Arakella Pty Ltd v Paton

The Law of the Trust 7The first problem is where is the proper law of the trust and what significance does that have? 8It is clear that the proper law of the trust is ascertained at the time the trust is set up and is not affected by subsequent changes in trustee or the situation of assets: M Davies, A S Bell, P L G Brereton, Nygh's Conflict of Laws in Australia (LexisNexis, 9th edn, 2013) at [34.9]. I should have mentioned that the trust is a discretionary trust though that probably makes no difference to the principles that have to be considered in the present case. 9Once a trust has a proper governing law it is difficult to change it. Thus, if for good fiscal reasons in 1973 the settlor and the trustee chose to have the proper law of the trust as the law of Papua New Guinea then, even though things have changed dramatically, that remains the proper law. 10The document itself does not indicate what is the proper law of the trust and accordingly one is thrown back on general law principles and the Hague Convention on the Law Applicable to Trusts and on their Recognition [1992] ATS 2. A complication is that the Hague Convention has not been adopted by the independent nation of Papua New Guinea but I do not consider that is of great moment because the tests in the Convention are not very, if at all, different, to those under the general law. 11Each trust has a proper law. This is so both under the common law and under the Hague Convention. For convenience I will refer to the provision of the Hague Convention. Under article 6 of the Convention the trust is governed by the law chosen by the settlor. If the settlor does not clearly indicate that choice then the court must work out the proper law, including by reference to the four factors in article 7, as to the law to which the trust is most closely connected. I will come back to that matter in due course. Under article 8 the proper law of the trust "shall govern the validity of the trust, its construction, its effects, and the administration of the trust". The Convention makes it clear that administration comes under the umbrella of the proper law of the trust; under the common law this was a little unclear: Nygh's Conflict of Laws in Australia [34.23]. 12However there is some difference between theory and practice. A beneficiary can usually only enforce the trust by suing the trustees. This is an in personam action and any equity court where the trustee is resident will have jurisdiction. An order made against the trustee in the jurisdiction where he or she resides will be binding. Conversely, if the trustee is not resident in the country that is the proper law of the trust then the courts of that jurisdiction may have difficulty in pursuing the trustee though the court may appoint a new trustee in his or her stead. 13Where then is the proper law of this trust? 14In the time before State and Federal death and estate duties were removed and in the case of the federal duty brought into the capital gains tax regime, it was very important not to set up large settlements in New South Wales. It was quite common for trusts to be set up in the Australian Capital Territory (or sometimes, as in the present case, in Port Moresby) with a small amount, say $100, being settled by a settlor who had no real connection with the potential beneficiaries. Once the trust was set up then the trust property was augmented by megadollars. 15However it should be noted that in Augustus v Permanent Trustee Co (Canberra) Ltd [1971] HCA 25; (1971) 124 CLR 245 the High Court said that the mere fact that a settlement is made outside New South Wales - in Augustus' case in the ACT to avoid tax liabilities in New South Wales - does not necessarily mean that the proper law of the settlement will be the ACT. In that case Walsh J analysed the whole of the terms of the deed in question, saw many references to NSW, saw that because of the modern rule against perpetuities the settlement would be invalid under the law of the ACT but would be saved in NSW by a special provision of the Conveyancing Act 1919 (NSW). The High Court thus held that the proper law of the settlement was NSW. 16The trust deed in the present case shows that the settlor was Matthias Wentworth Allen of Wollongong, the trustee was Green View Pty Ltd, a company which was incorporated in the then Territory of Papua New Guinea with its registered office in Port Moresby, and the sum settled was $60. The trust was a discretionary trust. 