. [41] It should I think be said of In re Londonderry's Settlement that the Court of Appeal gave protection to the trustees' considerations of the exercise of a discretion to appoint interest in the trust on the basis of acknowledgement that consideration started with the beneficiary having a right to disclosure. The fact that the beneficiary's entitlement depended on a favourable exercise of discretion did not influence this right. [42] In Randall v Lubrano (SCNSW 31 October 1975 unreported) Holland J made a clear and emphatic statement of a beneficiary's right to know what the trust property is and how it has been and is being administered by the trustee. In that case the interest of the beneficiaries was discretionary, and all objects of the discretionary trust joined in seeking a remedy. I know from my having been in practice at the time that the judgment of Holland J. created a wide impression and dispelled resistance by trustees which it was not then unusual to encounter, although in retrospect it is difficult to see what its basis can have been; I see no encouragement for that view in In re Londonderry's Settlement. It is surprising that Randall v Lubrano was not reported. [43] In Spellson v George (1987) 11 NSWLR 300 Powell J at 315F-316C stated his Honour's view of the law, and of the basis in principle of the law:
At the risk of being regarded as overly simplistic, it is as well to start with the fundamental proposition that one of the essential elements of a private trust, be it a discretionary trust or some other form of trust, is that the trustee is subject to a personal obligation to hold, and to deal with, the trust property for the benefit of some identified, or identifiable, person or group of persons: see, eg, Jacobs, op cit pars 108-111 at 8-9. It is, so it seems to me, a necessary corollary of the existence of that obligation that the trustee is liable to account to the person, or group of persons for whose benefit he holds the trust property, (see, eg Manning v Federal Commissioner of Taxation (1928) 40 CLR 506 at 509 per Knox CJ) and, that being so, the trustee is obliged not only to keep proper accounts and allow a cestui que trust to inspect them, but he must also, on demand, give a cestui que trust information and explanations as to the investment of, and dealings with, the trust property: see, eg, re Tillott; Ford and Lee, Principles of the Law of Trusts (1983) at 404 et seq; Jacobs, op cit pars 1713 et seq; at 391 et seq; Pettit, Equity and the Law of Trusts, 3rd ed (1974) at 330 et seq. This being the essential nature of the position of a trustee, and the liability to account being an essential ingredient in it, it seems to me that it is inescapable that the cestuis que trust, or any one of the cestuis que trust, have, or has, a correlative right to approach the Court for its assistance in enforcing the personal obligation of the trustee, and, in particular, in enforcing the trustee's obligation to account.

[44] His Honour went on to state, with reasons and references to authority, his view that the same right is available to a person whose status is only that of a potential object of the exercise of a discretionary power. [45] Hartigan Nominees Pty Ltd v Rydge (1992) 29 NSWLR 405 related to the beneficiary's claim to see a memorandum of wishes provided by the instigator (not the settlor) of a discretionary trust for the use of trustees in exercising their powers. This case exposed the difficulties of identifying what are referred to as

Page 59 "trust documents". The beneficiary's interest was, as the object of a discretionary trust, potentially but not yet entitled if there should be a favourable exercise of the trustees' discretion. The solicitor for the trustees had given the explanation that no distribution could be made because " ... there is no provision in Sir Norman's memorandum which would entitle the trustees to make any payment to you at this time" (at 408E). The facts were unlike those in In re Londonderry's Settlement in that there had been reference to the memorandum in an explanation given on behalf of the trustees. For reasons extensively stated, Kirby P (who dissented) did not regard In re Londonderry's Settlement as a decision which should be followed; the majority (Mahoney and Sheller JJA) did not take this view, although their reasons went far beyond a simple application of In re Londonderry's Settlement. The difficulty in the appeal and the division of opinion related to the application of the right of a beneficiary, including a discretionary beneficiary, to obtain information and inspect trust documents to the memorandum and to the trustees' discretionary decisions. Mahoney JA did not unqualifiedly endorse the extension of the right to all persons who are only possible beneficiaries under a discretionary trust or are one of a large number of possible beneficiaries (431E-432F), and discussed the difficulties of the limits of trust documents in this context (432F-433B). Mahoney JA's judgment contains a wide general and (I would respectfully say) orthodox survey of the law in this field; Sheller JA also made a wide survey. It should I think be said that the majority judgments do not depart from In re Londonderry's Settlement. Those judgments illustrate a number of difficulties which do not bear on the present case. [46] In my opinion judges at first instance in New South Wales should treat the majority judgments in Hartigan Nominees as authoritative. While not all matters susceptible of doubt are settled, the starting point, at which the beneficiary is entitled to see trust documents and have information about trust property, and that entitlement has a proprietary basis, is not open to question. The facts in the present case do not raise even the potential difficulties which might be thought to exist where the entitlement of the beneficiary is contingent or subject to a discretionary decision, or involve a decision of trustees which might raise a conflicting principle. [47] The subject under decision in Schmidt v Rosewood Trust Ltd was the appellant's claim for fuller disclosure of trust accounts and information about trust assets in which the appellant claimed discretionary interests or expectations in right of himself and of his deceased father. Under "Disclosure to discretionary beneficiaries: the recent cases" the Judicial Committee made a wide survey of case law, including New South Wales case law and (at 729 [52]) stated its general agreement with the approach adopted in the judgments of Kirby P and Shelley JA in Hartigan Nominees. The judgment of Kirby P, to which their Lordships referred at some length [52], was of course a dissenting decision and reached its conclusion on the basis of the beneficiary's right of inspection without examining or indeed referring to judicial decisions; the conclusion based itself instead on agreement with a view expressed by Professor H.A.J. Ford in "Principles of the Laws Of Trust, 2nd ed (1990) which included this sentence (at 425): "The equation of the right to inspect trust documents with the beneficiary's equitable propriety of rights gives rise to unnecessary and undesirable consequences." The consequences referred to included doubts cast on the rights of beneficiaries who cannot claim to have an equitable proprietary interest in trust assets, such as the beneficiaries of discretionary trusts. This was, I must respectfully say, a slight basis indeed for discarding an established right of beneficiaries with vested interests to inspection of documents of such primary importance as the accounts of the trustees. A decision that all access to trust documents should be in the discretion of the Court is a drastic solution to whatever problems might be perceived in supposing a proprietary basis for discretionary interests, and whatever problems may be perceived in delimiting which documents should be treated as trust documents and in protecting from access documents access to which involves some conflicting principle. Their Lordships alluded, twice but briefly, to the reasons given by Sheller JA which addressed difficulties relating to discretionary interests, not vested interests. [48] The views expressed in Schmidt v Rosewood Trust Ltd by the Privy Council on appeal from the Isle of Man, while they should be considered with respect, are not possibly a binding or authoritative source for a rule of law which would render the entitlement of the plaintiff in these proceedings to access the documents, to information, in short to accounts, a discretionary one: see Cook v Cook (1986) 162 CLR 376 at 390. There may be room for the view, on which the Privy Council acted, that such an entitlement is discretionary in the case of a beneficiary who is no more than the object of a discretionary trust and does

Page 60 not have the benefit of a favourable exercise of the trustee's discretion; the weight of opinion in New South Wales the other way on that issue is strong, but the plaintiff's position in the present case is even stronger as her entitlement is not discretionary but rather vested in interest. Their Lordships' conclusion at 734-735 ([66] and [67]) would make the beneficiary's right to seek disclosure of trust documents an aspect of the Court's inherent jurisdiction to supervise, and where appropriate intervene in the administration of trusts. Although the reasons say that that right is "sometimes not inappropriately described as a proprietary right" it is plain that their Lordships did not treat the right as a proprietary right. [49] The history of Equity and the nature of its remedies mean that the treatment of equitable interests as proprietary, and the development of rules based on that treatment, can never be entirely logical or satisfactory; but if this is perceived as a problem, it is an inherent problem and should not be regarded as a basis for discarding a well-established rule. [50] An obiter dictum in the Privy Council about trust law in the Isle of Man has in my opinion very little claim to be followed at first instance in New South Wales where a different view has been accepted. The Privy Council does not exercise appellate authority over the courts of New South Wales, and its decisions made since its appellate power was abolished in 1986 have not had binding force in New South Wales. Still less have the Judicial Committee's obiter dicta. As with other decisions which are not binding, its claim to be followed depends upon the extent to which the views expressed are persuasive. [51] The opinion of Lord Walker does not to my reading identify any error in earlier opinion, or state any respect in which it might be said to be significantly unsatisfactory. No earlier judicial decisions adopting the basis on which the Privy Council reset the law were referred to, nor were any text writers. Nor to my reading were any significant policy considerations favouring departure from the previous rules set out; the only matter indicated was an opinion that the rule enounced was a better rule. It was not explained, with any significant reasoning, why it was a better rule. In my opinion it is not a better rule because it introduces discretion and promotes resistance and debate in substitution for a rule which is relatively concrete. The tendency will be that only the determined and litigious beneficiary will find out about his own affairs. Where there is a judicial discretion, there is room for litigious debate about the exercise of the discretion; there is no certainty on so elementary a matter as whether or not a beneficial owner is entitled to information about property in which the beneficial owner has an equitable interest. In the previous rule, in my interpretation Equity followed the law in treating as proprietary an equitable entitlement to trust property. Treating the equitable interest as proprietary brings with it an entitlement to information unless there is a conflict with some other principle which Equity must recognize, such as the principle protecting the trustee's discretionary considerations. Treating the entitlement to information as an aspect of the Court's discretionary exercise of its supervising power over trusts is a departure from the relatively concrete concept of equitable interests in trust property which has been adopted for some centuries. [52] In Avanes v Marshall [2007] NSWSC 191 Gzell J after review of authorities, including recent authorities in Australia in which Schmidt reference has been made to, expressed the view at [15] that the approach in Schmidt should be adopted by Australian courts. I respectfully do not agree. It might be that the approach of Schmidt is appropriate where the interest of the beneficiary is no higher than those of the potential objects of a discretionary trust, although opinion in New South Wales is otherwise. However that may be, in the present case where the plaintiff's right is already vested in interest, it would be a departure from clearly established opinion in New South Wales not to treat the claim to information as based on a proprietary interest, or to withhold enforcement of it except so as to enforce some competing entitlement, such as that of the trustees considered In re Londonderry's Settlement, which required such departure. [53] On the facts of the present case there is nothing in the nature of a discretionary ground on which any withholding of the plaintiff's entitlement to information could reasonably be based. While I repeatedly sought in the course of argument to establish what discretionary ground was relied upon, nothing was referred to higher than Mrs Ellis' objection to any information about her affairs being given to the plaintiff, expressed to Mr Ellis some years ago before incapacity overtook her. This is in the nature of a claim of confidentiality, but it is not supported by any underlying reason of greater strength than her expressed wish that the plaintiff should not know her affairs. A person who accepts benefits under a trust of which there are other beneficiaries does so on the basis that other beneficiaries also have rights in the trust, including rights

Page 61 to information. I characterise what is put forward as a claim to privacy, and not as a claim to confidentiality; in substance nothing was advanced as a reason for the Court to enforce Mrs Ellis' confidentiality by withholding the rights of some other person. There is no competing principle such as protection of the position of trustees in the exercise of discretion, which was protected in In re Londonderry's Settlement. [54] Notwithstanding my repeated enquiries counsel was not able to refer to any adverse impact on the interests of Mrs Ellis or of anyone else or any particular harm that would be done by giving the plaintiff the information she seeks. Counsel informed me that the information contained in the managing agents' documents relating to the maintenance which has taken place is not itself the subject of any claim that it should not be produced; but production to the plaintiff herself of those documents was resisted because they disclose Mrs Ellis's income, for which confidentiality is claimed. This is not a case where confidentiality relates to the interest of a third party. Mrs Ellis, when taking advantages under the trust, necessarily also incurs any disadvantage to her, actual or perceived, which arises out of administration of the trust. [55] On behalf of Mr Ellis it was contended to the effect that it was shown by communications in correspondence that the plaintiff's case was presented as justified by or based on a concern to see that the interests of Mrs Ellis are properly protected, that she receives income, what income it is that she receives and how her income is disbursed. It is clear that the plaintiff in correspondence by her former solicitor did put forward in strong terms a concern relating to Mrs Ellis's interests as the ground on which she claimed relief. However it is in my opinion plain, as discussion elsewhere in this judgment shows, that the plaintiff had a right herself to see the trust documents and obtain information about the trust asset. A wish to protect the interests of her mother is not a ground on which she could base a claim, but her claim is well based on her own interests, and the presence of the other asserted basis in correspondence does not justify resistance to her claim. Advance by the plaintiff of grounds which were unnecessary, or even quite wrong, in support of a claim which she has on other grounds cannot prejudice that claim or dispose the Court against granting it on those other grounds. [56] Correspondence on behalf of the second defendant asserted readiness to give the plaintiff information about expenditures on maintenance of the block of flats:
We take the position that a beneficiary's entitlement to view estate accounts extends only to the interest the beneficiary has in relation to the estate. For instance a beneficiary who receives a specific legacy is not entitled to be given the accounts that relate to residue. Similarly our clients are willing to satisfy your client that her interest in remainder is maintained but will not provide details of the income and outgoings on the trust property to which the income beneficiary is entitled. Accordingly we will provide to you a statement from the managing agents acting out that there are no outstanding rates or taxes on the property, the report obtained from the structural engineer and the certification relating to the fire rating of the property. If your client requires a valuation of her interest, please confirm that she will meet the cost of obtaining it and that the provision of this information will satisfy your client's concerns.

[57] The plaintiff did not accept this limitation on the information to be given to her, either before or at the hearing. In my view there is no justification for limiting information to be furnished to the plaintiff in this way. Notwithstanding the position taken in that letter, it was maintained on behalf of Mr Ellis during the hearing, and in final submissions, to the effect that the plaintiff does not and cannot have any interest in aspects of management, including maintenance, because she as a remainderman has very limited rights of recourse against the trustee with respect to maintenance. [58] Whether or not such rights exist and whether or not the trustees have incurred any liability in respect of such rights, and the condition of block of flats, are questions which it is not necessary to consider fully and to answer for the purpose of disposing of Claim 1. In my view those questions should only be addressed and answered when and if the Court is presented with a live issue relating to some clearly expressed and comprehensible basis upon which it is said that the trustees ought to be charged with some liability. Decision on the responsibility of trustees can only be addressed on a clear basis. An attempt to give answers in the abstract may fail to meet the difficulties presented by some actual attempted impeachment of the trustees, when and if one ever eventuates.

Page 62 [59] Mr Ellis's counsel contended that the present litigation is an exercise in futility because the plaintiff is not entitled to compel the life tenant or the trustee to repair the premises, let alone make a capital investment, and cannot compel the creation of a sinking fund. It would indeed be surprising if the plaintiff obtained an order compelling the trustees to take any such course, even more so, the life tenant; any judicial remedy is much more likely to take the form of imposing liability for some failure on the part of the trustees. [60] My Orders are:

5) 4) 2)

2) 2)
Order

Direct pursuant to UCPR 10.14 that the Summons be taken to have been served on the first defendant on 11 July 2006 being the date of the second defendant's appearance. Order pursuant to UCPR 7.10 that the second defendant be appointed to represent the persons other than the plaintiff interested in the trusts of the will of the late Harold Wilfred Wills Baker. Order that the second defendant forthwith provide to the plaintiff accounts for the years ended 30 June 1998 to 30 June 2005 of all moneys received and disbursed by him and by the first and second defendants or on behalf of him or them in respect of the assets of the trust established by Will of Harold Wilfred Wills Baker. Liberty to apply with respect to the production of trust documents and with respect to the claims in the Summons. Order that the second defendant pay the plaintiff's costs of the proceedings.

6) 5) 3)

3) 3)

Direct pursuant to UCPR10.14 that the Summons be taken to have been served on the first defendant on 11 July 2006 being the date of the second defendant's appearance Order pursuant to UCPR 7.10 that the second defendant be appointed to represent the persons other than the plaintiff interested in the trusts of the will of the late Harold Wilfred Wills Baker Order that the second defendant forthwith provide to the plaintiff accounts for the years ended 30 June 1998 to 30 June 2005 of all moneys received and disbursed by him and by the first and second defendants or on behalf of him or them in respect of the assets of the trust established by Will of Harold Wilfred Wills Baker Liberty to apply with respect to the production of trust documents and with respect to the claims in the Summons. Order that the second defendant pay the plaintiff's costs of the proceedings.

