The High Court has dismissed an appeal against a decision of the New South Wales Court of Appeal on directors powers in the context of family trust dispute. In 1994, the directors of Nemeske Pty Ltd, a trustee company, resolved to make a final distribution of the trust monies to the beneficiaries, Mr and Mrs Nemes. That resolution was purportedly made pursuant to cl 4(b) of the trust deed, which provided that the trustee may ‘advance or raise any part or parts of the whole of the capital or income of the Trust Funds and to pay or to apply the same as the Trustee shall think fit for the maintenance, education, advancement in life or benefit of any of the Specified Beneficiaries …’. No money was ever paid, but instead a non-current liability of close to $4 million was created, eventually executed as a charge in favour of the Nemes, which stated that Nemeske Pty Ltd was indebted to them in the amount of almost $4 million, and would pay the money on demand from the Asset Revaluation Reserve. By the time both Mr and Mrs Nemes had died, the money was still unpaid. The appellants, who following the deaths of the Nemes and their daughter became the beneficiaries under the trust, sought a declaration that Nemeske was not indebted to Mr Nemes’ estate. The NSWCA dismissed an appeal against the trial judge’s refusal to make that declaration, holding that the 1994 resolution was within the directors’ powers under cl 4(b).
The Court dismissed the appeal 3:2 (French CJ and Bell J, Gageler J) with Kiefel J and Gordon J dissenting. French CJ and Bell J held that among the many ways of making an advancement for the beneficiaries which can be curtailed by the terms of the power conferred by the deed, here creating a debt in the trust accounts was one such acceptable means of ‘advancing’ or ‘applying’ the capital of the trust under the terms of cl 4(b) (see at [19]–[30]). The text of the resolution disclosed a clear intention to create a debt due to the Nemes of the amount shown in the accounts, and the entry in the accounts gave effect to that intention (at [32]). Gageler J focused on dismissing the appellants’ arguments against what he termed the two critical steps in the reasoning of the Court of Appeal: first, accepting the trial judge’s interpretation of the resolution, acknowledging that the resolution did not lead to any payment or change of ownership of property, and concluding nonetheless that the resolution would have been a proper exercise of the cl 4(b) power to ‘advance’ or ‘apply’ the funds, thus giving rise to an immediate unconditional equitable obligation to pay the Nemes; and secondly, going on to hold that implementing the resolution by recording the liability in the balance sheet was sufficient sufficient to give the Nemes a cause of action in common law against the trustee company (see at [90]–[92]). Gageler J rejected the appellants’ first argument that no resolution would be effective as an exercise of the cl 4(b) power without an intention to immediately alter the beneficial ownership of the trust assets ,on the basis that neither principle nor the terms of the deed supported confining the power in that way (see at [94]–[104]), and also rejected the appellants’ second argument, that the common law action for the recovery of the money could only arise where the trustee holds the assets in a ‘bare trust’, on the basis that nothing in the case law raised by the appellants excluded a common law liability also arising when the liability had been admitted by the trustee (see at [109], and at [105]ff).
Kiefel J in dissent held that neither the terms of the resolution, the circumstances around it, or the conduct of the trustee company afterwards supported the inference that the powers in cl 4(b) were intended to be exercised by the trustee (see at [48]ff), particularly because no property had been set aside that would amount to an ‘application’ of capital or income within the meaning of cl 4(b) (see at [56]–[71]), as demonstrated by the trust accounts (see at [37]ff). Kiefel J also emphasised the importance of looking to the trust records (at [88]). Gordon J, also dissenting, held that the trustee was not indebted to the estate of the Nemes, emphasising that there is a ‘real and radical’ difference between an asset and its value, and holding that the resolution did not deal with any capital of the trust funds themselves, but only involved the bookkeeping entry that merely reflect a change in the value of an asset: no was any money advanced or raised, or paid and applied, as required by the specific terms of cl 4(b) (see at [152]–[183]).
| High Court Judgment | [2016] HCA 11 | |
| Result | Appeal dismissed | |
| High Court Documents | Fischer | |
| Full Court Hearing | [2015] HCATrans 321 | 2 December 2015 |
| Special Leave Hearing | [2015] HCATrans 262 | 16 October 2015 |
| Appeal from NSWCA | [2015] NSWCA 6 | 11 February 2015 |
| Trial Judgment, NSWSC |
[2014] NSWSC 203 | 10 March 2014 |
Hi Martin, this is a 3:2 decision, as Kiefel J was also in dissent.
