Shares in a publicly listed company
119 A share, it has been said, is "the interest of a shareholder in the company measured by a sum of money for the purpose of liability in the first place and of interest in the second, but also consisting of a series of mutual covenants entered into by all the shareholders" (Archibald at 156). The subsequent abolition of the concept of par value and of authorised capital effected by the Company Law Review Act 1998 (Cth) renders the reference to the measurement by a sum of money in this description inapt (National Mutual Life Association of Australia Ltd v Commissioner of Taxation [2009] FCAFC 96; (2009) 177 FCR 539 at [48] referring to Pilmer v The Duke Group Pty Ltd [2001] HCA 31; (2001) 207 CLR 165 at [19]). In Pilmer at [19] McHugh, Gummow, Hayne and Callinan JJ said:
Once issued, a share comprises "a collection of rights and obligations relating to an interest in a company of an economic and proprietary character, but not constituting a debt" [citing Pennington, "Can shares in companies be defined?", (1989) 10 The Company Lawyer 140 at 144].
120 For a share to be held on trust there must be "certainty …as to the property bound by the trust" (Herdegen v Federal Commissioner of Taxation [1988] FCA 419; (1988) 84 ALR 271 at [19] citing Federal Commissioner of Taxation v Clarke [1927] HCA 49; (1927) 40 CLR 246 at 283-5; Scott on Trusts, 4th ed, 1987, s 76, 77). In the context of shares which do not need to be numbered and certificated (as permitted by s 1070B(2) of the Corporations Act 2001 (Cth)), as is the case with shares in MIN, the question that arises is the certainty of the subject matter of any trust. This is because shares are considered to be fungible or interchangeable (a concept which, as noted below, itself has attracted criticism).
121 The analysis of Campbell J in White v Shortall [2006] NSWSC 1379; (2006) 68 NSWLR 650 warrants detailed consideration. The defendant held shares in a company which were unnumbered. The defendant declared in writing that a specified number of these shares were held on trust for the plaintiff and would be transferred to the plaintiff after a specified date or on the plaintiff's death. The plaintiff requested transfer, but the defendant refused. Campbell J held that the defendant was liable for damages for breach of contract. He also considered the trust claim and concluded that the declared trust was valid and enforceable, the remedy for which would be equitable compensation. In so doing, his Honour provided a detailed analysis of issues relevant to the present case.
122 His Honour started from these basic premises:
[149] There is no doubt that a share can be held on trust. Lord Shaw said in Lord Strathcona Steamship Co Ltd v Dominion Coal Co Ltd [1926] AC 108 at 124:
The scope of the trusts recognised in equity is unlimited. There can be a trust of a chattel or of a chose in action, or of a right or obligation under an ordinary legal contract, just as much as a trust of land.
…
[151] In Kauter v Hilton (1953) 90 CLR 86 at 97 Dixon CJ, Williams and Fullagar JJ reiterated:
… the established rule that in order to constitute a trust the intention to do so must be clear and that it must also be clear what property is subject to the trust and reasonably certain who are the beneficiaries.
123 His Honour then considered the decision of the English Court of Appeal in Hunter v Moss [1993] EWCA Civ 11; [1994] 1 WLR 452 in which it was held that a valid trust over a specified number of shares in a larger pool had been created. His Honour noted the extensive criticism which the decision had attracted at [155] to [162] on the basis that the outcome offended the fundamental requirement that the subject-matter of the trust be certain, so that an undifferentiated number of shares forming part of a larger parcel could not be the subject of a trust. His Honour observed at [164] that an application for leave to appeal from the orders was dismissed. At [165] Campbell J said that, there being no Australian authority, he had to consider the question "on the basis of general principle".
124 His Honour referred to the criticism of the analogy drawn in Hunter v Moss between a testamentary gift of shares from a larger parcel and an inter vivos declaration of trust (at [168]-[169]) and preferred not to adopt the same process of reasoning by analogy to a testamentary disposition which involves the unique position of an executor (at [176]). His Honour next noted the reliance in Hunter v Moss on the capacity to transfer inter vivos some shares from a larger parcel by execution of a transfer and conduct to give effect to it without any identification of the individual shares (at [177]). He explained that the case relied upon, Re Rose [1952] Ch 499, in fact involved specific numbered and certificated shares and thus did not support the proposition for which it was cited in Hunter v Moss (at [179]).
125 His Honour referred at [180] to obiter dicta in Corin v Patton [1990] HCA 12; (1990) 169 CLR 540 that "there can be an effective voluntary equitable assignment of property transferable at law when the donor has done everything that only the donor has the power to do to transfer the legal estate, even if actions remain undone that lie within the power of the donor to do to advance the transfer but that can equally well be done by someone else". He observed that this is "consistent with the decision of the English Court of Appeal in Re Rose, because in Re Rose it was only necessary to decide whether the transfer of shares was effective at a time when the only step remaining undone was for the company to register the transfer". Suffice to say Campbell J did not find Re Rose supported the conclusion in Hunter v Moss (at [182]).
