Mr Eric Storm died on 24 February 2000 leaving a will dated 16 November 1999. At the time of his death, Mr Storm's estate had an approximate value of $12 million. It is currently valued at something in the order of $23 million.
By his will, Mr Storm settled a charitable trust known as "The Eric Storm Charitable Trust" ("the Trust"). The plaintiff ("the Trustee") is the trustee of the Trust.
By cl 7 of the will, Mr Storm directed that the Trustee apply 44 per cent of the net income of the Trust to the Australian Youth and Health Foundation ("the Foundation"):
"…to be applied for the promotion of natural health in accordance with the present philosophy and practices of the Hopewood Health Centre at Wallacia".
At the time of the will, the Foundation, through a wholly owned subsidiary, Hopewood Health Centre Pty Ltd ("Hopewood") conducted a health centre at Wallacia.
Mr Storm directed that other percentages of that net income be directed to three other entities: 22 per cent to Mission Australia "for the use of Sydney City Mission"; a further 22 per cent to The Salvation Army (NSW) Property Trust "to be applied for the benefit of young people"; and 2 per cent to Mamre Plains Ltd absolutely. The balance of 10 per cent was to accumulate to capital.
That direction in cl 7 was expressed to be subject to a proviso ("the Proviso") which, relevantly, was in the following terms:
"PROVIDED ALWAYS that if in the opinion of my Trustee [the Foundation] shall…cease to operate under [its]…fundamental objects and purposes as at the date of this my Will or shall not apply the funds for the charitable purposes set out above then my Trustee shall apply the income which [the Foundation] would otherwise have received to such well established and well organised charities as my Trustee shall select in equal proportions but so that no individual charity receives in excess of TEN THOUSAND DOLLARS ($10,000.00) per annum".
Between 2001 and 2013, the Trustee distributed some $5.2 million to the Foundation. Since 2013 the Trustee has withheld distributions of some $300,000 pending its consideration of whether to form one or both of the opinions in the Proviso.
The Trustee now seeks judicial advice pursuant to s 63 of the Trustee Act 1925 (NSW) that it would be justified in forming either of those opinions (in which event, the Trustee contends, it will be required by the terms of the will to pay the share of income to which the Foundation would otherwise have been entitled to "such well-established and well organised charities" as the Trustee selects).
The Trustee seeks advice that it would be justified in forming the opinion that the Foundation has:
1. ceased to operate under its fundamental objects and purposes as at the date of the will; and (or)
2. not applied the funds it has received from the Trust for the promotion of natural health in accordance with the philosophy and practices of the Hopewood Health Centre as at the date of the will.
In his outline of oral submissions, Mr Coles QC, who appeared with Mr Robertson and Mr Santucci for the Trustee, stated that the Trustee "is of the view that it would be open to it to form these opinions but seeks judicial advice as to whether that view is correct".
Thus, this is not a case where a trustee has merely "identif[ied] a problem as difficult and then approach[ed] the Court without having formed its own view as to how it will resolve the problem" (cf In the application of NSW Trustee & Guardian [2014] NSWSC 423 at [25] per Kunc J).
The Trustee must give the question of whether or not to form one of the opinions its "properly informed consideration" (Finch v Telstra Super Pty Ltd (2010) 242 CLR 254; HCA 36; at [66] per French CJ, Gummow, Heydon, Crennan and Bell JJ). Further the Trustee "must actively and honestly bring its mind to bear" on whether to form one of the opinions (In the application of NSW Trustee & Guardian at [25] per Kunc J). The Trustee has been seeking information from the Foundation about these matters for a number of years. It is not necessary for me to set out the detail of those enquiries or the response the Foundation has made. I am satisfied that the Trustee has made adequate and appropriate enquiries, has given the matter its "properly informed consideration" and has "actively and honestly" considered whether to form one of the opinions.
My role is to express an opinion as to whether the Trustee is "justified" in forming one or both of the opinions. It is neither necessary nor appropriate that I express my own opinion on the relevant questions. If I conclude that the Trustee could reasonably form one or both of the opinions, or that it would be reasonably open to the Trustee to form one of the opinions, then I should give the Trustee the advice it seeks.
