Practice and procedure - Application to strike out statement of claim - Trusts - Appointment of sole beneficiary of unit trust as trustee - Whether extinguished trust - Turns on own facts

Corporations Act 2001 (Cth), s 50

Land Tax Act 1958 (Vic)

Transfer of Land Act 1893 (WA), s 138

Binningup Nominees Pty Ltd v Brogue Tableau Pty Ltd [2004] WASC 14

CPT Custodian Pty Ltd v Commissioner of State Revenue [2005] HCA 53; (2005) 79 ALJR 1724

Dey v Commissioner of Railways [1949] HCA 1; (1949) 78 CLR 62

DKLR Holding (No 2) Pty Ltd v Commissioner of Stamp Duties (NSW) [1982] HCA 14; (1982) 149 CLR 431

General Steel Industries Inc v Commissioner for Railways (NSW) [1964] HCA 69; (1964) 112 CLR 125

Halloran v Minister Administering National Parks and Wildlife Act 1974 [2006] HCA 3

Hospitals Contribution Fund of Australia v Hunt (1983) 44 ALR 365

Saunders v Vautier [1841] EngR 629; (1841) 4 Beav 115

Davis v Commonwealth [1986] HCA 66; (1986) 61 ALJR 32

European Asian Bank AG v Punjab & Sind Bank (No 2) [1983] 1 WLR 642

Midland Brick Company Pty Ltd v Welsh [2002] WASC 248

Munnings v Australian Government Solicitor (No 2) [1994] HCA 12; (1994) 68 ALJR 429

Murphy v Lew (1994) 13 ACSR 10

Southern Wine Corporation Pty Ltd (In Liq) v Frankland River Olive Co Ltd [2005] WASCA 236

Young v Murphy [1996] 1 VR 279

1 MASTER NEWNES: This is an application by the second and third defendants ("these defendants") to strike out parts of the statement of claim as disclosing no reasonable cause of action. The application was heard on 13 February 2006 and at the conclusion of the hearing the plaintiff was given leave to file further written submissions to deal with a point raised only shortly before on behalf of these defendants. The plaintiff's further submissions were delivered on 1 March 2006.

2 To explain the basis of the application it is necessary to describe, so far as currently relevant, the case as advanced in the statement of claim.

3 The plaintiff pleads that the first defendant ("Binningup Nominees") is and was at all material times a wholly owned subsidiary of the second defendant and that the third defendant is and was at all material times related to the second defendant by virtue of s 50 of the Corporations Act 2001 (Cth). The directors of these defendants are, and have at all material times been, Barry Granville Waller ("Waller") and Linton John Scott ("Scott").

4 It is alleged that by a deed dated 31 December 1975 made between Clive Gregory Waller as founder and Binningup Nominees as trustee, the Binningup Estate Unit Trust (the "Estate Trust") was created.

5 By a deed of the same date, made between Clive Gregory Waller as founder and Binningup (South) Pty Ltd as trustee, the Binningup South Unit Trust (the "South Trust") was created.

6 It is pleaded that Binningup Nominees, in its capacity as the trustee of the Estate Trust, is and was at all material times the registered holder of all the issued units in the South Trust.

7 It is pleaded that, on or about 22 September 1988, the plaintiff became the holder of all of the units in the Estate Trust. On or about 16 March 1995, the plaintiff was indebted to the third defendant in the sum of $680,993. As a result of certain transactions on or about that date, the units in the Estate Trust were reclassified and further units issued. The plaintiff became the holder of 182 A class units and the second defendant became the holder of 2,000,098 B class units in the Estate Trust.

8 It is alleged that by a deed dated 22 April 1997, made between Waller, Scott, Binningup (South) Pty Ltd and Binningup Nominees, Binningup Nominees became the trustee of the South Trust in place of Binningup (South) Pty Ltd.

9 By a deed dated 17 December 1997, the name of the South Trust was changed to the Lakewood Shores Unit Trust. However, as the parties referred to it in argument as the South Trust, I will also refer to it in that way.

10 The plaintiff alleges in par 11 of the statement of claim that by reason of the appointment of Binningup Nominees as trustee of the South Trust, Binningup Nominees held the property of the South Trust on the trusts of the Estate Trust. That is, upon the appointment of Binningup Nominees as trustee of the South Trust, its beneficial interest in all of the units in the South Trust and its legal title as trustee of the South Trust merged, and the South Trust thereupon ceased to exist.