126 The next case to be considered was Re London Wine Co (Shippers) Ltd [1986] PCC 121 which, as the name suggests, involved wine which was sold but not segregated from larger quantities stored by the vendor. Oliver J held that legal title to the wine had not passed to the purchasers. Dillon LJ in Hunter v Moss distinguished the case on the basis it involved the passing of title to chattels, and not a declaration of trust. This, Campbell J accepted at [185], but his Honour continued, stating that the difference may be accepted but Hunter v Moss gave no principled basis for the factual difference affecting legal principle.
127 Mac-Jordan Construction Ltd v Brookmount Erostin Ltd (in receivership) (1991) 56 BLR 1; [1992] BCLC 350 was then addressed. A builder was required to set aside on trust parts of progress payments for construction on behalf of a contractor. The builder did not do so. It was held that there was no trust. At [187], Campbell J agreed saying he could "readily accept that there was no trust property at all, because the fund had not been constituted. It was not as though there was even a specific fund of money, part of which was said to be held on trust". In Hunter v Moss, the case was distinguished on the basis that it did not involve any equitable charge over a blended fund. Campbell J said this reasoning "begs the question" (at [190]).
128 Campbell J concluded this part of his reasons at [191] in these terms:
That is the totality of the reasoning in Hunter v Moss. I do not, with the greatest respect, find it sufficiently persuasive, for the reasons I have given, to simply adopt it as the solution to the present problem.
129 I agree.
130 As a result, Campbell J returned to first principles. At [193], by reference to various cases, his Honour identified the defining characteristics of a share as the shareholder's interest in the company constituting personal property which is a chose in action incapable of transfer by delivery and "closely akin to a debt", (Colonial Bank v Whinney (1885) 30 Ch D 261 at 287). At [195] Campbell J referred to s 1070A of the Corporations Act in which a share is described as "personal property", "transferable or transmissible as provided by" the constitution of the company or "the operating rules of a prescribed CS facility [clearing and settlement facility, see s 768A of the Corporations Act] if they are applicable", "capable of devolution by will or by operation of law".
131 At [198] Campbell J noted the orthodox position that some rights associated with shares, such as the right to receive a dividend, are themselves assignable as those rights are also property, also being choses in action. At [199] his Honour gave this example:
…when the holder of 1000 shares in a company sues to recover a dividend that has been declared but is unpaid, there is just one action that the shareholder brings, to recover the dividend - there are not 1000 separate rights to be paid a dividend… In that way, the chose in action - the thing that the law regards as a piece of property because it can be sued for - is the single right to be paid the dividend, the measure of which is the number of shares held.
132 At [201] Campbell J noted that many shares are held in unnumbered and uncertificated form as contemplated by s 1070B(2) of the Corporations Act which permits fully paid up shares in a company or of the same class, which rank equally, not to be numbered. His Honour noted that share identification by number is not critical for all purposes. Thus, if all of the shares of a shareholder are transferred, it has been held that a transfer is valid even if the shares are not identified by number in the transfer (at [204]). Incorrect share identification is also not necessarily fatal to an effective transfer (at [205]-[209]). The Commissioner disputes no part of this reasoning.
133 The key part of Campbell J's reasoning, on which all the parties rely for their competing purposes, commences at [210]. At [210] Campbell J said:
The declaration of trust that the defendant made is, in substance, that, of those shares in Unitract that he held, 222,000 of them were held in trust for the plaintiff. In my view, that is, in substance, that 220,000 of the shares he held were on trust for the plaintiff, and the rest were on trust for himself… The declaration of trust left him free to deal with the parcel of 1.5 million shares as he pleased, provided that it was not reduced below 220,000, provided that any encumbrances on the shareholding were such that at least 222,000 were left unencumbered, and provided that the plaintiff was entitled to call for the transfer of 222,000 shares at any time after 1 August 2003. If there were to be any declaration of dividend or return of capital prior to the time that the plaintiff had the 220,000 shares transferred to her, the plaintiff would be entitled to receive an appropriate proportionate part of the dividend or return of capital.
134 In other words, the declaration of trust applied to the whole of the shareholding. This, his Honour explained at [211], was because:
Once a finding has been made that there was an intention to hold 220,000 shares on trust, that intention needs to be given effect to in the way that is appropriate to the kind of property that is being talked about. Given the types of rights that are involved in holding shares in a company, the way that rights of a shareholder need not be identified only in terms of owning particular identified shares, how identification of individual shares can be unimportant for a transfer of some of the shares in a shareholding, and how these particular shares in Unitract were in any event not numbered and were held as an undifferentiated balance in a share register, there is nothing in the nature of the trust property that is inconsistent with recognising the validity of the trust. To recognise the trust is not to perfect an imperfect gift - because there is no transfer of any property involved in a declaration of trust, but rather the declarer of the trust states the terms on which, henceforth, he will hold certain property that he already holds.
