Donovan v Sheahan as Trustee of the Bankrupt Estate of Donovan

BACKGROUND 7 As noted, this matter relates to events that have been the subject of a great deal of litigation in this Court: see, eg, Sheahan in the matter of Gemhall Holdings Pty Ltd (in liq) v Lo Pilato [2012] FCA 700, [7]-[8]. 8 On 15 June 1994, the Trust was established. Gemhall was appointed, and remains, the trustee of the Trust. SD was the sole shareholder of Gemhall. 9 On 20 August 2010, Karaville issued a bankruptcy notice to SD. That bankruptcy notice was founded on the orders of the Court made on 17 August 2010 and referred to above. 10 On 2 April 2012, the Federal Magistrates Court made a sequestration order against SD and the trustees were appointed as the trustees of SD's bankrupt estate. The bankrupt estate of SD included the shares in Gemhall. On 24 April 2012, the trustees, being entitled to all of the shares of Gemhall, appointed themselves directors of Gemhall. 11 Ms Donovan is the former wife of SD. She and SD had a child together, James Donovan who was born in about June 2009, so he is now nearly four years old. 12 On 3 December 2012, Gemhall received a letter from solicitors acting for Karaville giving Gemhall notice of a monetary claim against it as trustee of the Trust in an amount of at least $500,000 (excluding interest). A subsequent letter was received on 11 February 2013, putting Karaville's claim at $800,000 (including interest). 13 On 12 April 2013, Karaville advised the bankruptcy trustees that it would accept the bankruptcy trustees' offer of $150,000 in full and final settlement of its claim against Gemhall. On the same day, the bankruptcy trustees were advised that the Deputy Commissioner of Taxation would accept $565,000 in full and final satisfaction of the Trust's capital gains tax liability in respect of the sale by Gemhall as trustee of the Trust of a property in Chapel Street, South Yarra, Victoria. 14 The bankruptcy trustees also negotiated with Ms Donovan on her claim and on behalf of James Donovan. As a result of those negotiations, it has been agreed that she will receive $25,000 by way of distribution and a further $150,000 on trust for her son James. 15 There are a few further facts to record before considering the application of the trustees. 16 The objects or beneficiaries of the Trust include SD and some 33 other persons, including Ms Donovan and James Donovan, and others who are relatives of SD. It is a discretionary trust, so no particular object or beneficiary has any entitlement to receive any, or any particular, benefit from the Trust. To date, Gemhall (whether under the control of SD or of the trustees) has made no distribution from the Trust's capital or income. The objects or beneficiaries other than Ms Donovan and James Donovan are, it is established, well provided for independently of the Trust and have no need for access to any capital or income from the Trust. 17 At the date the sequestration order was made over the estate of SD, namely 2 April 2012, the assets of Gemhall as trustee of the Trust comprised: (1) real property at 5-7 Wilson Street, South Yarra in Victoria (Wilson Street) held subject to registered and first mortgage to Capital & Equity Group Pty Ltd (Capital & Equity); (2) a claim against Ms Donovan for funds misappropriated from the Trust in the amount of approximately $277,000.00; and (3) a GST refund due of $33,372. 18 The liabilities or potential liabilities of Gemhall as trustee comprised: (1) the debt to Capital & Equity secured by registered first mortgage (which debt and mortgage Ms Donovan caused Gemhall to undertake on very onerous terms); (2) a claim by Karaville to recover a capital amount of $500,000 (together with interest) said to represent its traceable funds received by Gemhall with notice that they had been fraudulently obtained by SD or entities controlled by him; (3) the costs of the trustee in and about the administration of the Trust; (4) creditors who submitted claims against Gemhall in the amount of $38,031; (5) a claim by Wilmoth Field Warne, solicitors for a lender which had agreed to lend money to Gemhall for the purchase of the Wilson Street property, but which agreement was allegedly breached by Gemhall, in an amount of $14,784; and (6) a claim by 58 Queens Parade Pty Ltd, the company which sold the Wilson Street property to Gemhall, in respect of land tax, in the sum of $10,946. 19 On or about 2 August 2012, Gemhall procured the sale of Wilson Street at auction at and for the price of $2,300,000 plus GST and received a deposit of $230,000. Settlement on the sale occurred on 17 December 2012. A capital gains tax liability on the part of Gemhall arose as a result of that sale. Gemhall received the balance owing of $2,315,704.16 representing the sale price after adjustments less the deposit and less costs associated with the sale. 20 In or about September 2012, Gemhall entered into an agreement with Capital & Equity the terms of which were subject to an undertaking of confidentiality and included a provision that Gemhall pay $504,844.67 in full settlement of Capital & Equity's claim to principal and interest. The sum of $504,844.67 was paid to Capital & Equity on settlement of the sale of Wilson Street. 