Ability One Financial Management Pty Ltd and Anor v JB by his Tutor AB

Supreme Court of NSW|2021-10-22|Before: Lindsay J

sts in Australia (Lexis Nexis Butterworths, Australia, 8th edition, 2016) O R Marshall, "Deviations from the Terms of a Trust" (1954) 17 k 420 Category: Principal judgment Parties: First Plaintiff: PDC, a person incapable of self-management Second Plaintiff: DB, enduring attorney of the first plaintiff First Defendant: SM, trustee of a Special Disability Trust of which the first plaintiff is the beneficiary Second Defendant: NSW Trustee and Guardian Representation: Counsel: Plaintiffs: H Morrison First Defendant: RD Wilson SC Second Defendant: M Rice, solicitor

Solicitors: Plaintiffs: Turner Freeman Lawyers First Defendant: Coleman Grieg Second Defendant: NSW Trustee and Guardian File Number(s): 2021/00187583

Problems with the Proposal

There are several problems in finding a pathway to achievement of the parties' common objective.
First, because the trust deed constituting the Trust: (a) confers on the trustee a discretion in the application of trust property and income for the "care and accommodation" of the incapable person as "principal beneficiary" of the Trust; (b) makes no clear provision for determination of the Trust before the death of the principal beneficiary; and (c) then makes provision for other classes of persons (Donors to the Trust and special beneficiaries, if any, nominated by a Donor) to share in trust property, attention must be given to: (d) whether the principal beneficiary's interest in trust property can be described as an absolute, vested and indefeasible interest sufficient to allow her to terminate the Trust in accordance with "the rule in Saunders v Vautier" (1841) 4 Beav 115; 49 ER 282, assuming she has the requisite capacity to do so; and (e) if the principal beneficiary's interest in trust property falls short of an absolute, vested and indefeasible interest, whether, in the absence of any other person identifiable as having an interest in trust property, the principal beneficiary, the settlor and the trustee together constitute the entire range of persons entitled to call for the due administration of the Trust so as to invoke the rule in Saunders v Vautier.
Secondly, how does the Court deal with doubts about the principal beneficiary's capacity to make decisions about determination of the Trust in circumstances in which it is satisfied that she lacks capacity to manage her own affairs?
Thirdly, what, if any, jurisdiction (inherent or statutory) does the Court have to revoke or vary the Trust in light of the determination in Chapman v Chapman [1954] AC 430 (followed in Australia) that, save in exceptional circumstances, the inherent jurisdiction of the Court does not extend to a power to sanction a departure from the terms of a trust on behalf of an incapacitated person.

Pathways to a Solution

Three potential pathways to the parties' common objective are under consideration in this judgment. As they are all directed towards protective management of the incapable person's affairs by a "financial manager", an element they have in common is the making of orders for protected estate management under section 41 of the NSW Trustee and Guardian Act 2009.
The first pathway is a finding that the incapable person's interest in the Trust supports an entitlement to terminate the Trust by invocation of the rule in Saunders v Vautier, coupled with the appointment of a protected estate manager authorised and directed to act upon that entitlement on her behalf.
Because the intended outcome involves the appointment of a financial manager, it is not necessary to consider whether a person ostensibly appointed by the incapable person as her enduring attorney (under the Powers of Attorney Act 2005 NSW) has power to terminate the Trust on her behalf, a question canvassed in other jurisdictions as noted in Lewin on Trusts (Thomson Reuters, London, 20th edition, 2020), volume 1 paragraph [22-026] and volume 2 paragraph [53-016].
The second pathway is a finding that the Court has an inherent jurisdiction to authorise an arrangement for revocation or variation of the Trust (as a means of transferring management of the incapable person's affairs to a protected estate management regime) as an exception to the general rule, established by Chapman v Chapman, to the effect that the inherent jurisdiction of the Court does not extend to a power to sanction a departure from the terms of the trust on behalf of an incapacitated person.
The third pathway is a finding that the Court has, and should exercise, jurisdiction to approve the parties' arrangement pursuant to section 86A of the Trustee Act 1925 NSW, a recently enacted provision (based on the Variation of Trusts Act 1958 (Eng)) designed to confer on the Court the jurisdiction denied in Chapman v Chapman.

The Solution

After canvassing each of the potential pathways, that taken by the Court is the parties' preferred course, section 86A of the Trustee Act 1925.