135 It is apparent from what follows that the validity of the trust depended on the fact that all shares were subject to the declaration of trust; this must have been the declarer's intention in order to give effect to the trust. Thus his Honour said:
[212] A trust of this kind is not analogous to a simple trust, where a single and discrete item of property is held on a bare trust for a single beneficiary. Rather, it is a trust of a fund (the entire shareholding of 1.5 million shares) for two different beneficiaries (the plaintiff and the defendant himself), where powers of management are necessarily involved in the trust (to sell or encumber, within limits that such dealings do not impinge on the plaintiff's rights), and where duties on the trustee would arise as a matter of law (eg to deal with any dividends and capital distributions by distributing them in the appropriate proportions). It is because the trust is construed as being of the entire shareholding that it is not necessary for the plaintiff to be able to point to some particular share and be able to say "That share is mine". It is because of this feature of the trust that the defendant declared that an attempt to draw an analogy with cases concerning whether property passes in items of goods when the goods are not appropriated to the contract (like London Wine Co or Re Goldcorp Exchange [[1995] 11 AC 74]) fails - because in those cases, identification of the individual items in which property has passed is essential if the property in them is to pass. The construction that is needed to be able to make a trust of part of a shareholding operate - and which I infer is what the defendant actually intended - is the one that I have set out in para [210] above. It does not require there to be identification of particular shares in which the beneficiary has the beneficial interest. Given the nature of shares in a company, it is perfectly sensible to talk about an individual having a beneficial interest in 222,000 shares out of a parcel of 1.5 million, even if it is not possible to identify individual shares that are held on trust.
[213]… the test for validity of a trust is not dependent on a beneficiary being able to identify particular property that is held on trust for him or her. In many discretionary trusts, the only interest that a particular beneficiary can claim to have at a particular time is the vested interest subject to defeasance (and sometimes contingent as well) that a taker in default of appointment has (cf Stein v Sybmore Holdings [2006] NSWSC 1004 at [25]-[26]). Because of the powers of management that the trustee of such a trust often has, it is often not possible for the taker in default of appointment to be able to point to any of the assets of the trust and say simply "that asset is mine". All that such a person can do is point to an asset and say "that asset is mine, provided the trustee does not sell it before the vesting date, provided the trustee does not make an appointment of it to someone else, and provided any other contingencies that there are before I take an interest vested in possession happen." In the present case, one can identify the property that is subject to the trust (the entire shareholding) one can identify the trustee (the defendant), and one can identify the beneficiaries (the plaintiff as to 220,000 shares, the defendant as to the rest). That is all that is needed for a valid trust.
136 His Honour noted that this conclusion was consistent with equity's capacity to "recognise a trust of a particular number of shares out of a larger parcel, by way of remedy" (at [217]), and authorities in the United States which recognised trusts of unnumbered shares in a larger parcel (at [219]-[229]).
137 At [236] Campbell J turned to Herdegen. His Honour noted that:
The proposition that Gummow J is denying is (in part) that Mr Herdegen held 38 of his 59 shares on a bare trust. Among the authorities to which his Honour referred at 277 is Scott on Trusts, 4th ed, 1987, s 76, 77. At 444-445, in s77 Scott refers to both Rollestone and Busch v Tuitt. Scott cites Rollestone as an example of the proposition that:
A person who holds the entire legal interest may be trustee for another to the extent of a share of the property and subject thereto for his own benefit.
It is exactly that type of trust that the defendant in the present case has declared.
138 Campbell J continued:
[237] If the correct way of regarding what Mr Herdegen had done was that he had declared himself a trustee of 38 of his 59 shares, that is a trust of his 59 shares that would be partly for the benefit of the beneficiary, and partly for the benefit of Mr Herdegen himself. Such a trust of the 59 shares is not a bare trust.
[238] Further, the proposition that Gummow J is denying is that Mr Herdegen held 38 of his 59 shares on a bare trust, in a particular factual situation namely that he is not able to establish (i) which of the 59 shares were so held, and (ii) for whom, out of the potential beneficiaries, they were so held. Gummow J is not denying that it was possible for Mr Herdegen to hold 38 of his 59 shares on trust for some specified person.
…
[241] The passage from the judgment of Gummow J at 277 is also followed by the paragraph in brackets, that I have quoted above from p 279, that expressly leaves open the question of whether it is possible to have a valid trust of a particular number of shares from a larger parcel. Thus, reading his Honour's reasons as a whole, they leave open the question of whether under Australian law it is possible to have a valid trust of a particular number of shares from a larger parcel.
139 At [243] his Honour concluded:
It follows from this discussion that I do not, with respect, agree with the view expressed in Jacobs [Jacobs', Law of Trusts in Australia, 7th edition, 2006, at [523]] that Herdegen is authority for the proposition that an undifferentiated portion of a parcel of shares is a subject matter too vague for the court to enforce any trust in respect of, unless one uses "undifferentiated" with a very particular shade of meaning.
140 It is apparent from [245] to [247] of his reasons that by "undifferentiated" Campbell J meant the subject-matter of the trust was itself uncertain, in contrast to the trust being over a specified proportion of a fund of some kind (be it shares or another kind of chose in action such as the debt represented by a bank account).
141 At [249] Campbell J considered the question of liability to capital gains tax if the person who has declared the trust over part of a larger body of shares disposes of some of the shares. In short, does the disposal relate to those shares of the person who declared the trust and thus, on Campbell J's analysis, holds some shares on trust for himself or herself, or those of the other beneficiary? His Honour noted the terms of s 104-10 of the ITAA 1997 and s 121-20 of that Act which requires that records be kept of every act, transaction, event or circumstance that can reasonably be expected to be relevant to working out whether there has been a capital gain or loss from a CGT event. This led his Honour to say at [252] that the person would need to have records "to indicate whether any shares in that parcel which had been disposed of belonged beneficially to the shareholder".