17Clause 14 empowered various named persons to remove any trustee and appoint any other person to be trustees in substitution; the appointment to be made by deed. 18Clause 15 read as follows: Thomas Dion, Edward Dion, Charles Dion, Ernest Sidney Dion, Leslie Frank Dion or Rose Dion or any of them may at any time with or without the consent of the Trustee by deed revoke all or any of the trusts hereby declared and declare other trusts of the settled property and income derived therefrom in favour of such person or persons as the said Thomas Dion, Edward Dion, Charles Dion, Ernest Sidney Dion, Leslie Frank Dion or Rose Dion or any of them shall in their absolute discretion determine with or without a like power of revocation and variation PROVIDED THAT no trusts so declared may be declared in favour of the Settlor, the Trustee, or the beneficiary who declares such trusts and they shall not nor shall any of them derive any benefit of any kind by virtue of trusts so declared and any benefit which they or any of them would have derived from any such trusts so declared shall pass to and be vested in the Beneficiaries in equal shares PROVIDED FURTHER that no trusts shall be or be capable of being so declared which are in contravention of the rule against perpetuities. 19As I have said the deed was delivered on 10 August 1973. Twelve days later on 22 August 1973 Thomas Dion exercised his right to appoint a new trustee and appointed the present plaintiff, Dion Investments Pty Ltd, an Australian company with its registered office in Wollongong. 20A complication occurred when in 1975 the former Territories of Papua and New Guinea became the independent nation of Papua New Guinea. Thereafter the proper law of the trust was the law of a foreign country. When the Hague Convention came into force in 1992 in Australia the Convention applied even though, had the proper law been that of an Australian State or Territory, the Convention would have had no application. However as I have said this is of little moment because the Convention mostly reflects the common law. 21Article 7 of the Convention points to four factors which are to guide courts in working out what is the proper law of the trust; these are: (a) the place of administration of the trust designated by the settlor; (b) the situs of the assets of the trust; (c) the place of residence or business of the trustee; (d) the objects of the trust and the places where they are to be fulfilled. 22As Nygh points out at [34.10] these are also the factors which are relevant at common law. Of these four factors, (b) and (c) would point to Port Moresby as being the site of the assets and the place of residence or business of the trustee. There is no indication of the places where the objects of the trust are to be fulfilled or where the trust is to be administered by a Papua New Guinea trustee, but probably that Territory (now country). There is some indication that, as all the beneficiaries and the settlor are in Wollongong, the law of NSW is the proper law of the trust. 23In Saliba v Falzon (Supreme Court of New South Wales, Young J, 1 July 1988, unreported) I considered a trust deed where the testator was domiciled in England but created trusts expressed in terms of Australian dollars in favour of an Australian beneficiary to be administered by Australian testamentary executors. I found that the intention of the testator must be to have NSW law apply, that State being the part of Australia where the trustees and the beneficiaries lived. 24Mr Barlin submitted that the fact that the settlement was made by a settlor domiciled in New South Wales with beneficiaries all resident in New South Wales and the ability to remove the Papua New Guinea trustee and replace it with an Australian trustee were sufficient factors to outweigh the factors pointing to the law of Papua New Guinea being the proper law. 25I appreciate the force of that argument. It is a matter for me to assess the facts. The fact that the settlor went out of his way to set up a trust in Port Moresby, added to the other factors I have mentioned, mean that the proper law of the trust is the law of Papua New Guinea. 26Mr Barlin put, as a subsidiary argument, that each time an addition of capital was made to the trust property a new trust was created, which new trust, after the trustee became situated in New South Wales, was a trust the proper law of which was New South Wales. 27I do not consider that that proposition is correct. The Trust Deed specifically mentions the fact that it covers all additions to the fund. Again, when property is added to the fund, there is no new declaration of trust, even though the property added is then impressed with the trust. 28Thus the administration of the trust is committed to the proper law of the trust, Papua New Guinea. 29During the hearing, we briefly looked at the law of Papua New Guinea. The current statute appears to be the Trustee and Executors Act 1961 Chapter 289, section 47 of which is in the same terms as section 81 of the Trustee Act 1925 (NSW) and it gives jurisdiction to the National Court. There does not appear to be any power in the Court to vary trusts. 