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 –). 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 ). 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 –). 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 –), 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 , and at 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 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 –), as demonstrated by the trust accounts (see at ff). Kiefel J also emphasised the importance of looking to the trust records (at ). 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 –).
|High Court Judgment|| HCA 11|
|High Court Documents||Fischer|
|Full Court Hearing|| HCATrans 321||2 December 2015|
|Special Leave Hearing|| HCATrans 262||16 October 2015|
|Appeal from NSWCA|| NSWCA 6||11 February 2015|
|Trial Judgment, NSWSC
|| NSWSC 203||10 March 2014|