This is the fourth procedural judgment I have given in these proceedings.
By summons filed on 21 June 2013 in the General List, a number of beneficiaries of the will of the late Chow Cho Poon commenced proceedings against the defendants, who are the executors, and trustees of the testamentary trust of the residuary estate of the deceased. As in the first judgment, which is Chow v Chow [2016] NSWSC 908, I will refer to the plaintiffs as the "beneficiaries", and to the defendants as the "trustees". The beneficiaries sought relief to enforce their rights under the testamentary trust, and also, by order 1, sought an order that the trustees account for their administration of the estate.
The application by the beneficiaries for an order that the trustees account for their administration of the estate in Equity remains outstanding.
On 14 February 2014, when the court made orders on the other substantive relief claimed by the beneficiaries, it also made an order directing the plaintiffs (ie the beneficiaries) to file and serve any application for the passing of the accounts and for commission by a stipulated date. I assume the reference to the plaintiffs (which was also made in the short minutes of order provided to the court by the parties) was a typographical error for the defendants.
The trustees filed a notice of motion on 18 July 2014, in which they sought an extension of time for the making of the application, as well as directions, and an order that the notice of motion be treated as also having been filed in the original 1997 Probate proceedings concerning the deceased's estate.
Senior Deputy Registrar Studdert rejected the form of the accounts prepared by the trustees, and the trustees sought a review of that determination under UCPR r 49.19. I heard the application for review, and in my first judgment I gave my reasons for rejecting the application.
I also expressed some puzzlement about the trustees' decision to have their accounts passed by the Probate office, as that would not have resolved the beneficiaries' application in the Equity proceedings for an accounting in Equity.
The court made orders and directions on 11 August 2014 for the service of the trustees' accounts on the beneficiaries, and the passing of accounts by the trustees, as well as other orders in conformity with Pt 78 of the Supreme Court Rules 1970 (NSW). The court does not appear to have made the order sought concerning the original probate proceedings. It appears that the proceedings were stood into the Probate List for the purpose of the trustees' accounts being passed.
It is my understanding that, following the delivery of the first judgment, the trustees have abandoned their application for their accounts to be passed by the Probate office.
I made a number of observations in my first judgment concerning the utility of the dispute between the parties over the format in which the trustees had prepared accounts. Given that the testamentary trust had been in operation for a period over 15 years, I suggested that it was in the interests of the parties to cooperate in order to try to refine the issues between them and streamline the future conduct of the proceedings.
As a result of a dispute between the parties concerning the orders that should be made for the further conduct of the proceedings, after a further hearing, I gave my second judgment on 18 July 2016: Chow v Chow (No 2) [2016] NSWSC 994.
At [35] I set out proposed orders and directions for the further conduct of the proceedings. I invited the parties to cooperate, and to agree, if they saw fit, to more appropriate directions than those that I suggested.
That attempt to foster cooperation between the parties prompted further dispute between them. I heard further argument and, on 19 August 2016, I handed down my third, short, judgment: Chow v Chow (No 3) [2016] NSWSC 1156.
In that judgment I made orders substantially in the terms that I foreshadowed in my second judgment. The objective of the orders was to require the trustees to provide additional information to the beneficiaries, so as to enable the beneficiaries to identify the real issues that they wanted to contest in relation to the accounts provided by the trustees.
The operative order was order 7, which was in the following terms:
Provided the plaintiffs are given reasonably appropriate information by the defendants (such that no further order by the court will be necessary), direct the plaintiffs by Friday, 11 November 2016 to file and serve on the defendants:
(a) points of claim that identify all transactions in the annual financial statements prepared for the trustees that the plaintiffs challenge, and if the plaintiffs seek an order against the defendants that they give an accounting on a wilful default basis, the grounds upon which the plaintiffs seek that order; and
(b) draft short minutes of order containing directions for the further conduct of the proceedings.
By order 8, I directed the defendants, by Thursday 2 December 2016, to file and serve on the plaintiffs points of defence, and a response to the draft short minutes of order served by the plaintiffs.