The Trustee also seeks advice that, on the proper construction of the will, once it has formed an opinion of the kind contemplated by the Proviso, it is not thereafter obliged to review that opinion. This raises a question as to the proper construction of an aspect of the Proviso itself. That question has relevance to the question of whether the Trustee would be justified in forming one of the opinions. It is common ground that I should determine the question of construction (rather than simply express a view as to whether the Trustee is justified in so construing the Proviso).
Alternatively, and assuming that my conclusion is that the Trustee was not justified in forming one of the opinions, the Trustee seeks advice that it would be justified in suspending payments of distributions to the Foundation from the Trust until it concludes whether or not it should form one or more of the opinions in the Proviso.
The Trustee's application is made with the consent of the Attorney General and was notified to the Foundation, which, in the circumstances I set out below, participated in the hearing.
[3]
Decision
On the proper construction of the will, once the Trustee has come to one or more of the opinions in the Proviso, it is obliged to apply the funds that would otherwise have been payable to the Foundation during the life of the Trust to such well established and well organised charities as it may select; and is not obliged to (and indeed may not) review that decision.
I am not satisfied that the Trustee would be justified in forming the opinion that the Foundation has ceased to operate under its fundamental objects and purposes as at the date of the will.
I am satisfied that the Trustee would be justified in forming the opinion that the Foundation has not used funds distributed to it from the Trust, namely the $155,000 referred to at [97] below, for the charitable purpose of promoting natural health in accordance with the philosophy and practices, as they were at the date of the will, of the Hopewood Health Centre.
I propose to advise the Trustee accordingly.
In those circumstances, it is not necessary that I give the Trustee advice as to whether it would be justified in suspending further distributions under the will until it forms one or more of the opinions in the Proviso; and I decline to do so.
[4]
The Foundation's notice of motion of 5 August 2016
Before dealing with the substance of the matter, I will deal with some procedural matters.
The Trustee commenced these proceedings on 8 April 2016.
On 5 August 2016, the Foundation filed a notice of motion seeking:
1. an order that it be joined as defendant;
2. leave to file and serve a cross-summons alleging, amongst other things, that the Trustee is in breach of the Trust; and
3. an order that the cross-summons be heard together with the Trustee's application for judicial advice.
On 11 August 2016 the Registrar ordered, by consent, that the Attorney General be joined as respondent to that motion and that the Foundation serve all evidence in support of the motion by 18 August 2016.
The Foundation did not comply with that order and served an affidavit by one of its directors, Mr Peter Miller, on 22 August 2016 (a little over a day before the hearing before me).
In the meantime the Attorney General had refused to give her consent, under s 6(1)(a) of the Charitable Trusts Act 1993 (NSW) to the bringing of the proposed cross-summons.
In those circumstances, and particularly because the late service of Mr Miller's affidavit meant that it was, as a practical matter, untestable, from the Trustee's point of view, I refused the Foundation's application to be joined as a defendant, refused its application for leave to file the cross-summons and admitted Mr Miller's affidavit as evidence only of the Foundation's position in relation to the Trustee's application for judicial advice.
Thereafter the Foundation participated in the Trustee's application for advice as a party having a proper interest in the question of whether or not advice should be given; albeit not as a defendant to the proceedings.
The Attorney General, by her solicitor, appeared before me at the outset of the proceedings but sought and was granted leave to withdraw once the above procedural matters were dealt with.
[5]
The Foundation
The Foundation is a company limited by guarantee. It was incorporated on 10 July 1942. Until October 1985 it was known as Youth Welfare Association of Australia.
The Foundation's Memorandum of Association ("the Memorandum") records that its objects include:
"1. To perfect Australian Youth by developing and improving their physical, mental, moral and spiritual qualities and characteristics.
2. To demonstrate to the people of Australia the degree of improvement in health, physique, deportment, intelligence, ability, culture, character, sociability, morality and spiritual development which results from the application of rational care, training and diet from birth."
The Memorandum lists some 30 other objects which, Mr Coles summarised as being the advancement of the welfare of children and the support of nursing mothers.
The Memorandum also sets out a number of powers of the Foundation including:
"39. Subject to Section 34 of the Companies Act 1936, to invest any monies of the [Foundation], not immediately required for any of its objects, in such manner as may from time to time be determined, and from time to time to vary such investments."
