procedural. Leave granted to file a verified statement of claim in substitution for the summons filed 8 November 2018; leave conditional on plaintiff’s undertaking not to claim indemnification for the costs...
Key principles
Where existing proceedings are to continue by way of pleadings, a court may allow the substitution of a statement of claim for an originating summons (or for an earlier...
The court will not, on an application to permit the substitution of pleading, determine whether an executor is justified in bringing the proposed claims on behalf of the estate...
Where a plaintiff who sues in his capacity as executor plainly has a direct personal interest in the outcome of the proposed proceedings, the court may grant leave to proceed...
The court will not, on the present application, determine issues about the substantive maintainability of asserted causes of action (for example, the viability of an ACL claim)...
Issues before the court
Whether the plaintiff should be granted leave to file a verified statement of claim in substitution for the summons filed 8 November 2018.
Plain English Summary
Vincent, an executor and beneficiary, sought leave to replace an earlier summons with a verified statement of claim alleging his late mother’s cancellation of special class shares was procured by undue influence, incapacity or unconscionable conduct by relatives. His co-executors and the companies opposed leave, arguing the litigation primarily benefits Vincent and risks depleting the estate. Ward CJ treated the application as procedural and granted leave to file the statement of claim because it would be inconsistent with the Civil Procedure Act's overriding purpose to refuse leave when identical proceedings could be started afresh; however, because Vincent plainly has a direct personal interest, the court required an undertaking that he will not seek indemnity for the costs of the proceedings from the estate unless the court authorises it. The court refused to appoint Vincent as a representative under UCPR r 7.10(2), ordered costs in the cause, and expressly declined to decide substantive questions such as the maintainability of an ACL claim or the value of the shares.
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Whether the plaintiff should be appointed to represent the interests of the estate under UCPR r 7.10(2).
Whether the court should give any form of judicial advice or determine whether the executor is justified in bringing the proposed proceedings...
Whether, given the plaintiff's personal interest, the court should permit him to be indemnified from estate assets for the costs of the proposed...
Vincent De Lorenzo, a son of the deceased and one of three executors of her Will, commenced proceedings by summons on 8 November 2018 challenging the cancellation of certain "M" class shares in two family companies. The M class shares carried special voting rights but no entitlement to dividends or capital on winding up. Vincent sought to relaunch the proceedings by filing a verified statement of claim (an amended version of a draft pleading at CB 38ff) to replace the originating summons; alternatively he sought to be appointed to represent the estate under UCPR r 7.10(2). His substantive pleading alleged undue influence, lack of capacity and unconscionable conduct (both in equity and under s 20 of the ACL as enlivened by NSW Fair Trading Act s 28) in respect of the inter vivos cancellation of the deceased's M class shares on or around 19 September 2016. Vincent concedes he has a personal interest in the outcome because, under the Will, reinstated shares or any monetary compensation would in effect benefit him.
Two of his siblings, Christopher and Jo-Ann, who are co-executors and beneficiaries, opposed the application. Their objections were focused: the litigation, they said, confers little if any benefit on the estate and risks depleting it; Vincent had not sought judicial advice under the Trustee Act as to whether litigation would be justified; he plainly stood to gain personally; and it was inappropriate for him to be appointed as representative of the estate. The Companies likewise opposed leave to proceed and intended to defend the proposed claims, though they took a less active role in the procedural dispute except to question the ACL claim.
Ward CJ heard the matter on 26 April 2019 and delivered reasons on 15 May 2019. She treated the application principally as a procedural request to allow existing proceedings to continue by way of pleadings rather than by summons. She granted leave to file the verified statement of claim in substitution for the summons, but made the grant conditional: Vincent must undertake that, unless authorised by the Court, he will not claim indemnification for the costs of conducting the proposed proceedings out of the deceased's estate. She refused to make any order appointing him under UCPR r 7.10(2), ordered the costs of the notice of motion to be costs in the cause, and explicitly declined to decide the substantive questions about the merits of the proposed causes of action.
Why the court decided this way
Two interlocking strands of reasoning decided the outcome.
First, procedural efficiency and the Civil Procedure Act's overriding purpose. Ward CJ treated the application as asking the Court to permit the existing matter to proceed by way of pleadings (a statement of claim) rather than by summons. She concluded that, given the substantive issues Vincent sought to raise, it was appropriate that the matter proceed by a properly verified statement of claim and that it would be inconsistent with the overriding purpose in s 56 of the Civil Procedure Act to refuse leave merely because the originating process was a summons. Moreover, the defendants did not contend that allowing the substitution would prejudice the efficient resolution of the dispute; and it was common ground that, if leave were refused, Vincent could simply discontinue and commence fresh proceedings by statement of claim after probate (Determination [2]-[3]). On that footing, denying the substitution would not advance the overriding purpose.
Second, protection of the estate and co-executors from a prima facie indemnity where litigation primarily benefits a particular executor. Ward CJ accepted that Vincent had a direct and obvious personal interest in the outcome: reinstatement of the cancelled M class shares (or monetary compensation) would ultimately directly benefit him under the Will. The co-executors' objection that Vincent sought to pursue litigation largely for his personal benefit and could therefore be operating at the cost of the estate was legitimate. Executorial indemnity against costs is not absolute; if an executor sues primarily for his or her own personal advantage, that can disentitle them to indemnity from the estate (see authorities cited at Determination [7]). On the facts and in the absence of a full hearing on whether Vincent would be justified in bringing the claims for the estate, Ward CJ considered it appropriate to grant procedural leave but to condition it on an unequivocal undertaking: Vincent must not seek indemnity for costs from the estate unless the Court authorises it (Orders 1-2; Determination [6]-[8]). This condition was designed to preserve the position of the co-executors and the estate pending determination of substantive issues at trial or in a separate judicial advice application.