THE TRUST AND PARTIES IN OUTLINE

The Trust was established for the benefit of the first plaintiff alone. Its purpose was protective of the first plaintiff alone. A clause in the trust deed provides that, in the application of trust property for the purpose of providing "reasonable care and accommodation" for the first plaintiff as principal beneficiary, the trustee is required, inter alia, "to ensure the interests of the Principal Beneficiary are to take precedence over any interest or expectancy as to net income or capital of any Donor or Special Beneficiary". Leaving aside a nominal sum ostensibly contributed by the second plaintiff as settlor of the Trust, the Trust was resourced entirely by a payment into the Trust of a legacy awarded by this Court to the first plaintiff, as family provision relief out of a deceased estate, under Chapter 3 of the Succession Act 2006 NSW. That payment is characterised in the trust deed as a contribution made by the Court as a "Donor". Although the trust deed provides for the possibility that "Donors", generally, might make a contribution to the trust fund established for the Trust, and stand to recover (or nominate a "special beneficiary" to receive) a proportion of the contribution left over on the death of the first plaintiff, no such contributions have been made beyond that nominally made by the Court.
By the terms of the trust deed, the settlor has no interest in the property of the trust during the term of the Trust. No third party "Donor" has made a contribution to the Trust such as to require a return of contributions upon determination of the Trust. The "person" nominated as a "special beneficiary" (ostensibly by the Court) to receive a final distribution of trust property upon determination of the Trust (assuming that to happen upon the death of the first plaintiff) is "the legal personal representative" of the first plaintiff.
The property of the Trust is unencumbered by an unsatisfied claim for indemnification by the trustee of the Trust, the first defendant.
The first plaintiff is a person who is incapable of managing her affairs within the meaning of section 41 of the NSW Trustee and Guardian Act 2009 (CJ v AKJ [2015] NSWSC 498 at [27]-[42]) and the principal beneficiary of the Trust.
Although the first plaintiff is incapable of managing her affairs, she is not without mental capacity. The concept of "capacity" is relative to the task to be performed: Gibbons v Wright (1954) 91 CLR 423 at 437-438. She has sufficient capacity to instruct her lawyers, and to participate, in these proceedings in company with the second plaintiff but without a tutor. She has a diagnosis of cerebral lupus which is presently controlled by medication, the day to day supervision of which she has entrusted to the second plaintiff as her carer. She is dependent upon his assistance in the performance of everyday functions. She is unable to manage anything other than small amounts of money. Left to her own devices, she is vulnerable to exploitation.
The second plaintiff is named in the Trust Deed as settlor. He has no interest in the ongoing management of the Trust, save to support the Trustee and the first plaintiff in promoting fulfilment of its protective purpose. He is a longstanding friend of the first plaintiff. He was ostensibly appointed by her as her enduring attorney under the Powers of Attorney Act 2003 NSW. He has joined with her in seeking his appointment as manager of her protected estate if a management order is made under the NSW Trustee and Guardian Act 2009 NSW, section 41. As the first plaintiff's carer, he receives a Commonwealth Government pension.
The first defendant is the current trustee of the Trust.
The second defendant is the NSW Trustee, a statutory corporation constituted under the NSW Trustee and Guardian Act 2009. It's functions include the supervision of managers appointed (by the NSW Civil and Administrative Tribunal ("NCAT") under the Guardianship Act 1987 NSW or by the Court, or the Mental Health Review Tribunal, under the NSW Trustee and Guardian Act) to manage the estate of a person who is declared incapable of managing his or her own affairs.
The Trust is now classified by the Commonwealth Government as a "private trust". A consequence of the Government's reclassification of the Trust is that an earlier entitlement of the first plaintiff to concessional treatment of her income and assets and a Disability Support Pension has been cancelled.
More particularly, the consequences of a failure on the part of trustees of the Trust to comply with (reporting) requirements of the Social Security Act 1991 Cth so that the Trust became "non-compliant" were that: 1. the Trust was reassessed as a "private trust" and the assets and income of the Trust were applied to the first plaintiff as "owner" of the Trust. 2. the assets of the Trust were assessed at a value which exceeded the pension assets test limit. 3. the Trust could no longer receive concessional treatment under assets and income tests. 4. the disability support pension paid to the first plaintiff was cancelled. 5. the operative provisions of the trust deed continue to limit the first plaintiff's access to the trust fund to expenditure approved by the Trustee for her "reasonable care and accommodation", not including "daily living costs or expenses … that do not relate to reasonable care and accommodation needs". 6. the first plaintiff has no access to funds to pay her ordinary living expenses, forcing her to be dependent on the second plaintiff, if not others, for sustenance.

SAUNDERS v VAUTIER

In Re Estate of BL (2006) 69 NSWLR 734 Windeyer J cautioned against the establishment of a trust for the benefit of an incapable person (using an award of compensation made to the incapable person) on terms describing the incapable person as the "principal beneficiary" and identifying other, "general beneficiaries". As his Honour observed, there should be only one beneficiary, that being the incapable person, the person entitled to the compensation. If that person dies, the trust fund should be held for his or her estate, and not at the discretion of a trustee. His Honour's observations do not quite match the terms of the plaintiff's Trust, but they provide an occasion to emphasise that the trust fund was intended to benefit only the first plaintiff and, in the absence of any contribution to the fund by others than herself, she is the only person beneficially interested in the fund.
Upon an assumption that the first plaintiff has the mental capacity to demand that all trust property be transferred to her, the terms of the trust deed are thought to offer an impediment to an application of the rule in Saunders v Vautier as a means of terminating the Trust. That is because there is a question as to whether the first plaintiff can be said to be absolutely, presently entitled to trust property in circumstances in which the ultimate beneficiary of the Trust is the legal personal representative of her deceased estate, not her personally.
In CPT Custodian Pty Ltd v Commissioner of State Revenue (2005) 224 CLR 98, the High Court of Australia recognised as the modern formulation of the rule in Saunders v Vautier the following statement in Thomas on Powers (1998): "Under the rule in Saunders v Vautier, an adult beneficiary (or number of adult beneficiaries acting together) who has (or between them have) an absolute, vested and indefeasible interest in the capital and income of property [of a trust] may any time require the transfer of the property to him (or them) and may terminate any accumulation".
At paragraphs [48]-[49] of the same judgment, the High Court approved the judgment of Kearney J in Sir Moses Montefiore Jewish Home v Howell and Co (No 7) Pty Ltd [1984] 2 NSWLR 406 at 410-411 in which is his Honour "treated the power to achieve immediate payment of the trust property as reposed in the entire range of persons entitled to call for the due administration of the trust in question".
In the current proceedings the only person who might realistically fit that description is the first plaintiff, or somebody duly authorised to represent her interests if she is held incapable of managing her own affairs. The support given to her in these proceedings by the second plaintiff and the first defendant completes the cast of persons who might be entitled to call for the due administration of the Trust if she is unable to do that on her own. No other person has an interest in the Trust. In my opinion, Saunders v Vautier is no impediment to achievement of the object all parties to the current proceedings seek to achieve.
If that opinion is correct, and (as anticipated) protective management orders are made under section 41 of the NSW Trustee and Guardian Act 2009 for management of the first plaintiff's estate, it would be open to the Court to make orders (under section 64 of the Act) authorising, and directing, the manager of her estate to terminate the Trust so as to bring the trust estate under management.

