citation: ABRUGIATO -v- HANS PETER HANSEN AS EXECUTOR OF THE ESTATE OF SEBASTIANA ABRUGIATO [2012] WASC 362 (5 October 2012)

Supreme Court of WA|2012-10-05|Before: Corboy J

Trusts - Construction of deed creating separate trust funds - Whether liabilities of trust to be split equally between children of appointor - Whether mistake in expression of the appointor's objective intentions - Whether any mistake capable of being cured in construing the deed

Trusts - Fraud on power of appointment - Whether power of appointment required liabilities of trustee to be allocated equally between trust funds to be created - Whether appointor failed to have regard to or failed to take into account relevant considerations - Principles in Re Hastings-Bass and Pitt v Holt

Trusts - Whether trustee entitled to be indemnified out of separate trust funds on a proper construction of trust deed

Equity - Rectification - Whether deed creating separate trusts failed to record intentions of appointor - Whether intentions of a director of trustee company, who was a beneficiary of the trust, relevant - Turns on own facts

Equity - Estoppel - Whether beneficiaries estopped from denying that appointor intended to split liabilities of trusts equally between them - Turns on own facts

Equity - Declarations - Whether proper contradictor whether party neither consents to nor opposes declaratory relief - Whether there was a dispute to be determined by a declaration on the effect resolutions made by the governing director of a company of the articles of association

Corporations - Dividends - Whether resolutions for declaring dividends made on the dates stated in company minutes - Whether resolutions and declarations effective

Declarations to be made that the liabilities of the F & S Abrugiato Family Trust are to be allocated according to the schedule to the Deed of Appointment of Separate Trustees; that resolutions by the governing director of Abrugiato Pty Ltd purportedly declaring dividends were ineffective; that Abruzzi Pty Ltd and Ortana Pty Ltd are not liable to Franknelly Pty Ltd for liabilities incurred by Franknelly as trustee of the F & S Abrugiato Family Trust and that Mrs Abrugiato was empowered by the trust deed for the F & S Abrugiato Family Trust to make the Deed of Separation according to its terms and she did not abuse the power conferred by the trust deed

1 The late Mr and Mrs Abrugiato operated a well-known restaurant in Fremantle. The restaurant business was conducted through the F & S Abrugiato Family Trust (the Family Trust), the trustee of which was Franknelly Nominees Pty Ltd (Franknelly). Mr and Mrs Abrugiato were also the directors of, and shareholders in, Abrugiato Pty Ltd (Abrugiato).

2 Mr Abrugiato died in 2000. Mrs Abrugiato assumed control of the Family Trust and Abrugiato on his death. By 2005, the Family Trust, Abrugiato and Mrs Abrugiato held a number of properties in and around Fremantle. Mrs Abrugiato also owned a property in Italy.

3 Mr and Mrs Abrugiato had five children Dr Abrugiato, Ms Santacaterina, Ms Keutzer, Ms Abrugiato and Ms Murray. In late 2005, Mrs Abrugiato sought advice from RSM Bird Cameron (Bird Cameron) on estate planning and in particular, about arrangements for distributing the various properties under her control among her children. A 'succession plan' was prepared by Bird Cameron (exhibit 10). The plan contained recommendations on how effect could be given to Mrs Abrugiato's wishes for the distribution of her estate among her children. Two important features of the succession plan involved 'trust splitting' (the creation of separate trust funds within the Family Trust) and a 'dividend payment plan' (a proposal for eliminating over time a liability of Franknelly, as trustee of the Family Trust, to Abrugiato and Mr and Mrs Abrugiato and for dealing with a corresponding asset in Abrugiato).

4 Mrs Abrugiato died in June 2008. Mr Hansen and Mr Johnston (the executors) were appointed executors of her estate. They are directors of Bird Cameron.

5 These proceedings concern various disputes over the effect of steps taken to implement the succession plan and in particular, to create separate trust funds within the Family Trust and to deal with the liabilities that had been incurred by Franknelly as trustee of the trust. The disputes reflected a split among Mrs Abrugiato's children that had developed prior to her death and which formed part of the context within which the succession plan was devised. The split was between on one side, Dr Abrugiato and Ms Santacaterina (the plaintiffs) and on the other side, Ms Keutzer, Ms Abrugiato and Ms Murray (the second defendants).

6 The issues to be determined in these proceedings focussed primarily on the meaning and effect of a deed entitled, 'The F & S Abrugiato Family Trust Deed of Appointment of Separate Trustees', made on 13 June 2007 between Mrs Abrugiato, Franknelly, Abruzzi Pty Ltd and Ortana Pty Ltd (the Deed of Separation) (exhibit 6). The deed gave effect to that part of the succession plan that involved splitting the trust fund of the Family Trust (the Trust Fund) into separate funds (referred to as the Roberto Abrugiato fund, the Luciana Santacaterina fund and the Roma fund). Among other things, it imposed an obligation on the trustees appointed to each trust fund to satisfy particular liabilities owed by Franknelly. (The liabilities were referred to in the proceedings as the liabilities of the Family Trust; that reflected the way in which they were described by the witnesses and in many of the relevant documents and it will be convenient to generally refer to the liabilities in that way.)

7 The plaintiffs and the second and fourth defendants (together, the defendants) disputed the proper construction of those provisions of the Deed of Separation concerning the allocation of the liabilities of the Family Trust between the different funds. Further, the fourth defendant (with the concurrence of the second defendants) sought rectification of the deed if it was found that it was to be construed as the plaintiffs contended. The defendants alleged that the deed failed, on the plaintiffs' construction, to record and give effect to Mrs Abrugiato's specific intentions on how the liabilities of the Family Trust were to be allocated between the separate trust funds that had been created.

8 Another issue to be determined concerned the effect of certain resolutions made by Mrs Abrugiato, as the governing director of Abrugiato, purporting to declare dividends to be paid to her by the company. The plaintiffs sought declarations that the resolutions were invalid according to the articles of association of Abrugiato. The defendants did not consent to or oppose the declaratory relief claimed. That raised a further issue over whether there was a proper contradictor to the claim.

9 The remaining significant issue to be determined concerned the right of Franknelly to be indemnified for liabilities that it had incurred to Abrugiato and Mr and Mrs Abrugiato (liabilities that were owed to Mrs Abrugiato following the death of Mr Abrugiato). The defendants contended that Franknelly had a right to be indemnified out of, and held equitable security over, each of the trust funds created by the Deed of Separation. The plaintiffs denied that Franknelly had any right to be indemnified out of the Roberto Abrugiato and the Luciana Santacaterina funds.

10 The plaintiffs commenced proceedings (CIV 1001 of 2011) seeking declarations and consequential orders concerning their disputes with the defendants. Those proceedings were commenced by writ indorsed with a statement of claim. The executors subsequently commenced proceedings by originating summons (CIV 1032 of 2011) seeking directions in relation to the administration of Mrs Abrugiato's estate. The proceedings were consolidated and directions made requiring the parties to file statements of facts, issues and contentions. That assisted in identifying and settling a list of issues to be determined in the consolidated proceedings. It was directed that many but not all of those issues should be tried as separate issues. The list of preliminary issues is annexed to the reasons.

11 The fourth defendant was directed to separately plead its claim for rectification of the Deed of Separation. Consequently, there were two statements of claim in the consolidated proceedings. I will refer to the fourth defendant's pleading as the rectification statement of claim.

12 Abrugiato was separately represented in the proceedings but did not take an active part. It indicated that it would abide by whatever decisions were made by the court. Similarly, the executors informed the court that they did not wish to be heard on all of the issues that were directed to be heard as preliminary issues. They were given leave to participate in the trial to whatever extent that they considered appropriate to their appointment and the requirement for further directions in the administration of the estate.

13 The fifth defendant was controlled by the second defendants. It appeared by the same solicitors as the second and fourth defendants. However, the court documents filed for the trial referred only to submissions and allegations made by the second and fourth defendants.

14 The Family Trust was created by a deed of settlement (the Trust Deed) made between Salvatore Caniglia and Franknelly on 11 August 1975 (exhibit 1). Mr Abrugiato was the guardian and appointor of the trust during his lifetime. Mrs Abrugiato became the guardian and appointor on Mr Abrugiato's death.