It is appropriate to refer to a number of observations made in my third judgment, which were intended to explain the purpose of the orders and directions that I would make.
As I have said above, the beneficiaries in the Equity proceedings seek an accounting in Equity from the trustees. On the facts of the present case, the beneficiaries appear to be entitled to an accounting from the trustees.
The purpose of my making the orders and directions in the third judgment was to encourage the parties, and if necessary impose upon them, the need to work out an efficient and cost-effective way to identify the real accounting issues between them, both in their own interests, and in the interests of the administration of justice. To the extent possible, I wished to avoid the court having to deal with an unnecessarily protracted and complex accounting between the parties.
However, this was to be done in a way that did not inappropriately interfere with the beneficiaries' right to an accounting from the trustees.
Accordingly, at [6] to [8] of the third judgment I made various comments, including that my orders and directions were to be a procedural step, and were not intended to affect the substantive rights of the parties, including, in particular, the right of the beneficiaries to identify transactions undertaken by the trustees that the plaintiffs wished to challenge. The requirement that the beneficiaries serve points of claim was not meant to impose upon them any burden to prove that any of the transactions engaged in by the trustees were improper or unauthorised. I went so far as to say that it may be a proper compliance with order 7 for the beneficiaries to identify transactions, and to state in respect of those transactions that they require the trustees to justify those transactions.
In the purported performance of order 7, the beneficiaries served points of claim on the trustees. Order 1 claimed:
An order in respect of all payments made to Cornerstone Law and to legal practitioners in New South Wales for the taking of accounts in common form to 30 June 2016 in relation to the estate of the late Chow Cho Poon.
The beneficiaries sought directions, and other consequential orders, including orders for the production by the trustees of certain descriptions of documents attached to the invoices rendered by various firms of lawyers.
The effect of the points of claim was to seek an accounting in Equity in common form in relation to all payments made to Cornerstone Law (a firm of Singapore lawyers) and to all legal practitioners in New South Wales who had been retained by the trustees. The points of claim did not identify specific payments to any of the lawyers which the beneficiaries wished to challenge.
The allegations of fact in the points of claim in support of the claims for relief were relatively simple. The beneficiaries claimed in respect of all of the lawyers that the trustees had provided no information, or alternatively no adequate information, to demonstrate the basis for the provision of the legal services or to establish that they were just allowances. The beneficiaries referred specifically to the narrations within the invoices rendered by the lawyers.
The trustees have not filed points of defence in accordance with order 8, and responded to the points of claim by asserting that they entirely failed to comply with the requirements of order 7.
On 29 November 2016, the trustees filed a notice of motion, in which they sought an order pursuant to UCPR r 13.4 that the proceedings be dismissed.
The matter came on for a brief hearing on 8 December 2016, which was the return date for the notice of motion. The parties delivered written submissions to the court, made brief oral submissions, and relied upon certain affidavit evidence.
The parties also handed up draft short minutes of order to the court. The trustees sought an order that the beneficiaries file and serve points of claim in conformity with order 7 made on 18 August 2016, and asked for their notice of motion to be stood over for directions on a date to be fixed.
The beneficiaries, on the other hand, sought an order that the trustees file and serve their points of defence, and also that the defendants file and serve verified accounts in common form in accordance with UCPR Part 46, in respect of the payments to the lawyers referred to in their points of claim.
The beneficiaries also sought orders for the production of documents, orders for the resolution of any dispute between the parties concerning the contents of documents required to be produced, an order that the beneficiaries file and serve a list of surcharges and falsifications to the accounts, an order that the beneficiaries have leave to apply to the Registrar to examine the trustees viva voce in respect of the accounts, and an order that an account be taken by the Registrar.
It may be noted that the beneficiaries' short minutes of order were expressed to be in the Probate List. Consequently, if the Court made orders as sought by the beneficiaries, the result would appear to be to require the officers in the Probate office to conduct an accounting in Equity.