A PROPOSED ARRANGEMENT FOR VARIATION OR REVOCATION OF A SPECIAL DISABILITY TRUST

By their Summons, the plaintiffs claim relief to the following effect: 1. a declaration, pursuant to section 41(1)(a) of the NSW Trustee and Guardian Act, that the first plaintiff is incapable of managing her affairs; 2. an order, pursuant to section 41(1)(a) of the NSW Trustee and Guardian Act, that the estate of the first plaintiff be subject to management under the Act; 3. an order, pursuant to section 41(1)(b) of the NSW Trustee and Guardian Act, that the second plaintiff be appointed manager of the estate of the first plaintiff subject to the orders and direction of the NSW Trustee; 4. an order, pursuant to section 86A of the Trustee Act 1925, that the trust known as ["The first plaintiff's Special Disability Trust"] be varied by the insertion of a new clause which reads: "in the event that, in the opinion of the trustee, the protected person no longer satisfies the definition of 'severely disabled' for the purposes of section 1209N of the Social Security Act, or, in the event that a Special Disability Trust ceases to be compliant with the requirements of Part 3.18A of the Social Security Act, the trustee must, subject to arrangements being in place for the protection of the protected person that are satisfactory to the trustee, distribute the capital and income of the trust to the protected person Or on such terms as the Court sees fit." 1. alternatively, a declaration that the trustee is liable to distribute the whole of the trust property to the first plaintiff pursuant to the rule in Saunders v Vautier; and 2. further or other orders as the Court sees fit.
It is common ground between all parties to the proceedings that, the Trust having become non-compliant with the requirements of the Social Security Act, it no longer provides any practical benefit to the first plaintiff but, on the contrary, it unreasonably confines her access to trust assets for the payment of her ordinary living expenses. In practical terms, she relies upon the second plaintiff to pay her everyday expenses from his own resources and periodically to submit formal claims to the Trustee for reimbursement. She has no substantial wealth independently of the Trust.

THE NATURE AND EXTENT OF THE COURT'S INHERENT JURISDICTION

The question whether the Court's inherent, protective (parens patriae) jurisdiction, reinforced by the jurisdiction conferred on the Court by section 23 of the Supreme Court Act 1970 NSW, could achieve the parties' object requires engagement with Chapman v Chapman [1954] AC 430.
The first plaintiff's Special Disability Trust was established for her sole benefit. No other person has any, or any prospective, beneficial interest in trust assets otherwise than as an expectant beneficiary of her deceased estate, in circumstances in which she remains entitled to vary her testamentary arrangements or, should she lack testamentary capacity, the Court is able to authorise the making of a "statutory will" under sections 18-26 of the Succession Act 2006 NSW.
Notwithstanding the general tenor of Chapman v Chapman against any judicially sanctioned departure from the terms of a trust, in my opinion it is open to the Court, upon an exercise of its inherent jurisdiction, to order that the Trust be revoked in favour of a more effective, protective management regime. I say this for five reasons.
First, Chapman v Chapman recognises four classes of exception to the general rule that the Court's inherent jurisdiction over trusts does not empower the Court to authorise a departure from the terms of a trust. Although the case at hand does not fit neatly into any of the four classes, it does sit comfortably with them collectively. The first class concerns cases in which a court has effected changes in the nature of an incapable person's property. The second concerns cases in which a court has allowed the trustee of settled property to enter into some business transaction which was not authorised by the settlement. The third concerns cases in which a court has allowed maintenance out of income which a settlor or testator directed to be accumulated. Each of these exceptional cases finds reflection in the current application for a trust arrangement protective of an incapable person to be recast as a protective management regime. The fourth of the exceptional cases (those in which a court has approved a compromise) finds little reflection in the current case, save that the parties' proposal contemplates a parting of the ways between the first plaintiff and a trustee who may bear some responsibility for the Trust falling into non-compliance.
The existence and nature of the Court's exceptional jurisdiction is confirmed in standard texts (including Jacobs' Law of Trusts in Australia (Lexis Nexis Butterworths, Australia, 8th edition, 2016) at [17-05] and Lewin on Trusts (20th edition, 2020), volume 2, paragraphs [52-001]-[52-007]), and elaborated in O R Marshall, "Deviations from the Terms of a Trust" (1954) 17 Modern Law Review 420, in terms that do not require exposition beyond noting the antiquity of most authorities cited and a reluctance to embrace an expansive view of any of the exceptions. The existence of statutory jurisdiction to revoke or vary trusts, or to confer powers on trustees, has diminished any need to consider the operation of the inherent jurisdiction in a modern setting.
In re New [1901] 2 Ch 534 and In re Tollemache [1903] 1 Ch 457 and 955 are commonly cited in elaboration of the second class of exceptions. The first authority expresses the Court's jurisdiction in positive terms. The second cautions against an expansive application of it.
A convenient summary of the jurisdiction, taking both perspectives into account, is found in Lewin on Trusts at paragraph [52-001]: "The Court has inherent jurisdiction to authorise otherwise unauthorised acts of management or administration of the trust property where an emergency arises connected with the trust property. But this can only be done in a case where the emergency may reasonably be supposed to be one not foreseen or anticipated by the author of the trust, the trustees are embarrassed by the emergency, the consent of the beneficiaries cannot be obtained to the course proposed, and the emergency must be dealt with at once. …"
Secondly, although Chapman v Chapman was expressed in terms as applicable to an "idiot" or a "lunatic" as to an "infant" (to use traditional terms for incapable persons then in use), it dealt only with an application to approve a variation of a trust on behalf of infants, none of whom was identified as mentally incapable. The Court's assumption was that similar considerations apply to persons subject to an exercise of lunacy jurisdiction as apply to persons subject to an exercise of infancy (or wardship) jurisdiction, both of which heads of jurisdiction are sometimes called parens patriae jurisdiction because they have a common historical source of authority in the Crown.