Third, the Court declined to resolve substantive questions on the present procedural application. Ward CJ explicitly declined to determine whether the M class shares had any real value, whether the ACL claim was maintainable, or whether the plaintiff's current evidence was sufficient to make out his case. Those are matters for trial. Nor did the Court provide judicial advice under the Trustee Act as to whether Vincent was justified in suing without his co-executors' consent; Vincent had disavowed any present application for judicial advice, and the Court would not make that substantive determination as part of this procedural application (Determination [4], [9]).
Finally, the Court refused to appoint Vincent as representative under UCPR r 7.10(2) because he plainly had an obvious personal interest and, if a representative were necessary, a disinterested person would be preferable (Determination [4]).
Before and after state of the law
Before: Courts recognise that executors or trustees may in some circumstances act severally and commence litigation relating to estate assets; they may also be indemnified out of estate assets for costs properly incurred on estate business. There are established doctrines limiting indemnity where executors pursue litigation that predominantly benefits themselves rather than the estate (see Miller v Cameron and later NSW authorities cited in the judgment). There is also an established distinction between an application for judicial advice under the Trustee Act, which requires the court to inquire into whether litigation would be justified, and ordinary procedural applications to manage court processes.
After: De Lorenzo v De Lorenzo reinforces and applies these settled principles in a procedural setting. It emphasises three points:
A court exercising its procedural management powers under ss 61 and 64 of the Civil Procedure Act may permit substitution of pleadings to replace an originating summons where that is consistent with the overriding purpose in s 56; a court should not deny such substitution merely because an executor is the plaintiff, provided procedural fairness and efficiency are respected (Determination [2]-[3]).
Where an executor who seeks to litigate plainly has a direct personal interest, the Court may grant leave to proceed but impose protective conditions, notably an undertaking that the executor will not seek indemnity from estate assets for costs unless authorised by the court (Orders; Determination [6]-[8]).
The Court will not, on such a procedural application, resolve substantive questions of maintainability or value; nor will it treat a substitution application as a substitute for an application for judicial advice under the Trustee Act (Determination [4], [9]).
Thus the decision is a procedural clarifying precedent: leave to amend/replace originating processes should generally be governed by the Civil Procedure Act's overriding purpose, but practical protections for co-executors and the estate can be imposed when a litigant-executor has an obvious personal stake.
Key passages with plain-English translation
"I cannot see that it is consistent with the overriding statutory mandate for the just, quick and cheap resolution of the real issues in dispute (see s 56 of the Civil Procedure Act) not to grant the leave sought." (Determination [3])
Plain English: Given the Court's duty to help resolve disputes efficiently and fairly, it would be wrong to refuse permission to replace the summons with a statement of claim where that would facilitate a proper and efficient determination of the issues.
"I am by no means making any determination to the effect that Vincent would be justified in bringing the claims ... in his capacity as executor;" (Determination [4])
Plain English: Granting procedural permission to file the pleading is not the same as saying the executor has the right to sue on behalf of the estate. That is a separate question the Court is not deciding now.
"I do consider it appropriate that the grant of leave should be conditional on an undertaking ... that he will not claim indemnification for the costs ... out of the deceased's estate." (Determination [8]; Orders)
Plain English: Because the executor clearly stands to benefit personally, the Court will allow him to proceed only if he agrees he will not ask to have his legal costs paid from the estate unless the Court later permits it.
"They are clearly claims for Vincent's ultimate personal benefit ..." (Determination [6])
Plain English: The Court recognises the proposed litigation would directly advantage Vincent, meaning special care is needed about any claim to have the estate pay litigation costs.
What fact patterns trigger this precedent
This decision is directly on point where:
An executor (who is also a beneficiary) seeks procedural leave to amend or substitute an originating process into a statement of claim, and
The proposed claims seek to vindicate rights relating to estate assets that, if successful, would personally benefit that executor under the Will, and
Co-executors object on grounds the litigation confers no real benefit on the estate and may deplete it, and
The executor has not sought or does not presently seek judicial advice under the Trustee Act as to whether litigation is justified.
If you face that combination of factors, De Lorenzo instructs that the Court will usually permit the procedural step (substitution of pleadings) to avoid inefficiency, but will protect the estate and co-executors by conditioning leave on an undertaking to bear costs personally unless the Court later authorises indemnity, and will refuse to appoint the interested executor as a representative under UCPR r 7.10(2).
Conversely, fact patterns where the litigation plainly benefits the estate as a whole, where all co-executors consent, or where a disinterested representative is appointed, will not attract the same protective condition.
How later courts have treated it
At the date of this judgment the decision is recent (May 2019) and chiefly procedural in character. It applies settled principles rather than breaking new doctrinal ground and relies on established authorities concerning executorial indemnity and judicial advice. The immediate effect is to be used as persuasive authority in cases where a litigant-executor seeks procedural management relief while having a clear personal benefit, showing that courts can and will impose cost-protection undertakings as a condition of leave. Practitioners dealing with estate litigation should expect courts to require similar undertakings where the executor litigates at a personal advantage and co-executors object.
(As this deep dive is confined to the judgment itself, it does not catalogue subsequent appellate treatments. Users should search post-2019 databases for any appellate commentary or application of De Lorenzo in later decisions.)
Still-open questions
The precise scope of undertakings: Ward CJ required an undertaking not to claim indemnity unless authorised by the court. What form of application or evidence would suffice at a later stage to displace that undertaking and obtain indemnity remains to be tested. Courts will need to consider what evidence shows that the litigation did benefit the estate or was properly taken for estate purposes.
The boundary between a procedural substitution application and a judicial advice application: De Lorenzo emphasises the distinction but leaves unresolved precisely when a substitution application should be treated as so entwined with the question of executor authority that judicial advice is required at the outset. Practitioners should be cautious: if the core contest is whether an executor may properly sue, a standalone judicial advice application may be the safer procedure.
The maintainability of ACL claims that are alleged to be personal torts or equitable wrongs and their survival to the estate: Ward CJ declined to determine whether the ACL-based unconscionability claim was maintainable by the estate; that remains an open substantive question to be resolved on the pleadings and evidence at trial, and potentially on appeal.