Section 34 of the Companies Act 1936 (NSW) provided that the Governor could direct that an association be registered as a company with limited liability without the addition of the word "Limited" if it was formed for a charitable purpose and intended to apply its profits, if any, in promoting its objects.
Paragraph 4 of the Memorandum provided that:
"The income and property of the [Foundation], whensoever derived, shall be applied solely towards the promotion of the objects of the [Foundation] as set forth in this memorandum of association...".
Mr Storm was a director of the Foundation from 18 October 1960 until his death.
There are currently four directors of the Foundation including Mr Miller and Ms Julie Knox.
In 1961 the Foundation established "The Hopewood Health Centre" in Wallacia. In the Foundation's 1962 annual report that centre was described as a "30 bed resort primarily for people who seek to regain health by natural means".
On 14 March 1972 Hopewood was incorporated. It has two shares, one of which is held by the Foundation and the other by Mr Miller as trustee for the Foundation.
Since 1972, Hopewood has itself conducted the centre at Wallacia.
Its directors are currently Mr Miller, Ms Knox and Ms Sharon Beavon.
The accommodation centre at Wallacia ceased operating in 2015 because of, Mr Miller has asserted, the absence of distributions from the Trust since 2013. Mr Miller has stated in his affidavit that the Foundation hopes to continue to operate Wallacia as a day centre and that it still employs Ms Beavon and markets "its philosophy and practices through its website and newsletter".
The most recent financial statements for the Foundation and Hopewood that have been made available to the Trustee are those for the year ended 30 June 2014.
According to those statements, the Foundation has net assets in the order of $10.7 million including cash and cash equivalents in the order of $3.15 million and "available-for-sale" assets (including shares in listed companies) in the order of $3.8 million. The Foundation's accounts also disclose that it has issued a letter of support to Hopewood.
The Foundation's balance sheet also records as a non-current asset some $23.4 million owed to it by Hopewood (valued as nil on the balance sheet; evidently it is considered irrecoverable). It also records a non-current asset of some $2.85 million, after taking into account "provisions for impairment", owing to the Foundation by Maybrook Court Pty Limited ("Maybrook") as trustee of the SEQ Development Unit Trust ("the Unit Trust"). I will return to that loan below.
Hopewood's balance sheet for the year ended 30 June 2014 records that it has a deficit of shareholders' equity in the order of $23.5 million. Its profit and loss account for that year shows a trading loss in the order of $1.7 million.
[6]
The proper construction of the Proviso
A question arises as to whether, assuming that the Trustee forms one of the opinions in the Proviso, the "income which [the Foundation] would otherwise have received" and which is to be applied instead to "such well-established and well organised charities" as the Trustee may select, is all the income that the Foundation would otherwise, during the life of the Trust, have received.
In my opinion, it is.
The element of the Proviso concerned with the application of the Trust funds for charitable purposes is oddly expressed. It is enlivened if the Trustee forms the opinion that the Foundation "shall not apply the funds" for the relevant purpose. The word "shall" might, absent context, suggest the need for a prospective enquiry. But in the context in which that word appears, it is clear that Mr Storm intended that the enquiry be retrospective and that this aspect of the Proviso directs attention to how the Foundation has in fact applied "the" funds; that is, particular funds distributed to it from the Trust.
Contrary to the submission advanced by Mr Knoll, with whom Mr Cotman SC appeared for the Foundation, and who presented this aspect of the argument for the Foundation, I do not read the words as calling for some kind of prediction to be made by the Trustee as to how the Foundation "shall" (in the future) apply funds not yet distributed (perhaps based on the manner in which past distributions have been applied).
I read the words "shall not apply" as meaning "did not apply" or "has not applied" and the words "the funds" as referring to distributed funds; i.e. any part of the distributed funds. Thus, this element of the Proviso is enlivened if the Trustee forms the opinion that the Foundation has applied any of the funds distributed to it from the Trust otherwise than for the relevant charitable purpose.
That being so, and viewing the Proviso as a whole, I accept the Trustee's submission that the Proviso is in the nature of a condition subsequent. The will directs the Trustee to apply the income from the Trust to the Foundation unless and until that condition subsequent is satisfied. If the Trustee forms one of the opinions contemplated by the Proviso, and the condition subsequent is satisfied, the Trustee is directed to cease applying income to the Foundation and must instead apply it to the relevant portion of the net income to other "well established and well organised charities".