As is recognised in Secretary, Department of Health and Community Services v JWB and SMB (Marion's Case) (1992) 175 CLR 218, both in the text of the High Court's judgment at 249-250 and in its adoption of the judgment of La Forest J in Re Eve [1986] 2 SCR 388; (1986) 31 DLR (4th) 1, the two heads of jurisdiction generally operate in the same way in modern times. However, differences may remain in so far as may be necessary to accommodate an incapable person's incapacity. The Court has a custodial jurisdiction over infants, but not adult incompetent persons: Re Eve at [1986] 2 SCR 408. The passage of time can generally be relied upon to cure the incapacity of an infant. In the fullness of time he or she will acquire the capacity to put an end to a trust (if necessary, in combination with other beneficiaries of full capacity) in reliance upon the rule in Saunders v Vautier (1841) 49 ER 282. A mentally incapable person may never acquire such capacity. An infant can generally look to a parent or guardian for maintenance and support. A mentally incapable person might lack anything comparable. Where a trust is established for the benefit of a mentally incapable person, in particular, the protective purpose of the trust may require that it be amenable to an exercise of inherent protective jurisdiction if the object of the trust is to be achieved.
Thirdly, the limits (or scope) of the Court's inherent, protective jurisdiction have not been, and cannot be, defined; the jurisdiction exists for the care of those who cannot look after themselves: Marion's Case (1992) 175 CLR 218 at 258-259. In transferring trust assets to a protected estate manager, the trustee would have the protection of a court order against any allegation of breach of trust, assuming the existence of a person with standing to make the allegation. Legal title to an estate under protective management resides in the protected person, not his or her manager: Ability One Financial Management Pty Ltd and Anor v JB by his Tutor AB [2014] NSWSC 245 at [166]-[175]. There may be a debate, when the Court's orders are made, about the respective benefits of a "trust regime" and a "protective management regime", but the Court's order would determine that debate.
Fourthly, the Court's inherent jurisdiction (preserved by section 22 of the Supreme Court Act 1970 NSW) is reinforced by section 23 of the Act, a provision not under consideration in Chapman v Chapman. Section 23 provides that "[the] Court shall have all jurisdiction which may be necessary for the administration of justice in New South Wales". It has been described as a source of the Court's protective jurisdiction additional to that conferred on the Court, upon its establishment, by reference to the office of the English Lord Chancellor: Re W and L (Parameters of Protected Estate Management Orders) [2014] NSWSC 1106 at [73]-[78]; Re AAA; Report on a Protected Person's Attainment of the Age of Majority [2016] NSWSC 805 at [22]-[26]; Fountain v Alexander (1982) 150 CLR 615 at 633.
Fifthly, if invoked as an alternative to a trust for the protection of an incapable person, the administrative regime governed by the NSW Trustee and Guardian Act for management of the affairs of a protected person approximates the kind of arrangements for restructuring a trust (business) that were accepted in Chapman v Chapman as exceptions to the general rule that the Court's inherent jurisdiction over trusts does not empower the Court to authorise a departure from the terms of the trust.
By analogy, even if the Trust could not be revoked by invocation of the rule in Saunders v Vautier by or on behalf of the first plaintiff, on this analysis the Court is able, by an exercise of its inherent jurisdiction, to authorise the trustee of the Trust to transfer all trust property to the first plaintiff in circumstances in which her estate is under protective management. This is not an unconstrained jurisdiction. It is governed by a need to give effect to the protective purpose of the Trust by an exercise of protective jurisdiction.
The family provision orders made in favour of the first plaintiff (for her maintenance, education and advancement in life, to paraphrase section 59 of the Succession Act 2006 NSW) took the form they did because the establishment of a Special Disability Trust, compliant with the requirements of the Social Security Act 1991 Cth, was perceived to be both protective of the first plaintiff and financially beneficial to her. But for the establishment of the Trust as a Special Disability Trust, the strong likelihood is that, in the ordinary course, a protected estate management regime would have been established under the NSW Trustee and Guardian Act 2009 NSW (rather than a trust regime) to manage her affairs. The legacy she received by way of a family provision order was substantially the whole of her wealth.
The Commonwealth Government's reclassification of the Trust as "a private trust", so that it lost its status as a Special Disability Trust and the first plaintiff lost her entitlement to fiscal benefits, was an unexpected, catastrophic event that deprived the Trust of its raison d'etre.
Deprived of the advantages of a compliant Special Disciplinary Trust, the complex administrative requirements of the trust deed, which continue to govern the first plaintiff's access to trust funds for her ongoing maintenance and care, became onerous for her (as beneficiary), the second plaintiff (as her carer) and the trustee. The Trust ceased to be an effective mechanism for the maintenance, education and advancement in life of the first plaintiff, and for management of her affairs generally.
A transfer of the management of the first plaintiff's interest in her non-compliant Special Disability Trust to a regime of protected estate management is likely to be of benefit to both the first plaintiff and her estate, and in the interests of all persons involved in or associated with management of the estate. An arrangement for such a transfer to take place can be said to be "necessary" if the protective purpose of the Court's family provision orders is to be served, and the subject of an "emergency" if by that is meant an unexpected event requiring urgent remedial action, factors characteristic of exceptions to Chapman v Chapman's general rule against court authorisation of a departure from trust terms.
The transfer of management of the first plaintiff's estate from a trust regime to a protected estate regime will change the nature of her property interest, from an equitable entitlement to a legal one, but it will not diminish the estate or leave her unprotected in its disposition. She will continue to enjoy it under a form of protective management, with a more flexible form of management and fewer restrictions on the availability of funds for her support.
A transfer of the management regime from a trust regime to a protected estate regime will not alter any rights of succession to the estate. Under both the trust deed and a protected estate management regime the first plaintiff remains entitled to make a will (if she has testamentary capacity) and the Court remains able to authorise the making of a statutory will (if she does not).