Counsel for the plaintiff: R Winfield Counsel for the second defendant: S A Sirtes Solicitors for the plaintiff: Northside Law Solicitors for the second defendant: Teece Hodgson & Ward

Page 63

Page 64

7 of 10 DOCUMENTS: Unreported Judgments NSW 60 Paragraphs

McDONALD v ELLIS - BC200812952


Supreme Court of New South Wales Bryson AJ 1191/2006 5, 27 September 2007 McDonald v Ellis [2007] NSWSC 1068
TRUSTS AND TRUSTEES -- Accounts -- Entitlement of beneficiaries to accounts and to see trust documents -- Authority of Schmidt v Rosewood Trust [2003] 2 AC 709 doubted. Trustee resisted beneficiary's claim for accounts and information, asserting confidentiality of income to life tenant -Order for accounts. Avanes v Marshall [2007] NSWSC 191; Cook v Cook (1986) 162 CLR 376; Hartigan Nominees Pty Ltd v Rydge (1992) 29 NSWLR 405; Havyn Pty Ltd v Webster [2005] NSWCA 182; Re Arbitration between Parry and Hopkin [1900] 1 Ch 160; Re Armstrong [1899] SALR 155; Re Dartnall, Sawyer v Goddard [1895] 1 Ch 474; Re Londonderry's Settlement, Peat v Walsh [1965] 1 Ch 918; Re Tillott, Lee v Wilson [1892] 1 Ch 86; Lehmann v Haskard (SCNSW Young J 29 August 1996 unreported); O'Rourke v Darbishire [1920] AC 581; Randall v Lubrano (SCNSW Holland J 31 October 1975 unreported); Roberts v Roberts (1915) 16 SR NSW 6; Schmidt v Rosewood Trust Ltd [2003] 2 AC 709; Spellson v George (1987) 11 NSWLR 300; Walker v Symonds (1818) 3 Swanston 1 ; 36 ER 751; Watson v Little (1921) 38 WN NSW 143; Wilkie v Equity Trustees Executors and Agency Co Ltd [1909] VLR 277, cited

Bryson AJ.
[1] These proceedings relate to the administration of the trusts of the Will of the late Harold Wilfred Wills Baker who died on 16 December 1977. On 22 May 1978 this court granted Probate of his last will dated 10 February 1970 to his executrices. The plaintiff is one of the granddaughters of the testator and the Will gave her a quarter share of the interest in remainder in a block of eight flats known as "Tamahine", 21 Baden St Coogee, expectant on earlier successive life interests given to the testator's widow Mrs Marie Baker (who died on 9 November 1997) and his daughter Mrs Roxane Marie Ellis, the plaintiff's mother, who is still in receipt of benefits under the Will. The express words of the trust confer no right on Mrs Baker and in succession Mrs Ellis other than the right to be paid the net annual income, but the effect of these dispositions in my opinion is to confer on them successive equitable life estates. The Will appointed the testator's widow and daughter to be executrices and trustees. Mrs Ellis is still a trustee, and she is the first defendant. After Mrs Baker died Mrs Ellis appointed her son Mr John Baker Ellis to be a new trustee by a deed which was registered and took effect on 21 August 1998. Mr Ellis is still a trustee, and he is the second defendant. The block of flats is to pass to the plaintiff and her brother and sister when Mrs Ellis' life

Page 65 ends. The litigation has been highly combative as between the plaintiff and Mr Ellis. [2] Executorial duties were completed long ago. The testator had other assets but his Will gave them to his widow and his daughter. Only the block of flats remained when Mr Ellis became a trustee. [3] Mrs Margaret Clouting is a daughter of Mrs Ellis and a sister of the plaintiff and of Mr Ellis. Her interests are involved in this litigation but she is not a party. On 7 December 2000, when Mrs Ellis still had capacity to do so, she appointed Mr Ellis and Mrs Clouting to be her attorneys under power; the deed appointing them was registered on 15 July 2005. Mr Ellis and Mrs Clouting have managed Mrs Ellis' affairs, under this power of attorney, for some years. A deed of appointment of Mrs Clouting as an additional trustee has been prepared, but Mr Ellis has not yet signed it. Such deed would take effect only upon execution and registration, which have not yet happened. [4] Mrs Ellis was diagnosed as suffering Alzheimer's Disease about 2003. She now has advanced Alzheimer's Disease, her memory is significantly impaired and she is unable to live alone or support herself. Since about November 2004 she has been a resident in an aged persons hostel. Mrs Ellis has never filed an appearance. The summons was left for her at her nursing home, but this had no real effect as she did not have sufficient understanding to give instructions to lawyers and her attorneys did not do so; no tutor has been appointed. She has an interest in the litigation in two ways, as one of the trustees of the testator's estate and also as the life tenant presently entitled to income. I see Mr Ellis' not having decided to instruct lawyers and conduct the litigation on behalf of Mrs Ellis as an aspect of the combative nature of the litigation, but not as indicating any lack of protection of Mrs Ellis' interest. He could do this under his power of attorney, but he has not chosen to do so. As sometimes happens in litigation about family property among closely related persons, there are signs that the conduct of the litigation has been influenced by conflict at a much deeper level than the issues which are before the court for decision. There have been unseemly procedural manoeuvres but these should not in my view create difficulties for proceeding to decision. Because of the way in which Mr Ellis has conducted the litigation, and the strong positions he has taken and resistance he has offered, with legal representation, to the plaintiff's claims, I am of the view that Mrs Ellis' position and interests have been adequately protected and that it is appropriate to dispense with service of the summons on her while leaving her as a party and bound by the decision. Mr Ellis is in a position actually to maintain the interests of the estate and of all other than the plaintiff interested in it, and he has resisted the plaintiff's claim with vigour. In the circumstances it is just to treat him as representing all other than the plaintiff who are interested in the estate, and to make appropriate orders giving effect to this view. [5] It is very unfortunate that Mrs Ellis has continued to be a trustee and to be exposed to being a party to estate litigation, for some years after she became unable to fulfil her responsibilities. It was imprudent of Mr Ellis to continue as in effect a sole trustee, with a co-trustee in name only, though he had statutory power to appoint an additional trustee. This is not a responsibility which should be borne by one person alone; the Will appointed two trustees. In the situation of family conflict Mr Ellis left himself exposed to criticism and adverse inferences by acting on his own, and the difficulty in involving Mrs Ellis in the litigation (in which she was a necessary party) resulted from his inactivity. [6] The Will was not skilfully prepared. It appointed the executrices and trustees. It gave the testator's shares in three corporations to Mrs Ellis and then went on:
... I GIVE AND DEVISE AND BEQUEATH to my said Trustees the residue of my property real and personal upon the trusts and subject to the declarations and powers following that is to say upon trust to sell, call in and convert into money such part or parts which shall not consist of money with power for such period as my Trustees shall consider expedient to postpone the sale, calling in or conversion of any part or parts thereof and during the period of such postponement to manage the same and as regards my block of flats known as "Tamahine 21 Baden Street, Coogee upon trust to pay the net annual income therefrom to my said wife MARIE KATHRYN BAKER during her life and immediately after the death of my said wife to pay the net annual income to my said daughter ROXANNE MARIE ELLIS during her life and immediately after the death of my said daughter for my grandchildren absolutely in the following shares:

Page 66

2) 2) 2)

One half share thereof to my grandson JOHN BAKER McDONALD also known as JOHN BAKER ELLIS. One quarter share to my granddaughter MARGARET BEDFORD of Belmore, and One quarter share to my granddaughter NARELLE MARIE McDONALD also known as NARELLE MARIE ELLIS

I GIVE DEVISE AND BEQUEATH all the rest and residue of my estate both real and personal of whatsoever kind and wheresoever situate to my said wife MARIE KATHRYN BAKER absolutely.

[7] Several aspects of these provisions appear rather strange. There are two residuary gifts, being the gift to the trustees and the gift of residue to Mrs Baker absolutely in the last words of the Will. The gift of the block of flats is made in the middle of these residuary gifts, so that read completely literally the Will appears to include the block of flats in the trust to convert all the residue into money with power to postpone the sale and to manage the property during the period of postponement. The provisions dealing specifically with the block of flats create a series of interests in the block of flats altogether different to the interest created by the final residuary gift to the testator's widow. There are specific dispositions of the block of flats, as of the shares in several corporations, so the block of flats cannot have been part of the residue dealt with at two different places. [8] Although on a literal reading the trust for conversion into money could be read as applying to the block of flats, when the Will is taken as a whole I am of opinion that there is no trust for conversion of the block of flats and that the Will means that the trustees are to retain the block of flats during the lifetimes of Mrs Baker and Mrs Ellis and then transfer the block of flats itself (and not the proceeds of its conversion) in shares to the grandchildren. The trust relating to the block of flats is inconsistent with the trust for conversion. Converting the block of flats into money would serve no purpose and would be inconsistent with the scheme of disposition made specifically for the block of flats. The trustees were impliedly given continuing responsibilities relating to the block of flats, implied from the trust to pay the net annual income to Mrs Baker and Mrs Ellis successively. Overall the provisions of the Will can only work harmoniously if the direction for conversion into money with power of postponement relates only to the residue which was given to Mrs Baker. It was out of that residue, and not out of the block of flats of which there was a specific gift, that funeral and testamentary expenses and debts were payable. The provisions relating to the block of flats come later than the provision relating to conversion, and in the resolution of inconsistent provisions in a will this is a minor but not insignificant element favouring primacy for the later dispositions. While the language is not completely clear, I am of opinion that the better reading of the Will and the better view of the testator's intention is that the provisions relating to the block of flats are not affected by the provisions relating to the property which was to be converted into money. [9] The continuing powers and responsibilities of the trustees under the Will with respect to the block of flats are not based on the express power to manage property while conversion into money is postponed, however by implication the trustees have management powers and responsibilities for the block of flats. The implication arises from the continuing nature of the trust dispositions dealing specifically with the block of flats, which would take more than two lifetimes to work out and could be expected to continue for many years (as they have). The trust to pay the net annual income to the persons named could not be carried out without exercising management responsibilities so as to produce income, or without attending to outgoings and liabilities so as to produce net annual income; necessarily this would involve decisions about what liabilities and charges should be set against gross income to produce net annual income. [10] During argument I expressed the idea that the trust to pay the net annual income may mean that the trustees were not authorised to retain any reserves for long-term capital expenditure which should not be accommodated within the ordinary recurring expenditures appropriately dealt with out of the income of each year. This is not a final view. It tends against this view that the reference to the net annual income shows that some charges are to be set against the gross income, and it is open to consideration whether those charges are limited to actual expenditures and outgoings; it is often a responsibility of trustees to hold a fair balance between life tenants and remaindermen, and this may involve creating reserves or borrowing money so as to maintain the capital value of the trust property and the interests of the remaindermen as well

Page 67 as of the life tenant. [11] Retaining funds for use over a longer period and not just in the current year is an ordinary aspect of the responsibilities of trustees where there are both life tenants and remaindermen, and is an ordinary aspect of the conduct of business necessarily involved in owning a block of eight flats, letting them out and collecting the rent. The Will does not give the trustees power to borrow money or mortgage the property, which they could only do under some statutory power or by obtaining authority from the court, or with the authority of all beneficiaries. [12] The trust is not a bare trust in which trustees are authorised or required simply to hand the block of flats over to the life tenant for the time being for the life tenant to manage as she thinks fit. What the express terms of the Will require the trustees to do for the life tenant is to pay her the net annual income, and there is a clear inference that the trustees are to do all necessary things to realise the income, and they are to make any necessary decisions which bear on ascertaining the net annual income. [13] It is in my view fairly arguable that the trustees should keep the building in an appropriate state of repair including undertaking renovations as well as effecting routinely occurring repairs, and that they are either authorised or required to act prudently to provide for renovations, to set aside money out of rental income before ascertaining the net annual income, and to carry out the renovations when required. [14] On the other hand it is also fairly arguable that what the terms of the Will require is that the trustees should deal only with affairs in the course of each year, collect the rent, pay the expenses which present themselves during that period, and pay the net annual income to the life tenant. Even if this is the correct view, the remaindermen still have an interest in knowing what is being done in the management of the property. In their own interests they may decide to provide money for renovations themselves. [15] I was referred to a number of judicial decisions which bear on the position of trustees in holding a fair balance between life tenants whose interest is in the best available present income and remaindermen whose interest is in maintaining the value of the income-producing property. Decisions on such questions are largely affected by the express or implied terms of the trust in question. I am not called on when deciding claim 1 in the summons to decide whether it is the duty of the trustees to make provision, by reserves out of income or in some other way, for repairs or renovations which are not part of the ordinary flow of expenses incurred in each year; still less am I called on to decide whether Mr Ellis or the trustees have incurred any liability to the plaintiff. Counsel referred extensively to case law on the position of trustees in holding the balance between life tenants and remaindermen. Although no conclusion can be based on them I will set out observations on these submissions. [16] Counsel for Mr Ellis referred to Lehmann v Haskard (SCNSW Young J 29 August 1996 unreported). That case related to the construction of a will which the testator prepared and wrote out himself. He appointed trustees, and he gave a life interest in a house to his divorced wife in a provision which said "The property must be maintained and fully insured". The will did not give the trustees powers of management or a duty to manage the property and Young J held, "... [t]here is sufficient to throw the burden of effecting maintenance, that is, remedying defects, onto the life tenant." His Honour considered the duties and powers of trustees who are not given active powers of management. In this connection he referred to case law including Wilkie v Equity Trustees Executors and Agency Co Ltd [1909] VLR 277. In Wilkie the Full Court of the Supreme Court of Victoria made a clear statement of the powers of trustees who have powers of management of income-earning property and should adjust the entitlements of life tenants and remaindermen on a fair basis when they exercise their powers of management to effect repairs. Even if there is a bare trust with no powers, the Full Court contemplated (at 280) that corpus may be applied to effect repairs where the estate is in jeopardy, "... ie, that a case of salvage has arisen, in that expenditure is necessary to keep the property in existence for the remaindermen." The Full Court considered and ruled on a number of questions about specific items of repair, and also made general statements about the manner in which repairs should be charged (at 280-282). The Full Court distinguished between recurring ordinary repairs, structural repairs essentially appertaining to the remainderman's interest and structural repairs which would benefit both. Provisions set aside in advance for future repairs, did not receive the Full Court's consideration, and sinking funds to pay off borrowing after repairs have been carried out were considered

Page 68 briefly and not approved of (at 282). The judgment leaves a great deal to the discretion of trustees where costs should be borne in due proportion by income and corpus. [17] It is significant that Wilkie's case related to what may and should be done by trustees who have powers of management. A life tenant of a legal estate, or of an equitable estate where there are bare trustees without active duties to perform is under no liability to repair the property; the life tenant may repair the property or put up with disrepair if he chooses. (Actively causing waste involves a different principle.) Counsel referred to In Re Arbitration between Parry and Hopkin [1900] 1 Ch 160 which vividly illustrates the immunity from liability of a tenant for life of the legal estate. I see no room for a contention that the life tenant has a duty to maintain, and debate could relate only to acts or omission of the trustee. In Lehmann v Haskard the life tenant had a responsibility higher than this because she was bound by a provision of the will which said "The property must be maintained and fully insured". [18] Wilkie was followed and applied in New South Wales in Roberts v Roberts (1915) 16 SR NSW 6 (A.H. Simpson CJ in Eq). In that case the terms of the will created difficulty in deciding whether the trustees had active duties to perform. The will was a difficult one and clearly gave powers of management to the trustees during the lifetime of the widow; but she had died and the dispute related to one of a number of trusts which took effect after her lifetime; the will directed trustees after the deceased and his wife "to receive the rents and profits and to pay the same to his son H.F. Roberts during his life with remainder to his children ..." (at 7). A.H. Simpson CJ in Eq decided that this gave the trustees active duties to perform and applied the law laid down in Wilkie. [19] The kind of adjustment which the court in Wilkie said was left to discretion of trustees was made by the court in Watson v Little (1921) 38 WN NSW 143. [20] Counsel's submissions on the effect of Wilkie claimed the benefit of passages relating to a bare trust with no powers of management; but in my opinion this is not such a case. The conclusion counsel sought to draw was to the effect that the plaintiff's rights cannot be affected by the state of repair or dilapidation of the property. In my opinion this conclusion is incorrect and is not available on the facts. The trustees have an implied power of management which includes maintaining the property, it is conceivable that some need for repair or renovation may exist which may have some implication for the plaintiff's rights, and she is entitled to obtain whatever information the trustees have. Whether or not she has any ground of complaint about the way the property has been managed and repairs have been carried out or left unattended to is not part of my consideration, and cannot be considered unless some manner of complaint or question to be decided is first formulated in a clear way. [21] The plaintiff's counsel referred me to Havyn Pty Ltd v Webster [2005] NSWCA 182 where it was decided to the effect that the sale of a building containing six flats which was let out to earn income through management agents in a businesslike way was an event in trade and commerce for the purpose of fair trading legislation. I find little assistance in this decision. [22] I was also referred to In Re Armstrong [1899] SALR 155. In my opinion the problem addressed in that case is remote from any matter now relevant. A capital loss incurred, and the life tenants were not required to make any contributions to relieve the burden of that capital loss on the remaindermen. Presumably the capital loss reduced the corpus available to yield income to the life tenants. The grounds of the decision are obscure, particularly the grounds given by Boucaut J. [23] The plaintiff herself made adverse observations in evidence about the state of maintenance and repair of the building, and illustrated this by some photographs which show aspects of the building where maintenance work appears to be necessary. Her evidence does not establish that overall the building is in need of renovations, or show whether or not the shortcomings which her photographs appear to illustrate can or should be dealt with in the ordinary course of routine maintenance or on the other hand that there is a need for extensive works or renovations of a capital nature. Mr Ellis's evidence shows that with the managing agents he has given consideration to repair or renovation projects, particularly for the southfacing windows, but that no decision has been made. Without a capital fund there is little he could do; borrowing for capital works could happen only with the authority of all four persons who have interests in the property, or with authority obtained from the court. The powers conferred on trustees by the will do not

Page 69 extend so far. [24] In correspondence extending over some years the plaintiff has not been able to obtain accounts or any substantial information about the trust's affairs but has been refused them. The first claim in the summons as amended is:

7)

An Order that the Defendants forthwith provide to the Plaintiff accounts for the years ended 30 June 1998 to 30 June 2005 of all moneys received and disbursed by on his or his or their behalf in respect of the property comprised in respect of the trust established by Will of Harold Wilfred Wills Baker (Deceased);