15 The general beneficiaries of the trust included Mr and Mrs Abrugiato and any corporation in which they held at least one share. Accordingly, Abrugiato was a general beneficiary of the Family Trust. Mr and Mrs Abrugiato's children were specified beneficiaries.

16 The term 'Trust Fund' was defined by the Trust Deed to mean the sum settled on the trust together with 'all moneys investments and property paid or transferred to and accepted by the Trustees as additions to the Trust Fund the accumulations of income hereinafter directed or empowered to be made all accretions and additions to the Trust Fund from whatsoever source and the investments and property from time to time representing the said money investments property accumulations accretions and additions or any part or parts thereof respectively' (cl 1).

17 The trust was a discretionary trust. Clause 4 of the Trust Deed conferred powers on the trustee in respect of the accumulation and distribution of trust income. In summary:

(a) In any accounting period, the trustee could determine whether to (cl 4(a)):

(i) pay, apply or set aside all or any part of the trust income earned by the trust during that period for any of the general beneficiaries;

(ii) accumulate the income or any part of the income;

(iii) apply or set aside the income or any part of the income for such charitable purposes as the trustee might think fit.

(b) A determination to pay, apply or set aside any part of the trust income for the benefit of any beneficiary could be made by placing any amount to the credit of the beneficiary in the books of the trust (other means of paying a benefit were also permitted) (cl 4(b)(iii)).

(c) Any income that the trustee accumulated was to be dealt with as an accretion to the capital of the trust fund (cl 4(c)).

(d) Any amount set aside for any beneficiary was not to form part of the Trust Fund but upon being set aside would be held by the trustee as a separate trust on trust for the beneficiary absolutely with the trustee to have power, pending payment of the amount concerned to the beneficiary, to invest or apply or deal with the amount according to the powers generally conferred on the trustee to deal with the Trust Fund (cl 4(e)).

18 The Trust Deed was amended by a deed of variation made on 13 June 2007 (exhibit 5) to add a new clause (cl 5A) that permitted the trustee, with the consent of the guardian, to make a declaration that, at a time nominated in the declaration, the net income or capital of the Trust Fund or the income arising from the Trust Fund or some part of the income or capital 'may only be, or may not be, paid applied or set aside for or between such one or more of the Beneficiaries specified in the declaration'. Supplementary powers were conferred on the trustee if it made a declaration.

19 Clause 16 of the Trust Deed provided that the appointor was entitled by instrument in writing at any time to appoint additional trustees or new trustees in place of any trustee who resigned. The clause was amended by the deed of variation made on 13 June 2007 to permit the appointor to appoint a separate trustee for any part of the trust fund (the relevant clause of the Trust Deed as amended was cl 16(aa)(iv)). Clause 16A provided that if the appointor exercised the power contained in cl 16(aa)(iv), a separate trustee was only entitled to be indemnified out of that part of the Trust Fund held by the separate trustee in respect of liabilities incurred after the date of its appointment and it had no right of contribution or indemnity from any other separate trustee.

20 The deed of variation also added a new clause (cl 16B) that also provided that if the appointor exercised the power under cl 16(aa)(iv), the trustee was required, in accordance with any directions that might be given by the appointor, to divide the Trust Fund into the parts for which separate trustees had been appointed and to prepare separate accounts for each part made up to the date of the division.

21 Mrs Abrugiato was a director of Franknelly. Each of the second defendants was appointed directors of the company on 20 January 2006 (exhibit 80).

22 Abrugiato was incorporated on 24 December 1965. The articles of association of Abrugiato adopted the regulations contained in table A in the fourth schedule to the Companies Act 1961 (WA) with certain amendments (exhibit 9). The articles provided for at least three classes of shares:

(a) one class 'A' share issued to Mr Abrugiato and conferring on him governing director rights as contained in the company's constitution during his lifetime;

(b) one class 'B' share issued to Mrs Abrugiato and conferring on her governing director rights to take effect if she survived Mr Abrugiato;

23 Article 13 provided that the governing director could:

(a) at any time appoint any person a director of Abrugiato or remove from office any director;

(b) exercise all powers, authorities and discretions conferred by the articles on the directors generally;

(c) exercise three times the number of all votes capable of being cast on a resolution put to the vote at a meeting of Abrugiato.

24 Article 14 provided that so long as either the class 'A' or class 'B' share with the rights of governing director attached were held by any person then the company could declare dividends of varying amounts on such classes of shares as it might determine from time to time. Articles 98 to 105 governed the declaration and payment of dividends. Article 98 provided that the company in general meeting could declare dividends but no dividend was to exceed the amount recommended by the directors. Article 99 allowed the directors to pay interim dividends where that appeared to be justified.

25 Mrs Abrugiato was the governing director of Abrugiato following the death of her husband. The second defendants were appointed directors of the company on 20 January 2006 (exhibits 79 and 81).

The assets and liabilities of the Family Trust, Abrugiato and Mrs Abrugiato The succession plan balance sheet

26 The succession plan was prepared by Bird Cameron in mid2006. It contained a summary of Mrs Abrugiato's net assets at market value according to the instructions that she had been given:

27 The properties held by the Family Trust, Abrugiato and Mrs Abrugiato were:

The liabilities of the Family Trust as at 30 June 2006

28 The balance sheet for the Family Trust (exhibit 96) recorded the following liabilities as at 30 June 2006:

29 The succession plan stated that Abrugiato had retained earnings of $2 million and franking credits of $898,767 (exhibit 10, TB 294). Mr Ivanac stated that the source of that information was the balance sheet for Abrugiato for the year ended 30 June 2004 (ts 266; and see the references to the 2004 balance sheet in the schedule annexed to the succession plan that summarised the assets of Abrugiato TB 325).

30 The financial statements for Abrugiato for the year ended 30 June 2006 recorded as a noncurrent asset an item described as 'undrawn beneficiary entitlement' in an amount of $1,917,546 (exhibits 115 and 120). As can be seen, that amount was equal to the liability to Abrugiato recorded in the accounts for the Family Trust for the same period (and see note 7 to the financial statements for the Family Trust for the year ended 30 June 2006, exhibit 97). The liability was recorded in the accounts of the Family Trust as a current liability incurred as a result of borrowings by the Family Trust.

31 The undrawn beneficiary entitlement was said by Mr Ivanac to be the same as the retained earnings held by Abrugiato (ts 266). Strictly, that was not correct. Retained earnings formed part of the equity in Abrugiato and the amount retained as at 30 June 2006 was $2,188,429. However, broadly retained earnings were represented by the undrawn beneficiary entitlement (as that comprised nearly all of the company's net assets). Consequently, references in the succession plan to retained earnings were to the asset for which the beneficiary loan from Abrugiato recorded in the accounts of the Family Trust was the corresponding liability.

The succession plan The succession plan letter and objectives

32 The succession plan was dated August 2006 and was prepared by Mr Geoffrey Ivanac. It was sent by post to Mrs Abrugiato on 1 September 2006 (witness statement of Geoffrey Alan Ivanac, exhibit 26, par 82). Mr Ivanac was at that time employed by Bird Cameron as a chartered accountant specialising in estate and succession planning.

33 Mr Ivanac was first introduced to Mrs Abrugiato by Mr Hansen in late 2005. The purpose of the introduction was to enable Mr Ivanac to assist Mrs Abrugiato with succession planning (Ivanac, pars 7 9). Mr Ivanac subsequently provided Mrs Abrugiato with an engagement letter and a 'succession plan' letter at a meeting held on or about 10 January 2006 (Ivanac, pars 32 37). The succession plan letter (exhibit 75) stated that Mr Ivanac understood Mrs Abrugiato's succession planning objectives to include:

(a) providing for all of her children in a 'fair and equitable manner';

(b) reviewing and 'updating' control of her 'entities' so that they accorded with her succession planning objectives;

(c) restructuring her 'entities' so that her children would receive a 'fair and equitable share' of her estate without 'triggering unnecessary Capital Gains Tax and Stamp Duty' and so that control of the entities would 'flow' to her children without the transfer of control being contested;

(d) reviewing 'interentity loans' and loans between her entities and family members and considering the implications of separating the assets owned by her 'company'.

34 I accept that Mr Ivanac's letter accurately captured Mrs Abrugiato's estate planning objectives at the time that he was first instructed. The parties did not suggest otherwise.

