The plaintiff, Shead Real Estate Pty Ltd (the Trustee) is the trustee of the EA & F Shead (Chatswood) Trust (the Trust) established by deed of trust executed on 23 December 1977 (the Trust Deed). The Trustee seeks judicial advice under s 63 of the Trustee Act 1925 (NSW) (the Trustee Act) in relation to amendment of the Trust Deed. Section 63(1) of the Trustee Act relevantly provides that a trustee may apply to the Court for an opinion, advice or direction on any question respecting the management or administration of the trust property, or respecting the interpretation of the trust instrument.
[3]
The Trust Deed
The Trust Deed is expressed to be between the Trustee, of the first part, and the several persons who have executed or thereafter execute the Trust Deed or sign an application for units or a transfer of units or apply for an option to be allotted units containing an acknowledgement whereby such person agrees to be bound by the provisions of Trust Deed, of the second part. At the time of execution of the Trust Deed, the name of the Trustee was Portina Pty Ltd. Its name has been changed several times since the execution of the Trust Deed.
By cl 3 of the Trust Deed, the Trustee declared that it would thenceforth stand possessed of the Trust Fund (as defined) and the income thereof upon the trusts and subject to the powers and provisions contained in the Trust Deed. Trust Fund is defined as the initial capital sum of $100 and all monies, investments and property paid or transferred to and accepted by the Trustee as additions to the Trust Fund, all accretions to the Trust Fund, and the investments and property from time to time representing that money, investments, property, accumulations and accretions or any part or parts thereof respectively. By cl 5 of the Trust Deed, additions to the Trust Fund, being cash or authorised investments, can be accepted by the Trustee. Assets to be invested in the Trust can consist of any investments authorised by the Trust Deed or cash or any combination of such investments and cash in accordance with the Trust Deed.
The term Unit Holder is defined in the Trust Deed as a person for the time being registered under the provisions of the Trust Deed as the holder of a Unit. The term Unit is defined as an undivided part or share in the Trust Fund as described in cl 8. The reference to cl 8 may be an error for cl 7. Clause 7 describes the incidents of Units. Clause 8 deals with the selling, buying or otherwise transferring of Units.
By cl 7(a) of the Trust Deed, the beneficial interest in the Trust Fund is to be held by the Unit Holders for the time being in proportion to the Units registered in their respective names. All Units are at any given time to be of equal value. Clause 7(b) of the Trust Deed provides that each Unit entitles the registered holder, equally with the registered holder of all other Units, to the beneficial interest in the Trust Fund as an entirety but, subject thereto, does not entitle the Unit Holder to any particular security or investment comprised in the Trust Fund or any part thereof. No Unit Holder is entitled to the transfer of any property comprised in the Trust Fund, except as expressly provided in the Trust Deed.
By cl 7(c) of the Trust Fund, the Trust was to be divided into 100 units which were to be held by three named Unit Holders, each of whom was to hold the number of units specified in the First Schedule to the Trust Deed. The original Unit Holders were Mr WN Shead as to 25 Units, Mr SKP Barlow as to 25 Units and EA & F Shead Pty Ltd as to 50 Units.
Clause 7(d) provides that the Trustee is to have power to issue additional Units from time to time. It also provides that the Trustee is to have power to classify or designate additional units or to re-classify units that are already issued in such manner and upon such terms and conditions as the Trustee thinks fit. The power to classify, designate or re-classify is a matter raised in the present application.
Curiously, cl 7(d) contains no limitation on the terms on which the Trustee may issue new Units. On a literal view of the words, the Trustee could issue new Units for no consideration. However, the language of cl 11, to which reference is made below, indicates a clear intention that that should not be so. That is to say, the clear intention is that all Unit Holders would be treated equally in proportion to the Units held by them.
By cl 7(e), all persons to whom new Units are to be issued are required to sign such form of application as the Trustee may from time to time prescribe, including an undertaking to be bound by the terms of the Trust Deed and of any amendments to the Trust Deed. Further Units have been issued by the Trustee to persons who have complied with cl 7(e). The consequence is that, at the present time, there are 1020 Units issued, which are held by nine Unit Holders.
Clause 9 of the Trust Deed provides that the Trust is to terminate on the Vesting Day unless it has been terminated prior to that date under the provisions of the Trust Deed. By cl 10, the Trust may be terminated at any time before the Vesting Day if the Trustee in its absolute discretion so determines. In the Trust Deed as executed, Vesting Day was defined in cl 1(4) as meaning the first to occur of the following days:
(i) 1 July 2020;
(ii) the date 21 years after the death of the last survivor of the descendants of His Late Majesty George V who are living at the date of the Trust Deed;
(iii) such earlier day which the Trustee shall determine.