Essentially, the point taken by the trustees in their written submissions was that the points of claim were not in conformity with order 7, that they were entitled to know, with a degree of precision in the points of claim, the claims they are to meet at the hearing, and that the present points of claim entirely failed to achieve that end.
The trustees complained that it was not sufficient for them simply to be told that the real issues in dispute involve the entirety of the estate's legal costs and expenses.
The trustees also submitted that, as the beneficiaries seek an order that they account in Equity, the account should not be conducted in the Probate office.
The trustees' submissions essentially raise two matters. The first concerns the adequacy of the points of claim. The second concerns the venue for the taking of any accounts.
It will be convenient to dispose of the second issue first. At the hearing, counsel for the beneficiaries only faintly defended the submission that the accounting should take place in the Probate office. In my view it is appropriate that the accounting take place in the General List.
There is a live issue about whether any accounting in Equity can, or should, be undertaken before a registrar in the Equity Division, or before a judge, or by some other process. As associate judges no longer sit in the Equity Division, the former convenient approach of listing matters before an associate judge for the taking of accounts in Equity is no longer available.
In a matter such as the present, the practical consequence is that it will be necessary for the proceedings to be further case-managed, until a point is reached where the true issues for determination can be understood more clearly than is possible at present. I say that because, while the beneficiaries would prefer the accounting to take place before a registrar, the trustees say that the amount at issue is so large that it should be dealt with by the court.
I will now return to the primary issue of the adequacy of the beneficiaries' points of claim.
It is relevant to this issue for the court to note that the affidavit evidence discloses the communications exchanged between the parties, in conformity with the orders made on 18 August 2016, for the provision of additional information by the trustees to the beneficiaries. It seems that considerable information was provided, and that this information enabled the beneficiaries to decide to confine their request for an accounting to the payments for legal services made by the trustees.
The beneficiaries assert that, in the period 1998 to 2016, the trustees paid $4,557,708.48 to lawyers, of which $2,289,348.65 was reimbursed by the trustees to the trust fund on a 'non-admissions' basis, and without detailed explanation. The balance of the legal expenses paid out of the trust fund is, according to the beneficiaries, $2,268,359.83.
It is not necessary to go into the substance of the correspondence in detail, but it should be noted that the trustees partly responded to requests for information by the beneficiaries by relying upon a principle that beneficiaries have no entitlement to see documents which are private or confidential to the trustees, non-disclosure of which is necessary to preserve the trustees' right not to disclose their reasons for exercising discretionary powers and their reasoning processes: Hartigan Nominees Pty Ltd v Rydge (1992) 29 NSWLR 405 at 445. The trustees also relied upon Avanes v Marshall (2007) 68 NSWLR 595; [2007] NSWSC 191 at [25] for the proposition that, since deliberations by trustees precede their determination to have trust accounts drawn up, the balancing process comes down in favour of protecting the trustees from scrutiny of their deliberations leading up to the drawing of the accounts, and that "part of their administration should not become the subject of a fishing expedition by the beneficiaries".
The parties exchanged correspondence concerning the meaning and effect of my third judgment. It is sufficient to note that, in the trustees' solicitors' 29 November 2016 letter, they asserted that all supporting documentation in the hands of the trustees has been provided as part of the accounting, and that there is no obligation on the trustees, as part of the accounting process, to provide to the beneficiaries explanations for expenses incurred on behalf of the estate beyond what has already been provided in the supporting documentation. Further, the solicitors said:
A beneficiary's remedy for failure by trustees properly to undertake this duty is to bring a claim against the trustees for breach of trust. Significantly, no allegation is made in the "Points of Claim" against the trustees for any breach of trust.… This is not, nor could it be, a claim for breach of trust for there is no general duty on a trustee to provide information to beneficiaries, apart from that necessarily involved in the provision of proper trust accounts…
The solicitors for the beneficiaries responded in their 5 December 2016 letter by saying that the beneficiaries did not need to establish misconduct by the trustees to obtain an order for the taking of accounts in common form. They continued:
… The issues to be determined are "whether certain assets or their proceeds, including income, have been received by the executor or administrator and accounted for and whether items of claimed expenditure are proper expenses for the estate and have been vouched in amounts determined to be reasonable": Ellis v Ellis [2015] WASC 77 (E M Heenan J) at [176] (emphasis added).