11 Among other things, the plaintiff goes on to plead, in effect, that Binningup Nominees has, since 22 April 1997, purported to act as trustee of the property of the South Trust without regard to the terms of the Estate Trust and in breach of the terms of the Estate Trust. These defendants also attack those pleas but it was common ground that those pleas stand or fall with par 11.

12 This application therefore turns on the allegation in par 11 of the statement of claim that the effect of the deed of 22 April 1997 was to extinguish the South Trust, with the result that thereafter Binningup Nominees held the property of the South Trust on the trusts of the Estate Trust.

13 In earlier proceedings between Binningup Nominees and the plaintiff, under s 138 of the Transfer of Land Act 1893 (WA), it had been held that that was the effect of the deed of 22 April 1997: Binningup Nominees Pty Ltd v Brogue Tableau Pty Ltd [2004] WASC 14.

14 In those proceedings an application had been made by Binningup Nominees requiring the plaintiff to show cause why a caveat over the land the subject of the South Trust should not be removed. Pullin J referred to the position of Binningup Nominees as the trustee and sole beneficiary of the South Trust, and its position as trustee of the Estate Trust (in which capacity it held the equitable interest in the South Trust) and went on (at [5]):

"The first observation which I make is that there is no trust involved in the [South] Trust. A trustee may be one of a number of beneficiaries but cannot be the sole beneficiary. If a trustee is the sole beneficiary, there is no trust because there is no separate equitable interest vested in the beneficiary. The legal and equitable interests merge into full ownership: DKLR Holdings Co (No 2) Pty Ltd v Commissioner of Stamp Duties (NSW) [1982] HCA 14; (1982) 149 CLR 431 at 464 and 474. The result is that the plaintiff holds the trust fund of the [South Trust], including the south land, on trust for the beneficiaries of the [Estate] Trust."

15 That conclusion is necessarily challenged by these defendants on this application.

16 On behalf of these defendants, it was submitted, first, that as these defendants were not parties to those earlier proceedings and the judgment was not one in rem, they are not bound by it, and secondly, that the reasoning of Pullin J in that case is inconsistent with the subsequent decision of the High Court in CPT Custodian Pty Ltd v Commissioner of State Revenue [2005] HCA 53; (2005) 79 ALJR 1724.

17 These defendants accepted that there are a number of authorities for the proposition that where there is a sole beneficiary under a trust and the trustee of the trust is the same person as the sole beneficiary, the equitable interest of the beneficiary merges in its legal interest as trustee and the trust is brought to an end. But it was submitted that that result will come about only where the beneficiary has an equitable interest in the trust property, and where its equitable interest as beneficiary and its legal interest as trustee in the trust property are equal and co-extensive. It was submitted that that was not the position in the present case.

18 Counsel for these defendants argued that in CPT Custodian (supra) the High Court had rejected the notion that unit holders in a unit trust must be considered the equitable owner of each asset of the trust. The Court had held (at [36]) that whether a unit holder is the equitable owner of the trust property depends upon the terms of the relevant trust deed.

19 It was submitted that, in the present case, the South Trust deed gives the trustee wide powers to invest moneys forming part of the trust fund and limits the involvement of unit holders in those matters. The only right conferred by the deed on a unit holder in the South Trust is to a proportionate share of the net income of the trust fund.

20 Counsel argued that, in respect of trust deeds containing similar provisions, it had been held in CPT Custodian (supra) that the trust deeds did not confer equitable ownership of the trust property on the unit holders. In this case, as in that case, the beneficial interest of the unit holder in the trust fund is not a proprietary interest, but a mere right to have the trust administered in accordance with the trust deed.

21 Counsel submitted that it was clear from CPT Custodian (supra) that equity will enforce the terms of a unit trust where the trustee is the same as the sole beneficiary, providing the rights and obligations of unit holders are not the same as the rights and obligations of the trustee or others under the unit trust.

22 It was argued that under the South Trust deed the rights and obligations of Binningup Nominees as unit holder were not the same as its rights and obligations as trustee. The trust was not only for the benefit of Binningup Nominees as the sole unit holder, but also for the benefit of Binningup Nominees in its capacity as trustee of the South Trust. Binningup Nominees' rights and obligations as unit holder in, and trustee of, the South Trust differed. For instance, Binningup Nominees as trustee has (in addition to other rights) a personal right to pay out of the trust fund costs, charges and expenses incurred by it in its management of the trust fund. That gives effect to the trustee's general right to reimbursement or exoneration for liabilities incurred in the administration of the trust.