30Article 10 of the Convention allows the proper law of the trust to be moved. However, until that happens the law of the trust remains what it was as at the time when it was set up notwithstanding that the trustee, the administration and other relevant factors may have changed. As Papua New Guinea is not a signatory to the Convention as far as Nygh and the United Nations reveal that article 10 does not apply. There was some provision for altering the proper law of the trust at common law but as G W Thomas and A S Hudson put it in their Law of Trusts (Oxford University Press, 2nd edn, 2010) at 1203-1204 [43.94] the "question of whether, and if so in what manner and with what consequences, English law [which would probably apply in Papua New Guinea because of its constitution] permits the law of a trust to be changed has given rise to considerable discussion". Apart from pointing out this possibility I do not need to dwell on it or flesh it out. 31Accordingly, the court with the primary responsibility for dealing with the present application is the National Court of Papua New Guinea. Jurisdiction of the Supreme Court of New South Wales 32However, this Court has two sources of jurisdiction to deal with the matter. The first is that if there is a statute which is wide enough to cover trusts which have a substantial connection with NSW then that statutory power may be exercised notwithstanding that the proper law of the trust is not NSW. Perhaps the classic example for the exercise of this jurisdiction is Re Webb; Webb v Rogers (1992) 57 SASR 193 where the Full Court of the Supreme Court of South Australia held it had jurisdiction to order accounts in the case where the trustees were administering the trusts in South Australia even though the proper law of the trust was the Northern Territory. 33In Re BTA Institutional Services Australia Ltd [2009] NSWSC 1294; (2009) 3 ASTLR 207 Brereton J followed Webb v Rogers and held that, whilst the governing law of one of the trusts was the law of England, as the trusts under it were administered in NSW, the Trustee Act of New South Wales was able to be used to give judicial advice. 34The second source of jurisdiction is where the trustee is within the jurisdiction so that the court has an in personam jurisdiction over the trustee. 35An illustration of the in personam jurisdiction is Re Constantinou [2012] QSC 332; [2013] 2 Qd R 219; (2012) 271 FLR 276. In that case the proper law of the trust was Papua New Guinea however a Papua New Guinea resident had asked the Supreme Court of Queensland for orders. Everyone else had submitted and Dalton J held that he had in personam jurisdiction and exercised it to give advice to the trustees. 36In Salkeld v Salkeld (No 2) [2000] SASC 296 at [26] Perry J had to deal with a trust the proper law of which was that of NSW but which was administered in South Australia. Under South Australian law section 59C of the Trustee Act 1936 (SA) permitted the court to order the variation of the trusts. NSW law did not. Perry J held that the South Australian statute was sufficiently wide to cover all trusts, whether the proper law was South Australia or not, and made an order varying the trusts. The same thing happened in England in Re Ker's Settlement Trusts [1963] Ch 553 where a trust governed by the law of Northern Ireland but administered in England was varied under section 1 of the Variation of Trusts Act 1958 (UK) even though that section did not apply in Northern Ireland. 37Having dealt then with the matter of jurisdiction and having determined that even assuming the proper law of the trust is Papua New Guinea law, this Court has some jurisdiction at least to deal with the matter, I must now consider the application on the merits. A Power to Vary? 38The first question is whether clause 15 of the Deed contains a power to vary. I have already set out the text of clause 15. 39It must be remembered that all powers historically depended on the Statute of Uses 1535 (27 Hen VIII, c 10). A power to revoke in classic times was a gift to JS and his heirs the use of X and his heirs, but if Y exercises his power to revoke, then to the use of the grantor and his heirs. This is an example of a shifting use. If there were a combined power of revocation and declaring of new trusts it may operate in the same way as a shifting use. Unless the power was included in the initial settlement, it could not be added later. 40G W Thomas, Thomas On Powers (Oxford University Press, 2nd edn, 2012) indicates that there is a distinction between powers to revoke, powers to declare new trusts and powers of variation though he says there can be overlap between the various powers. 