Barclay v Owen

Judgment 1This is an application for judicial advice brought by the administrators of the estate of the late Dan Antonio Boian, to whom I will refer as "the deceased". 2The deceased died on 7 April 2004 intestate. Letters of administration were granted on 13 August 2007 to the deceased's widow, Carol, and three of his adult children, Daniel, Michael, and Kathleen. I will, without meaning any disrespect, refer to the persons involved in this case by their first name. The deceased also had two other children, David and Gen. Each of these children had a different mother to the other children. David has recently attained 18, but Gen is still a minor aged ten. 3There has been a partial distribution of the estate and what remains are shares in private companies which are concerned with a number of nursing homes, about $9.578 million in cash and two properties at Blakehurst. 4Apart from the Blakehurst real estate, the whole estate that remains is personalty. 5The nursing homes in which the estate through companies has a substantial interest are the Parramatta Nursing Home, the Russell Lea Nursing Home and the Hillcrest Nursing Home at Oatley. 6The Parramatta Nursing Home is on land owned by Broughton House Pty Ltd and is operated by Ark Health Care (Parramatta) Pty Ltd to which I will refer hereafter simply as "Ark Parramatta". 7Broughton House Pty Ltd has A and B class shares and ordinary shares. The estate holds 1A and eight ordinary shares. Daniel, one of the administrators, owns 1B class shares and seven ordinary shares. The estate thus holds 55.5% of the shares in Broughton House. Ark Parramatta has the same structure and the same shareholdings. 8The other nursing homes are on land owned by Petria Investments Pty Ltd (Petria), the company which is wholly owned by the estate and are operated by Ark Health Care (Hillcrest and Russell Lea) Pty Ltd, all the shares in which are owned by Petria. 9The net assets to be distributed are estimated to have a value of slightly in excess of $39 million. 10Under the rules of intestacy and in particular under s 61B of the Probate and Administration Act 1898 Carol takes the statutory amount plus the household chattels and one half the balance. This calculation is effected in the instant case because there was a settled Family Provision Act claim and under the settlement Carol bears the cost of that claim. However, the administrators are content that Carol's share in the estate is just over $16 million and that the share of each of the children is about $4.53 million. 11Carol currently lives in one of the estate's houses at Blakehurst. 12The plaintiff administrator suggests that the estate be distributed by way of appropriation. Part of the reason for this is that in the case of the Parramatta nursing home the estate does not have full control over the nursing home and the evidence suggests that purchasers would be rather difficult to find of the estate's interest. However, another reason is that the senior family of the deceased wish to continue in the nursing home business. 13The suggested appropriation is that Carol should receive 69.7% of the estate's interest in Petria plus the two Blakehurst houses, Daniel should receive the estate's share in Ark Parramatta, 8.9% of the estate's interest in Petria and 25.2% of Broughton Holdings, a share estimated at being $4.535 million, Kathleen should receive 74.8% of the estate's interest in Broughton Holdings which would give her $4.533 million on the values that have been accepted by the administrators, Michael should receive 21.4% of the estate's interest in Petria, giving him $4.553 million, David should receive $4,546,940 cash and Gen $4,554, 727 cash. 14The administrators have taken advice and the advice is that there are some complications because the appropriation involves dealing with assets which are not readily convertible into cash possibly for their own benefit which raises questions of conflict of interest and duty. They seek the opinion, advice and direction of the court on the following questions: (a)whether the plaintiffs as the administrators of the estate of the deceased would be justified in exercising the statutory power of appropriation to distribute the remaining assets of the estate in accordance with the distribution schedule set out in annexure H with the consent of the minor beneficiary, Gen, or the court acting on her behalf (the distribution schedule is what I have summarised earlier in these reasons). (b)whether the administrators are justified in selling the estate's shares in Ark Health Care Services Pty Ltd to Dimitru Stefan Boian for the sum determined by BCS Assurance Pty Limited. 15It is appropriate to deal with that second question first because if answered in a particular way the answer to the first question is simplified. 