23 In CPT Custodian (supra), the High Court had rejected the submission of the Commissioner of State Revenue that insofar as receipts may be applied by a unit trustee to persons other than as a unit holder, they must be seen as made on behalf of the unit holder. In this case, Binningup Nominees' right in its capacity as trustee to reimbursement or exoneration for liabilities incurred in the administration of the trust requires Binningup Nominees as trustee to retain possession of the trust property, receive the income earned by investment of the trust fund and deal with that income otherwise than simply by payment to the unit holder or unit holders of the South Trust.

24 It was submitted that as the rights and obligations of Binningup Nominees as beneficiary and trustee respectively were not the same, it followed that the South Trust was not extinguished by the appointment of Binningup Nominees as trustee but that it remained enforceable in equity.

25 Counsel for these defendants submitted that if the plea in par 11 of the statement of claim was rejected, the balance of the paragraphs of the statement of claim attacked by these defendants on this application must fall with it.

26 The last proposition was not contested by the plaintiff, but the plaintiff did contend that nothing decided in CPT Custodian (supra) had the result that the plaintiff's plea in par 11 was bad in law. It was submitted that, in the first place, the High Court in that case had expressly indicated (at [6]) that it was not concerned with the doctrine of merger. That was because the issue in that case was whether the unit holders in a unit trust have an equitable interest or estate in the trust property. The High Court held that whether a unit holder has any equitable interest in the trust property depends upon the terms of the particular trust deed.

27 It was submitted that the doctrine of merger, however, does not depend upon whether or not the beneficiary has an equitable interest in the trust property. The correct view is that a trust comes to an end when both the legal rights of the trustee and the equitable rights of the beneficiary become vested in one person. There is no requirement that the equitable rights of the beneficiary amount to an equitable interest in the trust property itself. The doctrine simply relied upon the principle that a person cannot be a trustee for himself alone.

28 In this case, the South Trust came to an end because the equitable rights (whatever their character) of Binningup Nominees as registered holder of the units became merged with its legal rights as trustee of the trust.

29 The plaintiff also argued that these defendants were bound by the decision of Pullin J in Binningup Nominees Pty Ltd v Brogue Tableau Pty Ltd (supra) which gave rise to an issue estoppel between the present parties.

30 It was submitted on behalf of the plaintiff that since these defendants take their interests as unit holders of the Estate Trust, a trust of which Binningup Nominees is trustee, these defendants are bound by any decision concerning the trust property of that trust. These defendants were not necessary parties to the earlier proceeding; that proceeding did not concern any dispute about the rights inter se of the unit holders and the trustee of the Estate Trust, but was an application in respect of the property, the subject of the trust. The trustee was the proper party. These defendants are therefore bound by the result of the proceedings brought by the trustee.

31 It was also argued on behalf of the plaintiff that it was incorrect to say that the decision was not binding on these defendants because it was interlocutory. It was submitted that Pullin J did not decide this point on any interlocutory basis but found that the doctrine of merger had brought the South Trust to an end.

32 At the outset of the hearing of this application, I suggested to counsel for these defendants that the issue in question might more appropriately be dealt with as a preliminary issue so that it was finally determined, rather than on a pleading summons where the test was simply whether the plaintiff's case was arguable. Counsel for these defendants was not attracted to the suggestion that the matter be dealt with in that way and insisted that this application was a sufficient vehicle for determination of the point. The plaintiff's contention, he submitted, is either right or it is wrong.

33 The latter proposition is correct as a matter of law, but I do not think that that is the matter for determination on an application of this nature. Counsel for these defendants accepted that a pleading should not be struck out where it raises a "debatable question of law": Dey v Commissioner of Railways [1949] HCA 1; (1949) 78 CLR 62 per Dixon J (at 91). He submitted, however, that that did not preclude the striking out of a pleading based upon a legal issue of some complexity if, upon analysis, there was no debatable issue to go to trial: General Steel Industries Inc v Commissioner for Railways (NSW) [1964] HCA 69; (1964) 112 CLR 125. Counsel referred to the well-known passage from the judgment of Barwick CJ (at 130) in that case as follows:

"I do not think that the exercise of jurisdiction is reserved for those cases where argument is unnecessary to evoke the futility of a plaintiff's claim. Argument, perhaps even of an extensive kind, may be necessary to demonstrate that the case of the plaintiff is so plainly untenable that it cannot possibly succeed."