41A power of revocation if exercised means that the whole of the original trust disappears. It was held by the Court of Chancery of New Jersey in National Newark & Essex Banking Co v Rosahl 128 A 586, 1925 (NJ Ch) that a power to revoke does not include a power to revoke partially involving a modification. There is also a power in clause 15 to declare new trusts but if a person does that then that person can not be a beneficiary under the new trusts. The distinction is shown in chapter 16 of Thomas on Powers. It is clear and one should not assume that a power to revoke imports a power to vary or that a power to create new trusts involves also a power to add on to or modify the existing trusts. 42However there are two indications that point in the opposite direction. First, clause 15 deals with a declaration of new trusts and then provides that those new trusts may be "with or without a like power of revocation and variation". The word "variation" has no sense unless it refers to the powers that exist to revoke and declare new trusts. 43Secondly there is the decision in Kearns v Hill (1990) 21 NSWLR 107 a decision of the Court of Appeal consisting of Mahoney, Clarke and R P Meagher JJA. That was an appeal from this Court constituted by me which was allowed and R P Meagher JA gave a leading judgment. His Honour held that my view of powers in discretionary trusts was too rigid and that in recent times discretionary trusts are usually subject to a power of variation to make fundamental changes in the structure of the trust instrument and that on the proper construction of the deed in that case the variation was allowed. On parity of reasoning of Mahoney and Meagher JJA in that case one should not be too technical in construing the provisions of clause 15. 44I agree with Mr Barlin who advised the trustee that the position is quite unclear. The factor which makes me come to the view that the better construction is that there is no power of variation is that there is only one person still alive who has a power of revocation and amendment. If those powers are exercised the new trust declared must exclude the person who exercises the power of amendment from any benefaction. It would not seem to be appropriate that a person should be entirely excluded from benefit which would not normally occur with a mere power of variation. Counsel said the provision was put in for taxation reasons but its operation would seem to me to be the pivotal factor as to why there is no power of amendment. Accordingly one must treat the word "variation" in clause 15 as if it were a reference to a declaration of fresh trusts. Variation of the Trust 45On that basis I must pass to whether the court can vary the trust under section 81 of the Trustee Act 1925. 46Section 81 of the Trustee Act 1925 is headed "Advantageous dealings". Subsection 1 reads: Where in the management or administration of any property vested in trustees, any sale, lease, mortgage, surrender, release, or disposition, or any purchase, investment, acquisition, expenditure, or transaction, is in the opinion of the Court expedient, but the same can not be effected by reason of the absence of any power for that purpose vested in the trustees by the instrument, if any, creating the trust, or by law, the Court: (a) may by order confer upon the trustees, either generally or in any particular instance, the necessary power for the purpose, on such terms, and subject to such provisions and conditions, including adjustment of the respective rights of the beneficiaries, as the Court may think fit, and (b) may direct in what manner any money authorised to be expended, and the costs of any transaction, are to be paid or borne as between capital and income. 47Subsection 2 then gives specific examples of what the court might do under the section. Subsection 1 is in similar terms to s 47 of the PNG Act. 48The great weight of authority supports the proposition that apart from adjustment of the terms of the trust or rights of the beneficiaries which is incidental or consequential on the advantageous dealing, the Court has no power to vary the trusts: see eg NM Superannuation Pty Ltd v Hughes (Supreme Court of New South Wales, McLelland CJ in Eq, 5 March 1996, unreported); Westfield Qld No 1 Pty Ltd v Lend Lease Real Estate Investments Ltd [2008] NSWSC 516; (2008) 1 ASTLR 525 at 531; Perpetual Trustees Victoria Ltd v Barns [2011] VSC 314; (2011) 7 ASTLR 349 and my decision in Re McNaughton (Supreme Court of New South Wales, Young J, 8 December 1994, unreported). 