To adopt the language of the Trustee's submissions, the apparent intent and effect of the Proviso is that, once the Trustee forms one of the opinions referred to in the Proviso, the direction in the will to the Trustee to apply the funds to the Foundation comes to an end and is replaced with a direction to apply those funds to alternative "well established and well organised charities".
The result is that once the Proviso is enlivened, the Foundation's entitlement to receive a distribution from the Trust ends and no call arises for the Trustee to reconsider the matter. Indeed the terms of the will in effect forbid the Trustee from doing so.
[7]
Would the Trustee be justified in forming the opinion that the Foundation has ceased to operate under its fundamental objects and purposes?
The "fundamental" objects of the Foundation are charitable and, as I have mentioned, include the advancement of the welfare of children and nursing mothers. The Foundation has power to invest its monies (see [34] above).
As developed in final submissions, the Trustee's contention that it would be justified in forming the opinion that the Foundation had ceased to operate under its fundamental objects and purposes, focused on the Foundation's investment in the Unit Trust. The Foundation, and Maybrook as trustee of the Unit Trust, have treated that investment as a loan.
The Trustee did not contend that the mere making of a bona fide investment by the Foundation would itself cause the Foundation to "cease to operate under [its]…fundamental objects and purposes".
However the Trustee contended that it would be open to it to conclude that, by investing in the Unit Trust, the Foundation had "deployed its resources for the benefit of associates of [the Foundation]" rather than for charitable purposes and had "been exercising or declining to exercise its rights as a unit holder of the Unit Trust in such a way as to benefit persons other than [the Foundation]". It was not clear to me who the Trustee contended the Foundation's "associates" or the "persons other than" the Foundation to be; I took them to be those behind the other unit holders in the Unit Trust (see [64] below).
Accordingly, the Trustee submitted, an inference was available to it that the Foundation "has and is likely to continue to 'invest' assets of [the Foundation] in such a way as to benefit persons other than [the Foundation] for purposes other than charitable purposes".
These are serious allegations. They require careful consideration of the nature of the Foundation's investment in the Unit Trust.
That investment was made over 20 years ago, in 1994.
Thus, on 22 June 1994, the board of the Foundation (which then included Mr Storm and a Mr Hershon) resolved to proceed with a "new venture". The board minutes read:
"Mr Miller advised the Board that a new project has been offered to the Foundation through Mr Hershon and Mr John Fitzgerald. This consists of a parcel of land for residential development, together with a small commercial development, located at Holmglen in Queensland which is inland, between Surfers Paradise and Brisbane.
It is proposed that the joint venturers be as follows:
25% equity - Australian Youth & Health Foundation.
25% equity - Mr Hershon's group of companies.
50% equity - John Fitzgerald, who is the promoter, developer, organiser and manager of the project.
The proposition is that the Foundation and the Hershon Group should each invest $1,500,000. John Fitzgerald's contribution will be $1,050,000 and he will provide all of the services at no cost to the other parties.
John Fitzgerald will organise and guarantee all the external borrowings, which are expected to be approximately $11,000,000.
For an investment of $1,500,000 it is anticipated that the Foundation will receive a return of $1,900,000. The initial investment will be repaid in about 2 years. Mr Hershon considers that the profit figures supplied by John Fitzgerald are conservative."
The Unit Trust was formed by a deed dated 29 August 1994. The trustee of the Unit Trust was (and is) Maybrook. The unit holders were (and are):
1. the Foundation - 1 unit
2. Kinsvan Pty Ltd (a company associated with Mr Hershon) - 1 unit;
3. JLF Corporation Pty Ltd (a company associated with Mr Fitzgerald) - 2 units.
Mr Miller and Ms Knox (two of the directors of the Foundation and of Hopewood) are also directors of Kinsvan and of Maybrook.