[25] There are a number of other claims, including claim 2 for a reference to take the estate accounts and enquire into a number of matters relating to dealings with estate assets, claim 3 for payment of any balance found to be due and claims for consequential and procedural orders. However at the hearing before me the plaintiff's counsel pressed only for order 1 on the basis that the plaintiff is entitled to see the accounts and have information, so as to know whether there is any further matter on which to press for remedies. This was obviously an appropriate position to take. [26] Mr Ellis' evidence shows clearly that he has not yet kept estate accounts and has not prepared any other documents, such as income tax returns, which may show estate affairs. The only documents which exist now and can be produced are copies of the monthly statements prepared by Taylors First National Real Estate, Randwick, the managing agents. These are Ex A. These usually take the form of showing the rents collected, the expenses occurred such as for repairs, rates and commission, leading to a balance which is deposited in Mrs Ellis' bank account. There is no estate bank account. The managing agents' statements are in form addressed to Mrs Ellis, although they were at some times posted to Mr Ellis and at other times to Mrs Clouting, and Mr Ellis has received copies of them by email. Mr Ellis did not produce these, either before or at the hearing; they were produced to the court on subpoena by the managing agents, who said they had records only from September 2000, and were tendered by the plaintiff; the tender was objected to on grounds which included a claim for their confidentiality in the interests of Mrs Ellis. I was not prepared to treat the claim of confidentiality as a ground for rejecting the tender, because the statements were plainly relevant. [27] Mr Ellis' evidence shows that there are no other documents which should be regarded as estate accounts; there are no annual accounts showing how net annual income is derived; there is no statement of receipts and expenditure. No money has been set aside in the nature of a sinking fund or reserve for repairs, maintenance or renovations; these are dealt with, insofar as they are dealt with, by payments out of the rental income each month. No funds are set aside for future needs, and, as aforementioned, there is no estate bank account. [28] The administration of the trust is the responsibility of Mrs Ellis as a trustee. If records of hers show how the net annual income is calculated or derived, she is obliged in her character as trustee to make those records available to beneficiaries. Mrs Ellis participated in trust affairs in two capacities, as a trustee and also as a beneficiary. It could be said that when income is paid to her, it does not pass out of the hands of the trustees; she is a trustee and (although it is unauthorised that one trustee and not both should hold trust funds) the funds in her hands remain within the court's control. The possibility is clear that Mrs Ellis, or attorneys acting on her behalf under power, may have documents relating to the trust property and its management. Mr Ellis referred in evidence to tax returns on behalf of Mrs Ellis which show the income, which raises the possibility that there may be lists of repair expenditures and depreciation schedules in those tax returns. As she is one of the trustees, such documents are within the range of documents to inspection of which the plaintiff is entitled. [29] It is the duty of trustees to keep accounts and be in a position to produce them, and the defendants and particularly Mr Ellis have not done this. The need to prepare estate accounts on a proper basis is not something arising out of the plaintiff's claim, nor is it something to be undertaken only to satisfy her; preparing accounts is an ordinary duty of trustees to which the trustees and particularly Mr Ellis should have attended in the past. In a relatively small and uncomplicated trust where all interested are closely

Page 70 related and there is no conflict, informality might cause no concern and the trouble and expense of preparing accounts might be thought of as unwarranted. In the present case, where the plaintiff has in effect been claiming a right to see accounts for years and her claim has been disputed, it has been rash of Mr Ellis not to prepare and retain estate accounts. At one point I thought that it may still be possible to avoid the trouble and expense of preparing estate accounts if the plaintiff should regard the information in the managing agents' statements as sufficient to answer her enquiries and concerns; I sought during argument to promote some such arrangement but I had no success as Mr Ellis' counsel maintained the position that these documents were confidential and the plaintiff should not see them. [30] The principal basis on which the plaintiff's claim was resisted was that the way in which estate affairs are conducted and the net annual income is derived are not matters in which the plaintiff as a remainderman has any interest. In the development of this argument it was contended to the effect that the plaintiff has no interest in the trust under which the trustees now pay net annual income to Mrs Ellis; that the trust for the remaindermen including the plaintiff is a different trust. This is not a correct view of the dispositions in the Will; when dealing with the block of flats the Will creates one trust of the block of flats with successive interests, and the remaindermen including the plaintiff now have present interests in the block of flats, vested in interest although not in possession. The remaindermen have at the present time an economic interest in the state of repair of the block of flats. Whether it is in or out of repair, whether some need for renovation at a future time is coming into being and whether there are any reserves or provisions, are factors affecting the money value of rights which the remaindermen now own. [31] There is no discretionary trust. The interests of the plaintiff and of other beneficiaries do not depend on any discretion of the trustees, or of anybody else. This sets to one side, as unimportant for disposition of this case, case law and principles relating to the protection of the discretionary decisions of trustees from disclosure. Decisions of trustees exercising choices in the performance of management duties, such as a decisions whether or not to carry out some repair or other, or whether or not to make a provision for a class of repairs in the future, are not the discretions to which that body of case law relates. [32] Until recently judicial authority established in a clear way that a beneficiary with a vested interest in trust property, even though that interest was not yet vested in possession, had a right to information about the estate property, including a right to see estate accounts and the right to inspect the property. This apparently clear position was disturbed by observations in the judgment of the Privy Council delivered by Lord Walker of Gestingthorpe in Schmidt v Rosewood Trust Ltd [2003] 2 AC 709 at 734-735. [33] The Judicial Committee's concluded view is indicated at two passages, the first at 729:

Their Lordships consider that the more principled and correct approach is to regard the right to seek disclosure of trust documents as one aspect of the court's inherent jurisdiction to supervise, and if necessary to intervene in, the administration of trusts. The right to seek the court's intervention does not depend on entitlement to a fixed and transmissible beneficial interest. The object of a discretion (including a mere power) may also be entitled to protection from a court of equity, although the circumstances in which he may seek protection, and the nature of the protection he may expect to obtain, will depend on the court's discretion ... (and their Lordships referred to authority).

[34] At 734-735 their Lordships said:

Their Lordships have already indicated their view that a beneficiary's right to seek disclosure of trust documents, although sometimes not inappropriately described as a proprietary right, is best approached as one aspect of the court's inherent jurisdiction to supervise, and where appropriate intervene in, the administration of trusts. There is therefore in their Lordships' view no reason to draw any bright dividing line either between transmissible and non-transmissible (that is, discretionary) interests, or between the rights of an object of a discretionary trust and those of the object of a mere power (of a fiduciary character). The differences in this context between trusts

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and powers are (as Lord Wilberforce demonstrated Re Baden [1971] AC 424 at 448-449 a good deal less significant than the similarities. The tide of Commonwealth authority, although not entirely uniform, appears to be flowing in that direction.

However the recent cases also confirm (as had been stated as long ago as Re Cowin 33 Ch D 179 in 1886 that no beneficiary (and least of all a discretionary object) has any entitlement as of right to disclosure of anything which can plausibly be described as a trust document. Especially when there are issues as to personal or commercial confidentiality, the court may have to balance the competing interests of different beneficiaries, the trustees themselves and third parties. Disclosure may have to be limited and safeguards may have to be put in place. Evaluation of the claims of a beneficiary (and especially of a discretionary object) may be an important part of the balancing exercise which the court has to perform on the materials placed before it. In many cases the court may have no difficulty in concluding that an applicant with no more than a theoretical possibility of benefit ought not to be granted any relief.

[35] When considering the case law it is important to bear in mind something I have already alluded to, that the plaintiff in the present case has a vested interest in the trust property and is not in the position of the object of a discretionary trust who may or may not, according to some future decision or contingency, come to have an interest. This is a basal consideration because the claim of a person with a vested interest is related to property rights and is a claim to information about the person's own property. This is no less so because the title of the property is equitable. A claim by the object of a discretionary trust has a less clear and compelling basis. If their Lordships' conclusions were followed, it would be necessary to depart from the state of opinion which I regard as clearly established in New South Wales and to do so for reasons which do not touch on the case of a beneficiary with a vested interest making a claim for documents the characterisation of which as trust documents cannot be doubted. [36] The clarity of the position existing prior to Schmidt v Rosewood Trust Ltd is borne out by an analysis of earlier authority. The first case to which counsel referred me was Walker v Symonds (1818) 3 Swanston 1 ; 36 ER 751. This complex case related to liability of trustees for default by a co-trustee; the facts included a release given by the beneficiary without adequate information. In the course of argument Lord Eldon LC said (Swanston 58, ER 772):
It is the duty of trustees to afford to their cestui que trust accurate information of the disposition of the trust-fund; all the information of which they are, or ought to be, in possession: a trustee may involve himself in serious difficulty, by want of the information which it was his duty to obtain.

[37] In Re Tillott, Lee v Wilson [1892] 1 Ch 86 Chitty J said at 88: "The general rule, then, is what I have stated, that the trustee must give information to his cestui que trust as to the investment of the trust estate." His Lordship made orders under which the trustee was required to give the beneficiary authority for the bank in which the trust fund was deposited to tell the beneficiary whether the trust fund was encumbered. In that case the beneficiary held a vested interest in a share of the trust estate contingently on the death of his mother; his interest was not discretionary. [38] In Re Dartnall, Sawyer v Goddard [1895] 1 Ch 474 the English Court of Appeal directed trustees to give a beneficiary a list of investments of the testator's estate. The beneficiary was entitled to share of a fund expectant on the death of a tenant for life. Most judicial attention was given to costs questions. In the course of decision Lord Halsbury said (at 478): "In the first instance the application made on behalf of the Plaintiff for particulars of the trust estate and the investment thereof was, in my opinion, a just and proper one, and ought to have been granted. I see no reason why the trustees should not have granted it." Lindley LJ said at 479: "... in strict right the Plaintiff was entitled to the further information which she asked for." [39] O'Rourke v Darbishire [1920] AC 581 relates to discovery, but two Law Lords made obiter dicta expressing in general terms what by then was clearly understood to be the right of beneficiaries with respect to trust documents. These dicta, cited in Re Londonderry's Settlement, Peat v Walsh [1965] 1 Ch 918 at 932 by Harman LJ, appear to contemplate a beneficiary with a vested interest. Lord Wrenbury, in O'Rourke v Darbishire, spoke at 626-7 of the right of access to documents as a property right and said, "The beneficiary is entitled to see all the trust documents because they are trust documents and because he

Page 72 is a beneficiary. They are in this sense his own. Action or no action, he is entitled to access to them. This has nothing to do with discovery. The right to discovery is a right to see someone else's documents. The proprietary right is a right to access to documents which are your own." [40] The entitlement of a beneficiary to see trust documents was considered in much greater detail by the Court of Appeal in Re Londonderry's Settlement. The Court of Appeal variously considered the effect of the beneficiary's entitlement's being discretionary; what documents are trust documents for this purpose; and the influence both of confidentiality and of the exemption of trustees from disclosure of their consideration of discretions. (The conflict of principles was stated by Harman LJ at 928-99.) Harman LJ also referred (at 931) to the difficulty of defining the obligations of trustees "in the air" and not in relation to a particular document which the court has seen. His Lordship pointed out (at 933) the shortcomings of general observations such as those in O'Rourke v Darbishire. He treated (again at 933) a right to disclosure of trust documents as the ordinary rule and the principle which protects trustees' discretionary deliberations from disclosure as overriding the ordinary rule, stating that, "In my opinion such documents are not trust documents in the proper sense at all." Danckwerts LJ and Salmon LJ reached the same conclusion for reasons separately stated. At 938 Salmon LJ stated common characteristics of trust documents, without a comprehensive definition. [41] It should I think be said of Re Londonderry's Settlement that the Court of Appeal gave protection to the trustees' considerations of the exercise of a discretion to appoint interest in the trust on the basis of acknowledgement that consideration started with the beneficiary having a right to disclosure. The fact that the beneficiary's entitlement depended on a favourable exercise of discretion did not influence this right. [42] In Randall v Lubrano (2009) 72 NSWLR 621, Holland J made a clear and emphatic statement of a beneficiary's right to know what the trust property is and how it has been and is being administered by the trustee. In that case the interest of the beneficiaries was discretionary, and all objects of the discretionary trust joined in seeking a remedy. I know from my having been in practice at the time that the judgment of Holland J. created a wide impression and dispelled resistance by trustees which it was not then unusual to encounter, although in retrospect it is difficult to see what its basis can have been; I see no encouragement for that view in Re Londonderry's Settlement. It is surprising that Randall v Lubrano was not reported at the time. [43] In Spellson v George (1987) 11 NSWLR 300 Powell J at 315F-316C stated his Honour's view of the law, and of the basis in principle of the law:
At the risk of being regarded as overly simplistic, it is as well to start with the fundamental proposition that one of the essential elements of a private trust, be it a discretionary trust or some other form of trust, is that the trustee is subject to a personal obligation to hold, and to deal with, the trust property for the benefit of some identified, or identifiable, person or group of persons: see, eg, Jacobs, op cit pars 108-111 at 8-9. It is, so it seems to me, a necessary corollary of the existence of that obligation that the trustee is liable to account to the person, or group of persons for whose benefit he holds the trust property, (see, eg Manning v FCT (1928) 40 CLR 506 at 509 per Knox CJ) and, that being so, the trustee is obliged not only to keep proper accounts and allow a cestui que trust to inspect them, but he must also, on demand, give a cestui que trust information and explanations as to the investment of, and dealings with, the trust property: see, eg, Re Tillott; Ford and Lee, Principles of the Law of Trusts (1983) at 404 et seq; Jacobs, op cit pars 1713 et seq; at 391 et seq; Pettit, Equity and the Law of Trusts, 3rd ed (1974) at 330 et seq. This being the essential nature of the position of a trustee, and the liability to account being an essential ingredient in it, it seems to me that it is inescapable that the cestuis que trust, or any one of the cestuis que trust, have, or has, a correlative right to approach the Court for its assistance in enforcing the personal obligation of the trustee, and, in particular, in enforcing the trustee's obligation to account.

[44] His Honour went on to state, with reasons and references to authority, his view that the same right is available to a person whose status is only that of a potential object of the exercise of a discretionary power. [45] Hartigan Nominees Pty Ltd v Rydge (1992) 29 NSWLR 405 related to the beneficiary's claim to see a memorandum of wishes provided by the instigator (not the settlor) of a discretionary trust for the use of trustees in exercising their powers. This case exposed the difficulties of identifying what are referred to as "trust documents". The beneficiary's interest was, as the object of a discretionary trust, potentially but not

Page 73 yet entitled if there should be a favourable exercise of the trustees' discretion. The solicitor for the trustees had given the explanation that no distribution could be made because "... there is no provision in Sir Norman's memorandum which would entitle the trustees to make any payment to you at this time" (at 408E). The facts were unlike those in Re Londonderry's Settlement in that there had been reference to the memorandum in an explanation given on behalf of the trustees. For reasons extensively stated, Kirby P (who dissented) did not regard Re Londonderry's Settlement as a decision which should be followed; the majority (Mahoney and Sheller JJA) did not take this view, although their reasons went far beyond a simple application of Re Londonderry's Settlement. The difficulty in the appeal and the division of opinion related to the application of the right of a beneficiary, including a discretionary beneficiary, to obtain information and inspect trust documents to the memorandum and to the trustees' discretionary decisions. Mahoney JA did not unqualifiedly endorse the extension of the right to all persons who are only possible beneficiaries under a discretionary trust or are one of a large number of possible beneficiaries (431E-432F), and discussed the difficulties of the limits of trust documents in this context (432F-433B). Mahoney JA's judgment contains a wide general and (I would respectfully say) orthodox survey of the law in this field; Sheller JA also made a wide survey. It should I think be said that the majority judgments do not depart from Re Londonderry's Settlement. Those judgments illustrate a number of difficulties which do not bear on the present case. [46] In my opinion judges at first instance in New South Wales should treat the majority judgments in Hartigan Nominees as authoritative. While not all matters susceptible of doubt are settled, the starting point, at which the beneficiary is entitled to see trust documents and have information about trust property, and that entitlement has a proprietary basis, is not open to question. The facts in the present case do not raise even the potential difficulties which might be thought to exist where the entitlement of the beneficiary is contingent or subject to a discretionary decision, or involve a decision of trustees which might raise a conflicting principle. [47] The subject under decision in Schmidt v Rosewood Trust Ltd was the appellant's claim for fuller disclosure of trust accounts and information about trust assets in which the appellant claimed discretionary interests or expectations in right of himself and of his deceased father. Under "Disclosure to discretionary beneficiaries: the recent cases" the Judicial Committee made a wide survey of case law, including New South Wales case law and (at 729 [52]) stated its general agreement with the approach adopted in the judgments of Kirby P and Shelley JA in Hartigan Nominees. The judgment of Kirby P, to which their Lordships referred at some length [52], was of course a dissenting decision and reached its conclusion on the basis of the beneficiary's right of inspection without examining or indeed referring to judicial decisions; the conclusion based itself instead on agreement with a view expressed by Professor H.A.J. Ford in Principles of the Laws Of Trust, 2nd ed (1990) which included this sentence (at 425): "The equation of the right to inspect trust documents with the beneficiary's equitable propriety of rights gives rise to unnecessary and undesirable consequences." The consequences referred to included doubts cast on the rights of beneficiaries who cannot claim to have an equitable proprietary interest in trust assets, such as the beneficiaries of discretionary trusts. This was, I must respectfully say, a slight basis indeed for discarding an established right of beneficiaries with vested interests to inspection of documents of such primary importance as the accounts of the trustees. A decision that all access to trust documents should be in the discretion of the court is a drastic solution to whatever problems might be perceived in supposing a proprietary basis for discretionary interests, and whatever problems may be perceived in delimiting which documents should be treated as trust documents and in protecting from access documents access to which involves some conflicting principle. Their Lordships alluded, twice but briefly, to the reasons given by Sheller JA which addressed difficulties relating to discretionary interests, not vested interests. [48] The views expressed in Schmidt v Rosewood Trust Ltd by the Privy Council on appeal from the Isle of Man, while they should be considered with respect, are not possibly a binding or authoritative source for a rule of law which would render the entitlement of the plaintiff in these proceedings to access the documents, to information, in short to accounts, a discretionary one: see Cook v Cook (1986) 162 CLR 376 at 390. There may be room for the view, on which the Privy Council acted, that such an entitlement is discretionary in the case of a beneficiary who is no more than the object of a discretionary trust and does not have the benefit of a favourable exercise of the trustee's discretion; the weight of opinion in New South