Martin, Justice Kiefel dissented in this case.
Regards
Ben
Hi both, thanks very much for that – not sure how I very stupidly managed to misread her Honour’s proposed orders (and was finding the reasoning a bit perplexing for allowing the appeal!). All fixed now.
We know from the judgement of the majority (apparently) that the trustee validly distributed $3,904,300 to Mr and Mrs Nemes, a sum ‘representing’ an unrealised capital gain in trust property, and that there is a legal debt or legal ‘debtor and creditor relationship’ created in the events which occurred.
Suppose the following later occurs in the order appearing:
(a) a further ‘accretion’ by way of unrealised capital gain of an additional $1m, arising merely upon a valuation of the trust property;
(b) distribution thereof by the trustee to discretionary object A with the same form of indebtedness for an amount representing that gain of $1m as in the case of the Nemes;
(c) on yet a subsequent valuation, some time later, an unrealised capital loss of $1m is perceived by the valuer and there is a write down of assets in the trust books accordingly (that is, back to the value at the time of the distribution to the Nemes); and
(d) later, the trustee winds up the trust and minutes, ‘No amount due to trustee for remuneration, or reimbursement otherwise — pay liabilities owing to beneficiaries (and there are no other creditors) — any residue to the Red Cross’.
Do the debts of $3,904,300 and $1m due respectively to the Nemes or their personal representatives, and to A or his representatives, (i) abate proportionately, or (ii) are the to be Nemes paid in full $3,904,300 with nothing available for A (and the $1,000 settlement sum going, I suppose, to the Red Cross or perhaps to A)? (Assume the book value of assets on the last valuation is realised.)
The strange mingling of legal and equitable interests and obligations contemplated by the majority simply makes this question impossible to answer with confidence. But it appears to me that the respective beneficial interests held in trust property by each of the Nemes and A respectively were so transient (or in the view of Gageler J perhaps, simply never existing) and so rapidly reduced to mere legal debts that these two amounts must abate proportionately.
If the minority view had prevailed, as trustee you would have to set aside and allocate amounts — somehow keep these separate and “in hand” such that they cannot be reduced to mere debts due to a number of beneficiaries and therefore subject to abatement when insufficient capital is realised come distribution day — at least not in the scenario described. Such is the significance of the division of the judges of the High Court in this instance.
Can’t help shaking my head at the majority’s decision in Fischer v Nemeske.
Gaegler J in the majority says at [90]:
‘Once it is accepted – as it was in In re Baron Vestey’s Settlement; Lloyds Bank Ltd v O’Meara and in Commissioner of Inland Revenue v Ward – that a trustee can “apply” trust property to the advancement of a specified beneficiary by resolving to allocate trust property unconditionally and irrevocably to the benefit of that beneficiary, it is difficult to see any reason in principle why such an unconditional and irrevocable allocation of trust property must take the form of an alteration of the beneficial ownership of one or more specific trust assets.’
Viscount Radcliffe in Pilkington v IRC [1964] AC 612 certainly saw things differently and said, OF COURSE, OF COURSE…:
“Of course, whenever money is raised [in order to advance it to a beneficiary] on on terms that it is to be settled on the beneficiary [he means as distinct from merely paying the money over absolutely], the money only passed from one settlement to be caught up in the other. It is therefore the same as a resettlement.”
And a resettlement must necessarily change beneficial interests otherwise there is no ‘re–‘ about it.
Of course, Viscount Radcliffe (as the majority would not doubt point out) was speaking of money in hand, not money as merely the index of an increase in the value of property. (An unrealised capital gain is not an accretion in the ordinary sense, or an accretion in any sensible sense, either, I would add.) So perhaps the majority have distinguished Pilkington so far as they need to.
Fischer v Nemeske involves a debt arising because of a distribution by deliberate act of the trustees by way of resolution. This the majority seem to think does not alter beneficial ownership in the trust property.
There is an alteration because the trust property must be charged with the debt (irrespective of any purported express charge).