142 His Honour delved further into the issue from [259], considering the consequences for calculating liability to capital gains tax if the shares were acquired at different times and thus had different costs bases. While the difficulty was not present on the facts in the case before him, Campbell J considered it necessary to address the issue to identify whether there was a problem in principle with recognising the trust he had identified. At [261] Campbell J said that the declaration of trust is itself a disposal, engaging the record keeping requirements of s 121-20, which would include the cost base of the shares the subject of the trust. The person declaring the trust is thus free to choose the shares the subject of the declaration. At [263] his Honour said:
The exercising of that choice does not have any effect on the amount of capital gains tax that might eventually be payable by the beneficiary. If the beneficiary has received the shares without consideration, the beneficiary's cost base for the shares that are held on trust will be zero. If the beneficiary has provided consideration for the declaration of trust, the beneficiary's cost base for the shares will be whatever is the value of the consideration that the beneficiary provided.
143 As the Commissioner pointed out, however, this conclusion does not take account of the roll-over provisions in Pt 3-3 of Ch 3 of the ITAA 1997 which attributes to the receiving entity (that is, the beneficiary) the cost base of the shares. Once this is taken into account, the assumption that the shares are identical for all purposes, including for the purposes of CGT event A1 as provided for in s 104-10, remains unanswered by Campbell J's meticulous analysis. Nor does his Honour specifically analyse the question whether a declaration of trust of unidentified shares in a larger parcel effects a "change of ownership" so as to constitute a disposal within the meaning of s 104-10(2); rather, his Honour appears to have assumed that to be the case.
144 An appeal from his Honour's decision was dismissed (Shortall v White [2007] NSWCA 372).
145 In Pearson & Ors v Lehman Brothers Finance SA & Ors [2010] EWHC 2914 (Ch) Mr Justice Briggs identified the principles which apply "where A acquires title to property for the account of B, to the question whether B thereby obtains a proprietary interest in that property" (at [225]) in these terms:
i) The recognition of a proprietary interest of B in property where A has the legal or superior title necessarily assumes the existence of a trust as between A and B.
ii) There can be no such proprietary interest if the necessary trust would fail for uncertainty.
iii) A trust of part of a fungible mass without the appropriation of any specific part of it for the beneficiary does not fail for uncertainty of subject matter, provided that the mass itself is sufficiently identified and provided also that the beneficiary's proportionate share of it is not itself uncertain.
iv) A trust does not fail for want of certainty merely because its subject matter is at present uncertain, if the terms of the trust are sufficient to identify its subject matter in the future.
v) Subject to the issue of certainty, the question whether B has a proprietary interest in the property acquired by A for B's account depends upon their mutual intention, to be ascertained by an objective assessment of the terms of the agreement or relationship between A and B with reference to that property.
vi) The words used by the parties such as "trust", "custody", "belonging", "ownership", "title", may be persuasive, but they are not conclusive in favour of the recognition of B's proprietary interest in the property, if the terms of the agreement or relationship, viewed objectively, compel a different conclusion.
vii) The identification of a relationship in which A is B's agent or broker is not conclusive of a conclusion that A is, in relation to the property, B's trustee, although it may be a pointer towards that conclusion.
viii) A relationship which absolves A from one or more of the basic duties of trusteeship towards B is not thereby rendered incapable of being a trustee beneficiary relationship, but may be a pointer towards a conclusion that it is not.
ix) Special care is needed in a business or commercial context. Thus:
(a) The law should not confine the recognition and operation of a trust to circumstances which resemble a traditional family trust, where the fulfilment of the parties' commercial objective calls for the recognition of a proprietary interest in B.
(b) The law should not unthinkingly impose a trust where purely personal rights between A and B sufficiently achieve their commercial objective.
x) There is, at least at the margin, an element of policy. For example, what appears to be A's property should not lightly be made unavailable for distribution to its unsecured creditors in its insolvency, by the recognition of a proprietary interest in favour of B. Conversely, the clients of intermediaries which acquire property for them should be appropriately protected from the intermediary's insolvency.
146 On appeal (which was dismissed) in Pearson & Ors v Lehman Brothers Finance SA [2011] EWCA Civ 1544 Lord Justice Lloyd observed that Mr Justice Briggs had relied on Hunter v Moss for proposition iii) above but, in so doing, "favoured the analysis that the trust worked by creating a beneficial co-ownership in the identified fund, an approach formulated in White v Shortall [2006] NSWSC 1379 and by Professor Sir Roy Goode Q.C. in an article "Are Intangible Assets Fungible?", [2003] LMCLQ 379" (at [71]). There was no challenge to this reasoning in the appeal.
147 In Priest v Ross Asset Management Limited (In liq) [2016] NZHC 1803 Clifford J in the High Court of New Zealand dealt with the same issue specifically in the context of unnumbered uncertificated shares. His Honour said this:
[178] Shares in one company are, amongst themselves, fungible. This means that there is no way to distinguish one share in a particular company from other shares in that company…
[179] Assume that, at the date of the acquisition by RAM/Dagger of shares comprising the Priest Holdings - say shares in Company X - RAM or Dagger already owned (for Other Investors) shares in Company X. In that circumstance, a question of the certainty of the subject matter of the trust would arise. That is, for a trust to come into existence the property which is the subject matter of the trust must be able to be identified with certainty. If RAM or Dagger already held shares in Company X for Other Investors, given that shares in a particular company are amongst themselves fungible, it could be argued it would not be possible to identify which of the pool of fungible shares was subject to the trust in favour of the Priests, and which were subject to the trust in favour of the Other Investors. I am not attracted to that argument. Given the ubiquity of decertificated shares, in my view it should be enough for a given number of those shares to be identified as having been earmarked for an investor for the trusts, bare or otherwise, recognised in managed funds to come into existence.