Valuation and remedial questions in family-company contexts: The judgment did not decide whether M class shares that confer only voting rights have compensable monetary value in equity or under statutory remedies. That substantive valuation issue remains to be litigated and will be important for estates where governance rights, not distributive rights, are at issue.
Representative appointment criteria under UCPR r 7.10(2): Ward CJ indicated an independent representative would be preferable where an interested family member seeks appointment. The judgment does not comprehensively chart the factors governing appointment; further decisions may refine how courts choose or reject a family representative in contested estate litigation.
Practical implications for practitioners: if acting for an executor who will personally benefit, consider whether to bring a s 63 Trustee Act judicial advice application at the outset; if opposing, press for undertakings against estate indemnity, and for appointment of a genuinely independent representative where appropriate.
Catchwords
[2001] FCA 760
Colin R Price & Associates Pty Ltd v Four Oaks Pty Ltd (2017) 251 FCR 404[2017] FCAFC 75
Drummond v Drummond [1999] NSWSC 923
Hewitt v GardnerHewitt v Gardner [2009] NSWSC 705(2009) 3 ASTLR 407
HIH Insurance Ltd (In Liq) ACN 008 636 575[1910] HCA 61
Kauter v Kauter [2003] NSWSC 741
King v Hudson [2009] NSWSC 1500
Miller v Cameron (1936) 54 CLR 572Johnson v Trotter [2006] NSWSC 67(2006) 12 BPR 23,339
Smith v Smith (12 July 1996unreported)
Stedman v O'HearnHosemans v O'Hearn [2006] NSWSC 1122
Szabo v Balogh [2007] VSC 232
TAL Life Ltd v Shuetrim (2016) NSWLR 439[2016] NSWCA 68
Talacko v Talacko [2015] VSC 624(2015) 305 FLR 353
Toll (FHL) Pty Ltd v Prixcar Services Pty Ltd (2007) 17 VR 632[2007] VSCA 285
Union Bank of Australia v Harrison, Jones & Devlin Ltd (1910) 11 CLR 492
Judgment (8 paragraphs)
[1]
Background
The Companies are privately owned family companies, involved in the hair care business. The Companies were established by Vincent and his siblings late father (the deceased's husband) and Vincent's late uncle. De Lorenzo HCR is the main operating company of a business which manufactures and sells the "De Lorenzo" range of hair products to hair salons across Australia. De Lorenzo Aust is the entity that employs and pays the management, employees and directors of De Lorenzo HCR.
Following the death of the Companies' founders, management of the Companies passed to Vincent, Christopher, and their cousin, Anthony. From 26 June 2008 to 29 October 2018, Vincent was a director of each of the Companies. (He had earlier been a director of De Lorenzo Aust, from 1 August 1991 to 14 March 1996, though it is not clear that anything presently turns on this.) Christopher and Anthony continue to be directors of each of the Companies.
It is not disputed that the Companies have remained under family ownership and control since their incorporation. The shares in each of the Companies are held, on the one part, by the other Company and, on the other part, by members of the De Lorenzo family. Vincent does not own shares in the Companies. (In his submissions, Vincent says that he has at no relevant time owned shares in either of the Companies. Christopher, however, says that Vincent has previously owned shares in each of the Companies.)
The Companies were registered as proprietary companies before 1 July 1998 and the Companies' constitutions were not repealed or replaced after 1 July 1998. Accordingly, the replaceable rules under the Corporations Act 2001 (Cth) do not apply to the Companies. The Companies have constitutions that make modifications to the Regulations in Table A of Sch 3 to the Companies (New South Wales) Code 1981 (NSW) (the Companies Code) but, other than those modifications, the Regulations in Table A of Sch 3 to the Companies Code apply to each of the Companies.
Until 19 September 2016, in each of the Companies there was on issue a class of shares known as the "M" class shares (M Class Shares), to which were attached special voting rights. The M Class Shares do not carry a right to participate in dividends or, on a winding up, in the capital of the respective Companies. Relevantly, however, the owners of the M Class Shares have disproportionately high voting rights. (See the Minutes of the Extraordinary General Meeting of Shareholders of De Lorenzo Aust dated 7 March 1987 and the Minutes of the Extraordinary General Meeting of Shareholders of De Lorenzo HCR dated 7 March 1987.) Prior to 19 September 2016, the deceased owned six of the nine M Class Shares and Anthony owned the remaining three M Class Shares in each of the Companies.
Under the deceased's Will dated 19 November 2014, the deceased bequeathed to her sons, Vincent and Christopher, "as tenants in common in equal shares all "M" Class Ordinary Shares in the Companies … registered in [the deceased's] name at the date of [the deceased's] death".
On 19 September 2016, resolutions were passed by the members and directors of the respective Companies for the cancellation of the M Class Shares then held by each of Anthony and the deceased. What Vincent now seeks to challenge, on behalf of the deceased's estate, are the cancellations of the deceased's M Class Shares in those Companies. He seeks to do so on various grounds (see further below) and complains that, to date, there has been no explanation made available to him "as to why or how [the deceased] could have agreed to cancel her shares".
Vincent argues that, leaving aside "the immediate loss of those assets to [the deceased]", the following two further consequences flowed from the cancellation of the M Class Shares: first, that the deceased's expressed objective in her 2014 Will to bequeath those shares in part to him would no longer be met; and, second, that the control exerted by the remaining shares (held by Anthony and Christopher) would become complete.
(Pausing here, Christopher submits that it is not to the point for Vincent to say that "[t]o date, there is no explanation available to the plaintiff as to why or how Patricia could have agreed to cancel her shares"; the onus on Vincent to prove his case resting with him. Further, it is noted that, for each of the Companies, the respective M Class Shares were cancelled by the same instrument, not as separate transactions.)
The deceased died on 17 March 2018. As adverted to above, the deceased appointed her three children (Vincent, Christopher and Jo-Ann) as her executors and trustees. They lodged an application for probate of the deceased's Will in about March 2018 (proceedings 2018/00098201).