35 The succession plan that was subsequently prepared by Mr Ivanac was divided into various sections. Section 2 contained a summary of the recommendations that were made in the plan. The recommendations included that:

(a) Mrs Abrugiato leave her shares in Abrugiato equally between her children;

(b) Abrugiato commence paying out its retained earnings either by a lump sum payment or over a period of five years;

(c) the undrawn entitlements of beneficiaries be paid out by Franknelly either as a lump sum or over a period of five years;

(d) a loan made by the Family Trust to Ms Santacaterina be repaid;

(e) the Family Trust be split into several trusts for each of Mrs Abrugiato's children;

(f) the properties located at 2 Tuckfield Street (where Mrs Abrugiato resided) and 6 Hillside Street be left in equal shares between Mrs Abrugiato's children as tenants in common;

(g) the property located at 4 Tuckfield Street be left in equal shares between the plaintiffs as tenants in common;

(h) Mrs Abrugiato's will document that the plaintiffs were receiving a greater share of her estate assets as the second defendants had received a greater share of Mrs Abrugiato's assets that did not form part of her estate;

(i) Mrs Abrugiato retain control of the Family Trust and Abrugiato for a period of five years at which time her succession plan should be reviewed.

36 It was implicit in those recommendations that the second defendants would receive the properties that were not identified as properties to be left to the plaintiffs. That was made clear in a schedule attached to the plan that is further described below.

37 Section 3 of the succession plan was entitled 'you and your family'. It was noted that none of Mrs Abrugiato's children had special needs that had to be addressed in her estate plans.

38 Section 5 of the succession plan restated Ms Abrugiato's estate planning objectives. The objectives concerning the distribution of Mrs Abrugiato's assets accorded with those stated in the succession plan letter.

39 The recommendations made by Bird Cameron were more fully explained in s 7 of the succession plan. The section was divided into parts by reference to the holder or source of the assets to be dealt with by the plan: Abrugiato; the Family Trust; allocated pensions paid to Ms Abrugiato; Franknelly; Mrs Abrugiato and Mrs Abrugiato's principal residence.

40 The plan noted that Abrugiato owned the property situated at 7 High Street (the site of the restaurant business), valued at $1,300,000. The property had been purchased prior to the introduction of capital gains tax (CGT). The company was also a beneficiary of the Family Trust and shares in the company had been issued prior to the introduction of CGT. The company had lent funds to the trust and had significant retained earnings and franking credits.

41 The primary issues regarding the Family Trust and Franknelly that were identified by the plan concerned the way in which the amount owed by Franknelly to Abrugiato might be repaid and how the retained earnings in Abrugiato could be paid out while minimising the associated tax liability. The trust's financial statements for the year ended 30 June 2005 recorded a substantial interest bearing liability. Note 8 to the accounts described the liability as loans by beneficiaries, including an amount of $1,795,624 owing to Abrugiato (and $297,597 owing to F & S Abrugiato) (see exhibit 65, TB 1082 and following). However, the succession plan referred to the amount owing to Abrugiato as 'unpaid entitlements'. The corresponding asset was referred to in the succession plan as retained earnings in Abrugiato.

42 The plan noted in relation to the retained earnings that (s 7.1.2):

In the event that you pass away, your children will each own an equal share in the Company. The Company will be owed money by the Trust or any new trusts that are created. This could be the cause of family conflict. Roberto and Luciana for example may demand that the loans from the Trust are repaid so that they can access the retained earnings locked up in the Company.

This may cause assets being required to be sold by the Trust or any new trusts, triggering GST.

It would be better if the Company did not have any loans owed to it by the Trust or any new trusts.

43 Accordingly, it was recommended that the unpaid entitlements owed by Franknelly to Abrugiato and the retained earnings of Abrugiato be paid out either as a lump sum or across a five year period (s 7.1.4 and s 7.2.4). However, Mrs Abrugiato was also advised that:

(a) There was a difficulty in paying out the retained earnings as a lump sum. Mrs Abrugiato could be liable for additional income tax of $330,000 and it might be necessary for her to sell one of the properties that she intended to leave to her children to meet that liability. Further, CGT would be paid on the sale of that property.

(b) Paying out the retained earnings over a period of five years would enable the tax liability on the earnings to be met from the income that would be received from rental properties and Mrs Abrugiato's allocated pensions.

44 The plan identified certain advantages from the proposal to pay the retained earnings of Abrugiato to Mrs Abrugiato as dividends. Those advantages included that 'payment of the Company's retained earnings will assist in avoiding any family conflict that may arise in the event that you pass away'; the 'risk of you or your children having debit loans in the Trust [or] the Company will be reduced' and 'the need for a forced sale of assets in the event that you pass away will be reduced' (section 7.1.5).

45 It was recommended that the Family Trust be split into five trusts, one trust for each of Mrs Abrugiato's children. The allocation of the real estate forming part of the trust property, together with the other properties under Mrs Abrugiato's control, was shown in an annexure to the plan (annexure 3) entitled 'Revised Allocation of Assets':

46 The succession plan identified a number of advantages to Mrs Abrugiato from splitting the Family Trust:

(a) splitting the trust would not constitute a disposal of property for CGT purposes;

(b) Mrs Abrugiato would be able to retain control of all of the trusts existing and created until she wished to hand over control to her children;

(d) it was unlikely that there would be 'adverse' income tax or stamp duty consequences from splitting the trust.

47 Annexed to the succession plan was a 'wealth appraisal statement' that recorded information relating to the financial position of Abrugiato, the Family Trust and Mrs Abrugiato. The appraisal statement comprised a bundle of schedules prepared by Bird Cameron. So far as was relevant, the schedules stated that:

(a) The net assets of Abrugiato were valued at $3,453,137. The assets comprised the net assets of the company as recorded in its accounts for the year ended 30 June 2004; cash at bank; the market value of real estate (apparently brought to account in Abrugiato's balance sheet at cost, the purchase price in 1973 (see exhibit 115)) and receivables, being loans made to the Family Trust ($1,856,030).

(b) The net assets of the Family Trust were valued at $7,014,568, primarily comprising the market value of real estate and cash.

(iii) 'beneficiary entitlements' - AE Murray, AJ Murray, NJ Murray, SF Santacaterina and GI Santacaterina ($1,286 each);

(iv) 'beneficiary entitlements' - Abrugiato ($1,856,030);

48 Mr Ivanac advised, in relation to splitting the Family Trust into separate trusts, that 'the liabilities of the Trust will be apportioned between each of the new trusts' (exhibit 10, s 7.2.3(c), TB 299). The defendants emphasised that statement as an expression of Mrs Abrugiato's intention that the liabilities of the Trust Fund should be allocated equally among the trusts to be created for her children. That assumed that the reference to liabilities in the advice was to all of the liabilities appearing in the balance sheets of Franknelly and the Family Trust. The plaintiffs submitted that the reference to 'liabilities' in s 7.2.3(c) of the plan was only to the trade and other incidental creditors of Franknelly (plaintiffs' closing submissions, par 41(b)). That submission was based on the reference to 'unpaid entitlements' (rather than 'liabilities') throughout the succession plan to describe the amount owed by the Family Trust to Abrugiato.

49 Other parts of the succession plan did not clarify what was intended by the reference to liabilities in s 7.2.3(c). For example, the statement of assets and liabilities for the Family Trust forming part of the wealth appraisal statement annexed to plan described the trust's liabilities as including loans at call, beneficiary entitlements and trade creditors. Further, the succession plan did not provide a definition for the term 'unpaid entitlements' or explain what was meant by the reference to the possibility of the Family Trust or 'the new trusts' owing money to Abrugiato and it contained a recommendation that 'a program be implemented whereby the Unpaid Entitlements owing to the Company are paid out either as a lump sum or over a period of five years' (s 7.2.4). That recommendation begged the question: why would the liability for 'unpaid entitlements' be allocated between the 'new' trusts if it was to be eliminated either as a lump sum or over time?

50 Annexed to the succession plan was an advice provided by Mr Grahame Young of counsel. The advice was contained in a letter was dated 28 March 2006 addressed to Bird Cameron, marked for the attention of Mr Ivanac.

51 The letter recorded that Mr Young had been advised that Mrs Abrugiato wished for her children to have 'independent control over different properties which are presently owned by the [Family Trust] whilst minimising the impact of stamp duty, capital gains tax, income tax and goods and services tax'. Mr Young advised that it would be possible to create a number of separate funds together comprising either the whole or part of the assets of the Family Trust and for each child to have control as the trustee, or over a corporate trustee, of one of the separate funds. He considered that there were two methods of achieving that result.