148 Where does this leave the matter? In terms of principle, the weight of authority is that there can be a valid trust over a fungible pool of assets provided the assets and relevant proportions for the different beneficiaries are identified with sufficient certainty. The better view is that for the requirement of certainty to be satisfied the trust must be over all of the fungible assets in the pool, the beneficial co-ownership proportions reflecting the respective interests of the beneficiaries. In the context of a declaration of trust, there may be a sound basis in principle to uphold the validity of such a trust on the basis that the trustee's intention must have been to create a valid trust which requires certainty of subject matter. By this means, it may be accepted that the beneficiary obtains a proprietary right in a proportion of the asset pool. If, given the terms of the declaration and the nature of the property, the trustee is constituted as nothing more than a bare trustee on behalf of the beneficiary in respect of the beneficiary's proportional interest, it may well be that there has been a change of ownership within the meaning of s 104-10(2) of the ITAA 1997. For this to be the case, however, the rights vested in the beneficiary must be capable of supporting the grant of equitable remedies the equivalent of ownership, including preventing the trustee from dealing in the relevant proportion of the asset pool other than in accordance with the beneficiary's directions. In Mateo and Jones, which concerned real property in the form of the familial home, construing the effect of the orders of the Family Court as constituting the husband as a bare trustee of his interest for the wife makes sense; real property is not fungible and, whether expressly provided for or not in the orders, no dealing by the husband in his interest pending compliance with the orders could be compatible with the rights vested in the wife.
149 What then of the facts of the present case in which the shares formed part of a larger pool of shares which Sandini owned, and in which there was no declaration of trust by Sandini, but orders of the Family Court? Can it be said that the Family Court orders of 21 September 2010 created a trust over the whole of Sandini's shares in MIN, Ms Ellison being the beneficiary of the trust as to 2,115,000 of those shares and Sandini as trustee of the KRUT being the beneficiary of the balance? Leaving aside the misidentification of Sandini's capacity, one conceptual difficulty with this analysis applying to the 21 September 2010 orders is that Campbell J identified in White v Shortall; shares may have a different cost base for the purposes of capital gains tax and thus, in this sense, may not be interchangeable. If and when the time for transfer of the beneficiary's proportion of the shares to the beneficiary arises, the owner of the shares could identify shares with a higher cost base to be the subject of the transfer, thus transferring a larger liability for capital gains tax than would otherwise be the case. In the present case, that is not the fact because, on the evidence, all of Sandini's shares in MIN had the same cost base, but the issue is one of principle.
150 This concern is not mere quibbling about details. The value of the asset to be transferred could be far less than that contemplated on the face of the orders, given the potential associated capital gains tax liability (and, indeed, that is the fact in the present case). Nor can it be dismissed in circumstances where the underlying basis of the analysis in the authorities is the inferred intention of the party declaring the trust or of the parties to other legal relationships. As the Commissioner put it, the resolution Campbell J reached in White v Shortall works only if it can be said that the trust created is over the whole of the fund and only if the trustee is not a bare trustee for the beneficiaries. Otherwise the inferred intention of the declarer of the trust or the parties, as relevant, may be bedevilled by capital gains tax issues as a result of rollover relief provisions. Further, in the case of orders of the Family Court under s 79 of the Family Law Act, which can be made only if the Court is satisfied that the orders are just and equitable, the issue is not one of the inferred intention or actual intention of the parties, but of the proper construction of an order made within that particular statutory context. In respect of this latter issue, consent orders for substantive relief under s 79 of the Family Law Act present a problem with which many courts grapple, albeit in different contexts. If substantive relief is conditioned on the existence of facts or the court holding a particular state of mind or the consideration of certain factors (as in the case of s 79), what is the court to do when confronted by the bare terms of a consent order? In many jurisdictions the problem has been addressed by requiring the parties seeking the making of a consent order in which substantive relief is granted to file a statement of agreed facts and joint submission with the proposed consent order which deals with the position of the parties about the pre-conditions to any exercise of power by the making of the orders. A practice of this kind has many advantages including the potential to disclose issues of concern which may not have occurred to one or other party (and would not necessarily occur to the court either), such as the capital gains tax implications which have arisen in the present case.
151 I do not consider it necessary or appropriate to attempt to unravel the question of the potential impacts of the competing arguments on Sandini's position as trustee for the KRUT (itself a unit trust with various beneficiaries), including the potential for Sandini to have acted in breach of trust if the respondents are correct and the orders immediately vested in Ms Ellison beneficial ownership of 2,115,000 shares in MIN. This is because the orders are the orders as made. The orders must be dealt with as a taxable fact, irrespective of the potential consequences for Sandini as the trustee for the KRUT. The fact, however, that Sandini owned MIN shares only as trustee for the KRUT may well be relevant to the proper construction of the orders. As the party seeking the declarations, it was for Sandini to answer any questions about its capacity and obligations to the KRUT in respect of the MIN shares. Sandini's inability to do so satisfactorily, weighs against its contention that the orders should be construed as it proposes, that is, as in White v Shortall, by creating a trust over the whole of Sandini's shareholding as to some shares on trust for the KRUT and as to 2,115,000 on trust for Ms Ellison, Sandini thereafter being nothing more than bare trustee for Ms Ellision as the beneficial owner of that proportion of the pool.