21 As at 20 December 2012, the net corpus of the Trust fund was approximately $1,150,000 after allowing for liabilities and contingent liabilities but not taking into account the claim of Karaville. That does not fully take account of the capital gains tax liability of Gemhall arising from the sale of Wilson Street. 22 As a result of the negotiation referred to above, the capital gains tax liability has been resolved. So too has the claim of Karaville. In addition, Ms Donovan on behalf of herself and James Donovan have agreed to resolve this proceeding. 23 After the payments to the ATO, and to Karaville, and the other creditors of Gemhall and to the other creditors of the bankrupt estate of SD (including counsel fees of $50,000, legal fees of $365,000 and directors fees of $230,000) the payments to Ms Donovan and to James Donovan will exhaust the assets of the Trust. 24 The trustees as directors of Gemhall by resolution of 20 December 2012 and about 2 April 2003 have resolved to distribute the net assets of the estate on the basis of the two payments of $150,000 and $25,000 referred to and any balance or surplus to SD. There is no significant balance or surplus anticipated (except, as noted above, to cover the other creditors of the bankrupt estate of SD). 25 I note that, in the circumstances, those persons who, in reality, would be interested in ensuring that the costs for counsel fees, legal fees and directors' fees are appropriate are Karaville and Ms Donovan on behalf of herself and James Donovan. They have each indicated through their counsel that they accept that all of those fees have been reasonably incurred and are reasonable in amount. I have not referred in any detail to the extensive steps required from time to time by the trustees (including as directors), solicitors and counsel to get to the present position. They can be seen, in a general way, by reported judgments of the Court. As those who might benefit if it could be shown that those costs were in any significant respect inappropriate - by the release of further funds in the Trust and their then further disposition - accept they are appropriate, I proceed on that basis.

CONSIDERATION 26 It is first important to note that all parties before the Court (including, by leave, Karaville) accept that this proceeding is an appropriate vehicle for the trustees' application for directions. 27 Secondly, counsel for Karaville accepted that it is not necessary or appropriate to consider separately the other applicants who received the benefit of the judgment of 17 August 2010. They are, as counsel said, all in the Karaville "camp" and to the extent that they have any interest in the Trust or any distribution from the Trust, that interest is accommodated by the proposed payment to Karaville. In the proceeding in which the judgment was given, all the applicants including Karaville were represented by the one firm of solicitor and the same counsel. 28 Thirdly, all parties before the Court, who are in essence those persons or entities who have a real and the most direct interest in the way in which the Trust is administered and how its assets are distributed, support the Court giving the directions sought. 29 Fourthly, senior counsel for the trustees acknowledged that the Court, in any event, is not now being asked to give a direction which accepts the reasonableness, as distinct from the appropriateness, of the proposed order. The Court is not, therefore, being asked to form a particular view about the commercial judgment of the trustees in reaching the various settlements of the claims referred to above. In fairness to the trustees, I note that Mr Lock as one of the trustees has nevertheless filed a number of affidavits which seek to expose fully the detail of their activities as directors of Gemhall as well as trustees of the bankrupt estate of SD.

PROPOSED DIRECTIONS 30 The proposed directions are as follows: [The Court directs] that it is reasonable and appropriate for Gemhall Holdings Pty Ltd and for John Sheahan and Ian Russell Lock as Trustees of the Bankrupt Estate of Stephen Gerard Donovan in their capacity as directors of Gemhall Holdings Pty Ltd to distribute the corpus of the Stephen Donovan Family Trust, after payment of all debts and liabilities of Gemhall determined by Messrs Sheahan and Lock to be payable, in the following manner: (a) as to $150,000 to James Donovan; (b) as to $25,000 to Kamila Joanna Donovan; (c) as to the balance of the corpus of the trust then remaining, to Stephen Gerard Donovan by his Trustees in Bankruptcy. 31 In essence, the Court is being asked to give the direction sought to bring Ms Donovan's action to an end. The ATO liability has been resolved and will be paid. If the direction is given, her action is otherwise to be dismissed with no order as to costs. On the evidence, the assets of the Trust will effectively have been applied to those payments, the payment to Karaville to settle its claim, and in the costs and disbursements of the trustees either in that capacity or as trustees of the bankrupt estate of SD. 32 In my view, for the purpose of considering and if appropriate giving, the direction sought by the trustees, it is not necessary to direct service on any other persons. I have noted that the interests of those who may directly be affected by such a direction are before the Court. The