On 30 August 1994 the Foundation, Kinsvan and JLF Corporation entered into a unit holders agreement which provided, amongst other things, that:
1. unless otherwise agreed by the venture's management committee, ongoing funding would be provided by unit holders in proportion to their unit holdings (i.e. 25 per cent by each of the Foundation and Kinsvan and 50 per cent by the developer and project manager, JLF Corporation);
2. funds advanced would carry interest at 10 per cent and be capitalised; and
3. JLF Corporation, as project manager, would be reimbursed for expenses but would not receive any remuneration for its services.
Between October 1994 and June 2004 the Foundation advanced to Maybrook as trustee of the Unit Trust, by way of unsecured loan, some 40 amounts totalling $3.745 million. These were the Foundation's own funds; no funds from the Trust were used. Maybrook repaid the $3.745 million between July 2003 and April 2005.
Maybrook paid no interest on the loan until June 2012. Interest accumulated at the agreed rate of 10 per cent in the meantime. Maybrook has now paid some $4.1 million interest. The Foundation's accounts for the year ended 30 June 2014 show that the "loan balance" was then some $5.8 million, the "estimated realisable value" of which is said to be some $2.8 million.
The Trustee has expressed three "concerns" which it contends would justify it reaching the conclusions set out at [59] and [60] above and thus opining that the Foundation has ceased to operate under its fundamental objects and purposes.
The first is that, whereas the unit holders agreement obliged each of the Foundation, Kinsvan and JLF Corporation to advance funds to Maybrook in proportion to their unit holding, the draft accounts for Maybrook for the financial year ended 30 June 2014 show that the only amounts owing by Maybrook to any of the unit holders was the amount of $2.8 million to which I have referred owing to the Foundation. During the hearing, the Foundation's legal advisors provided the Trustee's legal advisors with Maybrook's final accounts for the year ended 30 June 2014 according to which an amount of some $2.3 million is also owing by Maybrook to Kinsvan. Maybrook's accounts for the previous year, the year ended 30 June 2013, made no reference to any monies owing by Maybrook to Kinsvan. Neither set of accounts refers to any outstanding loan to the 50 per cent unit holder in the Unit Trust, JLF Corporation.
On 2 August 2016, the Trustee, through its solicitor, enquired of the Foundation as to why it was that the only current funding from unit holders was from the Foundation (according to the draft Maybrook accounts for the year ended 30 June 2014) and enquiring as to whether this was because the venture's management agreement had "otherwise agreed" for the purposes of the unit holders agreement (see [66(a)] above). The Foundation refused to respond to that enquiry (save for providing, without explanation, the final Maybrook 2014 accounts which, as I have mentioned, show that Kinsvan also remains a creditor of Maybrook).
The second "concern" that the Trustee has is that, whereas the unit holders agreement provides that JLF Corporation would perform its services as project manager without fee, material annexed to Mr Miller's 22 August 2016 affidavit records that Maybrook had paid JLF Corporation some $3.342 million in "management fees".
The third "concern" of the Trustee concerns an unsecured loan made by Maybrook of $5.2 million to an entity described as "Custodian Pimpana River Syndicate". The Foundation has refused the Trustee's request to explain the circumstances of that apparent loan.
It is certainly arguable that these circumstances call for some explanation and suggest, at least on the face of it, that Maybrook is not conducting the affairs of the Unit Trust in accordance with the unit holders agreement. As Mr Miller and Ms Knox are directors of each of the Foundation, Hopewood, Kinsvan, and Maybrook, these matters may also show that they, on behalf of the Foundation, are not adequately overseeing the Foundation's investment in the Unit Trust. I do not, however, think it would be reasonably open to the Trustee to conclude from these matters that the Foundation is managing this investment to benefit those behind Kinsvan or JLF Corporation (assuming that is the Trustee's contention).
Nor is it clear to me what light these matters cast on whether the Foundation has ceased to operate under its fundamental objects and purposes. The centre at Wallacia has closed but this is, Mr Miller says, because of lack of funding from the Trust. That proposition was not tested before me. It may strike some as a little problematic bearing in mind the resources of the Foundation (see [53] above) and the (relatively) small amount of Trust distributions currently withheld (see [7] above). However that may be, the Foundation continues to operate its website and newsletter, and hopes to reopen Wallacia as a day centre.
In these circumstances, I do not see that it would be reasonably open to the Trustee to reach the very serious conclusions set out at [59] and [60] above.