[2]
These proceedings
Before probate was granted, Vincent commenced the present proceedings (2018/00343648) by summons filed 8 November 2018. In his summons (CB p 4), Vincent claimed both final and interlocutory relief.
By way of final relief, Vincent sought: first, that (if probate had not yet been granted to him or it were otherwise deemed necessary) special letters of administration be granted to him as administrator ad litem of the deceased's estate for the purpose of seeking the relief set out in a draft summons attached to his 8 November 2018 summons (or in a replacement statement of claim) and the interlocutory relief referred to in prayer 5 of the summons (prayer 1); second, dispensation with the need to take certain steps in relation to that application (prayer 2); third, that he be appointed to represent the interests of the estate in respect of the attached draft summons (prayer 3); and, fourth, liberty to file in Court the attached draft summons or a replacement statement of claim, commencing proceedings on behalf of the estate (prayer 4).
The interlocutory relief sought related, inter alia, to injunctive relief to restrain the defendants from taking steps which have the effect of reducing the effective percentage of votes that the owner of the M Class Shares previously held by the deceased on and before 19 September 2016 would have (if those shares were reinstated) and from taking any steps to dispose of assets owned by the Companies of value greater than $10,000 other than in the ordinary course of business, in the absence of Vincent's written consent or the authority of the Court (see prayer 5(a) and (b)). Vincent says that this injunctive relief was to preserve the value of the M Class Shares. What he ultimately seeks is to set aside the inter vivos cancellation of the deceased's M Class Shares in the Companies or to obtain compensation for the estate for those shares.
By consent, on an interim basis, orders were made by the Equity Registrar on 26 November 2018 in terms of the interlocutory injunctions that had been sought in the summons.
Probate of the deceased's Will was granted on 16 November 2018. Thus, the orders sought in prayers 1-2 of the summons are no longer required (nor, it would seem, is the application for interlocutory relief proposed to be further agitated). Rather, what Vincent now seeks by his notice of motion is, in effect, the substantive relief sought in prayers 4 and (if necessary) 3 of the summons (in effect that he have leave to file in the present proceedings an initiating process on behalf of the estate, whether in his capacity as executor or as a representative of the estate). Vincent, however, says that he is not seeking the relief sought in the summons in this regard - he insists that the summons "is the very document that we are seeking to eliminate by putting these proceedings on a proper basis, which is the statement of claim" (see T 49.42). Vincent expressly disavows the proposition that his application for leave involves any judicial advice as to whether there is power for him to commence the proceedings in his capacity as executor without the consent of the co-executors (see T 49.45; T 50.41 - 51.16).
[3]
The proposed statement of claim
In summary, Vincent contends that, in the circumstances set out in his affidavit affirmed 7 November 2018 (some of which was read on the present application only as submissions or assertions by him), it should be inferred that Anthony and/or Christopher engaged in unconscionable conduct in connection with the cancellation of the deceased's M Class Shares and/or that it should be found or presumed that the cancellation of the M Class Shares was procured in circumstances of undue influence over the deceased or while she lacked relevant capacity.
Relevantly, the proposed statement of claim contains allegations to the effect that, by no later than 2015, the deceased (who turned 85 years old on 7 April 2015) was diagnosed with: an intellectual disability; cerebral arteriosclerosis; early signs of senile dementia; and early signs of memory loss (see [55]-[58]); that on 18 September 2016 (the day before the relevant company resolutions were signed) the deceased became ill with rhinovirus pneumonia and was admitted to hospital (see [59]); and that at the time of the cancellation of the M Class Shares, the deceased was gravely ill (see [106]).
The claims Vincent seeks to bring on behalf of the estate are claims seeking equitable relief and, or in the alternative, relief for unconscionable conduct in breach of s 20 of the ACL, as enlivened against natural persons by s 28 of the Fair Trading Act 1987 (NSW).
As to the former, the proposed statement of claim seeks declaratory relief to the effect: that Anthony and/or Christopher engaged in unconscionable conduct in connection with the cancellation of the deceased's M Class Shares (both under the general law and the ACL); that the cancellation of the said shares was procured in circumstances of actual or presumed undue influence; and that the deceased did not have capacity when she executed the instruments cancelling the shares and that the cancellation is voidable; as well as orders for compensation (by way of equitable damages or equitable compensation or both) reflecting the value of the shares and/or the restoration to the estate of ownership of the shares by their reinstatement in the register, including being recorded as owned by the estate of the deceased.
As to the latter, the proposed statement of claim seeks (further or in the alternative) declaratory relief to the effect that Anthony and/or Christopher engaged in unconscionable conduct under the general law or in breach of s 20 of the ACL in procuring the cancellation of the shares and orders for compensation to the estate for the loss of the shares (either by way of damages pursuant to s 236 of the ACL or compensation under s 237 of the ACL) and/or restoration of the shares to the estate.
[4]
Defendants' objections to the grant of leave
In both the correspondence leading up to the present motion and in the submissions filed for the respective defendants on the present application, a number of objections were raised to the grant of the leave that is now sought. They may be summarised as follows.
First, that the co-executors do not support the bringing of the proceedings. In that regard, Christopher and Jo-Ann accept that, in certain circumstances, a co-executor may act severally (referring by way of example to Union Bank of Australia v Harrison, Jones & Devlin Ltd (1910) 11 CLR 492; [1910] HCA 61 at 508, 516, 520 (Isaacs J); Re Estate of Trotter; Johnson v Trotter [2006] NSWSC 67; (2006) 12 BPR 23,339 at [21] (White J); Szabo v Balogh [2007] VSC 232 at [12]-[13] (Habersberger J)) though it is noted that this general proposition is not absolute (referring to my observations in John v John [2010] NSWSC 937 at [19] (John v John)); and that in Szabo v Balogh, Habersberger J recognised at [13] that the fact that co-executors can act severally does not explain how to resolve a conflict between co-executors in any particular case.