Thus, there appear to be two powers vested in the Trustee to bring the Trust to an end. First, the Trustee may determine an "earlier day" as the Vesting Day. Alternatively, the Trustee may determine that the Trust be determined at any time before the Vesting Day. Nothing appears to turn on that matter.
Clause 11 provides that, upon the Trust terminating or being terminated under the provisions of cll 9 or 10, the Trustee may distribute in specie or transfer the whole or part of the assets or investments of the Trust Fund to the Unit Holders in proportion to the number of Units held or to one or more Unit Holders to the exclusion of one or more of the other Unit Holders. If there is a transfer to one or more Unit Holder to the exclusion of one or more other Unit Holder, the Trustee must make a valuation of all assets or investments comprising the Trust Fund so as to ensure that there will be sufficient assets or investments remaining after such distribution or transfer for those Unit Holders who are not participating in such in specie distribution or transfer to receive "their full entitlement" pursuant to cl 7(a).
Clause 1(12) of the Trust Deed defines the term Accounting Period as periods ending on 30 June in each year up to the Vesting Day or the date of termination of the Trust. Under cl 20(a), the Trustee must, in each Accounting Period until the Vesting Day or the date of the termination of the Trust, whichever first occurs, pay, apply or set aside the whole of the net income of the Trust Fund of that Accounting Period to or for the benefit of the Unit Holders in proportion to the number of Units of which they are respectably registered at the end of that Accounting Period, and each Unit Holder is deemed to be presently and absolutely entitled to such net income.
Clause 24, which is relevant to the present application, provides that, prior to the Vesting Date or the date of termination of the Trust, whichever is earlier, the Trustee may, with or without consideration, pay or transfer the whole or any part of the Trust Fund with the income thereof to the trustees or trustee for the time being of any settlement or trust, where under any Unit Holder is entitled to any interest whatsoever. However, the power conferred by cl 24 does not extend to authorise any payment or transfer of the whole or any part of the Trust Fund or the income thereof to the trustees or trustee of any settlement or trust whereunder the Trustee has or may acquire any interest. Clause 24 contains a proviso that no payment or transfer is to be made pursuant to cl 24 if it would "infringe or result in the infringement of the rule against perpetuities". It is clear enough that the reference to "the Vesting Date" in cl 24 was intended to be a reference to "the Vesting Day".
Clause 33 of the Trust Deed relevantly provides as follows:
"(a) the [Trustee] may from time to time and at any time by Deed supplemental to this Deed modify alter or add to the provisions of this Deed (including this present clause) PROVIDED THAT such modification or alteration or addition:
(i) May relate to the management or control of the Trust Fund or the investment thereof or to the [Trustee's] powers or discretions in these presents contained.
…
(b) As soon as possible after the execution of any supplemental Deed and in any event not later than two months thereafter notice thereof containing a short summary of such supplemental Deed shall be sent by [the Trustee] to each Unit Holder." (Emphasis in original)
[4]
The Questions for Advice
The Trustee seeks advice under s 63 the Trustee Act in connection with a purported change and proposed changes to the Trust Deed. The first question concerns the operation of cl 33 of the Trust Deed. The second concerns a change to the definition of the Vesting Day in cl 1(4) of the Trust Deed. The third concerns the deletion of cl 24 of the Trust Deed. The fourth concerns a change to cl 7(d) of the Trust Deed.
[5]
Operation of cl 33
On 29 June 2017, the Trustee executed a Deed Poll (the Deed Poll). By the Deed Poll, the Trustee recited that it was the Trustee of the Trust and that the Trust Deed contained cl 33. It also recited that the Trustee desired to vary the Trust Deed by varying the term "the Vesting Day" as defined in the Trust Deed by deleting "(i) the first day of July in the year 2020". Clause 2.1 of the Deed Poll relevantly provided as follows:
"The Trustee in exercise of the Trustee's power contained in clause 33 of the Trust Deed … does hereby vary a provision of the Trust Deed, being the definition of the term "the Vesting Day" as contained in paragraph 1(4) of the Trust Deed by deleting paragraph (i) as contained in that definition, and in particular the words "The first day of July in the year 2020"."