52 The first method involved dividing the trust assets into a number of separate funds, each of which was subject to nominated liabilities, and to appoint separate trustees for the funds. It would be necessary to vary the Trust Deed to allow for the appointment of separate trustees to different parts of the trust property. He referred to that method as trust splitting.

53 The alternative method for dividing the assets of the Family Trust was to create new trust deeds having the same trusts, terms and conditions but with different trustees. Separate parts of the assets of the Family Trust, subject to nominated liabilities, could then be transferred to the trustees of the new trusts. He referred to that method as trust cloning.

54 Mr Young advised on the tax consequences of each of the methods and the steps that would be required for their implementation. It was to be inferred that his advice formed the basis for the recommendations contained in the succession plan about splitting the Family Trust into five trusts. The advice extended to the information that he would require to prepare the documents necessary to amend the Trust Deed. The required information included the following: 'you have not advised on the proposed division of assets and liabilities, in particular of the liability of the 2 larger interest bearing loans. I assume that the division will be done to assist in achieving equality if that is what is desired'.

55 It should be noted that the letter of instruction to Mr Young (dated 9 March 2006 and forming part of exhibit 65; TB 1080) stated that 'Mrs Abrugiato wishes for her children ... to have independent control over the different properties that are presently owned by the ... Family Trust whilst minimising the impact of Stamp Duty, Capital Gains Tax ... Income Tax and Goods and Services Tax'. The letter enclosed a financial statement for the Family Trust for the year ended 30 June 2005 that disclosed 'interest bearing liabilities' of $2,099,097, note 8 to the balance sheet describing those liabilities as 'beneficiaries' loans'. The letter of instruction made no reference to the dividend payment proposal or to any means by which the liabilities of the Family Trust might be eliminated.

56 A meeting was held between Mr Ivanac and Mrs Abrugiato, Ms Keutzer, Ms Murray and Ms Abrugiato on 14 September 2006. Mr Ivanac made notes of the meeting (exhibit 59). The notes incorporated an agenda that indicated that the purpose of the meeting was to review the recommendations contained in the succession plan and to obtain Mrs Abrugiato's authority to proceed with implementing the plan. According to Mr Ivanac, Mrs Abrugiato instructed him at the meeting that adjustments were to be made to the allocation of assets discussed in the plan. It was agreed that he would prepare a revised allocation of assets to reflect those instructions (Ivanac, pars 85 87).

57 On 10 October 2006, Mr Ivanac wrote to Mrs Abrugiato enclosing a revised allocation of assets (the 'final asset allocation') (exhibit 60). The asset allocation was as follows:

58 Mr Ivanac's letter noted that the final asset allocation indicated that the plaintiffs would each receive $225,971 less than the second defendants. The letter further noted that Mrs Abrugiato had advised during the meeting on 14 September that she proposed to 'even up this inequity' by bequeathing the residue of her estate to the plaintiffs. That comprised Mrs Abrugiato's allocated pensions. Mr Ivanac's letter advised that the residue of her estate was valued at approximately $634,000 as at 30 June 2004 and that it was likely that over time the residue would decrease so that the plaintiffs would receive less than that amount.

59 A further meeting was held between Mr Ivanac and Mrs Abrugiato, Ms Keutzer, Ms Murray and Ms Abrugiato on 17 November 2006. Again, Mr Ivanac made a note of the meeting (exhibit 61). The note was headed 'Agenda'. It was not clear whether the note also incorporated a record of what occurred at the meeting. I accept that, if it did not, it nevertheless recorded in some detail what Mr Ivanac proposed to discuss with Mrs Abrugiato.

60 Mr Ivanac also made a contemporaneous entry about the meeting in a running electronic record (known as a 'to do item') that he and others within Bird Cameron maintained in relation to the preparation and implementation of the succession plan for Mrs Abrugiato (exhibit 131).

61 Mr Ivanac's note and electronic record indicated that the proposed allocation of assets between Mrs Abrugiato's children was again discussed at the meeting. Mrs Abrugiato confirmed that 2 and 4 Tuckfield Street and the Italian property were to be allocated to Dr Abrugiato and Ms Santacaterina. However, she instructed Mr Ivanac that the allocated pensions and the residue of her estate were to be distributed equally between her children. It was also agreed at that meeting that the Family Trust was to be split into three rather than five trusts one each for Dr Abrugiato and Ms Santacaterina and one for the second defendants.

62 The meeting on 17 November 2006 was the last meeting at which formulation of the succession plan and the allocation of assets was discussed between Mrs Abrugiato and Mr Ivanac. I accept that the plan was, in effect, approved by Mrs Abrugiato at the meeting; that was apparently common ground between the parties.

63 Mr Ivanac, Mr Hansen and the second defendants gave evidence of the meetings held with Mrs Abrugiato during 2006 in which her instructions were sought and advice was given about the succession plan. That evidence was directed to establishing the intentions of Mrs Abrugiato in relation to her estate and in particular, to the object and terms of the Deed of Separation. The evidence relating Mrs Abrugiato's intentions is considered later in the reasons. Findings about what occurred during the various meetings between Mrs Abrugiato, Mr Ivanac and Mr Hansen are also made in that context.

Implementing the succession plan Mr Young's instructions

64 Mr Ivanac resigned as an employee of Bird Cameron in December 2006. He handed over the daytoday conduct of the succession planning for Mrs Abrugiato to a director of Bird Cameron, Mr David Groves, in or about midDecember 2006 (Ivanac, pars 98 99). Mr Ivanac had been assisted in his practice by a paraprofessional, Ms Haines. She subsequently assisted Mr Groves with the implementation of the succession plan (ts 355 and 382).

65 Mr Ivanac drafted a letter with further instructions for Mr Young prior to his departure (Ivanac, par 97; exhibit 62). The final version of the letter, dated 7 February 2007, was settled by Mr Groves (exhibit 64). Mr Young was instructed to prepare the documents necessary to split the Family Trust by creating three funds:

(a) the Roma trust fund - the properties at 6 Stockdale Road, 16 Cliff Street, 41 Wray Avenue and 6 Cliff Street were to comprise the trust fund. The trustee of the fund was to be Franknelly.

(b) the Roberto Abrugiato trust fund a half share in the property at 9 High Street was to form the trust fund. The trustee of the fund was to be Abruzzi Pty Ltd.

(c) the Luciana Santacaterina trust fund the trust fund was to comprise the other half share in the property at 9 High Street. The trustee of the fund was to be Ortana Pty Ltd.

66 Mrs Abrugiato was to be the guardian and appointor of each trust fund. Her successors were to be the second defendants for the Roma fund, Dr Abrugiato for the Roberto Abrugiato fund and Ms Santacaterina for the Luciana Santacaterina fund. However, Mrs Abrugiato and Ms Abrugiato were the directors of Abruzzi and Ortana at that time; they remained the directors of companies when the Deed of Separation was made on 13 June 2007 (see exhibits 17 and 18).

67 The letter to Mr Young concluded with a section headed 'Assets/Liabilities' in which it was stated that 'the assets and liabilities of the [Family Trust] are to be split as shown on the enclosed draft Trial Balance'. Four documents were listed as having been enclosed with the letter, including a 'draft trial balance for the period ended 30 June 2006'. By letter dated 10 September 2008, Mr Young provided Bird Cameron with a copy of their letters of instruction of 9 March 2006 and 7 February 2007 and the documents that had been enclosed with those letters (exhibit 65). The documents provided by Mr Young did not include a draft trial balance for the Family Trust; they did, however, include a balance sheet for the Family Trust as at 30 June 2006 (exhibit 65, TB 1051).

68 Mr Groves was unable to recall whether the balance sheet for the Family Trust was the 'draft trial balance' enclosed with the letter of instruction to Mr Young (ts 364). However, I am satisfied that the balance sheet was the document included with the letter it was the only document that approximated the description in the letter that was returned by Mr Young and Mr Groves was provided with a copy of the balance sheet, apparently at his request, shortly prior to settling his letter of instruction to Mr Young (see exhibit 63, email from L Burford to Mr Groves sent on 17 February 2007 and see at ts 360). The parties drew the same inference (ts 290).