In the present case, the co-executors raise concerns that Vincent is seeking to pursue his own personal interest and (at least up until during the course of oral submissions) had not provided any indication that he was willing to conduct the proceedings at his own risk as to costs; in circumstances where there has been no application by Vincent for judicial advice under s 63 of the Trustee Act 1925 (NSW) as to whether the commencement of proceedings would be justified, taking into account factors including the potential to deplete the estate and what would be gained if the action was successful (referring to Re Challis [2010] WASC 333 at [30] (Allanson J)). Reference is also made to the observations in Kauter v Kauter [2003] NSWSC 741 of Young CJ in Eq, as his Honour then was (at [73]-[76]).
Second, that Vincent should bring the claims in his personal capacity, noting that in "special circumstances" a beneficiary may pursue a claim that would ordinarily vest in trustees or the executors of an estate (see Ramage v Waclaw (1988) 12 NSWLR 84 at 91-93 (Powell J); TAL Life Ltd v Shuetrim (2016) NSWLR 439; [2016] NSWCA 68 at [54] (Leeming JA) with whom Beazley P and Emmett AJA agreed) and arguing that the unwillingness of his co-executors to bring the proceedings that Vincent seeks to agitate (and the fact that Vincent is the only beneficiary who both benefits from and supports the remedies sought in those proceedings) amounts to sufficient circumstances for Vincent to bring proceedings in his personal capacity (to the extent he is willing to do so). Reference is here also made to what was said in Colin R Price & Associates Pty Ltd v Four Oaks Pty Ltd (2017) 251 FCR 404; [2017] FCAFC 75 at [102]-[104] (Rares, Murphy and Davies JJ).
[5]
Vincent's submissions in response
In response to those matters, Vincent makes the following submissions.
As to the first, he says that, other than in relation to certain matters such as real-estate transactions, and unlike trustees, executors may act unilaterally (referring to John v John at [18]-[32]; and by way of example to Porker v Richards (No 2) [2017] SASC 11 (Blue J) at [38]; and Smith v Smith (12 July 1996; unreported; Bryson J; after a grant of limited administration). It is said that, had Vincent been an executor at the time he filed the summons, he could simply have commenced the proceedings in the same manner as he now proposes to do. As to costs, Vincent accepts that executors are only to be indemnified for legal costs which are properly incurred (referring to Re Atkinson, deceased [1971] VR 312 at 615 (Gillard J)); says that at present he is spending his own funds; and that the time to debate any questions about the propriety of bringing these proceedings will be reached "if and when indemnification is sought, or when costs are sought at the conclusion of the proceedings, or if the plaintiff brings a Beddoe application under s 63, Trustee Act 1925 (NSW)".
As to the second, Vincent maintains that the causes of action giving rise to the relief sought in respect of the reinstatement of the M Class Shares and/or claim an award of damages or compensation due to the cancellation of the deceased's M Class Shares are causes of action that vested in the estate on her death and which Vincent could not pursue in his personal capacity (unless he were a bare beneficiary who sought to bring a derivative action due to the inaction of executors). It is said that this is why he properly first sought to be appointed as an administrator ad litem. He emphasises the duty of executors, even if they are beneficiaries, to protect the estate.
As to the third and fourth of the matters, Vincent contends that if causes of action such as unconscionability or undue influence are established, then under the ACL and in equity, the Court will have power to grant orders to reverse all the consequences of the impugned conduct; that the remedial powers in equity and under the ACL are broad enough to encompass such relief; and that their exercise should be left to the trial judge. Insofar as Christopher says that Vincent has not raised other issues (such as the fact that M Class Shares held by Anthony were also cancelled), Vincent says that he is acting to restore assets to the estate and that if Anthony wishes to sue a party in connection with the cancellation of his own shares, that is a matter for him, but it is not "a reason to deny the proposed amendment" ([sic], presumably here Vincent means it is not a reason to refuse leave for the filing of the statement of claim).
[6]
Determination
By the conclusion of the hearing of submissions on the application it was difficult not to conclude that the parties had to a large extent been at cross purposes as to what was actually being sought. The defendants saw the application as tantamount to an application for judicial advice; Vincent, on the other hand, was adamant that it was not and was insistent that he was entitled, as one of a number of executors, to maintain the claims he had identified on behalf of the estate (albeit conceding that he was exposed to an order for personal costs irrespective of the outcome of the proceedings and might not be able to rely upon any prima facie entitlement as executor to indemnification out of the assets of the estate) and thus did not need leave to bring the proceedings as such (simply requiring leave in order to substitute the initial originating process with a statement of claim).
Moreover, insofar as it was suggested that the principles to be applied in determining whether the leave sought should be granted were akin to those applicable when determining whether leave to amend a pleading should be granted, it seems to me that in substance this is closer to an application for existing proceedings to continue by way of pleadings (see for example UCPR r 6.6; albeit that this rules applies where proceedings have been wrongly commenced by summons and there is no suggestion that that is here the case). When approached from that perspective, there is little doubt that the nature of the issues sought to be raised by the plaintiff in the proceedings would require that the matter proceed not by summons but by a properly verified statement of claim.
In circumstances where it does not seem to be disputed by the defendants that, were the present proceedings now to be discontinued or dismissed (without any hearing on the merits), it would be open for Vincent to commence new proceedings simply by filing a statement of claim in which (subject to the complaint as to whether a claim under the ACL is reasonably arguable) he would be able to raise precisely the same issues as he proposes now to raise if leave is granted for the filing of the proposed statement of claim, I cannot see that it is consistent with the overriding statutory mandate for the just, quick and cheap resolution of the real issues in dispute (see s 56 of the Civil Procedure Act) not to grant the leave sought.
[7]
Orders
For the above reasons, I make the following orders:
1. Subject to order 2, order that the plaintiff have leave to file in Court a verified statement of claim in the form of the statement of claim appearing at CB 38ff in substitution for the summons filed 8 November 2018, such statement of claim to take effect from the date of the filing of the statement of claim.