Clause 4 provided that the foregoing amendment was to take effect by way of addition to and augmentation of the terms and conditions presently contained in the Trust Deed, which were confirmed by the Deed Poll, but subject to the proviso that if any conflict or inconsistency should occur between the terms and conditions contained in the Trust Deed and those contained in the Deed Poll, then the latter were to prevail.
Two questions arise in relation to the purported exercise of the power conferred by cl 33 in executing the Deed Poll. The first is whether the Deed Poll can be said to be a "Deed supplemental to" the Trust Deed, as referred to in cl 33(a), and a "supplemental Deed" as referred to in cl 33(b). The second question in relation to the Deed Poll is whether it satisfies the proviso that the modification or alteration effected by it relates to the management or control of the Trust Fund or the investment of the Trust Fund or to the Trustee's "powers or discretions contained in the Trust Deed", within the meaning of cl 33(a)(i).
[6]
Supplemental Deed
It is clear without doubt that the Deed Poll was intended to modify and alter the provisions of the Trust Deed. It refers expressly to the Trust Deed. However, it is not "expressed to be supplemental to" the Trust Deed. Section 36D of the Conveyancing Act 1919 (NSW) relevantly provides that any instrument expressed to be supplemental to a previous instrument is to be read and have effect as if the supplemental instrument contained a full recital of the previous instrument. The question is whether, in the absence of such expression, s 36D would apply such that the Deed Poll would be read and have effect as if it contained a full recital of the Trust Deed. That is to say, the question is whether the reference to "supplemental" in cl 33 was intended to require a deed that was expressed to be supplemental to the Trust Deed, as distinct from merely referring to the Trust Deed explicitly as the Deed Poll does. I consider that the preferable view is that the Deed Poll is a deed supplemental to the Trust Deed within the meaning of cl 33(a) and is a supplemental deed within the meaning of cl 33(b).
[7]
Proviso to clause 33(a)
The effect of the purported modification or alteration of the definition of "the Vesting Day" by the Deed Poll is to modify or alter the provisions of the Trust Deed relating to:
the termination of the Trust under cl 9 and distribution under cl 11;
the payment, application or setting aside of the net income of the Trust Fund under cl 20(a); and
the exercise of the power of resettlement under cl 24.
The question is whether that alteration or modification is a modification or alteration that relates to:
the management or control of the Trust Fund;
the investment of the Trust Fund; or
the Trustee's powers or discretions contained in the Trust Deed.
The Trustee can exercise powers and discretions under the Trust Deed only for so long as the Trust continues in operation and the Trust Fund exists. Upon termination either because, under cl 9, the Vesting Day has arrived or, because, under cl 10, the Trustee has determined that the Trust be terminated, the provisions of cl 11 are triggered. Upon the Trust terminating:
the Trustee may distribute or transfer the whole or part of the assets or investments of the Trust Fund to the Unit Holders under cl 11(a);
the Trustee may sell all investments in the Trust Fund under cl 11(b);
the Trustee must as soon as is practicable distribute cash available in the Trust Fund to Unit Holders in proportion to Units held until the assets of the Trust Fund have been completely turned into cash and distributed to Unit Holders, in accordance with cl 11(c).
Thus, the powers and discretions of the Trustee, other than those conferred by cl 11, come to an end upon the termination of the Trust. I consider that a modification or alteration of the provisions of Trust Deed relating to the time when those discretions and powers of the Trustee cease is a modification or alteration relating to the powers or discretions of the Trustee contained in the Trust Deed.
[8]
Alteration of the Vesting Day
The Trustee, in its capacity as trustee of the Trust, carries on a real estate agency business. A balance sheet of the Trust as at June 2017 indicates total equity in a sum in excess of $800,000 and current earnings of a sum in excess of $2 million. The Unit Holders have invested capital Units in order, in effect, to acquire an interest in that real estate agency business conducted by the Trustee. When a new investor in the Trust is introduced, either new Units are issued under cl 7(d) or there is a transfer of existing Units to the new investor. Such a structure allows flexibility as to the granting of an interest by means of Units without disturbing the direct ownership of the business, which is owned by the Trustee.
Under the definition of "the Vesting Day" in the Trust Deed as executed, the Trust must terminate no later than 1 July 2020. Following the Deed Poll, the Trust will terminate, at the latest, on the day that is 21 years after the death of the last survivor of the descendants of King George V living at 23 December 1977.