CPT Custodian reminds us all of Griffith CJ’s prescience in rejecting the dogma that equitable ownership (or rather present entitlements and vested interests) must always be found somewhere in some beneficiaries. But there will be such interests readily and easily found in particular cases. It is unreal to say that the beneficiaries got by virtue of the distribution of the $3.9 million in moneysworth no beneficial interest in assets or particular assets.
They got at least a charge over the shares which comprised trust property. And that can be said without trying to resuscitate the encumbrance theory of equitable interests so conclusively rejected by writers like JE Penner or by virtue of the express encumbrance granted in Fischer. It is because the vicissitudes of the trust allow for no other rational view: it cannot be that the beneficiaries got out of the trustee’s distribution nothing but a bare legal right to recover a debt from the trustees who have no means to pay at the time of resolution except by recourse to all the assets of the trust (and nothing less). The trustees became barred from distributing to other objects by way of further debts granted or actual distributions any part of the trust assets (unless, I suppose, the trust property rose further in value).
If we can’t see the proprietary interest of the beneficiaries in the shares in Fischer then we’ve given up seeing beneficiaries’ proprietary interests in trust property as real rights in the aspect of title which counts in this context: the powers of trustees as legal owners to advantage others by paying over, putting in possession of, actually allocating…or charging…the trust property.
The CJ and Bell J at [28] remark:
“There is, however, more than one way of advancing and applying trust property to a beneficiary.”
True enough: and equity recognises each of these, when necessary to fulfil its doctrines, by raising an equitable proprietary right: here, as I would argue, an equitable charge over the trust property. Why necessary — otherwise the trustees would be free to distribute the trust property to other objects under the terms of the original settlement.
Martin, thinking further along these lines, I should perhaps say that it seems obvious that the minority’s reasoning and conclusions are right. But it has always seemed to me hopeless and pointless to make such an assertion about the decision of a final court of appeal at least until some years have passed! You always have to see what can be made of the majority reasons.
One thought, however, as follows: in the early law the distinction between a grant or conveyance and the incurring of an obligation was not clearly understood. Today we see a debt as clearly an obligation, but in the early law the creation of a debt was regarded as in the nature of a grant (Scott, ‘The Nature of the Rights of the Cestui Que Trust’, (1917) 17 Colum LR 269 at 271. The majority of French CJ and Bell J, and Gageler J, have (with respect) gone back to very old days when there is no clear distinction between conveyance and obligation-incurring debt ‘creation’.
It is only where the trustee cannot set up his trusteeship in defence that the beneficiary has an action in debt or to recover a liquidated sum legally from the trustee: where the money product of trust property is in hand or admittedly owing and the trustee has become a mere receiver (in the sense of being liable as on an action for money had and received). The trustee in Fischer’s case cannot pay the debt without engaging his powers as trustee (to raise money by selling or mortgaging assets), so he still has work to do as a trustee and should not be barred in any legal action by a beneficiary from pointing that out.
Perhaps by deed he’s made an admission of a sum owing. But as Gordon J points out it is a mere admission. There is no settled account or account stated with items on both sides set off against each other as if each were paid and a balance arrived at. And he cannot be a mere receiver on the reasoning of the majority because he has no cash in hand as a receiver with which to pay; that which he has not so much received, but had all along from the initial settlement — the shares — are not available in his hands as a mere receiver if the objects, the Nemes, have no interest therein other than as discretionary objects (or so I reckon!). Such interest as they have in the assets are too frail to support any such thing as the payment over of money.
I should stop fretting about the decision, however, I am sure that Professor Elise will set me straight in due course!
There is an interesting observation on the part of McCarthy J in Cmr of Inland Revenue v. Ward [1968] NZLR 1 at 30:
“I believe, too, that it is misleading to speak of the debtor-creditor relationship [arising out of the application of trust income in favour of specified beneficiaries]. The rights of the beneficiaries do not arise out of debt or contract. They arise out of the trusts created by the deed, and the beneficiaries are entitled to invoke the powers of the court by reason of a new title ‘consisting of the exercise of the trustees’s discretion in the infant’s favour.’ ”
This at least sounds orthodox and hard to quibble with, doesn’t it? One might accept that a common law debt arises if, after an equitable operation, there is nothing but an irreducible right recovery of an amount in hand payable over to an ascertained beneficiary. But the process hardly starts with an application of trust property or distribution which somehow creates debt: that is, which creates a debt in the sense of making it out of nothing and which merely has to be paid out of unascertained trust property. The benefit as applied by trustee has to come from somewhere and it must be sourced in the trustee’s power to dispose of trust property and the existence of trust power.