69 The balance sheet for the Family Trust for the year ended 30 June 2006 provided to Mr Young recorded that the trust had liabilities of $1,994,785. The liabilities were described as 'beneficiaries' loans'. Amounts of $1,286 each were recorded as owing to AE Murray, AJ Murray, NJ Murray, SF Santacaterina and GI Santacaterina (who I inferred to be the children of Ms Murray and Ms Santacaterina). The balance comprised an amount of $1,917,546 owing to Abrugiato and $67,836 to 'F & S Abrugiato'.

70 Mr Young prepared three documents pursuant to the instructions given by Bird Cameron (exhibit 66):

(a) Deed of Variation to the Trust Deed. The variation deed contained provisions amending the Trust Deed to enable the appointor to appoint separate trustees for any part of the Trust Fund and to divide the Trust Fund into the parts for which separate trustees had been appointed. There were other provisions that gave effect to the intention to permit the Trust Fund to be split.

(b) Deed of Separation by which Franknelly was removed as trustee and separate trustees were appointed for those parts of the Trust Fund that were to be known as the Roberto Abrugiato fund and the Luciana Santacaterina fund.

(c) Deed of Appointment of Successor, Appointors and Guardians by which Mrs Abrugiato, as the sole appointer and guardian of the Family Trust, appointed Dr Abrugiato and Ms Santacaterina as her successors as appointors and guardians for the Roberto Abrugiato fund and the Luciana Santacaterina fund respectively.

71 Mr Young provided the draft deeds to Bird Cameron by letter dated 16 March 2007 (exhibit 66). Mr Groves subsequently instructed Mr Frampton to prepare the land transfers necessary to give effect to the splitting of the Family Trust and to prepare a will for Mrs Abrugiato (exhibit 67). Mr Frampton was provided with copies of the draft deeds for that purpose.

72 Mr Groves gave evidence about steps taken by Bird Cameron to review the draft Deed of Separation prepared by Mr Young prior to its execution. It is convenient to first summarise the terms of the deed before returning to that evidence.

73 Recital C to the Deed of Separation provided that:

The Appointor [Mrs Abrugiato] wishes to exercise the power of appointment for that part of the Trust Fund specified in Item 7.1 of the Schedule (The Roberto Abrugiato Fund [of the Family Trust]) which in the future is to be known by that name, [The Roberto Abrugiato fund], by removing the Trustee as trustee of The Roberto Abrugiato Fund and appointing Roberto's Separate Trustee [Abruzzi] in its place and subject to the assumption by Roberto's Separate Trustee of those debts and liabilities, and of liability for payment of those amounts due to or set aside for beneficiaries of the Trust, in each case as are specified item 7.2 of the Schedule.

74 Clause 7.2 of the deed gave effect to the matters stated in Recital C. Abruzzi, as trustee of the Roberto Abrugiato fund, covenanted with Franknelly that it assumed liability for payment or satisfaction of those debts and liabilities, and liability for payment for those amounts due to or set aside for the beneficiaries of the Family Trust, that were specified in item 7.2 of the schedule to the Deed (the Schedule). Abruzzi also undertook to indemnify Franknelly from all claims and liability in respect of the liabilities that it had assumed.

75 Item 7 of the Schedule provided that the assets of the Roberto Abrugiato fund comprised a onehalf share in the land located at 9 High Street and that the fund had no liabilities nor did it owe any amounts to beneficiaries.

76 Recital D was in the same form as recital C, except that it referred to the Luciana Santacaterina fund, to 'Luciana's Separate Trustee' (Ortana) and to the liabilities specified in item 8.2 of the Schedule. Clause 8.2 was in identical terms to cl 7.2, except for whatever variations were required to refer to Ortana and the Luciana Santacaterina fund.

77 Item 8 of the Schedule provided that the assets of the Luciana Santacaterina fund also comprised a halfshare of the land located at 9 High Street and an amount of $553, being an amount standing in a beneficiaries loan account in the name of Ms Santacaterina. The liabilities of the fund and the amounts due to beneficiaries comprised $1,286 owing to each of G I and SF Santacaterina.

78 Recital D to the Deed of Separation stated that the balance of the Trust Fund of the Family Trust was to be known in the future as the Roma fund. No covenants were given on behalf of the fund but item 10 of the Schedule concerned its assets and liabilities. The assets of the fund were identified as being land located at 6 Stockdale Road, 16 Cliff Street, 6 Cliff Street and 41 Wray Avenue and cash at bank of $233,717 and a refundable deposit of $160. Item 10.2 of the Schedule referred to the liabilities of the Roma fund and amounts due to beneficiaries. The following liabilities and amounts due to beneficiaries were identified:

Abrugiato Pty Ltd (at 30 June 2006 being $1,917,546)

79 The draft Deed of Separation prepared by Mr Young formed part of exhibit 66. The draft was annotated with ticks. Mr Groves stated that the draft deeds were separately checked by Ms Haines and himself after they were received from Mr Young. In particular, Ms Haines reviewed the drafts to confirm that they accorded with the instructions given to Mr Young by Bird Cameron (ts 368). Mr Groves stated that the ticks marked on the draft were likely to have been made by Ms Haines ('Tammy was in the habit of ticking', ts 368). Ticks appeared against the following items in the Schedule: 8.1, 8.2, that part of item 10.1 that referred to cash and cash at bank and refundable deposits and 10.2.

80 Subsequently, in May 2007 Mr Young made further amendments to the draft deeds to vary the name of each of the trust funds (exhibit 69). It was not clear who initiated the changes, although they appear to have reflected stamp duty concerns held by either Mr Groves or Mr Young (see exhibit 68).

81 The Deed of Separation was executed at a meeting held on 13 June 2007 at Mrs Abrugiato's residence. The meeting was convened for the purpose of executing Mrs Abrugiato's will and the deeds that had been drafted by Mr Young. Mrs Abrugiato, Mr Groves, Mr Frampton, Ms Tay (of Norton Rose), Ms Keutzer and her husband and Ms Murray and her husband were present at the meeting according to Mr Groves (witness statement of David Jackson Groves, exhibit 31, par 8). However, Ms Keutzer and Ms Murray could not recall attending the meeting (witness statement of Mirella Edigarda Keutzer, exhibit 55 par 3, par 51; witness statement of Maria Viviana Murray, exhibit 25, par 41). Ms Abrugiato stated that she present at the meeting; she could not recall whether Ms Keutzer was present but she recalled that Ms Murray had not attended (witness statement of Morena Lisa Abrugiato, exhibit 20, par 72). Minutes of a meeting of Franknelly said to have been held that day and prepared by Bird Cameron did not assist in ascertaining who was present as they recorded Ms Keutzer and Ms Murray as being both present at and apologies for the meeting (exhibit 24). However, Ms Tay made a note of the meeting the following day that stated that all of the second defendants were present, along with Mr Keutzer (attachment MAF 4 to Mr Frampton's witness statement).

82 Mrs Abrugiato was legally blind by this time and I accept that some care was taken by Mr Groves and Mr Frampton to ensure that she understood the contents of the documents to be executed. Mrs Abrugiato's will was read to her verbatim, apart from one clause (witness statement of Michael Alan Frampton, exhibit 57, par 24). Mr Frampton explained the effect of that clause (Frampton, par 24). The other documents executed at the meeting were not read in their entirety to Mrs Abrugiato. Rather, Mr Groves and Mr Frampton explained their contents. They made a statutory declaration following the meeting in which they declared that the purpose and effect of each of the documents executed at the meeting had been explained to Mrs Abrugiato (exhibit 8). They also declared that Mrs Abrugiato confirmed that she understood the purpose of each document prior to its execution.

83 Mr Groves stated that he read the 'major parts' of the Deed of Separation to Mrs Abrugiato and paraphrased the 'standard' provisions of the deed (Groves, par 15). However, he could not recall reading out the 'specific allocation of the assets and liabilities made by the Deed and do not believe that I did so' (Groves, par 16). Mr Frampton stated that Mr Groves explained the purpose and effect of the deed to Mrs Abrugiato but he could not recall whether the deed was read clause by clause or whether the 'specific distribution detailed in the Deed' was discussed by Mr Groves (Frampton, pars 22 and 23). According to Ms Tay's note of the meeting, 'David ... explained the purpose and effect of the documents prepared by Grahame Young as generally facilitating the splitting of funds'.