The Trustee and the Unit Holders wish to encourage further investment in the Trust. A provision in the Trust Deed that requires termination of the Trust either on 1 July 2020 or at an uncertain date determined by reference to the death of descendants of King George V discourages investment in the Trust. Hence, the Trustee executed the Deed Poll and the Trustee wishes to make a further modification or alteration of the provisions of the Trust Deed by amending the definition of Vesting Day by removing the reference to the death of descendants of King George V.
The requirement that the Trust be terminated by reference to the death of descendants of King George V was no doubt intended to ensure that any disposition effected by or pursuant to Trust Deed would not be void by the operation of the rule against perpetuities. [1] The effect of cl 7 and cl 20 of the Trust Deed is that, although no Unit Holder is entitled to any particular security or investment comprised in the Trust Fund or any part thereof, the beneficial interest in the whole of the Trust Fund existing from time to time is held by the Unit Holders for the time being in proportion to the Units registered in their respective names. Further, all income vests in Unit Holders under cl 20. Accordingly, subject to the operation of cl 7(d), there is no part of the Trust Fund that is not vested in interest.
That is to say, an undivided share of the Trust Fund, according to the number of Units held, is vested in each Unit Holder. A Unit may only be sold or otherwise transferred as provided in cl 8 of Trust Deed. Further, the Trustee may refuse to register a transfer of Units under cl 8(b). Further, under cl 8(c), no Unit may be sold or otherwise transferred to a person who is not a Unit Holder so long as any Unit Holder is willing to purchase the same at "fair value". Clause 8 contains a mechanism for determining fair value. Thus, when the Trust was established by the execution of the Trust Deed, the whole of the beneficial interest in the Trust Fund vested in the three original Unit Holders, subject to the operation of cl 7(d).
Under cl 7(d), the Trustee has power to issue additional units from time to time. The holder of such additional Units would acquire an interest in the Trust Fund. That interest could vest at any time prior to the termination of the Trust. In so far as such an issue of additional Units occurred after the expiration of the perpetuity period, the disposition effected by the Trust Deed may have been void, but for the provision concerning descendants of King George V.
However, if the clause dealing with the descendants of King George V were to be deleted from the Trust Deed, and the reference to 1 July 2020 has been effectively removed, the Trust could continue in existence indefinitely. A question arises as to whether, in so far as the power to issue additional Units under cl 7(d) continues to exist, the effect would be that there is a new disposition that may be voided by the operation of the Perpetuities Act 1984 (NSW) (Perpetuities Act).
Under s 7(1) of the Perpetuities Act, the perpetuity period applicable for an interest created by settlement is 80 years from the date on which a settlement takes effect. Under s 7(2), where an appointment of an interest is made under a special power of appointment, the perpetuity period is to be reckoned from the date on which the settlement creating the power takes effect. The term settlement includes any instrument, transaction or dealing whereby a person makes a disposition. The term disposition includes:
the conferring or exercising of a power of appointment and any other power or authority to dispose of property; and
any alienation of property.
The term power of appointment includes any discretionary power to make a disposition. Under s 6(1) of the Perpetuities Act, a power of appointment is, at any particular time, to be treated as a special power unless, at that time, the appointor has, by the settlement creating the power, unconditional authority at his or her own discretion to exercise the power by appointing the interest the subject of the power to himself or herself. Under s 6(3), an authority is unconditional notwithstanding any formal condition relating to the mode of exercise of the power.
Section 8(1) of the Perpetuities Act relevantly provides that, where a provision of a settlement that creates an interest would, but for s 8, infringe the rule against perpetuities, the interest is to be treated as if the provision did not infringe the rule against perpetuities, until such time, if any, as it becomes certain that it must vest, if at all, after the end of the perpetuity period. The fact that it becomes certain that an interest must vest does not affect the validity of anything previously done in relation to the interest. Under s 8(2), where a provision of a settlement that creates an interest consisting of the conferring of a general power of appointment would, but for s 8, infringe the rule against perpetuities, the interest is to be treated as if the provision did not infringe the rule against perpetuities until such time, if any, as it becomes certain that the power will not be exercisable within the perpetuity period. Finally, under s 8(3), where a provision of a settlement that creates an interest consisting of the conferring of any power or right, except a general power of appointment, would, but for s 8, infringe the rule against perpetuities, the interest is to be treated as regards any exercise of the power or right within the perpetuity period as if the provision did not infringe the rule against perpetuities. The provisions are to be treated as infringing the rule only if and so far as the power or right is not fully exercised within the perpetuity period.