But it seems the core nature of the distribution is troublesome — at least to some. Turner J in CIR v Ward at 21 went to far as to say it was meaningless to speak of “3540 pounds out of the assets was made subject to the trust” [the trust created by application of income].
Yet Gageler J in Fischer says “an absolute beneficial entitlement to some part of a fund of property may be defined as an entitlement to be paid a sum of money out of the fund of property that is held on trust, irrespective of whether or not the assets within the fund are currently held in monetary form.”
Perhaps for Turner J the meaningless of it all comes about in this way. In respect of a certain trust you could well have the following: beneficiary A says I am entitled to Rosemount house for life according to the terms of the trust, beneficiary B says I am entitled to the bonus shares in ABC Ltd issued in 2013 which were appointed to me, beneficiary C says I am entitled to $10,000 accumulated for me in the NAB bank account over recent years, and beneficiary D says I am entitled to $10,000,000 distributed to me some years ago when the parcel of shares in DEF Ltd was worth that or may be more, and which is now practically valueless. Since (D says) my interest is not over any particular trust assets but indeed over the trust property generally; after all, I was simply given $10,000,000 as an “absolute entitlement” not some aliquot share in a parcel of securities or anything else, and it first in time, it is payable to me and may be charged proportionately over all trust assets.
There are particular passages which are hard to understand. The CJ and Bell J at [32]:
“In so doing [making the resolution about a particular quantum of money — note it is just a quantum or measure — not a particular fund or part of a fund — and making entries in accounting records], the Trustee adopted a mechanism which, without altering the ownership of the Aladdin shares, provided a basis for the application of the trust capital to Mr and Mrs Nemes by sale of the shares to meet the debt. The resolution and the entry in the accounts by creating a creditor/debtor relationship constituted an advance and application within the meaning of cl 4(b). The interest thus conferred on Mr and Mrs Nemes could be realised by the sale of the shares and remittance of the proceeds or by direct transfer of the shares to them.”
This passage sows confusion surely because:
(a) on the one hand it is said a “mechanism” [a much overused word] is adopted which provided “a basis” for the application of trust capital — yet the trustees presumably had no such power to provide for a basis or stepping stone or taking-off point for some future application of trust property. Are we to understand that providing “a basis for an application of trust property” amounts to the same thing as “paying or applying trust property to the benefit of beneficiaries?
(b) “The interest” so created in the beneficiaries could be realised by sale of the shares and remittance of the proceeds to the beneficiaries. Isn’t that later act — selling and remitting money — really the application? A beneficiary does not get one jot of maintenance, education, advancement or benefit out of someone resolving to be indebted to that beneficiary — not henceforth, anyway. As a father of teenage girls in private schools with know trustees including me in their surveyat all, I feel sure this is the bitter truht! (I suppose you might get interest received.)
(c) Also, the interest referred to by CJ and Bell J can be satisfied be transfer of the shares direct to the beneficiaries. What if they go down in value but there is a fair and reasonable prospect (in the opinion of the trustees) that they will in a foreseeable time return to their value as reflected in the asset revalution reserve, and likewise that they might well appreciate further still. Yet the specified beneficiaries, the creditors, are only owed a fixed sum. Does that not matter so long as there is no other beneficial interest in anyone? Mere discretionary objects don’t have an interest that counts here. Or do they? They are entitled to enforce due administration of the trust. Transfer of shares to a beneficiary entitled only to a fixed sum might not be proper administration in an environment where (say) there is real short term volatility or fluctuation, or at least that environment might make it very difficult for trustees or courts reforming administration to assess what proper administration demands. And after all — if the creditor/beneficiaries have no proprietary interest in the trust property, are they really in any different position to the discretionary objects waiting hopefully on the sidelines?
Martin, dude man, you haven’t moderated my comment of 17 May last.
Was I getting boring on the subject? Need to move on?
Sorry Kevin thought I had approved them all — not at all, keep on posting your views!