84 Ms Abrugiato stated that 'because my mother was legally blind and could not read documents unaided, and she would not sign a document unless it was explained to her, it was the practice of ... Bird Cameron's accountants to explain documents to her at meetings of Franknelly and Abrugiato' (Abrugiato, par 86). Ms Abrugiato could not recall her mother and herself being 'taken through' the Deed of Separation 'page by page' but 'I believe the substance of the document was explained to us at the meeting. I have this belief because otherwise it would not have been signed' (Abrugiato, par 87; see also at ts 167). Ms Abrugiato was confident that her mother understood the explanations given at the meeting for the documents to be executed (ts 168).

David Groves said to me and my mother that the Deed of [Separation] document was in accordance with, and facilitated, my mother's wishes and the succession planning process.

My mother and I were told by David Groves that via the succession planning process, debts would be equalised out amongst my mother's children and that there would be no exchange of money, but a paper transaction.

When I signed the Deed of [Separation] on behalf of Ortana and Abruzzi I did so on the understanding and with the intention that the debt owed by the [Family Trust] to Abrugiato ... and to my parents ... would be borne one-fifth by each of the Roberto Abrugiato Fund and the Luciana Santacaterina Fund and three-fifths by the Roma Fund ... Had I believed that not to be the case I would not have signed the Deed on behalf of Ortana and Abruzzi.

86 In crossexamination on her understandings at the time of the meeting, Ms Abrugiato accepted that she appreciated that the assets of the Family Trust were being distributed between the three trust funds; that Mr Groves explained at the meeting that this was the effect of the documents; that he explained about 'the debts'; that Mr Groves stated that the debts would 'be equalled out by some other aspect of the estate planning process' (the wording of the question with which Ms Abrugiato agreed); that she understood that the debts would be eliminated and that the debts were 'never going to affect the Roma fund' (counsel's question with which Ms Abrugiato agreed) (ts 168). She subsequently said in crossexamination that Mr Groves explained at the meeting that the liabilities would be allocated onefifth to each of the Roberto Abrugiato and the Luciana Santacaterina funds and threefifths to the Roma fund (ts 169) but it became apparent still later in her evidence that Ms Abrugiato had no clear recollection of what was said at the meeting (ts 170 - 171).

87 The defendants submitted that the effect of the evidence was that 'it did not appear' that the various deeds drafted by Mr Young were separately considered or 'if they were there is nothing to suggest that the deeds were described in any level of detail' and that 'given the level of detail necessary to be descended to, to explain the precise assets and liabilities disposed of, the most reasonable inference was that the document was not explained to [Mrs Abrugiato] or [Ms Abrugiato] in the level of detail required for the distribution of the assets, including the beneficiary entitlements, to be understood as being different from that contemplated' (defendants' closing submissions, pars 120 -121). That submission (apart from the very last aspect) accorded with parts but not all of the available evidence in particular, Ms Abrugiato's suggestion that the 'debts' were discussed at the meeting which was apparently relied on by her (and the fourth defendant) as a source of her understanding and intentions in respect of the contents of the Deed of Separation for the purpose of the rectification claim.

88 The defendants' position on what occurred at the meeting was put more forcefully in supplementary submissions. It was contended that the Schedule to the Deed of Separation had not been read or explained to Mrs Abrugiato and that she had not made any enquiries about how the liabilities of the Family Trust were to be allocated prior to signing the deed (supplementary submissions, par 20).

89 The possibility that the Schedule to the Deed of Separation was read or explained to Mrs Abrugiato cannot be discounted. However, I do not consider that the evidence permits a positive finding to that effect or conversely, a finding that the Schedule was not read or explained or that Mrs Abrugiato made no enquiries about how the liabilities of the Family Trust were to be treated in the deed. I find that the evidence does not establish whether or not the Schedule was read or explained or the allocation of the Family Trust's liabilities was discussed at the meeting.

(a) her shares in Abrugiato and her interest in 6 Hillside Road equally to her children;

(b) her interest in 2 and 4 Tuckfield Street and her Italian property to Dr Abrugiato and Ms Santacateria;

(f) the residue of her estate to those of her children who survived her by 30 days.

91 The effect of those provisions was that by her will, Mrs Abrugiato gave:

(a) the real estate to Dr Abrugiato and Ms Santacaterina that she had intended that they should take according to the succession plan and the final asset allocation in addition to the property referred to in the Deed of Separation;

(b) the second defendants control over the Family Trust and the property held in the trust, subject to the Deed of Separation (that is, the second defendants gained control of the property forming the trust fund of the Roma fund);

(c) Dr Abrugiato and Ms Santacaterina control over the Roberto Abrugiato and Luciana Santacaterina funds respectively - by that means she, in effect, divorced those funds from the Family Trust and completed a 'carve out' of the property allocated to those funds from the trust fund of the Family Trust.

92 As has been explained, the succession plan identified that the issues to be addressed by Mrs Abrugiato included the liability of the Family Trust to Abrugiato and the payment of retained earnings held by Abrugiato. The plan recommended that the trust's liability and the retained earnings be discharged and paid out over a fiveyear period. The retained earnings were to be eliminated by dividends declared to Mrs Abrugiato.

93 The plan did not explicitly relate discharging the Family Trust's liability to the payment of dividends by Abrugiato. However, reference has already been made to Mr Ivanac's evidence that the retained earnings/undrawn beneficiary entitlement were equivalent to the trust's liability - they constituted, in effect, the corresponding asset to the trust's liability. Mr Hansen gave similar evidence the repayment of the loans by the Family Trust was linked to the payment of the dividends by Abrugiato to Mrs Abrugiato (ts 454).

94 Mr Ivanac was unable to recall the steps by which the declaration of dividends by Abrugiato would result in the discharge of the liabilities in the Family Trust. However, Mr Hansen was able to provide the detail of the steps that were contemplated (see at ts 454 and following). Dividends declared by Abrugiato would be paid to Mrs Abrugiato out of retained earnings; Mrs Abrugiato would gift the funds received 'into the Family Trust'; the Family Trust would use the funds gifted to discharge the liabilities to Abrugiato (ts 308 309).

95 It was further proposed that those transactions would be effected by journal entries and that the plan would be implemented over five years to minimise the income tax liability incurred by Mrs Abrugiato on the income received by way of dividends declared by Abrugiato. Mr Hansen described the effect of the plan to be that after five years 'you would have a company with no connection with the family trust, so that the real estate that was sitting in the company was completely divorced and separate from the other assets and there was no link between the family company and any of the other entities' (ts 309).

96 A meeting or telephone conference was held between Mr Hansen and Mr Groves on 5 September 2007 to discuss, among other things, the 'splitting' of the balance sheet for the Family Trust following execution of the Deed of Separation (see exhibit 40, which was a note of the meeting made by Mr Groves, and Hansen, pars 69 70). Mr Groves' note of the meeting recorded that a half share of 9 High Street was to be transferred to each of the Roberto Abrugiato and Luciana Santacaterina funds. The note then stated, 'balance of trust assets and liabs remain in Roma fund'. Mr Groves stated that the note recorded matters about which he advised Mr Hansen during the meeting (ts 378). However, Mr Hansen stated that he had no recollection of having been told in the discussion with Mr Groves that the assets and liabilities of the Family Trust were to remain with the Roma fund apart from the property at 9 High Street (ts 428).

97 I note that there was no suggestion in the evidence that the statement recorded by Mr Groves that the balance of the liabilities of the Family Trust remained with the Roma fund did not accord with his understanding of the effect of the Deed of Separation as at the time of the meeting on 13 June 2007.

98 Mr Groves made a file note the day after the meeting that was headed 'What needs to be done to complete our succession task?' (exhibits 41 and 42). The note stated that the matters to be completed included 'the strategy of paying franked dividends from Abrugiato P/L to Mrs Abrugiato to reduce its retained earnings needs to be commenced by [Mr Hansen]'. The note also recorded that 'F & S Abrugiato Family Trust's loan from Abrugiato Pty Ltd is to be repaid over time with the funds used by the company to pay the above dividends. This then reducing the trust's liabilities'. It was not in issue that the dividend payment plan had not been implemented by 6 September 2007 (and see Hansen, ts 429).