AVAILABILITY OF A SOLUTION IN A COMBINATION OF STATUTORY POWERS: TRUSTEE ACT 1925 NSW, SECTION 86A AND THE NSW TRUSTEE AND GUARDIAN ACT 2009 NSW, SECTION 41

Section 86A of the Trustee Act is available to achieve the parties' object in these proceedings because the Court is satisfied that the first plaintiff is incapable of managing her affairs and protective management orders are to be made affecting her before any order is made for revocation of the Trust. It is by virtue of orders being made under section 41 of the NSW Trustee and Guardian Act that her incapacity, for the purpose of section 86A(2)(a) of the Trustee Act, is put beyond doubt.
In circumstances in which the Court's orders will involve no diversion of property away from the first plaintiff, but will simply be directed towards enhancing protective management of her property for her benefit, there is no occasion for notice of these proceedings to be given to any person who is not already a party. Nevertheless, I note that, by a will dated 14 June 2016 the first plaintiff has appointed the second plaintiff as her executor and nominated him, her mother, her sister and her daughter as equal beneficiaries of her estate.

THE FIRST PLAINTIFF'S SPECIAL DISABILITY TRUST

The Trust was established by a Deed dated 12 January 2016 which named the second plaintiff as settlor and a Trustee since replaced by the first defendant. The sum settled on the Trust Deed was a nominal $10. The first plaintiff was identified as the "Principal Beneficiary" and the Trust was named after her. The law of NSW was identified as the law governing the terms of the trust. The terms of the Trust reflect those required by the Social Security Act 1991 Cth to attract the benefits of a Special Disability Trust.
The trust deed bears a "Note" in the following terms: "This deed is based on and incorporates the provisions of the Model Trust Deed for Special Disability Trust amended as at 4 December 2012 published by the Department of Social Service (Cth)".
The terms of the trust deed make no clear provision for the determination of the Trust before the death of the first plaintiff. The nearest the deed comes to that is a clause that provides for the "Duration of Trust" in the following terms: "The trust will end on the earlier of: 1. the date of death of the Principal Beneficiary; or 2. if assets are fully expended on the Principal Beneficiary, the date of such full expenditure; or 3. any earlier date as required by law."
Other provisions of the trust deed govern the distribution of unutilised trust assets upon the death of the Principal Beneficiary. In the events that have thus far happened, the death of the first plaintiff would see unutilised trust assets paid to her legal personal representative.
Neither the trust deed's definition of "the end date" nor its provisions governing a distribution of trust assets on the end date provides a mechanism for protection of the first plaintiff in the event of the Trust becoming non-compliant with the requirements of the Social Security Act 1991 Cth.
Although the Trust was established with a view to attracting benefits under the Social Security Act 1991, it cannot be characterised as involving "trusts affecting property created by [an Act other than the Trustee Act]" within the meaning of section 86A(3)(b) of the Trustee Act.
The Trust was established in the working out of orders made by the Court on 12 December 2014 in the determination of an application (under Chapter 3 of the Succession Act 2006 NSW) made by the first plaintiff for a family provision order affecting the deceased estate of her de facto partner. By virtue of section 72 of the Succession Act 2006, the Court orders took effect as if the provision made for the first plaintiff was made to her in a will or codicil of the deceased.
She was, incidentally, represented in the family provision proceedings by a tutor appointed for the purpose of those proceedings.
The Court's orders included an order (made under section 59 of the Succession Act 2006) that the deceased's executor pay to her, by way of provision from the estate of the deceased, the sum of $790,000.
That order was attended by two ancillary orders to the following effect: 1. Order, pursuant to section 77(3) of the Civil Procedure Act 2005 NSW, that the monies due to be paid to [the first plaintiff, as she now is] out of the estate of the deceased, be paid into court to be invested by the Court pending the establishment of [a] Special Disability Trust for the [first plaintiff] to be created in accordance with Division 1 of Part 3.18A of the Social Security Act 1991 Cth; 2. Order that, upon the [first plaintiff's] solicitor filing an affidavit confirming the establishment of the Special Disability Trust for the [first plaintiff] created in accordance with Division 1 of Part 3.18A of the Social Security Act 1991 Cth, and providing details of the account into which the monies are to be paid, the monies due to be paid to the [first plaintiff], shall be paid out of court and into the Special Disability Trust.
The provenance of the Trust distinguishes it from the forms of trust commonly encountered on an application for an order under the equivalent of the Trustee Act, section 86A. In many cases, courts exercising jurisdiction under such legislation emphasise the importance of according respect to the intention of the person (a settlor or a testator) who created the trusts. In this case, observations about the intention of the creator of a trust are best understood to be a call to have regard to the objective purpose served by creation of the Trust.
Be it an intention imputed to the deceased whose estate funded the Trust after its creation, or an intention imputed to the Court by reason of its family provision orders, the object of the Trust's establishment was to confer a financial benefit on the first plaintiff as a person who, by reason of incapacity was in need of protection.
Although the Commonwealth Government marked its cancellation of financial support for the first plaintiff by classifying the Trust as a "private trust", the Trust always bore that character. The distinction between a "Special Disability Trust" and a "(non-compliant) private trust" is an incident of the Government's internal administrative arrangements, not one governed by the general law of trusts.