34 That is, of course, subject to the caution that, on an application to strike out a claim, the Court should be careful not to risk stifling the development of the law by summarily rejecting a claim where there is a reasonable possibility that, as the law develops, it will be found that a cause of action will lie: Hospitals Contribution Fund of Australia v Hunt (1983) 44 ALR 365 (at 373).

35 As this application was fought by both sides on the question of whether the plaintiff's pleaded claim was so plainly untenable that it could not possibly succeed, it falls to be determined on that basis.

Does the pleading disclose an arguable cause of action?

36 In circumstances where there is already a decision of this Court in which it has been held that the South Trust has ceased to exist by virtue of the doctrine of merger, and where it is sought to distinguish that decision on the basis of a subsequent decision of the High Court in which the Court expressly said that it was not concerned with questions of merger, it might be thought that these defendants face formidable difficulties on this application.

37 I do not consider that those apparent difficulties disappear on a closer examination of the decision relied upon by these defendants. It seems to me that, as contended by counsel for the plaintiff, the pleading raises a question of law which is, at its lowest, debatable. The ramifications of the decision in CPT Custodian (supra) for the present case are something that, at best, cannot be regarded as plain.

38 I think it is clear that the decision in CPT Custodian (supra), and the subsequent decision of the High Court in Halloran v Minister Administering National Parks and Wildlife Act 1974 [2006] HCA 3, proceeded on the basis that the holding of all of the units in a unit trust, or the holding of all of a particular kind of unit in a unit trust, does not necessarily give the holder of the units an equitable interest in the trust property. Whether the unit holder has such an interest will depend upon the provisions of the particular trust deed.

39 But I do not consider it is clear that the claim of the plaintiff in this case necessarily depends upon Binningup Nominees having an equitable interest in the trust property of the South Trust.

40 It is well established that a person cannot be the sole trustee and the sole beneficiary under the one trust. In such a case the person's beneficial ownership is inherent in the legal ownership and there is no need to postulate a separate equitable estate. In DKLR Holding (No 2) Pty Ltd v Commissioner of Stamp Duties (NSW) [1982] HCA 14; (1982) 149 CLR 431, Aickin J observed (at 464) that the authorities for that proposition go back a long way. His Honour (at 463) described the law in this way:

"If one person has both the legal estate and the entire beneficial interest in the land he holds an entire and unqualified legal interest and not two separate interests, one legal and the other equitable. If he first holds the legal estate upon trust for some other person and thereafter that other person transfers to him the entire equitable interest, then again the first-named person does not hold two separate interests, one the legal and the other the equitable estate; he holds a single entire interest - he is the absolute owner of an estate in fee simple in the land. The equitable interest merges into the legal estate to comprise a single absolute interest in the land. It is a fundamental principle of both the common law and of equity that the holder of an estate in fee simple cannot be a trustee of that fee simple for himself for what he holds is a single estate, being the largest estate in land known to the law."

41 In the same case, Brennan J (at 474) referred to the same authorities and stated the proposition succinctly as "a person cannot be trustee for himself."

42 I should interpose that in oral argument counsel for these defendants submitted that in CPT Custodian (supra) the High Court had said that the above passage from the judgment of Aickin J was no longer good law. I must say that I do not understand the Court to have suggested that.

43 As the learned authors of Principles of the Law of Trusts by HAJ Ford and WA Lee observe at par 5010, one reason that a person cannot be trustee for himself or herself is that there is no possibility of unconscionable conduct to the prejudice of the "beneficiary" and, in consequence, there is no basis for equitable intervention. Absent legislation making the person separate legal entities as trustee and beneficiary respectively, a person cannot owe the equitable obligations of trustee to himself or herself alone.

44 In my view, nothing that was said in CPT Custodian (supra) was addressed to those long-established principles. In CPT Custodian (supra) the issue was whether the beneficiary under the relevant unit trust deed fell within the definition of an "owner" in the Land Tax Act 1958 (Vic). The definition extended to "every person entitled to any land for any estate of freehold in possession". The Court concluded that under the unit trust deed the beneficiary was not an "owner". It rejected (at [25], [31]) what it described as a "dogma" that where ownership of property is vested in a trustee, equitable ownership of that property must necessarily be vested in someone else because it is an essential attribute of a trust that it confers upon individuals a complex of beneficial legal relations which may be called ownership. Whether a unit holder has any proprietary interest in the assets of the trust depends upon the terms of the particular trust deed and no conclusion can be drawn generally in respect of unit trusts. The Court concluded that the trust deeds in question did not confer any proprietary interest in the assets of the trust and the only right of a unit holder was to a proportionate share of the income of the fund for the year.