The power to issue additional Units is a power of appointment. Thus, in so far as the Trust has an indefinite life, it is possible that there could be an issue of additional Units being issued outside the perpetuity period. The question therefore arises as to whether the power of appointment contained in cl 7(d) is a special power of appointment.
The power in cl 24 of the Trust Deed is subject to a proviso that the power does not authorise any payment or transfer to the Trustee. Given that proviso, the power contained in cl 24 is a special power for the purposes of the rule against perpetuities. A power will be properly characterised as a special power if it is limited such that the donee can appoint to any person other than the donee. [2]
However, there is no such limitation on the power conferred by cl 7(d). That may suggest that the Trustee has unconditional authority to appoint property to itself, in so far as the Trustee could issue new Units to itself. The question is whether the power is equivalent to absolute ownership on the part of the Trustee in respect of the Trust Fund [3] , because the choice of the Trustee is so wide that, in practical terms, its power amounts to absolute ownership [4] .
[9]
Removal of discretionary powers under clauses 7(d) and 24
The Trustee is concerned that the provisions of cl 24 and cl 7(d) are a disincentive to prospective investors. On one view of those provisions, the Trustee would have power to defeat or substantially eliminate the interest of a Unit Holder.
The Trustee is contemplating that staff members of the business conducted by the Trustee be offered Units in the Trust as an incentive. The staff members are concerned that the effect of cll 24 and 7(d) is that the Trustee has the potential to exercise a power that could detrimentally affect the value of their Units. The Trustee has no intention of exercising the relevant powers and does not consider that there is any reason for the powers to subsist. The Trustee therefore proposes to exercise the power conferred by cl 33 to alter and modify the provisions of the Trust Deed by deleting cl 24 and deleting from cl 7(d) the following words:
"with power to classify or designate the same or to re-classify units which are already issued in such manner and upon such terms and conditions as the Trustees think fit."
I consider that, in the circumstances, the Trustee would be justified in exercising the power contained in cl 33 to make those alterations or modifications to the Trust Deed.
[10]
Conclusion
I am satisfied that it is appropriate to make orders pursuant to s 63 of the Trustee Act. I propose to direct the Trustee to bring in short minutes of orders to give effect to my conclusions.
[11]
Endnotes
See Cadell v Palmer (1833) 1 Cl & F 372.
See Re Park [1932] 1 Ch 580.
See Re Earl of Coventry's Indenture [1974] Ch 77 at 93.
See JHC Morris and W Barton Leach, The Rule against Perpetuities (Stevens & Sons, 1962, 2nd ed) at 135-8.
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Decision last updated: 09 May 2018
That is to say, the question is whether the power conferred by cl 7(d) can be properly characterised as a general power, in circumstances where the power could be exercised by the Trustee in favour of itself. Putting it another way, the question is whether it is possible to characterise any part of the Trust Fund as being property beneficially owned by the Trustee. I do not consider that the express limitation on the power contained in cl 24 leads to the conclusion that there is no limitation on the exercise of the power conferred by cl 7(d). Rather, I consider that the proviso in cl 24 evinces an intention on the part of the author of the Trust Deed that the Trustee would at no time have any beneficial interest in the Trust Fund. It would be curious indeed if the Trustee could issue Units to itself without restriction but was unable to pay or transfer any part of the Trust Fund or income thereof to the Trustee or to the Trustee of any settlement or trust under which the Trustee may acquire an interest. While there is no such express proviso to cl 7(d), the scheme of the Trust Deed requires that the Trustee not have any beneficial interest in the Trust Fund.
Further, limitations would be imposed by operation of law in the sense that, even if the Trustee could be the beneficial owner of Units, it would be a breach of trust for the Trustee to issue Units to itself unless, perhaps, it was shown that the consideration provided by the Trustee for the issue of capital units was no less than the full value of the Units acquired. I do not consider that an express power for a trustee to sell the property of a trust to itself for full value would be a general power of appointment.
The essence of a general power of appointment is that a trustee, by the mere stroke of a pen, can make itself the owner of the trust property. The Trustee cannot make itself an owner of Units without providing full consideration for the issue of the Units. I consider that the power conferred by cl 7(d) is not a general power of appointment for the purposes of the rule against perpetuities. I do not consider that the Trustee would be justified in exercising the power reserved in cl 33(a) of Trust Deed so as to delete the reference to the death of the last survivor of the descendants of King George V from cl 1(4) of the Trust Deed.