99 The annual general meeting of Abrugiato was held on 4 February 2008 (exhibit 43). On 30 January 2008, Ms Hansen of Bird Cameron sent an email to Ms Abrugiato attaching documents to be signed in advance of the general meeting (exhibit 11). Those documents included two draft resolutions declaring dividends to be made by Mrs Abrugiato as governing director of Abrugiato. Ms Hansen stated that the email was sent on his instructions (ts 430).

100 The draft resolutions sent by Ms Hansen to Ms Abrugiato on 30 January 2008 were purportedly for resolutions made on 28 June 2007 and 3 July 2007. Mrs Abrugiato signed the resolutions as drafted some time between 30 January and 4 February 2008 (the resolutions were considered at the annual general meeting of Abrugiato held on 4 February 2008). No explanation was provided for why draft backdated documents were presented to Mrs Abrugiato for her signature.

101 The resolution supposedly made on 28 June 2007 was made by Mrs Abrugiato in her capacity as governing director of Abrugiato. She resolved that, pursuant to the powers contained in cl 13(ii) and cl 14 of the articles of association of Abrugiato, a dividend of $400,000 be paid to 'B' class shareholders. She further resolved that 'all necessary documents be signed to execute this dividend and allocate this dividend as a reduction to the Undrawn Beneficiary Entitlement receivable from the F & S Abrugiato Family Trust' (exhibit 12).

102 The resolution purportedly made on 3 July 2007 was in identical terms to the '28 June' resolution. Again, it was made in Mrs Abrugiato's capacity as the governing director of Abrugiato (exhibit 13).

103 It was apparent from the minutes of the annual general meeting of Abrugiato held on 4 February 2008 (exhibit 43) that a financial report for the company for the year ended 30 June 2007 had been circulated prior to the meeting. That report (exhibit 120) recorded that the company's non-current assets included, as 'financial assets', an 'undrawn beneficiary entitlement The F & S Family Trust' in an amount $1,485,891 ($1,917,546 for the year ended 30 June 2006). The equity of Abrugiato included retained earnings in an amount of $1,808,229 (see notes 3 and 8 to the financial statements).

104 The minutes of the annual general meeting recorded that Dr Abrugiato enquired as to the source and nature of 'undrawn beneficiary entitlement' and that Mr Hansen (who was invited to chair the meeting) advised that 'to the best of his knowledge this reflects distributions of accounting income from the associated family legal entity over many years maybe as far back as when the trust was established in the 1970s'. The minutes further recorded that Dr Abrugiato expressed his concern that the earning capacity of the funds represented by the entitlement was not being fully utilised to the advantage of Abrugiato.

105 It was also apparent from the minutes that the dividend declaration purportedly made by Mrs Abrugiato on 28 June 2007 was submitted to the meeting for ratification. The minutes only recorded in respect of that item that Dr Abrugiato and Ms Santacaterina 'objected to the notification of the dividend'. There was no record of a vote having been taken by the meeting. Mr Hansen's evidence on whether a vote was taken was inconclusive (ts 438 440).

106 There was a further item in the minutes described as 'ratification of dividend paid 22/8/08'. Obviously, that description was an error. It was to be presumed that the item ought to have referred to the dividend declaration purportedly made by Mrs Abrugiato on 3 July 2007. Again, the minutes recorded that Dr Abrugiato and Ms Santacaterina objected to the notification of the dividend and there was no record of a vote having been taken by the meeting on the resolution.

107 Finally, the minutes recorded under and item described as 'future strategy':

Dr R Abrugiato asked the directors as to what the business strategy for the company is going forward. The chairman [Mr Hansen] advised that it was planned to continue to pay large dividends to Mrs S Abrugiato, the proceeds of which are to be used to reduce the undrawn beneficiary entitlements.

The Dividend policy is to also reduce the company's retained profits and franking credits.

In the meantime, the Directors do not intend to make any further investments by the company. This strategy has been adopted as part of the governing Directors' over all succession plan for the family.

Dr R Abrugiato wishes to advise that he is not happy with this plan. Dissatisfaction noted.

108 On 4 April 2008, in her capacity as governing director of Abrugiato, Mrs Abrugiato resolved that a fully franked dividend of $1,085,891 be paid that day to her as a 'B' class shareholder in Abrugiato (exhibit 15). Again, the resolution was recorded as having been made pursuant to the powers conferred by cl 13(ii) and cl 14 of the articles of Abrugiato.

109 The amount referred to in the resolution of 4 April 2008 represented the balance of the retained earnings/undrawn beneficiary entitlement recorded in the accounts of Abrugiato. Although the dividend payment plan contemplated that the retained earnings/entitlement would be paid out over five years, Mrs Abrugiato's health had deteriorated by April 2008 and according to Mr Hansen, she was concerned that she would not survive the remainder of the period envisaged by the plan (ts 449).

(a) Mrs Abrugiato signed a letter addressed to the directors of Abrugiato. The letter referred to the fully franked dividend declared that day and advised that Mrs Abrugiato 'would like you to offset this dividend to the F & S Abrugiato Family Trust loan' (exhibit 48).

(b) Mrs Abrugiato signed three further letters addressed to the directors of Franknelly, Abruzzi and Ortana. The letters advised that Mrs Abrugiato gifted amounts to the Roma fund ($651,534.60), the Roberto Abrugiato fund ($217,178.20) and the Luciana Santacaterina fund ($217,178.20). Each letter further advised that 'to satisfy this gift, instructions have been issued to Abrugiato Pty Ltd ... to offset your loan account with a dividend declared to me on 4 April 2008' (exhibits 49, 50 and 51).

(c) Meetings of the directors of Franknelly, Abuzzi and Ortana were held at which the letters received from Mrs Abrugiato were tabled and the gifts recorded in the letters acknowledged (exhibits 49, 50 and 51). The minutes recorded that Mrs Abrugiato and the second defendants attended the meeting of the directors of Franknelly and Mrs and Ms Abrugiato were present at the directors meetings for Abruzzi and Ortana.

111 Article 13(ii) of the articles of association of Abrugiato conferred on the company's governing director the right to exercise all powers and discretions vested by the articles in the directors generally. Clause 14 of the articles contained a power to declare and pay dividends to particular classes of shareholders. However, that power was conferred on the company and not on its governing director. Article 98 of Table A required dividends to be declared by the company in general meeting on the recommendation of the directors.

112 Bird Cameron prepared the dividend declaration resolutions. It was clear that they did not appreciate at the time that the June and July 2007 resolutions were supposedly made that dividends could only be declared by the company in general meeting. However, Mr Hansen received advice by letter dated 6 March 2008 from solicitors about, among other things, the rights and powers conferred by the articles of association of Abrugiato on Mrs Abrugiato as the company's governing director (exhibit 14). The advice:

(a) Noted that the power conferred by Art 14 was vested in the company in general meeting.

(b) Further noted that as governing director Mrs Abrugiato had the power to cast three times the number of votes capable of being cast on a resolution put to the vote at any general meeting.

(c) Indicated that, 'although the formality of a general meeting' of Abrugiato was required in order to declare a dividend that differentiated between classes of shares, Mrs Abrugiato as the holder of the B class share had the power to determine the outcome of any resolution that had that effect. However, Mrs Abrugiato could not simply exercise the powers of the company in general meeting without a meeting being convened. She could only, as governing director, make a recommendation regarding the declaration of dividends to a general meeting.

113 It was not clear why the resolution of 4 April 2008 was prepared in light of the advice that Mr Hansen had received in early March 2008 (and see Hansen, ts 435 438).

114 Mr Hansen did not give evidence about the resolutions in his witness statement. However, he was asked questions about the resolutions in his oral evidenceinchief (ts 317 and following). The purport of the questions was to accept that the Mrs Abrugiato had made the resolutions on the dates stated, with Mr Hansen apparently agreeing that he was present on each occasion and that he explained the resolutions to Mrs Abrugiato. However, in crossexamination Mr Hansen readily accepted that the resolutions dated 28 June and 3 July 2007 were not made on those dates (ts 425 and ts 433; that, of course, was made plain by Ms Hansen's email of 30 January 2008). He thought that Mrs Abrugiato signed the resolutions at the same time, although he was not sure of the date. He also thought that he was present when Mrs Abrugiato signed the resolutions (ts 433). However, significantly he did not give evidence of what was actually said if he was present and it was apparent from other evidence that he gave that he had not read the Deed of Separation by early 2008 (or indeed, by April 2008; he was not present at the meeting at which the deed was signed).