16Dimitru Stefan Boian is commonly known as James and I will refer to him by that name. The statement of facts says that an agreement in principle has been reached between the administrators and James to sell the estate's 50% share of Ark Health Care Services Pty Limited to James for the value of the shares as determined by BCS Assurance Pty Limited, subject to an updated valuation. BCS has actually now changed its name or identity and is now the Assura Group Pty Ltd. The Assura Group Pty Ltd chartered accountants, by Hanoze Udachia, has prepared a report as to the value of the shares. The value includes a 5% allocation for a control premium and a 5% allocation for liquidity discount. However, the valuation depends on the value of commercial real estate in Beverly Hills. It is accepted by Mr Meek SC, who appears for the applicants, that there will need to be an updated valuation of this real estate but if the valuation of the real estate is not significantly different to what was accepted by Hanoze Udachia then there will be sufficient cash money in the estate to pay each of David and Gen their $4.5 million in cash. 17I should note that in 2011 the administrators obtained judicial advice from this court constituted by Macready AJ that they were justified in selling to James where there were appropriate valuations of the amounts to be paid and arrangements made with respect to dividends. I do not think that I need to go into the problems that were faced by the valuers which Mr Meek deals with in his opinion which was tendered and which will remain with the papers, and will be marked confidential, but it would seem to me that the method adopted by Mr Udachia is one in which the court can have some confidence subject to the updating of the valuation of the Beverly Hills real estate. There are a few other assets of this company and it would be wise for an updated valuation to be obtained of those other assets as well as the real estate. Accordingly, I would be prepared by order to give advice to cover question (b) that the administrators are justified in selling the estate's shares in Ark Health Care Services Pty Limited to Dimitru Stefan (James) Boian for the sum to be determined by Assura Group Pty Ltd after receipt of an up-to-date valuation of that company's Beverly Hills real estate. 18I now pass to question (a). Section 46 of the Trustee Act so far as is relevant provides as follows: (1)A trustee may appropriate any part of the property subject to the trust or of the real or personal estate of a testator or intestate in the actual condition or state of investment thereof in or towards satisfaction of a legacy or of any share or interest in the property or estate, whether settled or not, as to the trustee may seem just and reasonable, according to the respective rights of the persons interested in the property or estate, provided that: (a)the appropriation shall not be made so as to affect prejudicially any specific gift devise or bequest, (b)the appropriation shall be made with the consent, if any, required by this section, (c)in making the appropriation the trustee shall have regard to the rights of any person who may thereafter come into existence or who cannot be found or ascertained at the time of the appropriation or as to whom it is uncertain at that time whether he or she is living or dead, and of any other person whose consent is not required by this section. 19It is clear that s 46 applies in an intestacy. Accordingly, there is a statutory power to make an appropriation of assets in specie to the beneficiaries. All the adult children have agreed to the proposed appropriation. In the case of David he is just 18 but the court has evidence of the advice from an experienced solicitor that it is a fair settlement. 20So far as the minor, Gen, is concerned at the directions hearing on 8 May 2014 I said that the court would be obliged if Gordon Salier, solicitor, would examine the material and report to the court whether the proposed distribution is fair and just so far as the infant, Gen, is concerned. I am glad to say that Mr Salier acted on the court's request. Mr Salier is well accepted as being one of the most experienced solicitors in trusts and estate work in this state. He has, in his report of 10 June 2014, considered all the relevant matters and has reported that the proposed distribution by the administrators of the estate to the infant beneficiary, Gen, is fair and just. 21One of the reasons why it appears to everybody who has looked at it that both David and Gen would be better off under the appropriation than if they remained involved with the nursing home companies is that they have had no real contact with other members of their father's family for about 10 years. They have different mothers and it would be far better for them to receive cash rather than be involved with the family companies. I should note that Gen's interest under the estate is being cared for by the ANZ trustees and they also appear to be in favour of the distribution. 22Were it not for the fact that Gen is a minor and were it not for the fact that the persons to whom the major distributions are going to be made under the proposed appropriation are themselves the administrators one would have thought that the court would just sign off on the appropriation, especially as it appears that everyone involved has considered the pros and cons and has been well advised. However, Mr Meek has pointed out that there may be a problem because the persons who are principal beneficiaries are the administrators themselves and has, in his very thorough opinion for which the court is very grateful, dealt with a number of the leading cases in the area. Unfortunately not all of these are consistent one with the other. 23In Wigley v Crozier [1909] HCA 86; 9 CLR 425 at p 439 Griffiths CJ said that when exercising the power to appropriate the trustees are bound to consider the interests of all persons interested. 24Generally, trustees have a duty to hold the scales equally between the beneficiaries and trustees are not normally allowed to purchase the trust property. However, in the instant situation those general principles do not seem to be strictly applied. For instance, in Re Charteris [1917] 2 Ch 379 Swinfen Eady LJ in the English Court of Appeal said at 389 that the trustees must act prudently and properly in the management of the estate as a whole. Accordingly, it is not the be all and the end all of the matter to say that the rule that the scales must be held equally between the beneficiaries is an overriding principle and that thought has been picked up in Williams, Mortimer and Sunnucks - Executors, Administrators and Probate, 20th ed, 2013, para 55 and 54. 