Page 74 Wales the other way on that issue is strong, but the plaintiff's position in the present case is even stronger as her entitlement is not discretionary but rather vested in interest. Their Lordships' conclusion at 734-735 ([66] and [67]) would make the beneficiary's right to seek disclosure of trust documents an aspect of the court's inherent jurisdiction to supervise, and where appropriate intervene in the administration of trusts. Although the reasons say that that right is "sometimes not inappropriately described as a proprietary right" it is plain that their Lordships did not treat the right as a proprietary right. [49] The history of Equity and the nature of its remedies mean that the treatment of equitable interests as proprietary, and the development of rules based on that treatment, can never be entirely logical or satisfactory; but if this is perceived as a problem, it is an inherent problem and should not be regarded as a basis for discarding a well-established rule. [50] An obiter dictum in the Privy Council about trust law in the Isle of Man has in my opinion very little claim to be followed at first instance in New South Wales where a different view has been accepted. The Privy Council does not exercise appellate authority over the courts of New South Wales, and its decisions made since its appellate power was abolished in 1986 have not had binding force in New South Wales. Still less have the Judicial Committee's obiter dicta. As with other decisions which are not binding, its claim to be followed depends upon the extent to which the views expressed are persuasive. [51] The opinion of Lord Walker does not to my reading identify any error in earlier opinion, or state any respect in which it might be said to be significantly unsatisfactory. No earlier judicial decisions adopting the basis on which the Privy Council reset the law were referred to, nor were any text writers. Nor to my reading were any significant policy considerations favouring departure from the previous rules set out; the only matter indicated was an opinion that the rule enounced was a better rule. It was not explained, with any significant reasoning, why it was a better rule. In my opinion it is not a better rule because it introduces discretion and promotes resistance and debate in substitution for a rule which is relatively concrete. The tendency will be that only the determined and litigious beneficiary will find out about his own affairs. Where there is a judicial discretion, there is room for litigious debate about the exercise of the discretion; there is no certainty on so elementary a matter as whether or not a beneficial owner is entitled to information about property in which the beneficial owner has an equitable interest. In the previous rule, in my interpretation Equity followed the law in treating as proprietary an equitable entitlement to trust property. Treating the equitable interest as proprietary brings with it an entitlement to information unless there is a conflict with some other principle which Equity must recognize, such as the principle protecting the trustee's discretionary considerations. Treating the entitlement to information as an aspect of the court's discretionary exercise of its supervising power over trusts is a departure from the relatively concrete concept of equitable interests in trust property which has been adopted for some centuries. [52] In Avanes v Marshall [2007] NSWSC 191 Gzell J after review of authorities, including recent authorities in Australia in which Schmidt reference has been made to, expressed the view at [15] that the approach in Schmidt should be adopted by Australian courts. I respectfully do not agree. It might be that the approach of Schmidt is appropriate where the interest of the beneficiary is no higher than those of the potential objects of a discretionary trust, although opinion in New South Wales is otherwise. However that may be, in the present case where the plaintiff's right is already vested in interest, it would be a departure from clearly established opinion in New South Wales not to treat the claim to information as based on a proprietary interest, or to withhold enforcement of it except so as to enforce some competing entitlement, such as that of the trustees considered Re Londonderry's Settlement, which required such departure. [53] On the facts of the present case there is nothing in the nature of a discretionary ground on which any withholding of the plaintiff's entitlement to information could reasonably be based. While I repeatedly sought in the course of argument to establish what discretionary ground was relied upon, nothing was referred to higher than Mrs Ellis' objection to any information about her affairs being given to the plaintiff, expressed to Mr Ellis some years ago before incapacity overtook her. This is in the nature of a claim of confidentiality, but it is not supported by any underlying reason of greater strength than her expressed wish that the plaintiff should not know her affairs. A person who accepts benefits under a trust of which there are other beneficiaries does so on the basis that other beneficiaries also have rights in the trust, including rights to information. I characterise what is put forward as a claim to privacy, and not as a claim to

Page 75 confidentiality; in substance nothing was advanced as a reason for the court to enforce Mrs Ellis' confidentiality by withholding the rights of some other person. There is no competing principle such as protection of the position of trustees in the exercise of discretion, which was protected in Re Londonderry's Settlement. [54] Notwithstanding my repeated enquiries counsel was not able to refer to any adverse impact on the interests of Mrs Ellis or of anyone else or any particular harm that would be done by giving the plaintiff the information she seeks. Counsel informed me that the information contained in the managing agents' documents relating to the maintenance which has taken place is not itself the subject of any claim that it should not be produced; but production to the plaintiff herself of those documents was resisted because they disclose Mrs Ellis's income, for which confidentiality is claimed. This is not a case where confidentiality relates to the interest of a third party. Mrs Ellis, when taking advantages under the trust, necessarily also incurs any disadvantage to her, actual or perceived, which arises out of administration of the trust. [55] On behalf of Mr Ellis it was contended to the effect that it was shown by communications in correspondence that the plaintiff's case was presented as justified by or based on a concern to see that the interests of Mrs Ellis are properly protected, that she receives income, what income it is that she receives and how her income is disbursed. It is clear that the plaintiff in correspondence by her former solicitor did put forward in strong terms a concern relating to Mrs Ellis's interests as the ground on which she claimed relief. However it is in my opinion plain, as discussion elsewhere in this judgment shows, that the plaintiff had a right herself to see the trust documents and obtain information about the trust asset. A wish to protect the interests of her mother is not a ground on which she could base a claim, but her claim is well based on her own interests, and the presence of the other asserted basis in correspondence does not justify resistance to her claim. Advance by the plaintiff of grounds which were unnecessary, or even quite wrong, in support of a claim which she has on other grounds cannot prejudice that claim or dispose the court against granting it on those other grounds. [56] Correspondence on behalf of the second defendant asserted readiness to give the plaintiff information about expenditures on maintenance of the block of flats:
We take the position that a beneficiary's entitlement to view estate accounts extends only to the interest the beneficiary has in relation to the estate. For instance a beneficiary who receives a specific legacy is not entitled to be given the accounts that relate to residue. Similarly our clients are willing to satisfy your client that her interest in remainder is maintained but will not provide details of the income and outgoings on the trust property to which the income beneficiary is entitled. Accordingly we will provide to you a statement from the managing agents acting out that there are no outstanding rates or taxes on the property, the report obtained from the structural engineer and the certification relating to the fire rating of the property. If your client requires a valuation of her interest, please confirm that she will meet the cost of obtaining it and that the provision of this information will satisfy your client's concerns.

[57] The plaintiff did not accept this limitation on the information to be given to her, either before or at the hearing. In my view there is no justification for limiting information to be furnished to the plaintiff in this way. Notwithstanding the position taken in that letter, it was maintained on behalf of Mr Ellis during the hearing, and in final submissions, to the effect that the plaintiff does not and cannot have any interest in aspects of management, including maintenance, because she as a remainderman has very limited rights of recourse against the trustee with respect to maintenance. [58] Whether or not such rights exist and whether or not the trustees have incurred any liability in respect of such rights, and the condition of block of flats, are questions which it is not necessary to consider fully and to answer for the purpose of disposing of Claim 1. In my view those questions should only be addressed and answered when and if the court is presented with a live issue relating to some clearly expressed and comprehensible basis upon which it is said that the trustees ought to be charged with some liability. Decision on the responsibility of trustees can only be addressed on a clear basis. An attempt to give answers in the abstract may fail to meet the difficulties presented by some actual attempted impeachment of the trustees, when and if one ever eventuates.

Page 76 [59] Mr Ellis's counsel contended that the present litigation is an exercise in futility because the plaintiff is not entitled to compel the life tenant or the trustee to repair the premises, let alone make a capital investment, and cannot compel the creation of a sinking fund. It would indeed be surprising if the plaintiff obtained an order compelling the trustees to take any such course, even more so, the life tenant; any judicial remedy is much more likely to take the form of imposing liability for some failure on the part of the trustees. [60] My Orders are:

8) 6) 4)

4) 4)
Order

Direct pursuant to UCPR 10.14 that the Summons be taken to have been served on the first defendant on 11 July 2006 being the date of the second defendant's appearance. Order pursuant to UCPR 7.10 that the second defendant be appointed to represent the persons other than the plaintiff interested in the trusts of the will of the late Harold Wilfred Wills Baker. Order that the second defendant forthwith provide to the plaintiff accounts for the years ended 30 June 1998 to 30 June 2005 of all moneys received and disbursed by him and by the first and second defendants or on behalf of him or them in respect of the assets of the trust established by Will of Harold Wilfred Wills Baker. Liberty to apply with respect to the production of trust documents and with respect to the claims in the Summons. Order that the second defendant pay the plaintiff's costs of the proceedings.

9) 7) 5)

5) 5)

Direct pursuant to UCPR10.14 that the Summons be taken to have been served on the first defendant on 11 July 2006 being the date of the second defendant's appearance Order pursuant to UCPR 7.10 that the second defendant be appointed to represent the persons other than the plaintiff interested in the trusts of the will of the late Harold Wilfred Wills Baker Order that the second defendant forthwith provide to the plaintiff accounts for the years ended 30 June 1998 to 30 June 2005 of all moneys received and disbursed by him and by the first and second defendants or on behalf of him or them in respect of the assets of the trust established by Will of Harold Wilfred Wills Baker Liberty to apply with respect to the production of trust documents and with respect to the claims in the Summons. Order that the second defendant pay the plaintiff's costs of the proceedings.

No appearance for the first defendant. Counsel for the plaintiff: R Winfield Counsel for the second defendant: S A Sirtes Solicitors for the plaintiff: Northside Law Solicitors for the second defendant: Teece Hodgson & Ward

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8 of 10 DOCUMENTS: Unreported Judgments Administrative Appeals Tribunal 37 Paragraphs

RE ELISABETH MURDOCH AND COMMISSIONER OF TAXATION - BC200708229


ADMINISTRATIVE APPEALS TRIBUNAL Downes J, President NT 2006/47 27-28 August, 21 September 2007 Re ELISABETH MURDOCH and COMMISSIONER OF TAXATION [2007] AATA 1791
TAXATION -- Income tax -- lump sum -- compensation for breach of trust -- life tenant and remainderman -- investment policy increased capital more significantly than income -- life tenant only had an interest in income -- payment on income account. (CTH) Taxation Administration Act 1953 ss 14ZZE, 14ZZJ Allied Mills Industries Pty Ltd v Federal Commissioner of Taxation (1989) 20 FCR 288; Boardman v Phipps [1967] 2 AC 46; Booth v Federal Commissioner of Taxation (1987) 164 CLR 159; Re Earl of Chesterfield's Trusts (1883) 24 Ch D 643; Federal Coke Co Pty Ltd v Federal Commissioner of Taxation (1977) 15 ALR 449; Federal Commissioner of Taxation v Dixon (1952) 86 CLR 540; Federal Commissioner of Taxation v Myer Emporium Ltd (1987) 163 CLR 199; GP International Pipecoaters Pty Ltd v Federal Commissioner of Taxation (1990) 170 CLR 124; Howe v Lord Dartmouth (1802) 7 Ves 137 ; 32 ER 56; Kelsall Parsons and Co v Commissioner for Inland Revenue (1938) 21 TC 608; Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378; Scott v Federal Commissioner of Taxation (1966) 117 CLR 514; Tindal v Federal Commissioner of Taxation (1946) 72 CLR 608

Downes J, President.
Summary [1] The taxpayer, Dame Elisabeth Murdoch, who has a life interest in the income of four trusts, was paid a substantial lump sum as compensation for breaches of trust by the trustees. Although the lump sum was paid out of capital, I have decided that it was received as income. The only entitlement of the taxpayer was an entitlement to income and the payment remained income, or compensation for lost income, though paid out of capital. Form of reasons for decision [2] These reasons for decision were originally "framed so as not to be likely to enable the identification of" the taxpayer in accordance with s 14ZZJ(2D) of the Taxation Administration Act 1953 (Cth), pursuant to a request made under s 14ZZE of the Act. Because the condition precedent to reasons being prepared in this

Page 79 form, namely, that "a notice of appeal has not been lodged with the Federal Court" (s 14ZZJ(2D)(b)), is no longer applicable, the reasons are now published in full. Facts [3] The taxpayer has a life interest in four trusts that were established in the 1930's In two of them she is entitled to the whole of the income. The taxpayer's son, Rupert Murdoch, is the sole remainderman. In the other two trusts the taxpayer was originally entitled to a defined share of income in conjunction with Mr Murdoch and other children. The children were the remaindermen. These two trusts were reorganised in the early 1990's The taxpayer and Mr Murdoch obtained the only life interests and Mr Murdoch became the sole remainderman. [4] Each of the trusts was settled by the taxpayer's husband. A representative clause setting out the taxpayer's interest is as follows:
THE trustees shall hold the trust fund IN TRUST to pay the income arising therefrom to the wife for life for her own use and benefit absolutely and upon the death of the wife IN TRUST as to both the capital and income of the Trust Fund for the son conditionally upon his attaining the age of twenty-five years.

Each trust contained an investment clause to the following effect:


Any funds in the hands of the Trustees for investment shall during the life of the Settlor be invested in such securities bonds stocks shares debentures or other investments as the Settlor shall in his absolute discretion direct and the Trustees shall if and whenever so directed by the Settlor sell and dispose of or otherwise realise any particular securities bonds stocks shares debentures or other investments in which the Trust Fund or any part thereof is for the time being invested and shall for the purposes of any such realisation if so directed by the Settlor take or join in taking any steps to wind up any company of or in which the Trustees hold stocks shares or debentures as part of the Trust Fund and from and after the death of the Settlor the Trustees shall either continue to hold any of the then existing investments or at their discretion shall call in and convert the same into money and with the like discretion invest the money arising thereby or otherwise in their hands for investment in the names of the Trustees upon some one or more of the securities authorised by any Statute for the time being in force in any State of the Commonwealth of Australia authorising the investment by Trustees of Trust Funds or upon the shares or debentures of any public industrial company which has been carrying on business in Australia for at least three years and which has paid up capital of not less than One hundred thousand pounds. During the life of the Settlor the Trustees shall not be entitled to call for a transfer into their own names of any of the property comprised in the said Trust Fund (whether as a result of investment or otherwise) which shall be in the name of the Settlor and such property shall unless the Settlor otherwise elects be left in his name.

[5] The trustees of the trusts changed over the years. For a time the Trustees Executors and Agency Company Ltd was the trustee. In 1983, the taxpayer, Mr Murdoch and Jack Kennedy became the trustees. In 1992, the taxpayer and Mr Kennedy were replaced by Actraint No 119 Pty Ltd. This company was associated with Mr Murdoch and Mr Kennedy. [6] During the life of the settlor the bulk of the assets of the trusts were shares in News Ltd, held through Cruden Investments Pty Ltd. After the death of the settlor the investments remained unchanged. During part of this period the taxpayer was a trustee. At all relevant times Mr Murdoch was the Chairman and Chief Executive Officer of News Ltd. [7] In 1994, a deed of release was entered into between the taxpayer, Mr Murdoch, Mr Kennedy and Actraint. Pursuant to the deed, the taxpayer was paid $85,087,176 in addition to her entitlement to the income of the trust. The Commissioner assessed the lump sum as a receipt of income. The taxpayer claims that it was a receipt of capital. [8] The taxpayer's case is that the lump sum represented compensation for the failure of the trustees to properly balance the trust investments so that they did not prefer capital gain (and the interests of the remainderman) over income (and the interests of the life tenant). The case appears to be put in a number of ways, but broadly it is said that the lump sum payment was made in accordance with the principles of

Page 80 Boardman v Phipps [1967] 2 AC 46. This operated to create a charge or constructive trust over the capital of the trusts from which the taxpayer received a capital sum. [9] I have concluded that the taxpayer's claim must fail and that the receipt of the lump sum was correctly assessed as income. The taxpayer's only entitlement under the trusts was to income. Any charge or constructive trust arising out of any failure of the trustees to properly administer the trust could only be compensation for lost income. This must be so, even if the amount of the lump sum was calculated by reference to the swelling of the capital value of the trusts' investments and not by reference to income not paid. Accordingly, the lump sum was received as income and not as capital. My detailed reasons follow. Deed of release [10] The Deed of Release and Agreement that led to the payment of the lump sum was executed by one person acting as attorney for each party. The signatures were witnessed by a different person. The deed contained the following recitals:

1.

The trustees of the Trusts from time to time since the death of the Settlor have followed an investment policy of investing the funds the subject of the Trusts almost exclusively in shares in companies, Cruden Investments Pty Ltd ('Cruden Investments') and Cruden Holdings Pty Ltd, which are not authorised trustee investments under Australian legislation relating to trustees (such investment policy being referred to below as the 'Investment Policy'). Dame Elisabeth has claimed that:

1.