2. Order that the leave granted in order 1 be conditional on the plaintiff undertaking to the Court that, unless authorised by the Court so to do, he will not claim indemnification for the costs of the conduct of the proposed proceedings (whatever the outcome of those proceedings) out of the deceased's estate.
3. Otherwise dismiss the plaintiff's notice of motion filed 14 November 2018.
4. Order that the costs of the plaintiff's notice of motion filed 14 November 2018 be costs in the cause.
5. Note that, to the extent that the plaintiff has a direct and obvious personal interest in the outcome of the proceedings that he intends to bring in his capacity as executor of the deceased's estate, and has sought leave to do so without seeking judicial advice as to whether he would be justified in so doing on behalf of the estate, he does do at the risk that he will not be entitled to indemnification out of the assets of the estate for the costs of those proceedings irrespective of the outcome of the proceedings and that he will be personally liable for those costs.
[8]
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: 15 May 2019
LR 84
Re Atkinson, deceased [1971] VR 312
Re Challis [2010] WASC 333
Re Estate Nitopi, deceased [2018] NSWSC 1560
Re Estate of Trotter; Johnson v Trotter [2006] NSWSC 67; (2006) 12 BPR 23,339
Smith v Smith (12 July 1996; unreported)
Stedman v O'Hearn; Hosemans v O'Hearn [2006] NSWSC 1122
Szabo v Balogh [2007] VSC 232
TAL Life Ltd v Shuetrim (2016) NSWLR 439; [2016] NSWCA 68
Talacko v Talacko [2015] VSC 624; (2015) 305 FLR 353
Toll (FHL) Pty Ltd v Prixcar Services Pty Ltd (2007) 17 VR 632; [2007] VSCA 285
Union Bank of Australia v Harrison, Jones & Devlin Ltd (1910) 11 CLR 492; [1910] HCA 61
Warton v Yeo [2015] NSWCA 115
Texts Cited: Nil
Category: Procedural and other rulings
Parties: Vincent De Lorenzo (Plaintiff)
Anthony De Lorenzo (First Defendant)
Christopher John De Lorenzo (Second Defendant)
De Lorenzo Hair & Cosmetic Research Pty Ltd (Third Defendant)
De Lorenzo Australia Pty Ltd (Fourth Defendant)
Jo-Ann De Lorenzo (Fifth Defendant)
Representation: Counsel:
T Maltz (Plaintiff)
JS Burnett (First, Third, Fourth and Fifth Defendants)
FJ McNeil (Second Defendant)
Leave granted to file a verified statement of claim in substitution for the summons filed 8 November 2018; leave conditional on plaintiff’s undertaking not to claim indemnification for the costs of the proposed proceedings from the deceased's estate unless authorised by the Court; application for appointment under UCPR r 7.10(2) dismissed; plaintiff's notice of motion otherwise dismissed; costs of the motion to be costs in the cause; formal note that plaintiff proceeds at his risk as to indemnity for costs (Orders 1-5).
What Vincent no longer seeks to press, although this was included in the draft statement of claim attached to his notice of motion, is any claim for relief relating to his removal as a director of the Companies (relief that, on no view of things, could be said to be sought on behalf of the deceased's estate).
The causes of action as proposed to be pleaded are for undue influence (both presumed and actual) (see [106]-[112] and [113]-[120] respectively); for unconscionability under the general law ([121]-[126]) and under the ACL ([129]-[131]); and as to the deceased's incapacity (see [132]-[135]).
Pausing here, it is apparent from the broad summary of the background to the present dispute that, ultimately, the benefit of any restoration to the estate of ownership of the deceased's cancelled M Class Shares is that those shares would then pass under the deceased's Will to Vincent and Christopher in equal shares (giving Vincent voting rights though no right to participate in dividends or in the capital of the Companies) (see cl 9 of the Will) and that any monetary compensation or damages order enuring to the benefit of the estate (as an alternative to reinstatement of the shares) would (assuming the pecuniary legacies were otherwise met out of other assets of the estate) fall into residue (the residuary beneficiaries being each of Vincent, Christopher and Jo-Ann in equal shares) (see cl 11 of the Will). Thus, it can readily be seen that although Vincent maintains that he is bringing the proceedings in his capacity as executor on behalf of the estate, if those proceedings are ultimately successful he clearly stands to benefit therefrom (and it was conceded by his Counsel that Vincent thus has a personal interest in the outcome of the claims he seeks to bring - see T 26.40-45).
It was emphasised for Vincent, in oral submissions, that he is not here seeking leave to commence proceedings on behalf of the estate; rather, that he is seeking leave to file the proposed statement of claim (such leave being necessary in order to replace one originating process for another) (see T 49.14-15), in circumstances where it is said that it would have been open to him (once probate was granted) simply to commence proceedings afresh by filing a new statement of claim (see T 49.27-28):
…in other words [leave is sought] to do the thing that we could do as a matter of course had we commenced the proceedings after probate has been granted.
Vincent's position in this regard was that (see T 49.36):
…we seek simply to put these proceedings on their proper basis now, which is a statement of claim that properly reflects our rights [my emphasis; unless "our rights" is to be understood as a reference to the estate this would seem to be somewhat of a Freudian slip]
It was said that there was nothing in the notice of motion that requires "any determination of anything like judicial advice, [or] any assessment of the quality of the case" and that the relevant test to be applied on the present application (for leave to file the statement of claim) is that which is to be applied in the exercise of the power to permit the "straightforward substitution of one document for another" (by the giving of directions as to practice and procedure pursuant to s 61 of the Civil Procedure Act 2005 (NSW) (Civil Procedure Act or the amendment power in s 64 of the Civil Procedure Act). (An alternative source of power would be the inherent power of the Court to control its own process.)