152 These considerations tend to support the doubt that has been expressed as to the fungible character of shares (see, again, Professor Sir Roy Goode Q.C. in an article "Are Intangible Assets Fungible?" [2003] Lloyd's Maritime and Commercial Law Quarterly 379). As pointed out at 381 of this article, the essence of fungibility is "a choice between legally interchangeable units". If all shares in the company are of the same class, there is but a single asset, being the issued share capital. On this basis, as Professor Goode proposes, a single asset cannot give rise to the capacity for selection which defines a fungible asset.
153 In any event, I do not accept that, as the respondents would have it, the orders operate on the MIN shares Sandini owned in its capacity as the trustee for the KRUT. While s 79(1)(a) of the Family Law Act refers to the "property of the parties to the marriage or either of them", s 79(1)(c) refers to "an order for a settlement of property in substitution for any interest in the property". The "property" referred to at the end of s 79(1)(a) is the "property of the parties to the marriage or either of them" whereas "property in substitution" for that property in s 79(1)(c) is any property. Order 2 of the 21 September 2010 orders sets aside earlier orders under which Ms Ellison gained interests in property of the parties to the marriage. It is not apparent that order 3 relates to property of the parties to the marriage or either of them (being the MIN shares owned by Sandini). Order 3 may be "an order for a settlement of property in substitution for any interest in the property" which is included within the concept of an order "altering the interests of the parties to the marriage in the property." Order 3 thus may merely require Sandini to do what is necessary to transfer the required number of any MIN shares to Ms Ellison within seven days irrespective of Sandini owning any such shares. The same could not be said of the orders in Mateo or Jones, which is another distinguishing feature from the present case.
154 As discussed, the nature of the property is one issue. The terms of the orders are another.
155 In the present case, although the orders were made by consent, they are orders of a court and fall to be construed as such. In Wende v Horwath (NSW) Pty Limited [2014] NSWCA 170; (2014) 86 NSWLR 674 at [60] Basten JA summarised the general principle with respect to construing court orders in these terms:
Although there has been a debate as to whether it is permissible to go to extrinsic material to assist an understanding of a court order, it is not in doubt that such material may be relied on in a case of ambiguity: P Herzfeld, "Interpretation of Orders", in P Herzfeld, T Prince and S Tully, Interpretation and Use of Legal Sources - The Laws of Australia (Thomson Reuters, 2013) at [25.4.730]. In Athens v Randwick City Council [2005] NSWCA 317; 64 NSWLR 58 at [29], Hodgson JA accepted a statement that "in the case of real ambiguity extrinsic material such as the reasons for judgment may be considered", referring to Justice P W Young, "Construing Court Orders" (1998) 72 ALJ 117. Hodgson JA also cited the proposition from Repatriation Commission v Nation (1995) 57 FCR 25 at 34, where Beaumont J said (Black CJ and Jenkinson J agreeing) that "evidence of surrounding circumstances is admissible to assist in [construction] of an instrument if the language is ambiguous or susceptible of more than one meaning, but not admissible to contradict the language of the instrument when it has a 'plain meaning' (see Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337 per Mason J at 352)". This proposition was recently affirmed in Ross v Lane Cove Council [2014] NSWCA 50 at [30]-[31] (Leeming JA).
156 Orders in matrimonial causes, however, appear to be a special case. In Langford and Coleman [1992] FamCA 68; (1992) 16 Fam LR 228 at 233 Nygh J (with whom Barblett DCJ and Ellis J agreed) said:
…there is clear authority for the proposition that at least in matrimonial causes once any financial agreement reached between the parties is embodied in consent orders, it is to these orders alone that the court must look. The court cannot take into account whatever agreement might or might not have been reached between the parties which led to the making of the consent orders, and the authority for that proposition is found in the opinion of the Privy Council on appeal from Hong Kong in de Lasala v de Lasa1a [1980] AC 546 at 560, where Lord Diplock said:
"Financial arrangements that are agreed upon between the parties for the purpose of receiving the approval and being made the subject of a consent order by the court, once they have been made the subject of the court order no longer depend upon the agreement of the parties as the source from which their legal effect is derived. Their legal effect is derived from the court order."
That principle was applied by the English Court of Appeal in the case of Thwaite v Thwaite [1901] 3 WLR 96 and I refer particular to the judgment of Lord Justice Ormrod, as he then was, at 101, where his Lordship said:
"The effect of eliminating the contractual basis of these consent orders should simplify the problems. If their legal effect is derived from the court order it must follow, we think, that they must be treated as orders of the court and dealt with, so far as possible, in the same way as non-consensual orders."