The beneficiaries' solicitors then set out what they expect to occur as part of the accounting process. They said the parties will be concerned with what is referred to in UCPR r 46.7(2) as "a charge", and which was formerly called a "falsification". That is because the accounting will substantially be concerned with the legitimacy of the payments made out of the estate to the lawyers.
I accept that the approach adopted by the beneficiaries is in accordance with the orders and directions that I made on 18 August 2016, and that the points of claim conform with order 7, in the light of the explanation of the purpose of order 7 given in my third judgment.
The crucial point is that the orders and directions made on 18 August 2016 were procedural in nature, and were made in furtherance of the beneficiaries' application for an order for an accounting in Equity by the trustees.
The beneficiaries were not required by order 7 to allege any case of breach of trust against the trustees. They were expected to confine their request for an accounting to the extent that they felt reasonably able to do so on the basis of all of the information provided to them by the trustees. At least in principle, the beneficiaries have substantially confined the accounting they now seek, when viewed from the perspective of over 15 years of the accounts of the residuary trust. The court has no means to assess the extent to which, as a practical matter, the beneficiaries have confined the accounting they seek to a proportion of all of the transactions in which the estate engaged. That does not matter, because I have no reason to find on the evidence before the court that the beneficiaries have acted unreasonably.
It must be remembered that the beneficiaries may be entitled to a full accounting, and the court must be careful to avoid going further than to encourage the parties to adopt an efficient and cost-effective means of satisfying the beneficiaries' entitlement to an accounting.
Although the evidence does not permit the court to take a view about the transparency and adequacy of the information provided by the trustees to the beneficiaries to support the payments made to lawyers out of the estate, it must be acknowledged that the amount is substantial, the need for the estate to incur substantial legal costs is not transparent, and the barely explained reimbursement of $2,289,348.65 makes it reasonable for the beneficiaries to require the trustees to undertake a conventional accounting process, albeit in common form and limited to legal expenses.
Orders and directions should therefore be made for the conducting of the account in common form in respect of the limited subject matter sought by the beneficiaries.
It should not be a great burden on the trustees to prepare verified accounts concerning the payment out of the estate for legal expenses, as the court has been advised that one of the trustees has already sworn an affidavit listing all of those expenses.
In due course the beneficiaries will be required to falsify claims for legal expenses made by the trustees. At that time, the falsification process will identify the subject matter of the beneficiaries' complaints, either on a specific, or a more general basis. It is too early to know whether that process will provide any more specificity than is provided in the points of claim that have been served.
As the accounting will be concerned with falsification, the onus will fall on the trustees, as the accounting parties, to begin, and thus carry the burden of proving, that the charges were justified charges against the estate of the deceased.
As a practical matter, it will be a matter for the forensic judgment of the trustees in the first instance to determine the evidence that should be put before the court to satisfy the court that each charge is justified.
As the beneficiaries will be entitled to challenge the manner in which the trustees seek to justify or vouch the legal expenses, the beneficiaries may be entitled to access documents in the possession of the trustees that are relevant to the issue of the justification for the legal expenses.
The present case is not one in which beneficiaries of a trust simply seek access to documents in the possession of the trustees for the beneficiaries' own purposes. The beneficiaries helpfully provided to the court a short submission on the legal principles governing the entitlement of beneficiaries to documents in the hands of trustees (which, among other things, examined the difference between the line of the authorities that included Deutsch v Trumble [2016] VSC 263 on the one hand and AIT Investment Group Pty Ltd v Markham Property Fund No 2 Pty Ltd [2015] NSWSC 216 on the other hand). It is not necessary for the court to resolve this area of legal uncertainty at this stage of these proceedings. Whether or not it becomes necessary to do so may become clear at a later stage. However, if these issues need to be addressed, the question will arise in a context where the trustees have the burden of proving that particular legal expenses were justifiable charges against the estate and where the beneficiaries have a right to challenge the justification for the charges.