25Again, there are various exceptions to the rule that the trustees cannot purchase the trust property by way of appropriation under s 46. Even the strictest of the authorities, the English decision of Kane v Radley-Kane [1999] Ch 274 suggests that where the appropriation is of cash or assets equivalent to cash such as government stock or shares listed on the stock exchange the principle does not apply. 26It should be noted that there has been development in the thinking in this particular area over the last 100 years. In Barclay v Owen (1889) 60 LT 220 at 222 Kay J said: It is however well settled that where an administrator is also one of the next of kin, the right to appropriate a part of the intestate's estate for himself as his own share is a right perfectly independent of any agreement with other next of kin. 27That statement was approved by PW Street J in Re Gamble (1915) 32 WN (NSW) 121 though PW Street J held that the rule did not apply to real property. That problem has now almost certainly been overcome by the amendments made to the law in ss 153 and 154 of the Conveyancing Act 1919. It would seem that the problems referred to by Kay J and PW Street J have now been transmogrified into the sort of principle referred to in Kane. 28However, one must be a little careful about Kane's case. There the trustee made the appropriation on the basis of probate valuations. It is a basic rule and when the late Frank C Hutely was a lecturer in succession he drummed into those who were privileged to be in his succession class that one must never appropriate on the basis of valuations obtained for probate purposes. There must always be proper independent valuations made close to the time of the proposed appropriation. That did not happen in Kane's case where the administrator transferred to herself assets at probate valuation which on the facts was far less than their real valuation at the time of distribution. 29Thus, the general rule set down by Sir Richard Scott VC in Kane's case was probably not completely necessary for the decision because the appropriation was clearly bad. However, his Lordship said at p 279: It is a general and highly salutary principle of law that a trustee cannot validly contract with himself and cannot exercise his trust powers to his own advantage. 30He has then quoted from the 15th edition of Underhill and Hayton Law of Trusts and Trustees at p 647. That is now picked up in the 18th edition of 2010, article 55 at p 856. Then at p 280 his Lordship said that there were very exceptional circumstances to a rather inflexible rule that a disposition of trust property to a trustee is automatically voidable by a beneficiary ex debito justitiae however fair the transaction may be unless certain things happen and noted that one of the exceptions was by leave of a competent court. He said: If beneficiaries all being of full age consent to the trustee doing something that would otherwise offend the self-dealing rule, then there is no reason why the trustees should not do it. If a trustee puts the case before the court and says, "Can I do this?" then the court can authorise the trustee to do it. 31The 20th edition of Williams, Mortimer and Sunnicks at p 783 cites Kane as authority for the proposition that the statutory power does not allow a representative to appropriate assets other than cash or the equivalent of cash in his own favour apart from the exceptional circumstances. I consider that Kane overstates the principle, though perhaps it is just a matter of semantics. In my view the statutory power is there but equity will not permit a fraud on the power and normally a trustee selling to himself or herself, particularly without proper and fresh valuation, will find that the court will set aside the appropriation. 32The principle is I think far more flexible than Kane states it and indeed the subsequent cases in England in the companies area such as Public Trustee v Cooper [2001] WTLR 901 esp at 933 suggest that the rule is somewhat more flexible than is stated by Scott VC in Kane's case. However, the basal rule is stated the case where the court gives leave is an exception and the question is, as I have been asked for judicial advice, should I advise that the trustees would be justified in going ahead. 33The court, when it is making that decision, looks to all the factors that a wise and just trustee would do, putting aside any consideration of personal advantage. A good illustration of the way in which the court goes about this task is provided by the decision of John Mowbray QC, sitting as a deputy judge in the Chancery Division in Lloyds Bank plc v Duker [1987] 1 WLR 1324. 34His Lordship is well known as the editor of the recent editions of Lewin on Trusts and is one of the most respected trust lawyers in the common law world. 35The brief facts in Duker were that the testator held 999 of the 1,000 issued shares in a private company which owned a luxury hotel in Torquay, a beachside provincial town in southern England. The widow was entitled to half the estate. Because of the peculiar facts, the widow became entitled to 46/80ths of the estate and the remaining 34/80ths became divisible amongst the five defendants. The widow requested the trustee to transfer to her 574 shares, being the closest whole number to 46/80ths multiplied by 999. She then died and her executors sought an order that there be an appropriation for it to receive the 574 shares. 