These details, although they relate respectively to the law of Hong Kong and to the law of England, have been treated as authoritative in this country and were followed and applied most notably by the Full Court of this court in In the Marriage of Robinson and Willis (1981) 8 Fam LR 131 at 141-2 by Asche J and at 144 by Fogarty J. Although in those cases, admittedly, the courts were concerned with the rights of appeal arising from consent orders and stressed the fact that a consent order can be appealed from, like any other order, in my view the principle is wider than that. It follows that if an order made by consent must be treated like any other non-consensual court order it must be read and interpreted quite independently of what the parties subjectively might have intended thereby. It must be read as standing on its own feet, as it were.
157 There is no ambiguity on the face of the 21 September 2010 orders. The fact that Sandini was not the trustee of the Ellison Family Trust is not apparent from the face of the orders. Accordingly, recourse to extrinsic material is impermissible. It also must follow that Sandini as trustee for the KRUT owning more than 2,115,000 shares in MIN when the orders were made cannot be taken into consideration in construing the orders. Rather, the orders are to be construed on their own terms. As discussed, it may not be the case that order 3 concerns "property of the parties to the marriage" (s 79(1)(a)) because given order 2, order 3 may be "an order for a settlement of property in substitution for any interest in the property" of the parties to the marriage (s 79(1)(c)). Thus, unlike the case in Mateo and Jones, where the real property was "property of the parties to the marriage", the terms of order 3 do not necessarily refer to property owned by any party at the time the orders were made. This also follows from the nature of MIN shares which are available to be acquired or sold as shares in a publicly listed company.
158 Apart from these considerations, the Family Court could not make the orders under s 79 of the Family Law Act unless satisfied that it was "just and equitable to make the order" (s 79(2)) and having taken into account the matters in s 79(4). This statutory context is also relevant to the construction of the order. This statutory context supports my conclusion that the effect of the order was not, as Sandini contends, to create a trust over all of Sandini's shares in MIN, Ms Ellison being the beneficiary in respect of a proportion of the total shares represented by 2,115,000 shares and Sandini as trustee for the KRUT being the beneficiary of the balance, the effect of the trust being to constitute Sandini as a bare trustee and nothing more.
159 I consider that, having regard to these considerations, the preferred construction of the orders is against the respondents. The following matters also support this conclusion.
160 First, the orders do not purport to make any declaration "with respect to existing title or rights in respect of property" as permitted by s 78 of the Family Act. Nor are they orders which, in terms, alter interests in property of the parties to a marriage or either of them under s 79 of the Family Law Act. They are orders under s 79 which, as discussed, permits orders to be made in respect of property in substitution for any property of the parties to a marriage.
161 Second, the order relates to shares in a publicly listed company. The respondents would have it that the only reason Sandini was joined as party to the Family Court proceedings was because it owned shares in MIN and thus was capable of transferring such shares to Ms Ellison. This may be so as a matter of the subjective intention of the parties, but insofar as the orders are concerned, Sandini's ownership is irrelevant. In any event, it is equally plausible that Sandini was a mere convenient vehicle to ensure steps are taken to effect transfer of the required number of MIN shares.
162 Third, and even if the orders should be construed as relating to the MIN shares Sandini owned, a necessary question is what a court of equity would do. Would it prevent Sandini from dealing in 2,115,000 MIN shares on and from the date of the order? Would it declare Sandini to be a bare trustee of 2,115,000 MIN shares for Ms Ellison on and from the date of the order? I consider these questions must be answered against the respondents having regard to the following matters:
(1) the nature of the shares as an asset freely traded in a publicly accessible market by reason of being shares in a publicly listed company. As a result, Sandini could acquire shares and do all acts necessary to transfer shares to Ms Ellison as required irrespective of owning shares in MIN at the time or not;
(2) the fact that order 3 refers simply to "2,115,000 [MIN] shares" and not to "2,115,000 of the MIN shares owned by Sandini" or words to similar effect;
(3) the fact that the orders do not require Sandini "to transfer" any shares to Ms Ellison. Rather, they require Sandini to "do all acts and things and sign all documents necessary to transfer to the wife 2,115,000 [MIN] shares";
(4) the period of seven days in order 3 for Sandini to do all acts "necessary to transfer" 2,115,000 MIN shares;
(5) the orders do not suggest that their effect is that Sandini holds all shares it owns in MIN on trust, the beneficiaries being Ms Ellison as to 2,115,000 and Sandini as to the balance;
(6) the orders do not prevent Sandini dealing in any MIN shares it might own; and
(7) the orders refer to Sandini doing all things necessary to transfer "to the wife" 2,115,000 MIN shares. They do not identify the wife as having a power to direct the transfer of the shares to another entity. The rights created are thus personal to the wife. It is not apparent that those rights are themselves assignable.
163 Fourth, the same matters weigh against construing the orders as the respondents propose. In the case of:
(1) assets which involve possibly complex questions of the cost base of the assets for capital gains tax purposes;
(2) a lack of anything on the face of the orders dealing with the capital gains tax implications if rollover relief is available;
(3) the fact that the party joined to the orders is identified as a trustee for another entity (the Ellison Family Trust); and
(4) a statutory context in which the orders could be made only if the Family Court was satisfied they were just and equitable,
it seems to me that there is not a sound foundation to construe the orders as the respondents propose.