The NSW Trustee and Guardian Act 2009 NSW

Text. Chapter 4 (sections 38-100) of the NSW Trustee and Guardian Act is entitled "Management functions relating to persons incapable of managing their affairs".
So far as is material, section 38 of the Act defines the following terms (with emphasis added): "estate of a person means the property and affairs of a person and, if only part of the estate of a person is under management under this Chapter, means only that part of the property and affairs of the person. managed person means a protected person, managed missing person or patient whose estate is subject to management under this Act. manager of an estate means the NSW Trustee, if management of the estate is committed to the NSW Trustee, or any person who is appointed as the manager of the estate of a managed person. protected person means a person in respect of whom an order is in force under Part 4.2 or 4.3 or the Guardianship Act 1987 that the whole or any part of the person's estate be subject to management under this Act."
Part 4.2 includes section 41 of the NSW Trustee and Guardian Act, which empowers the Court to make management orders. Part 4.3 of the Act governs the making of management orders by the Mental Health Review Tribunal. The Guardianship Act governs the making of "financial management orders" by the Guardianship Division of NCAT.
In a manner that reflects, and elaborates, the seminal description of the Court's inherent, protective (parens patriae) jurisdiction in Marion's Case (1992) 175 CLR 218 at 258-259, section 39 imposes on everyone exercising functions under Chapter 4 a duty to observe specified principles. Section 39 is in the following terms: "39 General principles applicable to Chapter It is the duty of everyone exercising functions under this Chapter with respect to protected persons or patients to observe the following principles - (a) the welfare and interests of such persons should be given paramount consideration, (b) the freedom of decision and freedom of action of such persons should be restricted as little as possible, (c) such persons should be encouraged, as far as possible, to live a normal life in the community, (d) the views of such persons in relation to the exercise of those functions should be taken into consideration, (e) the importance of preserving the family relationships and the cultural and linguistic environments of such persons should be recognised, (f) such persons should be encouraged, as far as possible, to be self-reliant in matters relating to their personal, domestic and financial affairs, (g) such persons should be protected from neglect, abuse and exploitation."
Similar principles govern proceedings in NCAT by virtue of section 4 of the Guardianship Act.
Sections 40 and 41 of the NSW Trustee and Guardian Act empower the Court to make a management order under the Act. Such an order is similar to an order for the appointment of a committee of the estate upon an exercise of the Court's inherent jurisdiction (IR v AR [2015] NSWSC 1187), but it engages the institutional framework embodied in the Act (and cognate legislation), designed to allow the NSW Trustee to supervise the management of protected estates, subject to: (a) any orders or directions issuing from the Court; and (b) any right an interested person may have to apply to NCAT for a review of an administrative decision of the NSW Trustee.
Sections 40 and 41 are in the following terms (emphasis added): "40 Orders for management may apply to part of estate An order may be made under this Chapter for the management of the whole or part of the estate of a person. 41 Orders by Supreme Court for management of affairs (1) If the Supreme Court is satisfied that a person is incapable of managing his or her affairs, the Court may - (a) declare that the person is incapable of managing his or her affairs and order that the estate of the person be subject to management under this Act, and (b) by order appoint a suitable person as manager of the estate of the person or commit the management of the estate of the person to the NSW Trustee. (2) The Supreme Court may make an order on its own motion or on the application of any person having a sufficient interest in the matter. (3) For the purposes of this section - (a) evidence of a person's capability to manage his or her own affairs may be given to the Supreme Court in any form and in accordance with any procedures that the Court thinks fit, and (b) the Court may personally examine a person whose capability to manage his or her affairs is in question or dispense with any such examination, and (c) the Court may otherwise inform itself as to the person's capability to manage his or her own affairs as it thinks fit. (4) Subsection (3) also applies to an application arising out of the operation of section 37 (2) of the Powers of Attorney Act 2003."
Section 37 of the Powers of Attorney Act permits the Court to deal with an application for review of an enduring power of attorney (under section 36 of the Act) as an application for a management order.
The Court's powers under the NSW Trustee and Guardian Act include a power under section 64 to make orders in relation to the administration and management of a protected estate, and a power under section 65 to make orders for rendering the property and income of a protected person available for the payment of his or her debts, the maintenance or benefit of his or her family and otherwise as the Court thinks necessary or desirable for the care and management of the estate.
Section 71 of the Act (reinforced by David by her tutor the Protective Commissioner v David (1993) 30 NSWLR 417 at 438D) is important to the operation of the Act's regime of protective management because it suspends the power of a protected person to deal with his or her estate so far as it is subject to management under the Act. The section is in the following terms (with emphasis added): "71 Managed person cannot deal with estate (1) The power of a managed person to deal with his or her estate is suspended in respect of so much of that estate as is subject to management under this Act. (2) However, the manager may, by instrument in writing, authorise the managed person to deal with so much of the estate as the manager considers appropriate and specifies in the instrument. (3) The authorisation may be given at any time and may be withdrawn, wholly or in part, at any time. (4) More than one authorisation may be given under this section. (5) An authorisation must not be given or withdrawn by a manager who is not the NSW Trustee without the approval of the NSW Trustee. (6) Each of the following persons may apply to the Civil and Administrative Tribunal for an administrative review under the Administrative Decisions Review Act 1997 for a review of a decision of the NSW Trustee about whether or not to approve of the giving or withdrawal of an authorisation - (a) the manager, (b) the managed person, (c) the spouse of the managed person, (d) any other person who, in the opinion of the Civil and Administrative Tribunal, has a genuine interest in the matter to which the NSW Trustee's decision relates."
Commentary. Section 71, of itself, demonstrates that a protected person is (at least in the absence of any grant of authority under section 71(2) or an order of the Court authorising acts of self-management) the subject of an "incapacity" within the meaning of section 86A(2)(a) of the Trustee Act.
An illustration of the legal incapacity of a protected person is found in the Civil Procedure Act 2005 NSW and the Uniform Civil Procedure Rules 2005 NSW, which govern the conduct of civil proceedings in this Court and other courts. Section 3(1) of the Act defines a "person under legal incapacity" in terms that include a "protected person" within the meaning of the NSW Trustee and Guardian Act. UCPR rule 7.13 provides that, for the purpose of rules of court governing the conduct of proceedings by persons under legal incapacity, the expression "person under legal incapacity" includes "a person who is incapable of managing his or her affairs". That same expression is central to the operation of section 41 of the NSW Trustee and Guardian Act. By virtue of UCPR rule 7.14, a person under legal incapacity may not commence or carry on proceedings except by a tutor.
The concept of incapacity for self-management which is central to the operation of Chapter 4 generally, and section 41 in particular, is not identical with any concept of mental incapacity.
Section 41 contemplates functional incapacity, an incapacity for the performance of management functions: PB v BB [2013] NSWSC 1223.
Classically, a person who is incapable of self-management within the contemplation of section 41 is not, by reason only of that fact or the making of a management order, incapable of making a will: Perpetual Trustee Co Ltd v Fairlie-Cunningham (1993) 32 NSWLR 377. Whether or not a protected person has testamentary capacity is a different question.