45 The Court rejected a contention that had been accepted below that, because all of the units in the trust were held by one person, that person had the power to bring the trust to an end and to require the transfer to it of the assets (after satisfying any claims of the trustee), with the result that the person must be regarded as in equity entitled to an interest vested in possession of all of the trust assets. The Court had found that the individual units in the trust did not confer any proprietary interest and concluded that there was nothing in the trust deed which led to the result that cumulatively they conferred such an interest.

46 The Court also held that the power to achieve immediate payment of the trust property under the rule in Saunders v Vautier [1841] EngR 629; (1841) 4 Beav 115 reposed, not simply in the designated beneficiaries, but in the entire range of persons entitled to call for the due administration of the trust in question. It referred to the provisions in the trust deed by which the manager - in whom management of the trust fund was exclusively vested by the trust deed - covenanted with the trustee to ensure that there were at all times sufficient readily realisable assets of the trust available for the trustee to raise the fees to which the manager and the trustee were entitled under the deed. Those provisions, the Court said, made the trustee and the manager interested in the due administration of the trust, or, in other words, the unit holders were not the persons in whose favour alone the trust property might be applied by the trustee. I observe in passing that the trust deed for the South Trust does not contain any comparable provision for such a manager of the trust property.

47 The High Court found that the classic nineteenth century formulation of the rule in Saunders v Vautier (supra) did not give consideration to the significance of the right of the trustee under the general law to reimbursement or exoneration for the discharge of liabilities incurred in the administration of the trust. In the case before the Court, the unsatisfied trustees' rights of reimbursement or exoneration meant that it was impossible to say what the trust fund in question was. As the beneficiaries were only entitled to the surplus that was left after prior claims on the trust assets were satisfied, in those circumstances the rule could not apply.

48 The Court also observed that, in any event, it was one thing to say that a court of equity will not enforce a trust in which only one person has any interest and quite another thing to say, for a statutory purpose, that the person has a presently subsisting interest in all of the trust assets at a particular date because of what could be done in exercise of a power of termination of the trust although, at that date, it had not been done. Equity often regards as done that which ought to be done, but does not necessarily regard as done that which merely could be done.

49 I do not need on this application to reach a concluded view as to whether or not the plaintiff's plea is correct in law and I will refrain from doing so. It is sufficient that I conclude, as I do, that it is arguable. Having regard to the matters which fell for consideration in CPT Custodian (supra), I do not accept that what was said there is necessarily decisive of the issue raised by par 11 of the statement of claim in this case and, in particular, that it means the plaintiff's plea as to the extinguishment of the South Trust is unarguable.

50 It does not seem to me clearly to follow from the decision in CPT Custodian (supra) that the extinguishment of a trust in the circumstances pleaded in par 11 of the statement of claim depends upon whether the beneficiary has an equitable interest in the trust property or that the decision is otherwise inconsistent with the plea in par 11.

51 In my view, it is arguable that even if Binningup Nominees, as the holder of all of the units in the South Trust, had no more than a right to have the trust duly administered, upon its appointment as trustee its rights as beneficiary (whether or not they involve a proprietary interest in the trust property) "merged" with their legal ownership of the trust property, resulting in the legal ownership of the trust property becoming absolute. Put another way, however the plaintiff's rights as the beneficiary of the South Trust might be regarded, as sole unit holder and trustee it cannot have a right against itself to have the trust property administered in accordance with the trust instrument.

52 It follows that I do not accept that the conclusion reached by Pullin J in Binningup Nominees Pty Ltd v Brogue Tableau Pty Ltd (supra) that the South Trust has ceased to exist is necessarily inconsistent with the decision of the High Court in CPT Custodian (supra) and I do not consider that the plaintiff's claim is unarguable. The application must therefore fail.

53 I should add that, on the face of it, there is much to be said for these defendants' contention that the issue on this application is one that should appropriately be determined before the cost of preparing for a full trial of the action has been incurred. If that is the case, the issue would seem to me to be one appropriately to be determined as a preliminary question, where a final determination would be made. However, whether or not that is an appropriate course is not a matter on which I express any final view. That will arise for consideration only if and when such an application is brought.