36His Lordship considered a number of facts. One was whether the value of the 574 shares was markedly higher than the value per share of 425 shares and he found that it was. He considered a number of cases and accepted that the general principle espoused in cases like Re Marshall [1914] 1 Ch 192, Re Sandeman's Will Trusts [1937] 1 All ER 368 and Re Weiner [1956] 1 WLR 579 were proper authority for the proposition that as a general rule beneficiaries absolutely are entitled to insist on an in specie distribution. However, he held on the facts of the Duker case the value of the parcel was so affected by the fair differential in value between controlling shares and minority shares that the court should not agree with the distribution and ordered that the shares be sold and there then be a distribution of the proceeds on the basis of 46/80ths and 34/80ths. 37There has not been that much activity in the Australian courts over these problems. However, I should mention that Slattery J reviewed Duker and other cases in Re Henley (2013) 17 BPR 32435 but distinguished it on the facts. 38The present case also involves the problem of valuation because some beneficiaries will have or achieve controlling interests and others will be put in or remain in a minority position. Is this problem sufficient for me to come to the same result as his Lordship came to in Duker's case? 39There are a number of situations where courts have considered whether or not it is appropriate to consider that a majority interest in shares is greater than that of a minority interest. The point used to come up quite frequently in the former days when there was estate debt and federal estate duties. Generally, as Mr Wayne Lonergan says in "The Valuation of Businesses, Shares And Other Equity" Allen and Unwin 2003, 4th ed, particularly pp 138 and 417, logically speaking there are sound economic reasons why a minority interest in a private company is relatively worse off than a minority interest in a listed company and that also the concept of a premium for control reflects an additional value that attaches to a controlling interest compared to the value of a minority interest and that this is reflected in normal share trading. However, it is not always so and it is necessary to look to the facts of each case. It is significant to my mind that in some more recent cases dealing with what is a fair value of shares under pre-emption articles in companies or when considering the fair value of shares in an oppression suit the court has come to the rule that it is a matter for the discretion of the independent valuer who should take all relevant facts into consideration, see for instance Virdi v Abby Leisure [1990] BCLC 342 and Re Bird Precision Bellows Ltd [1984] Ch 419 430 (Nourse J) and [1986] Ch 658 at 673 before [CA]. I think that this more flexible principle is now the governing principle and one which I could adopt even in an estate case. There are so many variables with private companies that it is inappropriate to adopt some inflexible rule. In the present case the valuers have given thought to whether there should be adjustments in value because of majority or minority interests and have taken that into account, mostly saying that it would be inappropriate to do so, though as I have pointed out in the case of one valuation of Mr Udachia he has taken the factor into account. 40Accordingly it does not seem to me that the difficulties dealt with in the textbooks because of the conflict rule are sufficiently great in the instant case for me not to give my approval. It must be borne in mind that most of the people involved are heavily involved in the businesses of the nursing homes and know the businesses of the companies. They all consent. The solicitors who have been involved for David and for Gen who are experienced people have also thought that it is appropriate. Indeed, were it not for the fact that a minor was involved this court I think would have just signed off on the proposal. 41I probably should add that Stephen Viski, a chartered accountant, has deposed to the view that the distribution should not add a premium to the value of the shares in the various companies in the hands of majority shareholders for reasons he gives so that that is an illustration of one valuer who certainly took all these matters seriously into consideration. 42Another factor which goes to making it appropriate to approve of the appropriation is the evidence shows that at least in the case of Parramatta it would be very difficult to dispose of partial interests in the nursing home because there may not be a market. The market would, however, be there for Russell Lea and Hillcrest. 43Putting these altogether and particularly bearing in mind the facts of fully advised consent and the expert opinions that have been submitted to the court I have no hesitation in advising by order that the plaintiffs, as administrators of the estate of the late Dan Antonio Boian, would be justified in exercising the statutory power of appropriation to distribute the remaining assets of the estate in accordance with the distribution schedule set out in annexure H to the statement of facts subject to an updated valuation at the date of distribution. 44Order that the costs of the plaintiffs, including the costs of Mr Gordon Salier who, at the court's invitation, advised with respect to the infant, Gen, be paid out of the estate and also the costs of Mr Hunt, solicitor, for David, the costs in each case on the indemnity basis. The opinion of Mr Meek will be kept in a sealed envelope with the papers marked Confidential - not to be opened without the leave of a judge.