1.

the pursuit of the Investment Policy by the trustees of the Trusts:

1. 2. 2. 1. 1.

has not given rise to any exceptional increase in income of the Trusts but has greatly increased the value of the corpus of the Trusts; and involved significant risk for the beneficiaries of the Trusts, which risk was not properly rewarded in the case of Dame Elisabeth to the extent that she only had an income interest under the Trusts;

in pursuing the Investment Policy, the trustees of the Trusts from time to time have since the death of the Settlor breached their trust duties to Dame Elisabeth as a life tenant; Mr Murdoch, a man generally regarded as being of outstanding ability and force of personality with an extraordinary record of business success, as a trustee of the Trusts and holder of the whole of the remainder interest in the Subject Trusts, had substantial responsibility for such breaches of trust since May 1983 because he was pursuing goals not properly goals of the Trusts, but which goals required the Investment Policy to be pursued and inter alia had the effect of improving Mr Murdoch's financial position as beneficiary in remainder under the Subject Trusts; and that in the premises, a constructive trust has arisen in respect of eighty per cent or more of the beneficial interest in the assets of the Subject Trusts, constituting the advantage to Mr Murdoch of the Investment Policy having been pursued in lieu of a more appropriate investment policy, and/or Dame Elisabeth has the benefit of a charge over the assets of the Subject Trusts which Dame Elisabeth is not entitled to be paid as income of the Subject Trusts accompanied by a right to have sufficient of the corpus of the Subject Trusts sold to compensate Dame Elisabeth for the breach of trust and/or to ensure that the benefit of such advantage is made over to her and does not flow to Mr Murdoch.

1.

5 1.

The Current Trustees (including Mr Murdoch) and Mr Kennedy do not, and Mr Murdoch as beneficiary in remainder under the Subject Trusts does not, admit any such breach of trust or the existence of any such constructive trust, or charge, or right of sale. With a view to avoiding unnecessary disputation and any need for litigation, however, the Current Trustees (including Mr Murdoch) and Mr Murdoch as such beneficiary in remainder are desirous of compromising the claims made by Dame Elisabeth.

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1.

It has therefore been agreed that Dame Elisabeth, as the life tenant under the Subject Trusts, having shared in the risk of investing in the investments of the Subject Trusts and in consideration of her releasing:

2. 2.

The Current Trustees and any former trustees under the Trusts from any claims by her against them for breach of trust or otherwise in relation to following the Investment Policy in relation to the investments of the funds of the Subject Trusts and of the other of the Trusts; and The assets of the Subject Trusts and the other of the Trusts (being assets which Dame Elisabeth is not entitled to be paid as income of the Trusts) from any claims Dame Elisabeth has or may have upon or in respect of them other than her right to be paid a proportion of the undistributed current income and the future income of the Subject Trusts and any interest she may have in the capital and income of the other of the Trusts,

6
should be entitled to the following:

1iii) 1iv)

that the ordinary shares in Cruden Investments (the 'Cruden Investments Shares') comprising the assets of the Subject Trusts should be in whole or in part realised (by way of sale of some of such shares or partial return of capital on all of such shares to raise $85,087,176 in Australian currency; and that such $85,087,176 be paid to Dame Elisabeth or as she may direct as the absolute property of Dame Elisabeth to deal with as she in her full and complete discretion may determine.

[11] The operative parts of the deed contained covenants by the taxpayer and the other parties:

2.

LIFE TENANT RELEASES, AUTHORITIES AND REQUESTS

2.

Subject to the other provisions of this deed, Dame Elisabeth, in her capacity as the Life Tenant, hereby releases and discharges each other party hereto from any claims, proceedings, obligations to account and other liabilities for or in relation to (including without limitation any loss arising to or profit of or other benefit to any other party hereto in respect of) any or all of the following which, had this deed not been entered into, such party would have had against such other party or such other party may have had against such party as the case may be:

2. 2. 2. 2.

the pursuit of the Investment Policy in relation to the investment of the funds of the Trusts and the failure of the Trustees at any time and from time to time to consider pursuing to pursue another policy or otherwise to realise, convert and reinvest the funds of the subject of the Trusts or to consider doing so; any breach by the Trustees of the duties owed by the Trustees to the beneficiaries under the Trusts. any right of action whether at law or in equity, Dame Elisabeth has or may have against Mr Murdoch as a beneficiary of any of the Trusts in relation to any of above; and any right of action Dame Elisabeth has or may have upon or in respect of the Trust assets other than her right to be paid a proportion of the undistributed current income and the future income of the Subject Trusts and any interest she has or may have in the corpus or income of the other of the Trusts according to the express terms of the documents creating or recording the terms of the Trust.

3. 2.

Dame Elisabeth hereby authorises and requests the Trustees to continue to carry on the Investment Policy and undertakes not to bring any claims or proceedings against any of the Trustees in respect thereof.

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7 3.

TRUSTEE UNDERTAKINGS

The Current Trustees hereby undertake:

2a) 2b) 8

promptly to raise the Settlement Amount by selling some of the Cruden Investments shares or participating in a reduction and return of capital by Cruden Investments on and in respect of the Cruden Investments Shares; and to pay to Dame Elisabeth the Settlement Sum on the Settlement Date.

1.

REMAINDERMAN REQUEST AND AUTHORITY

Mr Murdoch, as beneficiary in remainder under the Subject Trusts, requests and authorises the Current Trustees to observe and perform their undertakings in cl 3 hereof. [12] The preparation and execution of the deed was preceded by two opinions by a Queen's Counsel as to whether the taxpayer had any claim arising out of the way the trusts had been administered. It is not clear to whom the Queen's Counsel was giving his opinion. The solicitor who instructed him did so orally. He had acted for Mr Murdoch from the late 1970's to the late 1990's [13] The evidence includes an affidavit by the same solicitor, filed on behalf of the taxpayer. An Annex to the affidavit is a memorandum he received from overseas lawyers, as follows:
If Dame Elisabeth has a valid claim under Australian Law with respect to the "Power to Contain Conversion", because she was not receiving a fair current return, Rupert would be obligated to act together with the other trustee and correct the situation by making a distribution to Dame Elisabeth. A distribution of this type made by the trustees to bring the trust into compliance with Australian law would not be construed to be a gift made by Rupert under United States law.

[14] The Queen's Counsel was instructed that the dividend yield of the public company shares had "been very low relatively to the earnings of blue chip shares in industrial companies quoted on the Stock Exchange, though there has been a considerable rise in the value of those shares". He was further instructed that "the result has been that Dame Elisabeth Murdoch has received much less income in virtue of her life interest than she would have done had the Trust Fund been differently invested". The Queen's Counsel considered possible claims under the Rules in Howe v Lord Dartmouth (1802) 7 Ves 137; 32 ER 56 and Re Earl of Chesterfield's Trusts (1883) 24 Ch D 643 but decided neither was applicable. He then considered a possible breach of trust by failing to exercise the trustee's powers of investment in such a way as to hold the balance properly between capital and income. He reached the following conclusion (at 13):
Whether the various trustees are liable for breach of trust to Dame Elisabeth Murdoch is thus a difficult question. If they were, the quantum of compensation for that breach may be hard to calculate but in principle it would be the difference between what the income of the assets could have been had they been invested in a mix of blue chip shares and other authorised investments producing a reasonable income, and what Dame Elisabeth Murdoch actually received.

He further said that if the problem was to be treated as a breach of trust, a number of principles were applicable. One of these was that a court "might recognise a charge over the remainder interests to benefit the tenant for life to the extent to which she was disadvantaged". He went on (at 23):

Page 83
Alternatively, on the reasoning in para 254 [of Scott on Trusts (4th edition)], a court might hold that there was a constructive trust which could be vindicated by a sale of the property subject to the constructive trust (or, on the earlier analysis, subject to the charge): the proceeds of the sale could then be applied partly to compensate the tenant for life for past losses and thereafter reinvested on more appropriate securities. If the facts, on investigation, turned out to be of the type indicated above there would be good prospects that the breach of duty by the trustees, and by Mr Murdoch as beneficiary-trustee in particular, could lead to the remedy indicated -- a court-ordered sale of the shares with a view first to compensating Dame Elisabeth Murdoch for past breaches, and then to reinvestment of the fund in appropriate assets so as to achieve for the future a proper balance between the interests of those interested in the income and those interested in capital.

[15] It subsequently emerged that the opinion proceeded on a wrong view of the facts. The income received by the taxpayer was "well in excess of the gross income [which] could have been received had a 'typical' investment policy been applied". This was partly because the increase in the value of the shares over the years led to substantial income, even though the dividend yield was low when measured year by year. [16] The Queen's Counsel was asked to give a further opinion. That opinion included the following (at 2-3):
It is perfectly true that the investment policy which has been adopted has been extremely advantageous for the tenant for life in that it has produced for her a much higher actual income than the alternative. But it is a real possibility that the adoption of the policy was at various points a breach of trust induced by the remainderman. It may also be true that that remainderman had no intention of breaching the trust, or of causing loss, or of advantaging himself at the expense of anyone else in either an absolute or a relative sense. But where a trustee/beneficiary has made a gain in breach of trust, that gain is to be accounted for by him and held by him in trust for the other beneficiaries, even though the gain could not have been made by lawful means, and even though the conduct in question has caused the other beneficiaries to be better off than they would otherwise have been: Phipps v Boardman [1976] 2 AC 46. The breach of trust by the trustees in general and the trustee/remainderman in particular may lie in the adoption of the investment policy, or the maintenance of it without undertaking occasional review of it, in such a manner as not to hold the balance properly between capital and income, pursuant to the principles discussed on pp 11-13 of the opinion of 7 June 1994.

[17] It is not readily apparent why a barrister's opinion is pertinent to the resolution of the issues before me. However, there was no objection to the tendering of the two opinions and the parties made reference to them. Nevertheless, it is for me to determine whether the lump sum paid under the deed was received as capital or income. The opinions do provide some evidence of the circumstances surrounding the execution of the deed. However, they cannot assist in construing the deed in the absence of supporting evidence and submissions. What is clear is that both parties contend that the lump sum was paid and received in accordance with the terms of the deed. There was one point at which counsel for the taxpayer did contemplate that the payment might have been outside the purported intent of the deed, but the purpose of that submission was to show the taxation treatment that would follow. It was not made to support a case that the payment was not, in fact, made under the deed (Transcript 92-93). Governing principles [18] Whether a receipt of money is income or capital is determined by the character of the receipt in the hands of the taxpayer (Scott v Federal Commissioner of Taxation (1966) 117 CLR 514 at 526 per Windeyer J; GP International Pipecoaters Pty Ltd v Federal Commissioner of Taxation (1990) 170 CLR 124 at 136-137). [19] Where a taxpayer provides consideration, "the consideration will ordinarily supply the touchstone for ascertaining whether the receipt is on revenue account or not" (Federal Coke Co Pty Ltd v Federal Commissioner of Taxation (1977) 15 ALR 449 at 472 per Brennan J). Where the consideration is discharging a cause of action, the character of the cause of action determines the character of the receipt (Federal Coke at 472; Allied Mills Industries Pty Ltd v Federal Commissioner of Taxation (1989) 20 FCR 288 at 309). Compensation or damages generally acquire the character of that for which it compensates (Federal Commissioner of Taxation v Dixon (1952) 86 CLR 540).

Page 84 [20] In determining the nature of a payment under an agreement, both the agreement itself and the circumstances surrounding its execution, its operation and the receipt of the money in question must be examined (Federal Coke at 460 per Bowen CJ; Allied Mills at 309-310). [21] If a payment is received on revenue account, the position will not be altered merely because the source of the payment is capital, including the capital of a trust (Tindal v Federal Commissioner of Taxation (1946) 72 CLR 608, especially at 627 per Dixon J). Application of governing principles [22] The sole entitlement of the taxpayer under the trusts was to income. In principle, any compensation for a breach of trust would address a resultant loss of income. That is what the Queen's Counsel said in his first opinion. [23] The settlement deed did not discharge or vary in any way the taxpayer's entitlement to income from the trusts. Indeed, the taxpayer authorised and directed the trustees to continue the investment policy described in the recitals so that her income would continue to reflect that policy. It cannot, therefore, be said that the taxpayer was giving up an interest in capital as she might have been if she had surrendered her life interest in return for a lump sum payment. This case cannot be equated with the surrender of an annuity for a lump sum (cf Federal Commissioner of Taxation v Myer Emporium Ltd (1987) 163 CLR 199 at 218; Booth v Federal Commissioner of Taxation (1987) 164 CLR 159 at 174-176 , 178 and Kelsall Parsons and Co v Commissioner for Inland Revenue (1938) 21 TC 608 at 624). [24] The consideration supplied by the taxpayer for the lump sum payment is described in the recitals and specified in the operative part of the deed (cl 2). The terms of the release state that it is given by the taxpayer "in her capacity as the Life Tenant". The release relates to "claims, proceedings, obligations to account and other liabilities". The only claims the taxpayer might have had as life tenant were obligations to her in relation to her entitlement to income under the trusts. [25] The types of claim or obligations specified in the release related to:

2. 3. 4. 2.

The investment policy and the trustees' failure to pursue another policy; Breach of the trustees' duties to beneficiaries; Rights of action as a beneficiary; Rights of action in respect of assets other than the right to current and future income and any interest the taxpayer may have in corpus or income.

Categories 1 to 3 could only relate to the income paid to the taxpayer. Although category 4 contemplates rights in assets or corpus, the trust deed did not confer any such rights other than to secure her right to income. [26] The recitals to the deed assert that the trust investments were not authorised investments under Australian law. However, they were authorised by the trust instrument. The question was whether the trustees performed their duty to properly balance investments between the interests of the life tenant and remainderman. On that issue it is asserted that the investment policy "has not given rise to any exceptional increase in income of the Trusts but has greatly increased the value of the corpus of the trusts" and that the beneficiaries were not rewarded for suffering a "significant risk", in the case of the taxpayer, "to the extent that she only had an income interest under the trusts". It is further asserted that in pursuing the investment policy the trustees "breached their trust duties to Dame Elisabeth as life tenant". The remaining parts of the recital assert culpalibility on the part of Mr Murdoch and further assert that "a constructive trust has arisen ... constituting the advantage to Mr Murdoch". In addition, or alternatively, the taxpayer was to have "a charge over the assets ... which Dame Elisabeth is not entitled to be paid as income ... accompanied by a right to have sufficient of the corpus sold to compensate her for the breach of trust and/or to ensure that the

Page 85 benefit of such advantage is made over to her and does not flow to Mr Murdoch". [27] A number of matters seem clear. First, the payment was made under the deed in vindication of rights at law or in equity. Secondly, these rights were the rights of the taxpayer as life tenant. Thirdly, the rights arose out of the trustees' policy relating to the investment of the trust funds. Fourthly, the rights were associated with the absence of an exceptional increase in income and the assumption of a significant risk relating to the investments. Fifthly, the lump sum payment was made in compromise of the taxpayer's claims for compensation for breach of trust and to deprive Mr Murdoch of such advantage as he might have otherwise gained. [28] The circumstances surrounding the receipt of the sum are relevant (Federal Coke at 460, 477; Allied Mills at 309-310). A letter from the firm of the solicitor referred to above to the Australian Tax Office disclosed that, on the day the payment was received, approximately one third was transferred to a trust associated with the taxpayer, which used the money for gifts to family members and charity, and the balance was converted to foreign currency "for the purpose of making a gift to Mr K R Murdoch". Because these events relate to a time after the receipt of the money, I have not taken them into account in arriving at my decision. [29] It must be a rare case in which a life interest beneficiary is entitled to compensation for breach of trust which does other than compensate for lost income rights. If the lump sum payment in question was paid to compensate for lost income, the payment would be received on income account. To the extent to which the taxpayer claims that the payment was received on capital account merely because it was paid out of capital, that claim must fail. [30] The taxpayer places substantial emphasis on the principles established by Boardman v Phipps [1967] 2 AC 46 (following Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378). Emphasis is placed upon the reference to Boardman in the Queen's Counsel's second opinion. [31] Boardman, Regal and subsequent cases relate to very different factual circumstances to the present matter. Broadly speaking they relate to circumstances where trustees personally acquire assets which should have been assets of the trust. In Regal, directors acquired shares in a company which were to have been Regal's They did so for bona fide reasons. Yet they were held to be fiduciaries and were required to account for their profit on the shares. In Boardman, a solicitor to a trust and a beneficiary of the trust acquired shares in a company, which the trust had first considered acquiring, and used some information gained through their involvement with the trust in connection with negotiations. There was at least some disclosure to beneficiaries who did not oppose the transaction. The solicitor and beneficiary were held to have placed themselves in a fiduciary position and were required to account for their profit. In both cases, the court imposed a constructive trust. [32] It is, accordingly, easy to posit a case in which a person acquires shares which are impressed with a charge or constructive trust because of the person's fiduciary relationship. But that is a very long way from the present matter. The conduct proscribed in Boardman and similar cases is the taking of an asset by a fiduciary which is in reality a trust asset. What is said here is that the trust funds should have been invested in different assets. The remedy in a Boardman case is imposing a charge or constructive trust upon assets of the fiduciary in favour of the trust. Here, the remedy was the imposition of a charge or constructive trust on the trust assets in favour of a beneficiary. In Boardman no question of the entitlement of the beneficiary to the benefit of a charge or constructive trust arose. The "beneficiary" of the charge or trust was the original trust and not a beneficiary; certainly not a beneficiary with only a life interest in income. The statement that Boardman leads to a charge or trust over assets needs to be seen in this context. Obviously, that will be the case when an asset held by a fiduciary belongs to a trust. The fiduciary will be a bare trustee for the trust. The trust imposed will be a separate trust arising by operation of law and will not be some manifestation of the existing trust. When the assets subject to that separate trust are transferred to the original trust, they will become part of the original trust's assets, subject to that trust's terms. [33] It follows that Boardman does not assist the taxpayer. First, the conduct giving rise to the charge or trust is quite different. Secondly, no question of a charge or trust directly in favour of a beneficiary arises.