If the future conduct of these proceedings is considered in a practical way, it seems obvious that the trustees, as the parties with the burden of proving the justification of charges that are subject to falsifications, will be required, in such manner as they may see fit, to provide evidence with their verified accounts that is sufficient to establish at least a prima facie case for the justification for the charges.
In short, the beneficiaries appear to claim that the information that has been provided to them by the trustees does not in a transparent or sufficient way explain why all of the legal expenses have been paid out of the estate, which particular legal expenses that were paid have been reimbursed, and why some legal expenses have been reimbursed and not others. If there is some overall explanation to be given that will explain these matters, it will fall to the trustees to give it. The earlier they do so the better, as it is not in the interests of the parties or of the court to continue this litigation in a fog of uncertainty. Rather, having regard to the burden of proof that falls on the trustees, it will be in their interests, as well as the interests of the beneficiaries and the administration of justice, for the trustees to put their case with all verification available to them. Issues of the provision of extra information or documents, the process of falsification, the examination of the trustees, and the final conduct of the accounting, would then occur in the light of the case put forward by the trustees.
I will now address more particularly the draft short minutes of order put forward by the beneficiaries.
The beneficiaries advised the court that there is no real point in requiring the trustees to serve points of defence. However, points of defence may be an efficient way for the trustees to explain their justification for the legal expenses that have not been reimbursed, and the reasons for the reimbursements that have occurred.
An order should be made for the taking of accounts broadly in terms of draft order 2, but the trustees should be given enough time to prepare affidavits that are as complete as may be necessary, given the generality of the allegations in the points of claim.
Draft orders 3 to 6 provide a regime for the parties to resolve differences concerning the need for the trustees to provide to the beneficiaries all invoices, including narrations, issued by the named lawyers for the years ending 30 June 2015 and 30 June 2016. As I presently understand the dispute, I do not see why orders in the form suggested by the beneficiaries should not be made.
Draft order 7 will require the beneficiaries to file and serve a list of surcharges and falsifications to the accounts by a nominated time. As I have noted, the beneficiaries appear to agree that it is likely that only falsifications will be notified.
It will be important for the parties to at least consider the relationship between the extensiveness of the evidence that the trustees may be able to give when they file and serve their verified accounts in justification of all of the charges of legal expenses, and what may occur when the beneficiaries file and serve their falsifications. It will plainly be desirable for the falsifications to be specific and be supported by particular reasons. The less the evidence provided by the trustees in justification for all of the legal expenses, the more likely it will be that the beneficiaries file and serve a blanket list of falsifications, which may do little to illuminate the true issues between the parties on the accounting.
Draft order 8 would grant liberty to the beneficiaries to apply for an order that the trustees be examined viva voce in respect of the accounts. Ordinarily, an accounting party is liable to be cross-examined by the other party on the accounts before the surcharges and falsifications are filed: see Ritchie's Uniform Civil Procedure NSW [46.5.5] (Ritchie's). Before being cross-examined, the accounting party is entitled to notice of the points on which they are to be cross-examined: see Ritchie's [46.5.10].
I propose to give the parties time to consider these reasons for judgment, and I will appoint a time for a directions hearing to resolve any dispute as to the orders and directions that should be made in relation to the accounting.
The orders and directions should not at this stage deal with how the accounting is actually to take place. That issue should be determined at a further directions hearing, after all intervening steps have been taken, at which time it should be possible for the court to formulate appropriate orders for the conduct of the accounting.
In the light of the reasons given in this judgment, it seems that the trustees' notice of motion filed on 29 November 2016 should be dismissed. I will not now make an order to that effect, as in their draft short minutes of order the trustees asked for the notice of motion to be stood over for directions, and in their written submissions they purported to reserve their position in respect of their notice of motion.
I will hear the parties on any other matters that it may be necessary for the court to deal with.
[2]
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Decision last updated: 10 February 2017