The Trustee Act 1925

Text. Sections 86A, 86B and 86C of the Trustee Act 1925 NSW are in the following terms (with emphasis added): "86A Court order to approve arrangement (1) If property is held in trust under any instrument creating the trust, the Court may, if it thinks fit, by order approve any arrangement to - (a) vary or revoke all or any of the trust, or (b) enlarge the powers of the trustees for the purpose of managing or administering any of the property subject to the purpose of the trust. (2) An order under this section may be made by the Court only on behalf of - (a) any person under the trust having an interest directly or indirectly, or vested or contingent, who by reason of being a minor or other incapacity is incapable of assenting, or (b) any person who may become entitled, directly or indirectly, to an interest under the trust, and the entitlement is contingent on a future date or event that has not occurred at the time of application for an order under this section, or (c) any unborn person, or (d) any person in respect of any discretionary interest of the person under protective trusts where the interest of the principal beneficiary has not failed or determined. (3) This section - (a) extends to a trust created before the commencement of this section, and (b) does not apply to trusts affecting property created by another Act, and (c) does not limit the operation of section 81. (4) In this section - discretionary interest, in relation to protective trusts, means an interest arising under section 45(6). principal beneficiary has the same meaning as in section 45. protective trusts has the same meaning as in section 45. 86B Court order to benefit person subject to application (1) The Court must not approve an arrangement on behalf of any person under section 86A unless the carrying out of the order would be for the benefit of that person. (2) Subsection (1) does not apply to an approval of an arrangement under 86A(2)(d). 86C Court may direct notice of application to certain persons Notice of an application to the Court for an order under section 86A must be given to any persons as the Court may direct."
Section 45 of the Trustee Act provides that income may be held on "protective trusts" for the benefit of a "principal beneficiary" on terms that allow his or her entitlement to income to pass to his or her family (for their maintenance, support or otherwise for their benefit) in the event that his or her entitlement to the income would otherwise be forfeited.
Section 81 of the Trustee Act empowers the Court to confer upon a trustee additional powers where, in management or administration of trust property, it is expedient to do so. In Cisera v Cisera Holdings Pty Ltd (2018) 98 NSWLR 747, the Court of Appeal confirmed that the power under section 81(1) must be exercised by granting specific powers relating to the management and administration of trust property. The jurisdiction conferred by section 81 does not extend to the making of an order for variation of the terms of a trust not concerned with the management or administration of trust assets.
Legislative History. The Bill that became the Act that inserted sections 86A, 86B and 86C in the Trustee Act included a "Explanatory Note" to the effect that enactment of those sections "to bring [the State of] NSW into line with other jurisdictions by allowing the Supreme Court to vary or revoke a trust where that is in the interests of the beneficiaries and fulfils the purpose of the trust." This statement of the Bill's purpose was reiterated in the second reading speech in support of the Bill.
So far as is material, the second reading speech of the Attorney General (Mark Speakman SC) in support of the Bill was in the following terms: "[Insofar as the Bill relates to the proposed enactment of sections 86A, 86B and 86C of the Trustee Act] the bill amends [the Trustee Act] to permit the court to approve an arrangement varying or revoking a trust where this is beneficial to the interests of the beneficiaries or to the fulfilment of the trust purpose. Section 81 of the Trustee Act currently empowers the court to make orders relating to the management and administration of trust property that can be seen to be expedient. The Court of Appeal has held that section 81 does not authorise the court to make orders for the variation of trusts, which will be beneficial to the interests of the beneficiaries or to the fulfilment of the trust purpose but which are not concerned with the management or administration of the trust assets. This amendment will ensure that the court can approve arrangements to vary or revoke trusts in these circumstances. There are legitimate reasons for which a trustee may seek to modify the terms of a trust in order to discharge their duty to a beneficiary. [Settlors] often create trusts without consideration to future circumstances and there may be a need to amend the trust to accommodate those circumstances in a way that is consistent with the intention of the [settlor]. This would bring New South Wales law into line with the law in the United Kingdom and in other Australian States."
Commentary. The Attorney's allusion to the Variation of Trust Act 1958 UK and Australian equivalents invites the Court to look for guidance in the experience of other courts with similar legislation. That said, the remedial nature of the legislation invites a liberal application of its text and militates against judicial gloss. The text needs to remain open to application to a broad range of trusts.
As Moore J said of the Victorian equivalent (section 63A of the Trustee Act 1958 Vic) in McNee v Lachlan McNee Family Maintenance Pty Ltd [2020] VSC 273 at [104], so too maybe said of section 86A of the NSW Trustee Act: "Section 63A replicates s 1(1) of the Variation of Trusts Act 1958 (UK). … [Section] 63A, like the UK legislation, was passed in response to the decision in Chapman v Chapman [1954] AC 429, where the House of Lords rejected the contention that a court has inherent jurisdiction to approve variations to a trust on behalf of minor, unborn and unascertained beneficiaries merely on the ground that the variation is for their benefit. The remedial legislation, it has been said, overcomes this limitation by enabling the court to give approval to an arrangement on behalf of persons who are unable by their incapacity to give such approval. The court in effect supplies the capacity which the beneficiary lacks."
The leading Australian case on the legislation is the judgment of the Victorian Court of Appeal in Perpetual Trustees Victoria Ltd v Barns (2012) 34 VR 387; [2012] VSCA 77. It dealt with an application for approval of an arrangement to vary (not to revoke) a trust.
By reference to English authority, the Court held (at [36]) that, in determining whether to make an order under the equivalent of sections 86A(1)(a) and 86A(2)(a) and section 86B(1) of the NSW Trustee Act, the Court must first be satisfied that the arrangement the subject of an application for approval is both for the benefit of the incapacitated person and a fair and proper one overall. The Court must take into account the purpose of the trusts and the intention of its creator (in the Victorian case, a testator). The Court should engage in "a business-like consideration of the arrangement, including the total amounts of the advantages which the various parties obtain, and their bargaining strengths". As recorded at [40], the Court must consider the benefits and disadvantages of the arrangement overall.
Counsel have been unable to find a case quite like that presently before the Court for consideration. Most cases involve a proposal for variation of a trust, not for revocation of a trust. No case has been found in which approval has been sought for revocation of a trust in combination of establishment of a protective management regime.
I am comforted, though, by a consideration of the judgment of Buckley J in In re Seale's Marriage Settlement [1961] Ch 574. In that case, the court exercising jurisdiction under the Variation of Trusts Act 1958 (Eng), approved an arrangement revoking all the trusts of an English settlement in the event of the trust property becoming the subject of comparable trusts of a settlement to be established in Canada, to which jurisdiction the beneficiaries had moved.
At [1961] Ch 578-579, Buckley J made the following observations (with emphasis added): "Under section 1 of the Variation of Trusts Act, 1958, the court has jurisdiction where property is held on trust under any will or settlement or other disposition to approve on behalf of the various classes of persons mentioned in the section any arrangement varying or revoking all or any of the trusts or enlarging the powers of the trustees of managing or administering any of the property subject to the trust. So far as I am aware this is the first case in which that jurisdiction is invoked for the purpose of converting an English trust into a trust governed by some other system of law. If it were merely a question of varying the trusts, it seems to me there might be difficulty in saying that this court could properly vary the trusts under the settlement by substituting trusts of a kind which would fall to be administered by some other law; but, having regard to the fact that the court can approve an arrangement which revokes all the trusts of the settlement, it seems to be clear that the court must have jurisdiction to approve an arrangement which, in effect, does revoke all the trusts of the English settlement in the event of the trust property becoming subject to the trusts of a settlement which would be recognised and enforced in some other jurisdiction. It seems to me I have jurisdiction to approve a scheme on the lines of the scheme I am asked to approve in the present case. The evidence establishes to my satisfaction that the husband and the wife intend to continue to live in Canada, that their children who are living in Canada and have been brought up as Canadians are likely to continue to live in Canada, and that it will be for the general advantage of all the beneficiaries that the administrative difficulties and the difficulties of other kinds which result from the fact that it is an English settlement and the beneficiaries all reside in Canada should be brought to an end; and I am satisfied that the arrangement is sensible and advantageous for all concerned."
His Lordship went on to mention an impediment to approval of the proposed arrangement which, in due course, was removed. He then continued (at 580): "it has, in general, been the attitude of this court that, in the case of an English trust, the court is unwilling to appoint trustees in such a way that all the trustees are out of the jurisdiction, more particularly if the property is likely to be taken out of the jurisdiction. In the present case I am asked to do something which will not result in that rather unsatisfactory state of affairs because, if the arrangement is carried into effect, the English trusts will cease to have any operative effect because all the funds will become free from the trusts of that settlement and will be caught by the trusts of the Canadian settlement. The assets will presumably be transferred to Canada, the trustee will be in Canada and the proper court for enforcing the trust will be the competent court in Quebec …"
In re Seale's Marriage Settlement was approved, but distinguished by the English Court of Appeal in In re Weston's Settlements [1969] 1 Ch 223 at 244-245 and 246. It was followed in In re Windeatt's Will Trusts [1969] 1 WLR 692.
In In re Weston's Settlements at [1969] 1 Ch 245, Lord Denning MR identified as a proposition clearly to be borne in mind by the Court upon an exercise of discretion under the legislation that "the function of the court is to protect those who cannot protect themselves. It must do what is truly for their benefit."
The same idea informs an exercise of protective jurisdiction and the management of the estate of a protected person.
Upon an exercise of discretion under section 86A or equivalent provisions, importance may attach to identification of continuity of purpose in comparison with a state of affairs before the making of an order and after.
The distinction between a "variation" of a Trust and a "revocation" of Trust is recognised in the text of the legislation but, it seems, courts are disinclined to sanction a revocation and reconstitution of a trust which might not find favour if expressed as a variation. Although, in my assessment, the distinction between a variation and a revocation might be important in a particular case, formalism must be eschewed and the substance of what is sought must be kept in view.
In management of the affairs of a person incapable of self-management, one commonly encounters the necessity to make a choice between a "trust arrangement" and a "protected estate management arrangement" as the structure for management of property of an incapable person. Section 16 of the Infants Custody and Settlement Act 1899 NSW contemplates the former, the NSW Trustee and Guardian Act 2009 NSW and the Guardianship Act 1987 NSW contemplate the latter: see, for example, AC v OC (a minor) [2014] NSWSC 53.
There is continuity of purpose in the plaintiffs' proposal that the first plaintiff's wealth be managed through a "protected estate management regime" rather than through the Trust.
It matters not that, if she recovers her capacity for self management, she can apply to the Court (under section 86 of the NSW Trustee and Guardian Act 2009 NSW) for an order that the protected estate management orders affecting her be revoked. Absent such management orders, if she were to recover her decision-making capacity vis-a-vis the Trust, she would be able to invoke the rule in Saunders v Vautier for the same end.