115 The dividend payment plan required that the funds provided by Mrs Abrugiato to the Family Trust be used for the purpose of reducing the loan owed by the trust to Abrugiato rather than to create a further liability in the Family Trust to Mrs Abrugiato. That was to be achieved by Mrs Abrugiato gifting the dividend payments 'into' the Family Trust according to Mr Hansen's explanation of the dividend payment plan (ts 308). However, there was no record made of any gifts of the dividends purportedly declared by the '28 June 2007' and '3 July 2007' resolutions.

116 Further, the resolutions and letters made and signed on 4 April 2008 provided for gifts by Mrs Abrugiato to Franknelly, as trustee for the Roma fund; Abruzzi, as trustee for the Roberto Abrugiato fund and Ortana, as trustee for Luciana Santacaterina fund. The amounts of the gifts to each fund represented the total amount of the dividend declared by Abrugiato, divided as to threefifths to the Roma fund and onefifth to each of the Roberto Abrugiato and Luciana Santacaterina funds. Mr Hansen prepared the resolutions and gift letters (ts 318). They obviously reflected a view that the liability of the Family Trust to Abrugiato had been distributed between the three funds.

117 Three documents were provisionally received that suggested that a further meeting of Abrugiato was held on 28 April 2008 for the purpose of passing a resolution to ratify the dividends previously declared and paid pursuant to the '28 June 2007' and '3 July 2007' and 4 April 2008 resolutions (exhibits 116P, 117P and 118P). The documents were tendered by the defendants but not for the purpose of establishing that the dividend declarations and payments were valid. Rather, the documents were said to be evidence of intention relevant to the fourth defendants claim for rectification of the Deed of Separation (ts 521).

118 The only person who attended the meeting in person was Mr Hansen. The minutes of the meeting recorded that he held proxies given by Mrs Abrugiato and the second defendants (exhibit 118P). There was no evidence of the circumstances surrounding the meeting (other than, by inference, that it was prompted by the advice given to Bird Cameron about the effect of the articles of association of Abrugiato) and the giving of proxies to Mr Hansen. I did not consider that the documents assisted in determining Mrs Abrugiato's intentions at the time that the Deed of Separation was made in the absence of further evidence about those circumstances. That conclusion was reinforced by the matters referred to immediately below concerning the circumstances in which the dividend declaration resolutions and the gift letters dated 4 April 2008 were signed by Mrs Abrugiato.

119 It was suggested that the meeting may not have occurred (see, for example, exhibit 136) or that it could not have been a proper meeting of the company. It is not necessary to make findings about those matters in light of the finding made in the previous paragraph.

The evidence on the making of the dividend resolutions and the gift letters

120 The defendants also relied on the resolutions purportedly declaring dividends and the gift letters of 4 April 2008 as evidence of Mrs Abrugiato's intentions to divide the liabilities of the Family Trust equally between the three trust funds created by the Deed of Separation. However, there was scant evidence on the circumstances in which Mrs Abrugiato signed those documents. Mr Hansen thought that he was present when they were signed but significantly, he gave no evidence about the circumstances in which the documents were signed in his witness statement (I accept that Mr Hansen was present when the documents dated 4 April 2008 were signed). Ms Abrugiato produced the resolutions dated 27 June and 3 July 2007 as forming part of the business records of Abrugiato (Abrugiato, pars 98 and 100) but also gave no evidence about the circumstances in which they were signed. Ms Keutzer and Ms Murray did not refer to the '2007' resolutions in their evidence. Consequently, there was no evidence that those resolutions were ever read or explained to Mrs Abrugiato (remembering that she was legally blind by this time).

121 Ms Abrugiato and Ms Keutzer gave evidence about Mrs Abrugiato signing the dividend declaration resolution of 4 April 2008 and the gift letters of the same date and also about the meetings of the directors of Franknelly, Abruzzi and Ortana held on that day. The effect of their evidence was to identify who was present, to further identify Mrs Abrugiato's signature on the documents she signed and to confirm that the documents were signed in their presence (Abrugiato, pars 110 121; Keutzer, pars 53 66). However, they did not provide any evidence of what was stated to Mrs Abrugiato about the documents she signed or what she might have said at the time that signified that she understood their effect. Similarly, Mr Hansen gave no evidence about those matters.

122 The three dividend declaration resolutions, the gift letters and the directors meetings of Franknelly, Abruzzi and Ortana on which the defendants relied as evidence of Mrs Abrugiato's intentions were all matters that occurred some time after the Deed of Separation was made. I did not consider that an inference could be drawn from those documents that they reflected an intention held by Mrs Abrugiato about the contents and effect of the Deed of Separation at the time that the deed was made. I make that finding having regard to the lack of evidence about Mrs Abrugiato's understanding of the resolutions and gift letters and what actually occurred at the time that the documents were signed. It was not possible to say whether she regarded the resolutions and letters as implementing what she had intended by the Deed of Separation. As counsel for the plaintiffs observed, the documents signed on 4 April 2008 stood 'in splendid isolation' (ts 552).

123 It appears that by early August 2008 disputes had arisen between the plaintiffs and the second defendants over the arrangements effected by the succession plan and the Deed of Separation (see exhibits 123 and 124). However, it does not seem that the disputes at that time concerned the allocation of the liabilities of the Family Trust.

124 On 4 September 2008, Dr Abrugiato wrote to Mr Marshall of Bird Cameron regarding two circulars that had been distributed in the previous month by the executors to the beneficiaries of Mrs Abrugiato's estate (exhibit 29). He stated:

With regards to the F & S Abrugiato Family Trust loan account, I do not consider that the executors have been sufficiently diligent in attempting to recover and claim interest on the loan. Action to recover the loan has been deferred pending completion of financial statements of the F & S Abrugiato Family Trust. This decision favours the trust and now highlights that there is a conflict of interest in RSM Bird Cameron acting in the interests of the estate whilst concurrently acting in the interests of the F & S Abrugiato Family Trust. If an outstanding loan has been established and probate has been granted on that basis, I reject that there should be a delay in recovering the loan and certainly there is no reason for not obtaining an assurance from the directors of Franknelly Nominees that the loan with interest will be repaid, and investigating the possibility of backdating interest to the time of inception of the loan (exhibit 29).

125 The circulars to which Dr Abrugiato referred were not in evidence. However, it was apparent that the reference to a loan account was to the liabilities of the Family Trust (and see Mr Hansen evidence at ts 333).

126 On 4 September 2008, Mr Hansen sent an email to Mr Marshall (exhibit 30) stating:

My understanding with respect to the purported loan between Mrs A and the trust is as it was interest free and ... we have no reason to change these arrangements post Mrs A's death? Again seek clarification from the lawyers.

127 On 10 September 2008, Ms Haines sent an email to Mr Young requesting copies of his letters of instruction and the documents enclosed with those letters (exhibit 126). She noted in her email that, 'unfortunately we have not been able to locate how the assets and liabilities (excluding the properties) were to be allocated'.

128 Mr Hansen and Dr Abrugiato met in September 2008. According to a letter subsequently written by Dr Abrugiato to Mr Hansen, the meeting was held on 18 September and Mr Hansen advised at the meeting that the liabilities of the Family Trust were 'apportioned' between the three funds created by the Deed of Separation (exhibit 44; there was no evidence on whether the use of the word 'apportioned' in Dr Abrugiato's letter was paraphrasing by him or whether it reflected the actual word used by Mr Hansen adopting the language of the succession plan). Mr Hansen accepted that he had given advice to that effect to Dr Abrugiato (ts 440).

129 On 21 September 2008, Dr Abrugiato and Ms Santacaterina wrote to Mr Hansen referring to the meeting and stating that the Deed of Separation provided that the liabilities of the trust were not to be apportioned as Mr Hansen had stated at the meeting (exhibit 44). The letter further noted that a review of draft financial reports for each of the trust funds revealed that the 'beneficiary loan accounts vested into the Roma fund have been apportioned to [the Roberto Abrugiato fund and the Luciana Santacaterina fund]'. Dr Abrugiato and Ms Santacaterina objected to that treatment.

At a glance

Court

Decision date

Before

Source

Judgment (408 paragraphs)

Equality in the distribution of the assets and liabilities

The intended effect of the dividend payment plan

The time within which the dividend payment plan was to be implemented

Legislation Cited (1)

Cases Cited (2)