49There are a number of quotable quotes about the inability of the court to change the trust which the settlor or testator has set up. The basal understanding is that once a person has given his or her property on trust then that trust is unalterable save and except insofar as the trust deed itself makes it unalterable and originally that was reinforced by the technical rules as to conveyances under the Statute of Uses. 50In Re Crawshay (1888) 60 LT 357 at 359 North J said: I should not be administering the trusts created by the testator if I consented to this scheme. I should be altering his trusts and substituting something quite outside the will. On the assumption that the scheme would be beneficial to the estate, I cannot decide that I have jurisdiction to authorise it. 51In Re Walker [1901] 1 Ch 879 at 885 Farwell J said: I decline to accept any suggestion that the Court has an inherent jurisdiction to alter a man's will because it thinks it beneficial. It seems to me that is quite impossible 52The leading English authority is in Re Downshire Settled Estates [1953] Ch 218 which was affirmed by the House of Lords sub nom Chapman v Chapman [1954] AC 429. 53In Downshire, Sir Francis Evershed MR in a joint judgment with Sir Charles Romer LJ said at 247 that management and administration in the English equivalent to section 81 was management and administration of the trust property and that could not include the equitable interests which the settlor had granted in the property. He then said at page 248 with respect to the word "transaction" that it had to be construed ejustem generis with "sale of lease mortgage surrender re lease or disposition" and did not cover transactions generally. 54Stein v Sybmore Holdings Pty Ltd [2006] NSWSC 1004; 64 ATR 325 involved a discretionary trust under the terms of which the vesting day was to be 23 December 2007. The person who had arranged for the trust to be set up wanted to defer the vesting date as the trust was not able to fulfil its purpose if it terminated on 23 December 2007. Campbell J made an order under s 81 of the Trustee Act extending the vesting day holding that the fact that that would be likely to alter who ultimately had beneficial interest in the trust fund was not necessarily fatal to the application. The case was heard ex parte because the various defendants put in submitting appearances so that the Judge was not given the benefit of argument by parties with conflicting interests. 55At 331 [30] Campbell J noted that the general proposition is put in a standard text book that "s 81 gives no power to alter the beneficial interests of the beneficiaries". His Honour said that no such general proposition can be drawn from the authorities. He did not discuss Downshire or Chapman v Chapman seemingly because the words "adjustment of the respective rights of the beneficiaries" occurs in the NSW section but not in the corresponding English section. He quoted cases including my own decision in Re Cosaf Pty Ltd (Supreme Court of New South Wales, Young J, 18 December 1992, unreported) where the beneficial interests had been affected. He noted the judgment of Williams J in Riddle v Riddle [1952] HCA 12; (1952) 85 CLR 202 at 220 that the section is couched in the widest possible terms and held that the power was sufficiently wide to justify the order being sought. 56I do not wish to criticise the actual decision but would say two things about Stein's case. First, I disagree with great respect that "transaction" in section 81 extends to amendment of the trust deed. It seems to me that this is quite inconsistent with the bulk of authorities particularly Downshire and that here the difference in the English and NSW Acts does not cause a different result. One of the cases relied on by Campbell J is Re Philips New Zealand Ltd [1997] 1 NZLR 93. That was a decision of Baragwanath J over a pension scheme where all of the relevant persons being affected consented and his Honour said at 99: The Court will not willingly construe a deed so as to stultify the ability of trustees, having proper consents, to amend a deed to bring it into line with changing conditions. 57The semantic significance of the word "transaction" was a mere throwaway line. The cases tend to show that in pension scheme cases a more "robust" view is taken of section 81 than in perhaps other cases. Perhaps my decision in Cosaf is in that category. Perhaps New South Wales judges have been more robust in their application in s 81 because there is no power to vary a trust in NSW as there is in England, Victoria, and South Australia. 58Indeed the very fact that NSW has not adopted the variation of trust legislation enacted elsewhere is itself a good reason for the Court to leave the matter to Parliament rather than re-interpret s 81. 