other creditors of the bankrupt estate of SD are to be, or have been, paid. The only other category of possibly interested persons are the other objects or potential beneficiaries of the Trust. It is a discretionary Trust, as clause 6.1 of the Trust Deed shows: see Federal Commissioner of Taxation v Vegners (1989) 90 ALR 542 at 552; Chief Commissioner of Stamp Duties (NSW) v Buckle (1998) 192 CLR 226, 234 [8]; Kennon v Spry (2008) 238 CLR 366 at [47] and [165]. Consequently, the objects of the Trust have no beneficial interest in the property of the Trust and their only interest is a mere expectancy coupled with a right to due administration of the Trust, including a right to due consideration in the exercise of the trustee's discretionary power to distribute capital and income; see Australian Securities & Investments Commission v Carey (No 6) (2006) 153 FCR 509; Kennon v Spry (2008) 238 CLR 366 at [165]. 33 In ASIC v Carey (No 6) French J observed at [22]-[26] that a beneficiary of a non-exhaustive discretionary trust (such as the Trust) has no assignable right to demand payment of the trust fund to them (and nor have all of the beneficiaries acting collectively) and that the essential right of the individual beneficiary of a non-exhaustive discretionary trust was to compel the due administration of the trust, including a right to consideration in the exercise of the trustee's discretionary power to appoint property out of the trust fund. 34 Gemhall seeks the direction pursuant to s 91 of the Trustee Act 1936 (SA) and s 69 of the Administration of Probate Act 1919 (SA) or, in the alternative, the equivalent provisions of the law of Victoria. As a supplementary source of power, the directors of Gemhall seek that same direction in their capacity as the trustees in bankruptcy of the bankrupt estate of SD pursuant to ss 30 and 134(4) of the Bankruptcy Act 1966 (Cth) on the basis that they hold the sixteen shares in Gemhall in their capacity as trustees of Donovan's bankrupt estate as a result of which they have been appointed directors (and controllers) of Gemhall. 35 An equivalent right to seek advice and directions from the Court is afforded to liquidators pursuant to s 479(3) of the Corporations Act in a winding up. The history and operation of the procedure was explained by McLelland J in Re GB Nathan & Co Pty Ltd (in Liq) (1991) 24 NSWLR 674, 676-681; also see Re Scott [2006] FCA 718. 36 Where a "beneficiary" claiming against the trustee applies to the Court for declarations (as is the case here) it is open to the trustee to seek directions or advice from the court in that proceeding; eg see Hartigan Nominees Pty Ltd v Rydge (1992) 29 NSWLR 405. As noted, the parties and Karaville accept that is applicable to the present application. 37 While the Court has no jurisdiction to advise a trustee how to exercise a discretion clearly conferred on the trustee, the Court will advise a trustee whether they would be justified in exercising their powers or discretions in particular ways (even thought the Court does not advise the trustee to do so): Heydon & Leeming, Jacob's Law of Trusts in Australia (7th ed) [2134]. See generally Re Mitchell (1913) 30 WN (NSW) 137. 38 In my view, the power of distribution in question is being exercised honestly without any improper or ulterior purpose; and it is being so exercised after the trustees have sought professional advice. The trustees have given genuine consideration to the objects of the trust in connection with a decision to make a distribution. Whilst the Court is not asked to say that the decision of the trustees is reasonable, the material before the Court, including the attitude of Ms Donovan and Karaville, does not give rise to any concern on my part that the decision of the trustee is not a sensible commercial one. 39 On the basis of the facts referred to above, and for the reasons given, I think it is appropriate - with one qualification - to give a direction in the following terms: (1) It is proper for Gemhall as the trustee of the Trust to distribute the whole of the net assets of the Trust at this time. (2) It is proper for Gemhall to distribute the whole of the net assets of the Trust as follows: (i) $150,000 to James Donovan, to be held on trust for his benefit by Ms Donovan; (ii) $25,000 to Ms Donovan; and (iii) the balance of the net assets of the Trust to SD. 40 The qualification is simply that I require the trustees, before making the distribution to James Donovan, to be satisfied that there is in place a proper trust account in the name of James Donovan, or in the name of a person as trustee for James Donovan (it may be Ms Donovan as trustee) so that it is clear that the sum of $150,000 payable to him is properly recognised as being held on trust for him and must be applied for his benefit. 41 If the trustees are not satisfied that there is in place an appropriate account for that payment, I will reserve to them or Ms Donovan liberty to apply to have addressed any issue on that aspect. 42 Otherwise, as foreshadowed, the application itself is dismissed. As agreed, there is no order as to the costs of the application generally or of the trustee's application for directions. I certify that the preceding forty-two (42) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Mansfield.