DETERMINATION

The first plaintiff being a person incapable of managing her affairs, it is appropriate that a declaration to that effect, and consequential management orders, be made under section 41 of the NSW Trustee and Guardian Act 2009 NSW.
As a protected person whose estate is governed by that Act, the first plaintiff has an incapacity that attracts the operation of section 86A(2)(a) of the Trustee Act 1925 NSW.
Section 86A is available as a means of revoking the Trust and transferring management of the first plaintiff's interest in trust property to a regime of protective estate management under the NSW Trustee and Guardian Act.
If the arrangement for transfer of management of the first plaintiff's interest in the Trust to a regime of protected estate management were to be approved, the carrying out of the Court's order approving the arrangement would be for the benefit of the first plaintiff. Viewed overall, the arrangement is a proper one and fair to all persons associated with the Trust.
Accordingly, I determine that the parties' proposed arrangement should be approved under section 86A(1) and, for that purpose, I make orders to the following effect: 1. DECLARE, pursuant to section 41(1)(a) of the NSW Trustee and Guardian Act, that the first plaintiff is incapable of managing her affairs. 2. ORDER, pursuant to section 41(1)(a) of the NSW Trustee and Guardian Act, that the estate of the first plaintiff be subject to management under the Act. 3. ORDER, pursuant to section 41(1)(b) of the NSW Trustee and Guardian Act, that the second plaintiff be appointed manager of the estate of the first plaintiff subject to the orders and direction of the NSW Trustee. 4. ORDER that the second plaintiff may not do anything in reliance on his appointment as manager of the estate of the first plaintiff until the NSW Trustee has authorised him to assume management of the first plaintiff's estate. 5. ORDER, pursuant to section 68 of the NSW Trustee and Guardian Act, that the second plaintiff give such, if any, security in respect of his management of the first plaintiff's estate as the NSW Trustee may determine to be appropriate. 6. ORDER, pursuant to section 86A(1) of the Trustee Act, that the arrangement for transfer of management of the first plaintiff's interest in the Trust to a regime of protective estate management under the NSW Trustee and Guardian Act be approved. 7. ORDER, pursuant to section 86A of the Trustee Act, that the Trust be revoked and all trust property be transferred by the first defendant (on notice to the NSW Trustee) to the first plaintiff, and be managed by the second plaintiff subject to the orders and direction of the NSW Trustee under the NSW Trustee and Guardian Act. 8. RESERVE for further consideration the question whether any trustee of the Trust is, or may be, liable to compensate the first plaintiff for a breach of duty giving rise to the Trust's non-compliance with the requirements of the Social Security Act 1991 (Cth) or cognate legislation. 9. RESERVE to all interested persons liberty to apply, generally and as may be required in the working out of these orders. 10. ORDER (without prejudice to such, if any, entitlement to compensation the first plaintiff may have against the first defendant) that the costs of all parties to these proceedings be paid out of the estate of the first plaintiff on the indemnity basis. 11. ORDER, pursuant to rule 36.4 of the Uniform Civil Procedure Rules 2005 NSW, that these orders take effect on 19 January 2022 or such earlier time as may be appointed in writing by the NSW Trustee on notice to the other parties to the proceedings. 12. ORDER that these orders be entered forthwith.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 23 December 2021

At a glance

Court

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Before

Catchwords

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Catchwords

Judgment (16 paragraphs)

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Legislation Cited (1)

Cases Cited (18)

Cited By (3)