59The view of Campbell J that the extra words in the NSW Act mean that one can cast aside Downshire and Chapman v Chapman is actually contrary to the decision of Myers AJ in Ku-ring-gai Municipal Council v Attorney General (1953) 19 LGR (NSW) 105 affirmed on appeal: (1954) 55 SR (NSW) 65. 60In James N Kirby Foundation Ltd v Attorney General NSW [2006] NSWSC 1153; (2004) 62 NSWLR 276 White J held that amendment of a trust deed falls within the definition of transaction in section 81 of the Trustee Act. It must follow from what I have said that I would respectfully disagree with that decision. Although Chapman v Chapman [1954] AC 429 was cited to the learned Judge he does not refer to it in his judgment and with great respect his decision goes further than other cases, and to my mind unjustifiably, further. 61In Arakella Pty Ltd v Paton [2004] NSWSC 13; (2004) 60 NSWLR 334 Austin J did use section 81 where the prime thrust of the trustees proposal was streamlining management or administration but he did say at 361 [117] that what was proposed was very much a matter of management and administration and that the effect on the beneficiaries was inconsequential. That passage, as Einstein J pointed out in the Westfield case, is entirely consistent with authority and does not justify a wider interpretation of the scope of section 81. 62I really said the same thing in Re Cosaf Pty Ltd supra. The judgment refers to and follows Downshire but then in a passage which is actually set out in Arakella's case at 360 [113]. That indicates that the courts may make an order under section 81 even though beneficiaries would be incidentally affected. 63Accordingly, in my view I cannot make an order under section 81 giving the trustees or other persons entitled power to vary the trust deed by "modernising" it in the way in which the taxation advisors have suggested. However I can approve advantageous dealings which incidentally affect beneficiary rights. 64During argument, Mr Barlin put up more restricted proposals as a backup to his primary case. These involved including new clauses 7(n), (o), and (p) as follows: (n) to raise or borrow moneys either alone or jointly with another or others, from any person including a firm or company, either bearing or free of interest and on terms and conditions and for purposes as the Trustee may decide, and to secure the repayment of any monies or other indebtedness by mortgage, charge, security or other encumbrance over the whole or any part of the Trust as the Trustee in their discretion may decide; or to have the repayment secured over property of a third party which may include property of a trustee or beneficiary, whether such third party collateral security is given alone or jointly with property of the Trust. No lender shall be concerned to enquire as to whether the necessity for any such borrowing has arisen or as to the purpose for which it is required, or as to the application of monies borrowed. (o) to draw, endorse, accept, guarantee or indemnify or be a party in any way to a commercial bill or other bill of exchange, promissory note, letter of credit, hypothecation or other facility whatsoever involving the raising, borrowing or lending of monies by or to the Trustee as trustee of the Trust. (p) power, whether with or without security and whether alone or jointly or severally or both jointly and severally with any other person, to guarantee, indemnify, secure by way of mortgage, charge or otherwise, over the whole or part of the Trust, or undertake in any way the payment or repayment of money or debts (including any interest whether existing or to accrue) previously or then lent or to be advanced; or any existing or future duties, undertakings, liabilities or obligations incurred or which may at any future time be incurred by any person whether a beneficiary or not and to guarantee, indemnify or secure, with or without security, the due performance of any contract, agreement, covenant or obligation of any person whether a beneficiary or not. 65It seems to me that each of these additional powers is well within section 81 and do not raise any matter of radical alteration to the rights of the beneficiaries. 66Accordingly, the orders should be as follows, though within 14 days of the delivery of these reasons a Notice of Motion may be taken out to vary them: (1)I advise the trustee by order that it would not be justified in assuming that clause 15 of the trust deed of 10 August 1977 authorises a variation of the trust deed. (2)I order pursuant to section 81 of the Trustee Act 1925 that the trust deed may be amended by inserting new clauses 7(n), 7(o) and 7(p) as set out in the reasons for judgment delivered herewith. (3)The trustee's costs of this application may be paid to it out of the fund. (4)Liberty to apply.

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