Page 86 [34] It was suggested during the hearing that, in cases of breach of trust like that posited here, the remedy is concerned not merely with compensation for loss but with depriving the fiduciary of any benefit obtained by the breach. On this basis, the charge would remove any profit element from the capital of the trust and confer that benefit on the other person with an interest. Where, as here, the only other person with an interest was a life tenant, that beneficiary would obtain a windfall outside any anticipated benefits. To the extent to which the argument was put, I think it must be rejected. First, it is contrary to principle. Secondly, there are no cases (including Boardman) which support it. Conclusion [35] The passages in the Queen's Counsel's first opinion suggest that any remedy for breach of trust flowing from improper exercise of the power of investment would reflect lost income. In that I think he was right. As compensation for breach of trust, the lump sum payment can only reflect lost income. Accordingly, the payment was received by the taxpayer on income or revenue account. [36] Because I have concluded that the lump sum payment is assessable income, I do not need to consider the alternative basis of the Commissioner's assessment that the receipt is subject to capital gains tax. The Commissioner's assessment was properly made and must be affirmed. [37] As agreed by the parties, I vary the assessment to exclude the amount of $6,900,026 previously assessed as a capital gain. Order

1. 1.

The Commissioner's assessment is affirmed in so far as it relates to income tax on the lump sum payment of $85,087,176. The Commissioner's objection decision of 20 December 2005 is varied to exclude the amount of $6,900,026 previously assessed as a capital gain from the assessable income of the applicant.

Counsel for the applicant: J W De Wijn QC with M Richmond Counsel for the respondent: A H Slater QC with J Hmelnitsky Solicitors for the applicant: Minter Ellison Solicitors for the respondent: Australian Government Solicitor

Page 87

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9 of 10 DOCUMENTS: Unreported Judgments SA 73 Paragraphs

IRONS v IRONS - BC200740701


District court of South Australia Reasons For Decision of J Millsteed DCCIV-07-74 23 January, 1 February, 14 May 2007 [2007] SADC 54
REAL PROPERTY Application for an order for time for removal of a caveat be extended until further order -application opposed by defendants -- where defendants' son owed plaintiff approximately $360,000 in child maintenance payments -- where defendants purchased unit for plaintiff to live in -- where plaintiff made capital improvements to the unit -- where defendants entered into a contract for the sale of the property -- where plaintiff lodged a caveat over the property claiming an estate or interest as beneficiary of a constructive trust or alternatively as a life tenant -- discussion as to authorities applicable to the application -- discussion as to authorities as to whether a constructive trust has been created. Held: Though plaintiff has a prima facie caveatable interest, balance of convenience favours the refusal of the application. Application refused. Real Property Act 1886 (SA) s 191(e), reffered to Whallin v Bailbart Investments Pty Ltd (1987) 47 SASR 198 ; Australian Broadcasting Corporation v O'Neill (2006) 229 ALR 457 ; Union Finance Pty Ltd and Others v Rateki Pty Ltd and Anor (No 2) [2007] SASC 11 ; Jakudo Pty Ltd v SA Telecasters Ltd (No 2) [1997] 69 SASR 440 ; Mushinski v Dodds (1985) 160 CLR 583 ; Baumgartner v Baumgartner (1987) 164 CLR 137 ; Windt v Carabelas (2002) 224 LSJS 124; Giumelli v Giumelli (1999) 196 CLR 101 ; Inwards v Baker [1965] 1 All ER 446 ; Vinden v Vinden [1982] 1 NSWLR 618 ; Milton v Proctor (1988) 4 BPR 9654 ; Re Sharpe [1980] 1 WLR 219; Jenke and Anor v Chaplin Unreported Judgment (SCWA) No 2034 of 1994 delivered on 27 October 1994; Pearce v Pearce [1977] 1 NSWLR 170 , discussed

Reasons For Decision of J Millsteed.


Introduction [1] This is an application by the plaintiff pursuant to s 191 of the Real Property Act 1886 (RPA) for an order that the time for removal of a caveat over land situated at Unit 3, 22 Tennyson St, Kurralta Park be

Page 89 extended until further order. The application is opposed by the defendants who are the registered proprietors of the property. The affidavits [2] On 17 January 2007 affidavits from the plaintiff and her solicitor William Sowden DeGaris were filed in support of the application. A further affidavit from Mr DeGaris was filed on or about 2 February 2007. On 31 January 2007 affidavits from the first defendant Raymond Irons, Brett Donald Williams and Bronte Halkett were filed on behalf of the defendants. The last of those deponents disputed certain aspects of the plaintiff's assertions. [3] On the hearing of the application, Mr O'Halloran, counsel for the defendants, properly conceded, in my view, that I must proceed on the basis that the factual assertions made by the plaintiff in her affidavit would be the findings of fact made by the court at trial. However, he submitted that I should ignore the second affidavit of Mr DeGaris because it is based on inadmissible opinion and hearsay. It is unnecessary to canvass the contents of the impugned affidavit. Suffice it to say that I agree with Mr O'Halloran's submission. [4] Accordingly, I will proceed on the basis of the plaintiff's assertions, as set out in her affidavit, and ignore the second affidavit of Mr DeGaris. I will also take into account the affidavit material filed on behalf of the defendants to the extent that it does not conflict with the plaintiff's assertions. Background facts [5] The relevant facts can be briefly stated. The defendants are the parents of the plaintiff's late husband Dean Irons. The plaintiff separated from Dean Irons in 1982 and divorced him in early 2002. He died in August 2002 in a plane crash. The marriage produced four children whose ages range from 27 to 33 years. It is not in dispute that the plaintiff and the defendants have enjoyed a good relationship over the years. [6] At the time of his death Dean Irons owed the plaintiff approximately $360,000 in child maintenance payments. In about 1995 the plaintiff instituted, through the Child Support Agency, proceedings against Dean Irons for the recovery of the child maintenance payments owed to her. The action included a claim against Irons Engineering Pty Ltd (IEPL) in which Dean Irons held an interest. The company was owned and controlled by the defendants. [7] After the proceedings were instituted the first defendant asked the plaintiff to terminate the action, expressing concern that he would financially suffer if the action succeeded. He promised the plaintiff that he would look after her and her children if she discontinued the proceedings. On the basis of this promise the plaintiff dropped the action. [8] In about mid 2002, the first defendant told the plaintiff that, because his son Dean had never looked after her, he was going to buy a property for her and the children. The plaintiff believed that he was honouring the promise which he had made in 1995. [9] On 23 September 2002, the defendants purchased the unit at Kurralta Park in their names. However, at the time of purchase the first defendant told the plaintiff that the unit was for her sole occupation and for her children when she did not wish to live there any longer. The first defendant further informed the plaintiff that the defendants did not purchase the unit in her name because they did not want any future partner of the plaintiff to have an interest in the property. [10] Since then the plaintiff has lived in the unit. She has not been required to pay rent and the defendants have paid all the rates and taxes on the property. However, the plaintiff has spent approximately $15,000 to $20,000 of her own money improving the unit. The capital improvements have included the installation of floating wooden floors and a dishwasher, carpeting the hallway and lounge room, paving the backyard and re-landscaping the rear and front gardens. During the plaintiff's occupation of the unit there have been a number of occasions when the first defendant has told friends and acquaintances, in the plaintiff's presence, that the unit was purchased for her exclusive occupation, and in the names of the defendants to prevent any

Page 90 future partner of the plaintiff acquiring an interest in it. [11] On 28 December 2006, the defendants entered into a contract for the sale of the unit for the sum of $275,000. The date of settlement has since passed. I accept the defendants' submission that they did not enter into the contract for the purpose of frustrating the plaintiff's claim. Earlier in the year IEPL went into liquidation. Both the first defendant and his wife received no financial return from the administration of the company. In the result, it became necessary for the defendants, who have both retired, to sell the property at Kurralta Park to fund their living expenses. The defendants only other assets are their family home -- a unit at West Lakes -- two motor vehicles (value not disclosed) and $7,000 in a bank account. The caveat [12] On 16 November 2006, about five weeks before the defendants entered into the contract of sale, the plaintiff (presumably because she discovered that the defendants intended to sell the unit) lodged a caveat over the defendants' property at Kurralta Park claiming:
an estate or interest as beneficiary of a constructive trust entered into on or about the 23rd of September 2002 in which the Caveatees are Trustees and the Caveator claims an interest in the land as a beneficiary presently entitled to the fee simple in the land or presently entitled to the exclusive use and occupation of the land as a life tenant pursuant to the terms of the constructive trust.

[13] On 4 January 2007, the Registrar-General served upon the plaintiff a notice warning the removal of the caveat pursuant to s 191 (e) and (f). The proceedings [14] On 17 January 2007, the plaintiff filed a summons seeking an extension of time for the removal of the caveat. On 23 January 2007, I made an order extending the time for the removal of the caveat until 1 February 2007 to enable full argument to take place before me. Also I granted the plaintiff leave to file an Amended Summons. [15] By her Amended Summons, filed on 31 January 2007, the plaintiff seeks an order that the time for the removal of the caveat be extended until further order, and a declaration that the defendants hold the unit upon trust for the plaintiff and that the defendants be estopped from denying that the plaintiff is the beneficial owner of the unit. [16] On 1 February 2007, I heard both parties and made an order extending the time for the removal of the caveat until the delivery of this decision. The Test [17] In Whallin v Bailbart Investments Pty Ltd1. Cox J held that the test for determining whether an order should be made extending the time for removal of the caveat is the same as the test for the grant of an interlocutory injunction, that is whether there is a serious question to be tried and, if there is, whether the order should be made on the balance of convenience. [18] Recently, in Australian Broadcasting Corporation v O'Neill2. the High Court by a majority (Gleeson CJ and Crennan J, Gummow and Hayne JJ) held that the relevant principles to be applied in determining applications for injunctive relief were those explained by the High Court in Beecham Group Ltd v Bristol Laboratories Pty Ltd.3. In Beecham, Kitto, Taylor, Menzies and Owen JJ, said that the court when faced with such applications needed to consider the following issues:4.
The first is whether the plaintiff has made out a prima facie case, in the sense that if the evidence remains as it is there is a probability that at the trial of the action the plaintiff will be held entitled to relief ... The second inquiry is ... whether the inconvenience or injury which the plaintiff would be likely to suffer if an injunction were refused outweighs or is outweighed by the injury which the defendant would suffer if an injunction were granted.

Page 91

[19] In Union Finance Pty Ltd and Others v Rateki Pty Ltd and Anor (No 2)5. Judge Lunn expressed the view that for extensions of time to remove caveats the "prima facie" rather than the "serious question to be tried" test is now to be used (together with balance of convenience). In my view, there is no significant difference between these expressions of the test provided they are applied in the manner explained by the majority in O'Neill. [20] Gleeson CJ and Crennan J after referring to Jakudo Pty Ltd v SA Telecasters Ltd (No 2)6. said:7.
As Doyle CJ said in the last-mentioned case, in all applications for an interlocutory injunction, a court will ask whether the plaintiff has shown that there is a serious question to be tried as to the plaintiff's entitlement to relief, has shown that the plaintiff is likely to suffer injury for which damages will not be an adequate remedy, and has shown that the balance of convenience favours the granting of an injunction. These are the organising principles, to be applied having regard to the nature and circumstances of the case, under which issues of justice and convenience are addressed. We agree with the explanation of these organising principles in the reasons of Gummow and Hayne JJ, and their reiteration that the doctrine of the court established in Beecham Group Ltd v Bristol Laboratories Pty Ltd should be followed. (my emphasis)

[21] Gummow and Hayne JJ explained:8.


[That] by using the phase "prima facie case", their Honours [in Beecham] did not mean that the plaintiff must show that it is more probable than not that at trial the plaintiff will succeed; it is sufficient that the plaintiff show a sufficient likelihood of success to justify in the circumstances the preservation of the status quo pending the trial. That this was the sense in which the court was referring to the notion of a prima facie case is apparent from an observation to that effect made by Kitto J in the course of argument.

[22] They went on to say that the strength of the probability required depends on the nature of the rights the applicant asserts and the practical consequences likely to flow from the order sought. [23] Gummow and Hayne JJ later observed:9.
When Beecham and American Cyanamid are read with an understanding of the issues for determination and an appreciation of the similarity in outcome, much of the assumed disparity in principle between them loses its force. There is then no objection to the use of the phrase "serious question" if it is understood as conveying the notion that the seriousness of the question, like the strength of the probability referred to in Beecham, depends upon the considerations emphasised in Beecham.

[24] So with those qualifications in mind there can be no objection to the continued use of the phrase "serious question to be tried". Caveatable interests [25] Section 191 of the RPA allows a person "claiming to be interested at law or in equity ... in any land" to lodge a caveat with the Registrar-General forbidding the registration of any dealing with that land. [26] Any existing interest at law or in equity, which is proprietary in nature, will support both lodgement and extension of a caveat.10. However, a purely personal or contractual right is insufficient.11. For example, a mere licence to use or occupy land creates no proprietary rights or interest in land and may be revoked by the licensor upon the giving of reasonable notice. Accordingly such a licence does not make any caveatable interest in land.12. The interest claimed by the plaintiff [27] In the present case the plaintiff does not assert any legal right to a transfer of the property to her.

Page 92 Indeed, she could not claim such a right because there is no agreement evidenced in writing to that effect. 13. Rather the plaintiff asserts an equitable interest in the property the basis of which has been described in several ways. [28] As earlier observed in the caveat the plaintiff claims, as the beneficiary of a constructive trust, an entitlement to the "fee simple in the land" and, in the alternative, a right to the "exclusive use and occupation of the land as a life tenant". In the Amended Summons, however, the plaintiff does not claim an interest in the land as life tenant, but seeks a declaration that the defendants hold the whole of the land upon trust for her and that the defendants be estopped from denying that she is the beneficial owner of the land. In her affidavit of 16 January 2007 the plaintiff asserts that she intends to bring an action claiming that the defendants hold the property upon a constructive trust for her for life and thereafter for the benefit of her children. [29] On the hearing of the application Mr Riggall, counsel for the plaintiff, agreed that there has been a lack of consistency in the descriptions of the plaintiff's claim. He put to me, as I understood his argument, that the plaintiff contends that she is entitled to the beneficial ownership of the property and, in the alternative, to an interest for her life, or for as long as she wishes to occupy the unit, and thereafter for her children and that a constructive trust should be imposed to recognise her interests. [30] As a matter of general principle the constructive trust is remedial in nature. It serves as a remedy which equity imposes regardless of actual or presumed agreement or intention to preclude the retention or assertion of beneficial ownership of property to the extent that such retention or assertion would be contrary to equitable principle.14. The remedy is not to be imposed in accordance with what the court thinks is just and fair.15. Rather, the foundation for the imposition of the constructive trust is that a refusal to recognise the existence of an equitable interest amounts to unconscionable conduct. The trust is imposed as a remedy to circumvent that unconscionable conduct.16. However, the use of the remedy depends on the person seeking relief establishing the existence of an equitable right.17. [31] In the present case the constructive trust sought is founded on the first defendant's promise that the plaintiff was entitled to sole occupation of the unit for life or for so long as she desired and thereafter for her children. On the basis of that promise the plaintiff has spent approximately $15,000 to $20,000 of her own money on capital improvements. The plaintiff contends that in those circumstances it would be unconscionable for the defendants to deny her beneficial ownership or a life interest in the property. The plaintiff maintains she has a prima facie case that it would be unconscionable for the defendants to assert their legal rights to the exclusion of these interests and that a constructive trust should be imposed to give effect to them. [32] Mr O'Halloran, counsel for the defendants, argued that the plaintiff has failed to establish the existence of an equitable interest in the property upon which a constructive trust could be founded. He submitted that the plaintiff may, at most, have a licence to occupy the unit for life, or for as long as she liked, and possibly an equitable estoppel that would entitle her to compensation in relation to the capital improvements made by her. He submitted that such an interest is less than a proprietary interest and cannot justify an extension of the caveat. Prima facie case [33] Has the plaintiff established an equitable basis for the imposition of a constructive trust? [34] The courts have shown a willingness to impose constructive trusts requiring the legal owner of land to hold the land on trust for another in circumstances where that other person has made contributions to the acquisition, maintenance or renovation of property pursuant to a joint endeavour or relationship which has failed in circumstances where blame cannot be attributed to either party. The two leading cases are the High Court decisions in Mushinski v Dodds18. and Baumgartner v Baumgartner.19. [35] In Mushinski a man and a woman who were living in a de facto relationship purchased property with the intention of building a house and restoring a cottage on the property. The property was conveyed to them as tenants in common. The woman contributed about $25,000 and the man about $2,500 to the

Page 93 purchase and improvement of the property. The court declared that the parties held their respective legal interests as tenants in common upon trust to repay each his or her respective contribution to the venture. [36] Deane J (with whom Mason J agreed) said:20.
Once its predominately remedial character is accepted, there is no reason to deny the availability of the constructive trust in any case where some principle of the law of equity calls for the imposition upon the legal owner of property, regardless of actual or presumed agreement or intention, of the obligation to apply the property for the benefit of another ...