Although this matter was not mentioned in any of the written submissions made on behalf of the Trustee, in oral submissions Mr Coles pointed to the financial position of Hopewood, and its dependence for financial support on the Foundation. Mr Coles submitted these matters demonstrated that the true characterisation of the Foundation's expenditure of money received by it from the Trust was to alleviate its potential liability under s 588V and 588W of the Corporations Act 2001 (Cth) for Hopewood's debts and that this bespoke a cessation by the Trustee of its operation under its fundamental objects and purposes. I do not accept the submission. I see no basis upon which the Trustee would be justified in reaching any such conclusion.
Accordingly I decline to give the Trustee the advice it seeks concerning this aspect of the matter.
[8]
Would the Trustee be justified in concluding that the Foundation has not applied funds received from the Trust for the promotion of natural health in accordance with the philosophy and practices of the Hopewood Health Centre at Wallacia as at the date of the will?
The Trustee's contention that it would be justified in concluding that the Foundation has not applied funds received from the Trust to promote the philosophy and practices of the Hopewood Health Centre arise from what the parties described in argument as "the Accumulation point" and the "Reimbursement point".
[9]
The Accumulation point
The Foundation maintains a No. 1 account and a No. 2 account at the Commonwealth Bank of Australia ("CBA").
The Foundation uses the No. 1 account for general operating purposes. The Foundation has used the No. 2 account exclusively to receive distributions from the Trust.
From time to time the Foundation has distributed money from the No. 2 account to Hopewood's bank account. The Trustee accepts that funds thus received by Hopewood were used by it for the relevant charitable purpose.
However, in the financial years ended 30 June 2005, 2006, 2007, 2008 and 2009, the Foundation did not distribute to Hopewood all of the funds distributed to it by the Trustee from the Trust in those financial years, but accumulated some of them and, from time to time, placed such accumulated funds on interest bearing deposit with the CBA. The funds placed on deposit, and interest thereon, were, in due course, repatriated to the No. 2 account.
All of the money received into the No. 2 account from the Trust was, ultimately, paid to Hopewood and thus used for the relevant charitable purpose; albeit not in the financial years of receipt.
Throughout the relevant period, the Foundation also used its own funds to make payments to Hopewood to fund Hopewood's activities.
Mr Miller prepared a schedule (to which I have made some minor arithmetical corrections) which was not in dispute before me, showing the various payments made.
Year ended 30 June Distribution from the Trust to the Foundation Distribution of Trust funds from the Foundation to Hopewood Cumulative Surplus / Deficiency Supplementary financial support to Hopewood by the Foundation Aggregate financial support to Hopewood Total payments to Hopewood in excess of Funds received from the Trust
2005 $246,673.00 $245,000.00 $1,673.00 $787,345.58 $1,032,345.58 $785,672.58
2006 $503,933.33 $351,709.16 $153,897.17 $350,418.00 $702,127.16 $198,193.83
2007 $510,025.08 $447,702.42 $216,219.83 $468,176.00 $915,878.42 $405,853.34
2008 $510,843.30 $430,000.00 $297,063.13 $512,906.05 $942,906.05 $432,062.75
2009 $585,329.38 $472,941.68 $409,450.83 $698,945.85 $1,171,887.53 $586,558.15
2010 $753,195.79 $935,000.00 $227,646.62 $263,028.26 $1,198,028.26 $444,832.47
2011 $381,369.59 $678,362.87 ($69,346.66) $781,151.09 $1,459,513.96 $1,078,144.37
2012 $461,809.69 $460,000.00 ($67,536.97) $815,850.91 $1,275,850.91 $814,041.22
2013 $406,101.37 $409,000.00 ($70,435.60) $849,677.70 $1,258,677.70 $852,576.33
2014 $68,352.97 $71,000.00 ($73,082.63) $1,186,500.00 $1,257,500.00 $1,189,147.03
Total $4,427,633.50 $4,500,716.13 $6,713,999.44 $11,214,715.57 $6,787,082.07
[10]
The question is whether it would be reasonably open to the Trustee to conclude that the Foundation had not applied the funds it received from the Trust for the relevant charitable purposes because, although all of the funds received by the Foundation from the Trust (apart from the sum of $155,000 that I will consider below in relation to the "Reimbursement Point" and one other small deposit mistakenly made to the No. 1 account which was immediately passed on to Hopewood) ultimately made their way to Hopewood, and were then applied (by Hopewood) for their relevant charitable purpose, the Foundation did not itself "apply" the funds for that purpose because it did not, in the financial year of receipt, pass the funds on to Hopewood (but, rather, invested them at interest for the ultimate benefit of Hopewood).