What was, however, made clear by Counsel for Vincent was that what was not here sought was any form of judicial advice to the effect that he was able to commence proceedings in his capacity as executor on behalf of the estate without the consent of his co‑executors (the debate on that issue being said to be solely in response to certain of the objections that had been made by the co-executors to the grant of the leave here sought).
Rather troubling in this context (in the sense that the efficient course, if an application for judicial advice had been seriously contemplated, would have been to bring that application up front, rather than the application now before me) was the suggestion, in oral submissions for Vincent, that he was in some way seeking to reserve his position as to whether to make some judicial advice application at a later time (namely, statements to the effect "… I'm not asking your Honour to determine anything like judicial advice. That will come, that may come, judicial advice may come at some point in the future" and, later, that "[h]e may one day seek judicial advice" - see at T 51.7; 36.6).
Finally, before turning to the objections raised by the defendants to the grant of leave, I note that in the course of oral argument Counsel for Vincent, having acknowledged that Vincent "is very much exposed to costs" (referring to the Petar v Macedonian Orthodox Community Church St Petka Inc (No 2) [2007] NSWCA 142), indicated that if something more than such an acknowledgement as to his present exposure to costs were required ("namely an undertaking that he accepts that he's personally liable for the costs in these proceedings") as the "price" he has to pay for the leave here sought, then Vincent was prepared to give that undertaking (though he maintained that he should not be required to do so).
By leave given at the time I reserved my judgment, Vincent subsequently proffered a formal undertaking in the following terms:
In the event that her Honour Ward CJ in Eq determines that giving the undertaking below is a necessary precondition to leave being granted to the filing of a Statement of Claim in matter 2018/343648 (the Proceedings), in which I proceed either in my capacity as executor, or in my capacity as a beneficiary who has been given leave to proceed, I give the following undertaking to the Court:
I, Vincent De Lorenzo, unconditionally undertake that in respect of the Proceedings, I will not seek or claim the costs of any successful or unsuccessful proceedings from the Estate of the late Patricia Ellen De Lorenzo.
Third (and fourth), that the relief sought is unconnected with the estate, on the basis that Vincent is the only person that stands to benefit from the proceedings (noting that Christopher's opposition to leave being granted leads to the inference that he sees no benefit in the proceedings; and that, when the application was first filed Vincent was seeking to propound proceedings in which he sought relief that he be reinstated as a director of the Companies); and arguing that this conclusion is reinforced by the fact that the relief sought by Vincent relates only to part of the cancellation of the M Class Shares.
Fifth, as to the claim under the ACL, that this is not reasonably arguable (by reference to the decision of the Full Court of the Federal Court in Pritchard v Racecage Pty Ltd (1997) 72 FCR 203 (Pritchard); and Byers v Overton Investments Pty Limited (2001) 109 FCR 554; [2001] FCA 760 at [2]-[3] (Branson, North and Stone JJ)). It is submitted that the same reasoning as applied in Pritchard here applies under the equivalent provisions of the ACL, whether or not applied as a law of the State of New South Wales; but that even if, contrary to their submissions, the claim under the ACL is arguable (and hence not liable to be struck out or summarily dismissed), it must be characterised as speculative in light of the clear decisions of Australian intermediate appellate courts on this issue.
Sixth, that there is no reason to think that the M Class Shares have any value (since they confer voting rights but otherwise no right to participate in the profits of the Companies). It is submitted that there is no obvious benefit to the estate (or to Vincent, who otherwise holds no shares in the companies) from the M Class Shares and that this raises serious questions as to whether there is any proper justification for bringing the claims. Christopher submits that the matters raised in Vincent's affidavit are insufficient to support any factual finding as to the value of the M Class Shares and that the reliance placed by Vincent in Holt v Cox [1994] 15 ACSR 313 at 334 (Santow J, as his Honour then was) and Toll (FHL) Pty Ltd v Prixcar Services Pty Ltd (2007) 17 VR 632; [2007] VSCA 285 (Toll v Prixcar) at [47] (Maxwell P, Nettle and Ashley JJA) is misplaced (the first because there the shares concerned had an entitlement to receive 20% of any distribution of the company's capital on winding up; the second on the basis that there was in that case a shareholders' agreement which included specific provisions in light of which the Court there reached its conclusion).
Seventh, that the claims are not supported by the evidence. It is submitted in this context that there is likely to be a significant factual contest in respect of the matters contained in the proposed statement of claim. (Christopher, however, also maintains that the strength or weakness of the claims sought to be advanced by Vincent has little bearing on the resolution of the present application.)
As to the procedural issue raised by the application (if it be deemed necessary) for the appointment of Vincent as a representative of the estate pursuant to UCPR r 7.10(2), the co-executors say that, for the same reasons that Vincent should not be permitted to bring proceedings on behalf of the Estate (in his capacity as a co-executor of the Estate), Vincent should also not be permitted to bring the proceedings as a representative of the estate pursuant to UCPR r 7.10(2) (reference there being made to my observations in Hewitt v Gardner; Hewitt v Gardner [2009] NSWSC 705; (2009) 3 ASTLR 407 at [83]; [92] and to the observation by Sloss J in Talacko v Talacko [2015] VSC 624; (2015) 305 FLR 353 at [165] as to there being little authority as to what factors should guide the exercise of the court's discretion to appoint a person to represent the estate of the deceased for the purposes of an application or the trial of a proceeding).
Christopher further argues that the following factors weigh against making an order that Vincent be appointed to represent the estate in the present proceedings: that Vincent does not stand as an independent party but has a direct personal interest in the relief sought in the proceedings pursuant to the amended statement of claim; that Vincent has not indicated that he is amenable to costs orders nor conduct the suit at his own risk as to costs (cf., Re Estate Nitopi, deceased [2018] NSWSC 1560 at [106] (Lindsay J) at [3]); noting that Vincent has not sought any alternative order that a disinterested person be appointed as representative nor has he provided any evidence in support of any such person's consent or as to that person's fitness to act as representative.