[37] Deane J concluded that it was appropriate to impose a constructive trust in the circumstances of that case to give effect to the general equitable principle which restores to a party contributions which he or she has made to a joint endeavour which fails when the contributions have been made in circumstances in which it was not intended that the other party should enjoy them.21. [38] In Baumgartner the parties to a defacto relationship pooled their incomes for living expenses. They lived in a unit owned by the male partner. They sold the unit and purchased a house which they placed in his name. The house was purchased with the aid of a mortgage which was also in his name. The male contributed approximately 55 per cent of his income and the female approximately 45 per cent of her income to the pooled funds which were used to meet their expenses including mortgage repayments. When they later separated the man claimed that the land was his sole property. [39] The High Court held that the case warranted the intervention of equity and the imposition of a constructive trust. Mason CJ, Wilson and Deane JJ considered that the parties had pooled their earnings for the purposes of their joint relationship and for their mutual security and benefit. Their Honours went on to say:22.
The case is accordingly one in which the parties have pooled their earnings for the purposes of their joint relationship, one of the purposes of that relationship being to secure accommodation for themselves and their child. Their contributions, financial and otherwise, to the acquisition of the land, the building of the house, the purchase of furniture and the making of their home, were on the basis of, and for the purposes of, that joint relationship. In this situation the appellant's assertion, after the relationship had failed, that the ... property ... is his property beneficially to the exclusion of any interest at all on the part of the respondent, amounts to unconscionable conduct which attracts the intervention of equity and the imposition of a constructive trust at the suit of the respondent.

[40] The court concluded that the constructive trust to be imposed should declare the beneficial interests of the parties in the proportions of 55 per cent to the male and 45 per cent to the female. [41] Since Baumgartner there have been a number of cases where courts have imposed constructive trusts in favour of members of a relationship who have made financial contributions or other forms of contributions (such as the pooling of labour) to the resources of a relationship.23. However, what is common to these cases, and the High Court decisions in Mushinski and Baumgartner, is that the parties contributed financially or otherwise to a joint endeavour involving the acquisition, maintenance or renovation of property. The imposition of construction trusts in these cases were a remedial response to an application of the established equitable principle which restores to a party contributions which he or she has made to a joint endeavour. [42] By contrast in Windt v Carabelas24. the Full court upheld the trial judge's decision that there was no basis for the imposition of a constructive trust where the evidence failed to establish that contributions made by the mistress of a land owner were in pursuance of a joint endeavour. [43] In the present case the financial contributions the plaintiff made in the form of capital improvements to the property were not made in the context of, or for the purpose of, a joint endeavour. In the circumstances there is no basis for an application of the principles expressed in Mushinski and Baumgartner. [44] Is there any other equitable basis for imposing a constructive trust?

Page 94 [45] Mr O'Halloran submitted, and as far as I am aware he is correct, that apart from the joint endeavour cases, the only other cases in which the courts have constructed trusts to recognise beneficial ownership of property are those where a person has relied upon a representation as to the future acquisition of property and has suffered detriment as a result. [46] The leading case is Giumelli v Giumelli.25. There a son worked on an orchard property belonging to his parents. The parents owned the property under a partnership agreement to which he and his brothers were later admitted. He was promised a portion of the property for working without wages. He was later told that he could build a residence on the property and the residence would be his. A residence was then constructed on the property which was partly paid for by him and the balance by the partnership. When he married he was promised a portion of the property upon which the residence had been built provided he stayed on the property. After his marriage ended in divorce he chose a wife of whom his parents disapproved. He was told that he would have to choose between his wife and the property. He then instituted proceedings against his parents claiming a beneficial interest in that portion of the property that had been promised to him. [47] The High Court held that the son had acted to his detriment on the promise made to him and was therefore entitled to equitable relief. Prima facie that entitled him to an order for the creation of a conveyance of the promised portion of land to him under the terms of a constructive trust. However, the court considered that such an order would cause unfairness to one of his brothers who also lived on the property with his family. It was also inappropriate by reason of a pending action relating to the family partnership. The court considered that to avoid injustice to others and to avoid relief that went beyond what was required for conscientious conduct by the plaintiff's parents, it was appropriate to grant relief in the form of monetary compensation rather than an acquisition of title to land. [48] The case of Giumelli, and others like it, are far removed from the present case. Here there was no promise of ownership but rather a promise of sole occupation for as long as the plaintiff desired. Furthermore, it is difficult to accept that the plaintiff would have believed that ownership of the unit had been given to her when she was not required to pay the rates and taxes on the land. In my view there is no basis in equity upon which it could be said that the plaintiff was entitled to the beneficial ownership of the property. [49] Is there any other basis upon which the plaintiff could claim a caveatable interest in the property? [50] In Giumelli, Gleeson CJ, McHugh, Gummow and Callinan JJ, in their joint judgment, observed that the relief in the form of a constructive trust was akin to orders for conveyance made in Dillwyn v Llewelyn26. and Riches v Hogben.27. [51] Their Honours added:
In these cases, the equity which founded the relief obtained was found in an assumption as to the future acquisition of ownership of property which had been induced by representations upon which there had been detrimental reliance by the plaintiff. This is a well recognised variety of estoppel as understood in equity and may found relief which requires the taking of active steps by the defendant.

[52] The variety of estoppel to which their Honours were referring was proprietary estoppel.28. The application of this form of estoppel extends beyond cases like Giumelli. [53] Dal Pont and Chalmers29. provide the following explanation of the doctrine of proprietary estoppel:
Proprietary estoppel can operate to prevent an owner of an interest in property from asserting her or his rights against another party whom he or she has allowed or encouraged to deal with that interest, or act in relation to that property, as if the latter had rights to the said property. Traditionally, this form of estoppel was divided into two categories: where the representor encouraged expenditure on her or his property by some representation or benefit ("estoppel by encouragement")30., and where the representor acquiesced to the expenditure (which developed into "estoppel by acquiescence")31. The equity created by the expenditure in question could be a beneficial interest or it may be given effect by way of a charge or lien.

Page 95 [54] In my view, this form of estoppel could operate to prevent the defendants from asserting their rights against the plaintiff by reason of the fact that they had acquiesced to her expenditure on the property in circumstances where she had been led to believe by the first defendant that she had a right to occupy the property for as long as she desired. This is arguably sufficient to give rise to a proprietary interest even if the plaintiff's occupation of the unit was under licence as the defendants contend. [55] This view accords with several authorities dealing with expenditure by an occupant of land in circumstances giving rise to proprietary estoppel. [56] In Inwards v Baker32. the defendant was induced by his father to build a bungalow on his father's land and had expended money for that purpose in the expectation of being allowed to remain there. Following the death of his father the trustees of his father's estate sought to evict him on the basis that he merely had a licence to occupy the premises which they had revoked. The court of Appeal held that he was entitled to remain in the bungalow. [57] Lord Denning (with whom the other members of the court agreed) said:33.
We have had the advantage of cases which were not cited ... to the County court judge, cases in the last century, notably Dillwyn v Llewelyn ... and Plimmer v Wellington Corpn ... This latter was a decision of the Privy Council which expressly affirmed and approved the statement of the law made by Lord Kingsdown in Ramsden v Dyson ... It is quite plain from those authorities that, if the owner of land requests another, or indeed allows another, to expend money on the land under an expectation created or encouraged by the landlord that he will be able to remain there, that raises an equity in the licensee such as to entitle him to stay. He has a licence coupled with an equity ... Counsel for the plaintiffs put the case of a purchaser. He suggested that the father could sell the land to a purchaser who would get the defendant out; but I think that any purchaser who took with notice would clearly be bound by the equity ... It is an equity well recognised in law. It arises from the expenditure of money by a person in actual occupation of land when he is led to believe that, as a result of that expenditure, he will be allowed to remain there. It is for the court to say in what way the equity can be satisfied. I am quite clear in this case that it can be satisfied by holding that the defendant can remain there as long as he desires to use it as his home. (citations omitted)

[58] See also Vinden v Vinden.34. [59] But does the expenditure on improvements in land give rise to a proprietary interest? [60] In Milton v Proctor35. the court of Appeal (NSW) had occasion to consider whether the plaintiff had acted unconscionably in terminating a licence to occupy a cottage where the defendant had expended money on the land and cottage in the belief that he was entitled to occupy it for life. The trial judge's decision that it would not be unconscionable for the plaintiff to obtain possession provided compensation was paid to the defendant was approved. [61] The discussion by McHugh J of the principles governing licences to use or occupy land is germane to this case. [62] His Honour said:36.
The licence agreement itself created no interest in land and could be revoked by the plaintiff: Cowell v Rosehill Racecourse Co Ltd ... The possessory rights of a land owner cannot be renounced or altered by a mere contract . They continue to exist notwithstanding a contract made by the owner; for the contract operates only to impose obligations and does not prevent the exercise of rights arising from the property which the owner has in the land; Cowell v Rosehill Racecourse Co Ltd ... Hence the grant of a licence to go on land raises no equity against its subsequent revocation ... Of course, if revocation of the licence constitutes a breach of contract the licensee may obtain damages for the breach ... (citations omitted) ... However, if the licensor requests or permits another to expend money on the licensor's land under an expectation created or encouraged by the licensor that the licensee will be able to remain on the land, an equity is raised which entitles the licensee to stay: Inwards v Baker ... Thus in Vinden v Vinden Needham J held that there was an irrevocable licence where the defendant undertook to meet the financial obligations of his father in return for the right to live in his father's house: see also Morris v Morris ...;

Page 96
However, expenditure on improvements on land by a licensee to the licensor's knowledge does not by itself create any equity ...

[63] His Honour then considered what the position would be if the licensor conferred a right of entry upon his land and, although not actually inducing or encouraging the licensee's expenditure, knows that it is being incurred. His Honour then cited with approval Re Sharpe37. and the following passage from Browne -Wilkinson J:38.
In a strict case of proprietary estoppel the plaintiff has expended his own money on the defendant's property in an expectation encouraged by or known to the defendant that the plaintiff either owns the property or is to have some interest conferred on him. Recent authorities have extended this doctrine and, in my judgment, it is now established that, if the parties have proceeded on a common assumption that the plaintiff is to enjoy a right to reside in a particular property and in reliance on that assumption the plaintiff has expended money or otherwise acted to his detriment, the defendant will not be allowed to go back on that common assumption and the court will imply an irrevocable licence or trust which will give effect to that common assumption.

[64] McHugh J concluded:39.


Accordingly, I think that equity will prevent a licensor from revoking a licence during the period of the licence agreement if the licensee has expended money on land upon the common assumption that the licensee is to have the right to reside on that land. The equity created constitutes an interest in the land: Plimmer v Mayor etc of Wellington, above; DHN Food Distributors Ltd v Tower Hamlets London Borough Council ... Re Sharpe, above. The nature of the equity is measured by the extent to which equity will give the licensee protection against interference with the equity: cf Stern v Mc Arthur ... (my emphasis)

[65] The above passage supports the view that where a person has expended moneys in improving land proprietary estoppel may give rise to an interest in land, though something less than beneficial ownership. Such an interest would be sufficient to support a caveat. As earlier observed any interest in "equity ... in any land" is sufficient: s 191. [66] Indeed, in Jenke and Anor v Chaplin40. the facts of which are not far removed from this case, White J (Supreme Court of Western Australia) held, on the basis of the principles expressed in Inwards v Baker, that the defendant had a caveatable interest where he had expended moneys in the construction of a granny flat on the plaintiffs property in the belief that he and his wife would be entitled to remain in occupation of the flat for life. It is to be observed that in Pearce v Pearce41. Helsham CJ left open the possibility that the equitable interest of a woman occupying premises under an irrevocable licence was a sufficient basis for the lodgement of a caveat. [67] Though the point may not be free of doubt, I am of the view that there is a prima facie case that the plaintiff has a caveatable interest. It would be unconscionable conduct on the part of the defendants to evict the plaintiff in circumstances where she had expended moneys on improvements to the unit on the basis of a belief induced by the first defendant's representations that she had sole occupation of the unit for life. Even if she were not entitled to a share of the beneficial ownership of the property, and merely had a licence to occupy the premises for life, equity would prevent the defendants revoking the licence. The equity created constitutes an interest in the land. [68] For these reasons, I am satisfied that the plaintiff has a prima facie caveatable interest. Balance of convenience [69] In deciding whether the balance of convenience favours the plaintiff the court must consider the risk of doing injustice to the parties in either granting or refusing the application.42. [70] It is relevant to bear in mind that if the plaintiff were to succeed in an action against the defendants on

Page 97 the basis I have identified, it would be necessary for the court to consider a form of relief that gave sufficient recognition to the plaintiff's equity. In my view, it is more likely than not that the court would consider an order for monetary compensation rather than an order that prevented the defendants from selling the property or regaining possession of it.43. The market value of the property is approximately $260,000-$280,000 of which only a small proportion could be regarded as attributable to the capital improvements made by the defendant. Furthermore, it is necessary for the defendants to sell the property to raise money upon which to live. Apart from their home they have limited assets and very little money in the bank. [71] In these circumstances it cannot be said that the plaintiff has established that the balance of convenience favours her. Orders [72] Application for an extension of time for the removal of the caveat refused. [73] I will hear the parties as to costs. Counsel for the applicant/plaintiff: MR D RIGGALL Counsel for the defendant/respondents: MR A D O'HALLORAN Solicitor for the applicant/plaintiff: C E PARKINSON Solicitor for the defendant/respondents: KELLY & CO

1. (1987) 47 SASR 198 at 203 2. Union Finance Pty Ltd & Ors v Rateki Pty Ltd & Anor (No 2) [2007] SASC 11 at [7] per Master Lunn; Australian Broadcasting Corporation v O'Neill (2006) 229 ALR 457 at 478-480 per Gummow and Hayne JJ; 466 per Gleeson CJ and Crennan J 3. (1968) 118 CLR 618 4. Ibid 622-3 5. [2007] SASC 11 at 466 6. (1997) 69 SASR 440 7. (2006) 229 ALR 457 at [19] footnotes omitted 8. (2006) 229 ALR 457 at 473 9. (2006) 229 ALR 457 at 479 10. S Colbran and S Jackson (3rd ed 1996) at [5.1]; McMahon v McMahon [1979] VR 239; Re Pile's Caveats [1981] Qd R 81 11. Cowell v Rosehill Racecourse Co Ltd (1937) 56 CLR 605 12. La Martina v Penney [1968] SASR 411

Page 98

13. See s 29 of the Law of Property Act 1936 (SA) 14. Muschinski v Dodds (1985) 160 CLR 583, per Deane J at 614; Baumgartner v Baumgartner (1987) 164 CLR 137, per Mason CJ, Wilson and Deane JJ at 148-150 15. Muschinski v Dodds (1985) 160 CLR 583, per Deane J at 616; Baumgartner v Baumgartner (1987) 164 CLR 137, per Mason CJ, Wilson and Deane JJ at 148 16. Baumgartner v Baumgartner (1987) 164 CLR 137, per Mason CJ, Wilson and Deane JJ at 147-150 17. See Windt v Carabelas (2002) 224 LSJS 124; Morton v Morton [1999] SASC 368 18. (1985) 160 CLR 583 19. (1987) 164 CLR 137 20. (1985) 160 CLR 583 at 616-617 21. Baumgartner v Baumgartner (1987) 164 CLR 137 at 147-148 22. (1987) 164 CLR 137 at 149 23. See discussion of authorities in Bryson v Bryant (1992) 29 NSWLR 188, per Kirby P at 202-203; Parij v Parij (1997) 72 SASR 153; Green v Green (1989) 17 NSWLR 343; Miller v Sutherland (1990) 14 Fam LR 416; Re Sabri (1996) 21 Fam LR 213; Lloyd v Tedesco (2002) 25 WAR 360 24. (2002) 224 LSJS 124 Lander J at 133 25. (1999) 196 CLR 101; see also Morton v Morton [1999] SASC 368 26. (1862) 4 De GF J 517 at 523[45 ER 1285 at 1287] 27. [1985] 2 Qd R 292 at 362 28. See discussion of Giumelli v Giumelli by A Bradbrook, S McCallum and A P Moore, Australian Real Property Law (3rd Ed 2002) at [5.46] 29. G Dal Pont and D Chalmers, Equity and Trust in Australia (3rd Ed 2004) 30. Citing Dillwyn v Llewelyn (ibid) 31. Citing Ramsden v Dyson (1866) LR 1 HL 129 32. [1965] 1 All ER 446 33. [1965] 1 All ER 446 at 448-449 34. [1982] 1 NSWLR 618 35. (1988) 4 BPR 9654 36. (1988) 4 BPR 9654 at 9660 37. [1980] 1 WLR 219

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38. [1980] 1 WLR 219 at 223 39. (1988) 4 BPR 9654 at 9661 40. Unreported Judgment (SCWA) No 2034 of 1994, delivered on 27 October 1994 41. [1977] 1 NSWLR 170 42. National Bank Ltd v Zollo (No 3) (1995) 64 SASR 63 at 68 43. See Giumelli v Giumelli (1999) 196 CLR 101 at 113; Milton v Proctor (1988) 4 BPR 9654

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10 of 10 DOCUMENTS: Unreported Judgments NSW 35 Paragraphs

AVANES v MARSHALL - BC200701448


Supreme Court of New South Wales -- Equity Division Gzell J 3585/04 7 March 2007 Avanes v Marshall and Ors [2007] NSWSC 191
EQUITY -- Equitable Estates and Interests -- Life tenant under a testamentary settlement seeking inspection of documents in the possession of the trustees -- Documents passing between counsel and solicitors for the trustees and between the solicitors for the trustees and accountants -- Trustees claiming client legal privilege -- Life tenant suing trustees for alleged breaches of trust -- Whether Re Londonderry's Settlement [1965] 1 Ch 918 still good law -- Whether Schmidt v Rosewood Trust Ltd [2003] 2 AC 709 should be followed in Australia. EVIDENCE -- Client legal privilege -- Consent and Waiver -- Opinion of counsel made available to life tenant -- Whether withholding of documents passing between counsel and solicitors for the trustees inconsistent with the maintenance of confidentiality for legal advice. (NSW) Evidence Act 1995 (NSW) Uniform Civil Procedure Rules 2005 Adelaide Steamship Co Ltd v Spalvins (1998) 81 FCR 360; Armitage v Nurse [1998] Ch 241; Chen & Ors v City Convenience Leasing Pty Ltd & Anor [2005] NSWCA 297; CPT Custodian Pty Ltd v Commissioner of State Revenue (2005) 224 CLR 96; Crowe v Stevedoring Employees Retirement Fund [2003] VSC 316; Gray v Guardian Trust Australia Ltd [2003] NSWSC 704; Hartigan Nominees Pty Ltd v Rydge (1992) 29 NSWLR 405; Mann v Carnell (1999) 201 CLR 1; O'Rourke v Darbishire [1920] AC 581; Re Cowin (1886) 33 Ch D 179; Re Londonderry's Settlement [1965] 1 Ch 918; Rouse v IOOF Australia Trustees Ltd (1999) 73 SASR 484; Schmidt v Rosewood Trust Ltd [2003] 2 AC 709; Spellson v George (1987) 11 NSWLR 300; Telstra Corporation Ltd v BT Australasia Pty Ltd (1998) 85 FCR 152; Trevorrow v State of South Australia (No 4) (2006) 94 SASR 64; Yates v Halliday [2006] NSWSC 1346, cited

Gzell J.
Ex tempore [1] In the course of discovery, the first and second defendant trustees of a testamentary settlement claimed client legal privilege with respect to certain documents numbered 1 to 3 and 5 to 10.