Mr Coles drew my attention to the decision of Eve J in In re Peel [1936] 1 Ch 161. That case is authority for the proposition that where a fund is held by a trustee on trust to "pay or apply" the income for the maintenance, education and benefit of a person, a trustee is not authorised to accumulate the funds for the ultimate benefit of that person. "Such a procedure would involve retention, not application, and be a breach of trust": per Eve J at 164.
I do not see that case as casting significant light on the question before me.
As Oliver LJ said in Inland Revenue Commissioners v Helen Slater Charitable Trust Ltd [1982] 1 Ch 49 at 59 "the meaning of an ordinary English word such as 'pay' or 'apply' may vary greatly according to the context in which it falls to be construed" and:
"The question whether any given act constitutes an 'application' of a fund may receive quite a different answer according to whether what is sought to be elicited is whether income is being 'applied for the benefit' of a particular beneficiary or whether the fund is being 'applied in accordance with' the trusts of the settlement."
Here the question is whether the Foundation, in acting as I have set out, did not "apply the funds" for the relevant charitable purpose.
As Oliver LJ also said in Helen Slater:
"Charitable trustees who simply leave surplus income uninvested cannot, I think, be said to have 'applied' it at all and, indeed, would be in breach of trust. But if the income is reinvested by them and held, as invested, as part of the funds of the charity, I would be disposed to say that it is no less being applied for charitable purposes than it is if it is paid out in wages to the secretary." [At 59]
Mr Coles also drew my attention to the observations of the High Court in Commissioner of Taxation v Bargwanna (2012) 244 CLR 655; HCA 11 (per French CJ, Gummow, Hayne and Crennan JJ) at [28] that:
"It has long been established that a provision in a will or settlement for the 'application' of moneys to a designated end requires that the moneys be devoted to or employed for that special purpose."
However, as Mr Knoll pointed out, the Court went on to state (at [30]) that the Commissioner in that case accepted "that a fund may be 'applied' for charitable purposes without immediate expenditure of income as it is derived".
The Foundation has not explained why the accumulation occurred in the years up to 2009. However, the above table shows that, in each of the financial years during which funds from the Trust were accumulated in the No. 2 account, the Foundation, from its own resources, provided significantly greater support to Hopewood than it accumulated. That suggests that the accumulation was not a result of any want of capital on the Foundation's part. In the financial years since 2009, the accumulated funds, and all other funds received from the Trust (together with large amounts of the Foundation's own funds) have been applied to Hopewood. Those circumstances suggest that to look at the matter on a financial year by financial year basis, rather than over the longer term, is apt to create an impression which does not reflect the substance of how the Foundation has dealt with the monies received from the Trust.
In those circumstances I am not persuaded that the Trustee would be justified in concluding that the Foundation failed to apply the accumulated funds for the relevant charitable purpose. Accordingly, I do not propose to advise the Trustee it would be so justified.
[11]
The Reimbursement point
The Foundation paid from its No. 2 account to its No. 1 account $155,000 in three amounts as follows:
1. 8 December 2011, $40,000;
2. 30 November 2012, $10,000;
3. 3 December 2012, $105,000.
Mr Miller said in his affidavit that prior to these payments, the Foundation had paid, from its own funds in the No. 1 account, a number of expenses of Hopewood; evidently because Hopewood could not itself pay the expenses. Those expenses arose for payment at a time when, because of the timing of distributions from the Trust, there were insufficient funds in the No. 2 account to enable the Foundation to meet them from that source. Clearly the Foundation had funds from which to pay the expenses without the necessity for reimbursement from the No. 2 account. Mr Miller did not explain why (or if) it would have been necessary for the expenses to be paid from the No. 2 account, assuming it was in funds.
Mr Miller said the three payments were transferred to "partially reimburse" the Foundation for those payments, such reimbursements being made after distributions from the Trust were credited to the No. 2 account.