As to the fifth (the reliance placed on the Full Court of the Federal Court's decision in Pritchard at 218 (Spender J), and on Re HIH Insurance Ltd (In Liq) ACN 008 636 575; FAI General Insurance Company Ltd (In Liq and subject to a scheme of company arrangement) [2018] NSWSC 1886 at [40] (Brereton J, as his Honour then was)) for the proposition that the claims under the ACL are not maintainable because they do not survive to the estate, Vincent relies upon reasoning of the kind set out by Nicholson J in Premiership Investments Pty Ltd and Another v White Diamond Pty Ltd (1995) 61 FCR 178, albeit there in relation to Western Australian legislation. (Vincent has indicated an intention to make this issue clearer in his proposed pleading - see [129A] and [129B] of the proposed statement of claim.)
As to the submission that the M Class Shares have no obvious value, it is submitted that they do have special value to insiders and potential acquirers, in that they conferred super-normal voting rights (referring by way of example to Holt v Cox at 334 (Santow J, as his Honour then was); and Toll v Prixcar at [47]).
Finally, as to the criticism that the material set out in Vincent's affidavit does not provide a "proper basis" for the claims he seeks to advance, Vincent argues to the contrary, pointing to the matters to which he has deposed as to: the deceased's mental impairment at the time of the cancellation of her shares; the apparent improvidence of the transaction; the apparent secretiveness of the transaction; the fact that Anthony and Christopher, who stood to benefit from the transaction (namely by expanding their voting powers), were in some way involved in the cancellation of the shares; and "the lack, to date, of any benign explanation for the cancellation".
As to the procedural issue, Vincent says that he may not actually require an order under UCPR r 7.10(2) to pursue the proceedings as the sole plaintiff in his capacity as executor but that he seeks such an order to make the capacity in which he sues "both clear and formalised" (referring to Stedman v O'Hearn; Hosemans v O'Hearn [2006] NSWSC 1122 at [6] (Hamilton J)).
Finally, as noted earlier, Vincent also seeks his costs of the notice of motion (citing Public Trustee v Nash (1921) 38 NSW WN 142 at 143 (James J)), on the basis that it was unreasonable for the defendants to refuse to consent thereto.
In doing so, however, it should be made quite clear that I am by no means making any determination to the effect that Vincent would be justified in bringing the claims identified in the proposed statement of claim in his capacity as executor; nor is it necessary here to add to the consideration in earlier authorities as to the power of one executor so to act without the consent of his co-executors. Indeed, Vincent has been insistent in his disavowal of any application for judicial advice of that kind. In those circumstances, I also do not consider it appropriate to make any order for the appointment of Vincent to represent the estate for the purposes of UCPR r 7.10(2) (and, were a representative appointment to have been pressed, I would have considered it more appropriate that someone independent of the family dispute and without such an obvious personal interest in the outcome of the proceedings, should be appointed).
Nor am I making any finding that the claims sought to be made in the proceedings are claims that can properly be characterised as for the benefit of the estate (though it seems to me much more likely, given that the only other beneficiaries likely to benefit from the reinstatement of the deceased's M Class Shares or from the payment of equitable damages or compensation for the loss of those shares have not consented to the bringing of the proceedings by Vincent as executor, that they are not being pursued for that purpose).
Vincent concedes that he has a personal interest in the outcome of the claims he seeks to make in his capacity as executor of the estate. That cannot seriously be in dispute. They are clearly claims for Vincent's ultimate personal benefit (albeit that the benefit arises from the reinstatement of the deceased's M Class Shares or the estate recovering whatever may be the monetary value thereof). That is evident from the proposition put for Vincent that the M Class Shares have a financial value "to insiders and potential acquirers" by reference to the super-normal voting rights they carry.
That the proceedings are in truth for Vincent's personal benefit is likely to have real consequences on the ultimate issue as to the costs of the proceedings; at the very least in the context of any question as to whether Vincent should be indemnified for the cost of bringing proceedings largely, if not wholly, for his own personal benefit (see, for example, cases where the personal interest of an executor in the outcome of proceedings may disentitle the executor to costs orders in his her or its favour - Miller v Cameron (1936) 54 CLR 572; [1936] HCA 13 at 578-579 (Latham CJ); Drummond v Drummond [1999] NSWSC 923 at [47]-[48]; [51] (Austin J); Warton v Yeo [2015] NSWCA 115 (at [68]); King v Hudson [2009] NSWSC 1500 at [23]).
I consider it perfectly understandable that Vincent's co-executors objected to leave being granted for him to file a statement of claim expressly in his capacity as executor if they perceived that the consequence of such leave would be a prima facie entitlement to indemnification for his costs as executor of so doing or if the grant of leave were perceived as giving some judicial imprimatur to Vincent's claim or conduct in bringing that claim. It is for that reason that, although I do not make the grant of leave conditional on an undertaking in the terms that were proffered by Vincent, I do consider it appropriate that the grant of leave should be conditional on an undertaking from him that, absent Court order, he will claim indemnification for his costs of the proceedings whatever their outcome may be.
I should note that I have not considered issues as to whether the claim sought to be brought under the ACL is properly maintainable, nor as to whether the evidence of Vincent, such as it is at present, would be sufficient to maintain a claim for the relief sought; nor as to whether the M Class Shares in fact have any real financial value. Those are matters best left to the trial. Suffice it to note that I would not have refused leave on the basis that the claims sought to be made by Vincent are obviously untenable or doomed to failure.
Finally, I consider that the costs of the motion should be costs in the cause. As noted above, I do not consider that it was unreasonable for the defendants to take the stance that they did in light of the apparent confusion as to what precisely was the basis on which the application was being made, and in light of the fact that the application was in a very real sense unnecessary in circumstances where Vincent could simply have commenced fresh proceedings after probate had been granted (as he insists he would have been entitled to do) and where he did not make clear until the conclusion of submissions on the hearing of the present application that he was prepared, if necessary, personally to bear the costs of proceedings that are obviously for his own personal benefit.