Page 102 [2] The plaintiff challenged the claim on the principal basis that the documents were trust documents in which the plaintiff had a proprietary interest. Re: Londonderry's Settlement [1965] 1 Ch 918 was relied upon. Aspects of that case were over-ruled by the Privy Council in Schmidt v Rosewood Trust Ltd [2003] 2 AC 709 and I invited further submissions on the impact of that decision. [3] The general rule that a beneficiary has a right at all reasonable times to inspect trust documents is generally attributed to Re Cowin (1886) 33 Ch D 179. In that case a cestui que trust sought a declaration of entitlement to inspect all the deeds, papers and documents relating to the property subject to the trusts of the will. North J expressed the view at 185 that the plaintiff had a prima facie right to inspect the deeds because the cestuis que trust were the beneficial owners of the trust property. [4] Significantly, the general rule did not apply to documents concerning the reasons for the exercise of a trustee's discretion. [5] In Londonderry the trustees had determined to exercise their power of disposing of the capital of the trust thereby bringing a settlement to an end. A beneficiary sought copies of various documents related to that determination. On appeal, their Lordships expressed themselves in the alternative and the ratio decidendi of the case is not easy to discern. Harman LJ at 933 took the view that since trustees are not required to disclose their reasons for a decision, the documents in question should not be disclosed because they would reveal those reasons. However, his Lordship went on to posit a different basis for excluding such documents from disclosure. He said they were not trust documents and thus not documents in which the beneficiary had any interest. Danckwerts LJ at 935 expressed a similar view. The documents were not trust documents or, if they were, they should be excluded from disclosure as revealing the trustees' reasons. Salmon LJ at 937-938 also approached the problem from two points of view. First, if the documents were trust documents, those portions disclosing the trustees' reasoning should not be disclosed. Secondly, the documents were not trust documents to which the beneficiaries were entitled to access. [6] In O'Rourke v Darbishire [1920] AC 581 at 626-627, Lord Wrenbury put the right to information on the basis that a beneficiary with a proprietary interest in the trust had a right of access to trust documents as his documents. [7] In Australia, a different view was formulated. Spellson v George (1987) 11 NSWLR 300 concerned a father seeking information on his own account and on account of his children about settlements made by members of his recently divorced wife's family. Powell J expressed the view that a person who was but a potential object of the exercise of discretionary power could properly be regarded as a beneficiary for the purpose of the right to have the trust property properly managed and to have the trustee account for that management. [8] In Hartigan Nominees Pty Ltd v Rydge (1992) 29 NSWLR 405, a discretionary trust was settled with $10 by a friend of the instigator. The instigator greatly augmented the fund during his lifetime. The trust was in favour of eligible beneficiaries. That class was defined to include grandchildren of the instigator. The respondent to the appeal was a grandchild. The instigator signed a memorandum of wishes that he gave to the trustees. The grandson sought access to the memorandum. The majority of the Court of Appeal concluded that the document was not one the trustees were obliged to disclose to the beneficiary. Mahoney JA at 437 regarded the memorandum as directed to matters of administration of such a kind that the document was not, in the relevant sense, part of the property of the trust and also because it was likely to have been given upon a confidential basis. Sheller JA at 446 concluded that since the memorandum of wishes was not attached to the trust deed but delivered separately to the trustees, it was the intention of the instigator and of the settlor that it should remain confidential and the trustees were bound not to disclose its contents. In his dissenting judgment, Kirby P at 421-422 criticised the notion that a beneficiary's entitlement to trust documents was based upon a proprietary interest and adopted a view in academic writings that a trustee's duty of disclosure arose from the fiduciary duty to keep a beneficiary informed and to render accounts. Sheller JA at 444 said that an enquiry as to whether or not a beneficiary had a proprietary interest was: "if not a false, an unhelpful trail". [9] In Rouse v IOOF Australia Trustees Ltd (1999) 73 SASR 484, the appellants were investors in a managed investment scheme as beneficiaries of a trust of which the respondent was trustee. The trustee had

Page 103 commenced proceedings against the scheme manager. The appellants had sought the appointment of an inspector of the trust and sought disclosure to them of documents forming part of the trustee's brief to counsel in the proceedings it had instituted. The Judge at first instance took the view that the proceedings could be determined by the answer to a question of law: whether the mere fact that the appellants were beneficiaries of the relevant trust gave them a right to inspect the documents in question. In refusing access to the documents, the judge concluded that the mere assertion of their status as beneficiaries did not give the appellants the right to inspect the documents in question. The Full Court, in dismissing the appeal, found it unnecessary to determine the basis upon which disclosure was available for whether the beneficiary's right to access was founded upon a proprietary right or a fiduciary duty, it was not unqualified and confidentiality or legal professional privilege were circumstances in which a discretion to refuse inspection might arise. [10] In Schmidt at 729, the Privy Council rejected the proprietary interest theory and adopted the approach that the right to seek disclosure of trust documents was an aspect of the court's inherent jurisdiction to supervise and, if necessary, to intervene in the administration of trusts. Since that right was not confined to proprietary interests, the object of a discretion or a mere power might also be entitled to protection. Their Lordships went on to say at 729-730 that they were in general agreement with the approach adopted in the judgments of Kirby P and Sheller JA in Hartigan. Having concluded that the right to information depended upon the court's exercise of its inherent jurisdiction, Lord Walker of Gestingthorpe, who delivered the advice on their Lordships' behalf, stated at 734-735 that no beneficiary had any entitlement as of right to disclosure of any trust document:
However, the recent cases also confirm (as has been stated as long ago as Re Cowin 33 Ch D 179 in 1886) that no beneficiary (and least of all a discretionary object) has any entitlement as of right to disclosure of anything which can plausibly be described as a trust document. Especially when there are issues as to personal or commercial confidentiality, the court may have to balance the competing interests of different beneficiaries, the trustees themselves, and third parties. Disclosure may have to be limited and safeguards may have to be put in place. Evaluation of the claims of a beneficiary (and especially of a discretionary object) may be an important part of the balancing exercise which the court has to perform on the materials placed before it. In many cases the court may have no difficulty in concluding that an applicant with no more than a theoretical possibility of benefit ought not to be granted any relief.

[11] The consequence is that according to Schmidt, there is no longer a general rule that a beneficiary has a right to inspect trust documents that is subject to exceptions, notably concerning the reasons for the exercise of the trustee's discretion and confidentiality in third parties. In each case it is a matter for the Court to exercise its discretion by balancing competing interests. At 730, Lord Walker suggested that in Londonderry and more recent cases, including the Australian decisions of Spellson, Hartigan and Rouse, the courts have begun to work out in detail the way in which the court should exercise its discretion. [12] Schmidt has been referred to in Australia on a number of occasions: in Gray v Guardian Trust Australia Ltd [2003] NSWSC 704, in Crowe v Stevedoring Employees Retirement Fund [2003] VSC 316, in CPT Custodian Pty Ltd v Commissioner of State Revenue (2005) 224 CLR 96, in Yates v Halliday [2006] NSWSC 1346 and in Trevorrow v State of South Australia (No 4) (2006) 94 SASR 64. [13] In Crowe, a retired stevedore entitled to benefit under a formula that included as an element a classification base wage, sought information as to the trustee's increase of that element. Balmford J concluded that, however inappropriate, Londonderry applied in Australia and applied to a superannuation scheme. However, her Honour took the view that the information in question did not reveal the reasons for any decision of the trustee and should be provided. [14] It seems to me, however, that the approach adopted in Schmidt requires a reappraisal of Londonderry. For example, in discussing the balancing exercise that the court must undertake, Lord Walker highlighted the significance of prospective entitlement of an applicant to benefit under a trust, whereas in Londonderry it was assumed that access to trust documents was limited to beneficiaries with proprietary interests. Further, the decision in Londonderry proceeded on the basis that there is an entitlement to inspection of trust documents subject to exceptions, whereas the reasoning in Schmidt concluded that there is no right to

Page 104 inspection of trust documents and it is for the court to decide whether inspection should be granted by balancing competing interests. [15] In my view, the approach in Schmidt should be adopted by Australian courts. The decision should not be regarded as abrogating the trustee's duty to keep accounts and to be ready to have them passed, nor the trustee's obligation to grant a beneficiary access to trust accounts. But when it comes to inspection of other documents there should no longer be an entitlement as of right to disclosure of any document. It should be for the court to determine to what extent information should be disclosed. I propose to adopt that approach in determining this application. [16] The documents in question fall into two categories -- correspondence between the barrister and the solicitors for the trustees and correspondence between the solicitors for the trustees and accountants. [17] It is submitted that the balancing exercise required by Schmidt favours disclosure to the plaintiff, the life tenant under the settlement. The remainderman is the third defendant, the infant daughter of the plaintiff. The plaintiff has expended monies on the property and the trustees have sought advice as to how that expense should be reflected in the trust accounts. The life tenant has requested the trustees to acquire a more expensive property under a power to do so under settlement. If exercised, it will reduce the value of the remainderman's estate. There are also questions about the payment of taxes and whether the plaintiff's husband can take an interest in the property, if acquired. The substantive proceedings allege breaches of trust by the trustees. [18] The plaintiff submits that the documents should be made available for inspection because she sues for various breaches of trust and must overcome a defence of acquiescence or consent. It is submitted that there is no evidence of personal or commercial confidentiality nor of a conflict between the exercise of discretion in favour of the life tenant to the prejudice of the remainderman. It is submitted that the third defendant has adopted a submitting role to her mother and the plaintiff sues for their joint benefit. It is submitted that there is no evidence that documents 2 to 3 and 5 to 10 are other than accounting documents for which the estate appears to have borne fees. It is submitted that the balancing process must be determined on the merits and not by reference to procedural matters such as the requirements under the Evidence Act 1995. It is submitted that only documents that indicate the reasoning process of the trustees are to be withheld and documents upon which that reasoning process is based should be made available for inspection. [19] The trustees submit that the court should, in its inherent jurisdiction of supervision of the administration of trusts upon which the decision in Schmidt is based, protect the trustees' confidential dealings with the legal and accounting advisers. It is submitted that there is no evidence that the plaintiff is suing for the benefit of the third defendant. The third defendant is separately represented by a tutor and her interests are adverse to those of her mother. [20] The trustees have provided copies of the documents to the court for its inspection under the Uniform Civil Procedure Rules 2005, r 1.8 and submit that the court should make its own determination based upon its perusal of the documents. It is submitted that the documents are confidential and have come into existence for the benefit of the trustees for making determinations about the due administration of the estate and the creation of documents that may ultimately become trust documents. The legal opinion of counsel was accepted to be a trust document and was made available for inspection. [21] Having perused the documents I am of the view that the first document in item 1 is a confidential communication by barrister to solicitor for the personal guidance of the trustees and should not be disclosed. The other document accompanied the opinion of counsel and, again, was for the personal guidance of the solicitors and should not be disclosed. In my view the documents do not relate to the exercise of any discretion or power the trustees possess under the settlement. Having no relevance to any discretion or power, the interests of the trustees in keeping confidential communications between their solicitors and counsel outweigh any requirement of openness between the trustees and the life tenant. [22] In Armitage v Nurse [1998] Ch 241 at 253-254, Millett LJ said there are irreducible trust obligations, and at 261 he indicated that the result of one such obligation is that every beneficiary is entitled to trust accounts.

Page 105 [23] In my view, those principles are unaffected by the decision of Schmidt. But the documents numbered 2 to 3 and 5 to 9 are preparatory to the preparation of the trust accounts. They comprise requests for advice by the accountants of the solicitors on matters of law and advice by the accountants to the solicitors on matters of accounting affecting the presentation of the accounts and the presentation to the solicitors of draft accounts and explanations of how they were compiled. [24] In my view, these documents go to the deliberations of trustees. This includes the accountants' presentation of a reconciliation of work undertaken for consideration by the trustees in arriving at a decision as to what fees should be paid. Again for deliberation and not as part of the final accounts. [25] Since deliberations by the trustees precede their determination to have trust accounts drawn up, I see the balancing process as coming down in favour of protecting the trustees from scrutiny of their deliberations leading up to the drawing up of the accounts. That part of their administration should not become the subject of a fishing expedition by beneficiaries. [26] In my view, none of the documents is discoverable under the principle in Londonderry excluding from inspection the reasoning process of the trustees or under the balancing process enunciated in Schmidt. [27] With respect to the documents numbered 1, there is also a claim for disclosure under the Evidence Act 1995, s 122 (1). [28] Client legal privilege in court proceedings is set out in Div 1 of Pt 3.10 of the Evidence Act 1995. Section 118 excludes the adducing of evidence of confidential communications between client and lawyer. It provides, so far as is relevant for present purposes:
Evidence is not to be adduced if, on objection by a client, the court finds that adducing the evidence would result in disclosure of:

3a)

a confidential communication made between the client and a lawyer.

[29] Section 122 of the Evidence Act 1995 provides exceptions to this rule where a party consents to the adducing of the evidence, or the substance of the communication has been disclosed, or the document is used to refresh memory. So far as is relevant for present purposes, s 122 (1) is in the following terms:
This Division does not prevent the adducing of evidence given with the consent of the client or party concerned.

[30] In Adelaide Steamship Co Ltd v Spalvins (1998) 81 FCR 360 at 370-371 a Full Court of the Federal Court saw no reason for construing consent in s 122(1) of the Evidence Act 1995 as referring only to express consent notwithstanding the contract with s 122(4) where reference is made to express or implied consent. In Telstra Corporation Ltd v BT Australasia Pty Ltd (1998) 85 FCR 152, a majority of a Full Court of the Federal Court cited this observation and also concluded that the reference to consent in s 122(1) included the implied consent of an imputed waiver of privilege. Their Honours said at 164:
But, unless "consent" has a meaning more extensive than actual, voluntary consent, it is difficult to see what s 122(1) adds to the opening words of s 118. And it may be observed that if s 122 (1) of the Act is construed as being concerned only with intended or voluntary consent, Div 1 of Pt 3.10 of the Act will have effected a dramatic change to the pre-existing common law with respect to legal professional privilege".

[31] As I said in Chen & Ors v City Convenience Leasing Pty Ltd & Anor [2005] NSWCA 297 at [31], in my view that interpretation must be correct. Section 9(1) of the Evidence Act 1995 provides that the Act does not affect the operation of a principle or rule of common law or equity in relation to evidence in a proceeding to which the Act applies, except so far as the Act provides otherwise expressly or by necessary intendment. It would take more than the reference to implied consent in s 122(4) to exclude, by necessary

Page 106 intendment, implied consent from the reference to consent in s 122(1). [32] In Mann v Carnell (1999) 201 CLR 1 at [29], the High Court stated the principle of implied waiver in terms of conduct inconsistent with the maintenance of confidentiality:
Waiver may be express or implied. Disputes as to implied waiver usually arises from the need to decide whether particular conduct is inconsistent with the maintenance of the confidentiality which the privilege is intended to protect. When an affirmative answer is given to such a question, it is sometimes said that waiver is "imputed by operation of law" (eg Goldberg v Ng (1995) 185 CLR 83 at 95). This means that the law recognises the inconsistency and determines its consequences, even though such consequences may not reflect the subjective intention of the party who has lost the privilege."

Their Honours later said:


What brings about the waiver is the inconsistency, which the courts, where necessary informed by considerations of fairness, perceive, between the conduct of the client and maintenance of the confidentiality; not some overriding principle of fairness operating at large.

[33] It is submitted that the inconsistency arises with respect to the documents numbered 1 in that the opinion disclosed to the plaintiff is only as good as the instructions to counsel that gave rise to that opinion. [34] I have had the advantage that the plaintiff and the plaintiff's legal advisers have not had, of viewing the documents. The content of both documents have nothing to do with instructions to counsel and the inconsistency upon which the plaintiff based her alternative approach for disclosure of those two documents fails. [35] I dismiss the notice of motion. I order the plaintiff to pay the defendants' costs. I order that the defendants be entitled to reimbursement from the income of the estate for any difference between their costs and the costs recovered from the plaintiff. Order Application for inspection of documents refused. Counsel for the plaintiff: Mr C Bevan Counsel for the first and second defendants: Mr A Lakeman Solicitors for the plaintiff: Turner Freeman Lawyers Solicitors for the first and second defendants: Heidtman & Co Solicitors

---- End of Request ---Download Request: Tagged Documents: 11-20 Time Of Request: Friday, October 26, 2012

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