It appears to me that there is a question as to whether the Foundation was entitled to do this. Hopewood is a wholly owned subsidiary of the Foundation and is dependent on the Foundation for funding to meet its expenses (see [45] - [47] above). The Foundation was obliged by the Trust to apply funds distributed to it from the Trust for the relevant charitable purpose; in effect to Hopewood. The Foundation was itself established with the object of pursuing that charitable purpose (among others) and, as I have set out above, has substantial resources that it has devoted to that end. If Mr Storm had not established the Trust in his will, the Foundation would have had to fund the entirety of Hopewood's operations itself, as it had before the Trust was created. The expenses referred to at [97] that the Foundation paid were ones that, but for the Trust, would have fallen for payment by the Foundation in any event. In those circumstances, I see a question as to whether the Foundation had any right to reimburse itself from the Trust funds for expenses which, for all practical purposes, it was in any event, obliged to pay.
As Mr Coles said in his reply submissions "the Foundation is paying Hopewood's way, it is picking up all of its shortfall between its own earnings and its operating costs" and that what the Foundation was doing by making the payments to which I have referred was "really alleviating their own, what otherwise was, a 100 per cent liability for the shortfall".
In these circumstances I consider that it is arguable that, by using the funds in the No. 2 account to reimburse itself for expenses which, but for what Mr Coles described as "Mr Storm's benefaction", would have been the Foundation's responsibility, does not amount to an application of the funds for the relevant charitable purpose.
I express no concluded view on the subject but am satisfied that it is a conclusion that is reasonably open and one that the Trustee would be justified in reaching.
For those reasons, I am prepared to give the Trustee advice that it would be justified in forming the opinion that the payment by the Foundation of the $155,000 from the No. 2 account to its No. 1 account constituted an application of funds received by it from the Trust otherwise than for the relevant charitable purpose.
[12]
If the Trustee was not justified in forming one of the opinions in the Proviso, would it be justified in suspending payment of further distributions to the Foundation from the Trust until it concluded whether or not it should form one of those opinions?
As I have concluded that the Trustee would be justified in forming one of the opinions under the Proviso, this question does not arise.
The will does not include any express power to suspend distributions.
On the contrary, cl 7(f) of the will states:
"I DIRECT that all income paid in accordance with this clause shall be paid within three (3) months of the 30th June each year." [Emphasis in original]
Nonetheless, it was submitted on behalf of the Trustee that a power to suspend distributions "can readily be implied", reference being made to the "cardinal rule" set out in Perrin v Morgan [1943] AC 399 at 420 that a will:
"…should be so construed as to give effect to the intention of the testator, such intention being gathered from the language of the will read in the light of the circumstances in which the will was made."
On behalf of the Trustee it was submitted that it could not have been Mr Storm's intention that the Trustee would be required to make distributions to the Foundation in circumstances where the Trustee had unanswered concerns as to whether the Foundation had ceased to operate under its fundamental objects and purposes or had not applied the funds distributed for the relevant charitable purpose.
The terms of the Proviso make clear that Mr Storm must have contemplated the possibility that any of his chosen beneficiaries, including the Foundation, might cease to operate under its fundamental objects and purposes and might not apply funds distributed for charitable purposes.
However the will contains no mechanism to enable the Trustee to gain information from the relevant beneficiary about those matters. For example, the will does not contain any provision that the beneficiary's entitlement to distribution is conditional upon it providing information to the Trustee and of the Trustee being satisfied about such information.
In those circumstances, I accept that it may be implicit from the terms of the will that the Trustee would be entitled to call on the beneficiary to provide such information and, perhaps, that the beneficiary be obliged to provide such information within a reasonable time.
However, the Trustee's obligation to distribute income in accordance with cl 7(f) would continue to apply; that is unless and until the Trustee formed one of the opinions referred to in the Proviso.
That points against the existence of a right on the part of the Trustee to suspend payments while it decides whether or not to form one of the opinions.
However, in view of the conclusions to which I have come, and as the Trustee only sought advice on this point in the alternative, I express no final view about this and decline to give the Trustee advice about what is a hypothetical question.
[13]
DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.
Decision last updated: 13 September 2016