164 As will be apparent my conclusions do not depend on the question whether the orders concern the shares in MIN which Sandini in fact owned or not. I consider the preferable construction is that the orders do not concern shares that Sandini in fact owned for the reasons already given. But if they do concern such shares, I do not accept that the effect of the orders was to make Ms Ellison the beneficial owner as to her relevant proportion of the share pool. No doubt, on that construction, the orders vested statutory rights and a beneficial interest of some kind in Ms Ellison but, as discussed, I do not consider that interest can be characterised as beneficial ownership or ownership of any kind sufficient to engage s 104-10(2) of the ITAA 1997.
165 Apart from these matters, the fact that Sandini did not own any shares in its capacity as the trustee of the Ellison Family Trust, as referred to in the orders, is itself relevant to the relief a court of equity might have granted. The respondents characterised the error as one of Sandini's capacity. This may be accepted. The relevant facts, to my mind, however, are that the orders are as made and capacity may be critical. The orders have never been amended. In any proceeding before a court of equity, it would be common ground that order 1 purported to join Sandini as trustee for the Ellison Family Trust when Sandini was not the trustee of this trust. As a result, when order 3 refers to Sandini doing things, it is "Sandini as trustee for the Ellison Family Trust" which is being referred to, given the defined term "Sandini" in order 1. While a court of equity could accept evidence that when the order was made Sandini was the trustee of the KRUT and the KRUT owned shares in MIN, but query what it could do with that evidence. A court of equity would not have power to amend the orders of the Family Court. It would be bound to construe the orders of the Family Court consistently with the principles noted above (that is, on their own terms and without regard to extrinsic material). As a result, it would be confronted with an order which purported to join a party which did not exist (Sandini as trustee for the Ellison Family Trust) and purported to require that non-existent party to do things necessary to transfer shares to Ms Ellison.
166 It may be accepted that the erroneous description of a person does not vitiate an instrument (Wingadee Shire Council v Willis [1910] HCA 35; (1910) 11 CLR 123; see also BHP Petroleum (Timor Sea) Pty Ltd v Minister for Resources [1994] FCA 1002; (1994) 49 FCR 155 at 172). While an order of the Family Court is not a performance bond subject to a principle of strict compliance as was the case for the instrument in Simic v New South Wales Land and Housing Corporation [2016] HCA 47; (2016) 339 ALR 200, the principles of construction which apply to orders in a matrimonial cause support the conclusion that the misidentification of the capacity of Sandini renders the orders incapable of operation. In Simic at [10] French CJ, albeit in the context of a performance bond, said:
In the ordinary case, saving minor slips and misdescriptions, the designation of a person or entity as a beneficiary cannot simply, as a matter of construction, be transmuted into the designation of a different person or entity. Nor can a reference to a non-existent entity be construed as a reference to an existing entity with quite a different name.
167 At [85] in Simic Gageler, Nettle and Gordon JJ noted that the instrument in issue was "independent of any underlying transaction and any other contract". So too is an order in a matrimonial cause.
168 I am unable to agree with the primary judge that the description of Sandini's capacity was otiose and thus did not affect the application of the orders to Sandini itself. As noted, the orders are to be construed on their own terms without reference to extrinsic material. The fact that Sandini is the trustee of the KRUT, which owned shares in MIN, is all extrinsic material. So too is the fact that Sandini was and is not the trustee of the Ellison Family Trust. None of those matters arise on construction of the orders. As a result, it cannot simply be assumed that the orders meant that Sandini in its capacity as trustee of the KRUT be joined and subjected to order 3. Nor can it be assumed that the orders meant that Sandini Pty Ltd in its own capacity be joined and subjected to order 3. If this is so, then other potential consequences arise relating to the enforcement of the orders. In short, on their own terns, the orders have no operation and cannot be enforced.
169 It must also be the case that the capacity in which Sandini was joined as party and subjected to order 3 would be relevant to the relief a court of equity would grant. To my mind, this indicates that the identification of Sandini's capacity in the order for joinder (order 1) is not mere inutile verbiage which can be disregarded.
170 It follows from this that I accept the Commissioner's example of the problem with which a court of equity would be confronted by these orders. The Commissioner said, assume Sandini approached a court of equity seeking a declaration that it was the bare trustee of 2,115,000 shares on behalf of Ms Ellison based on the orders. What would a court of equity do? It could not ignore the terms of the orders. It could not construe those orders other than consistently with principle. It could not read out the words "…as trustee for the Ellison Family Trust" in order 1 and read in the words "…as trustee for the KRUT". I do not see how the court could have granted the declaration to Sandini. The same must apply to the position of Ms Ellison. She could not obtain a declaration or relief on the basis that she was the beneficial owner of 2,115,000 MIN shares owned by Sandini as trustee for the KRUT based on the orders.
171 It is not that the orders are invalid; they are simply ineffective. Sandini in its capacity as the trustee of the Ellison Family Trust did not exist, could not be joined as party and could not be ordered to do anything.
172 What of the fact that Ms Ellison requested the transfer of MIN shares to Wavefront? The respondents characterised this as Ms Ellison exercising a power of direction, consistent with equitable ownership of 2,115,000 shares. I am unable to agree. There is no basis to conclude that in so doing Ms Ellison was actually exercising any right that she held by reason of the orders. Nor does the subsequent fact of execution of a share transfer by Sandini support the conclusion that Ms Ellison was vested with any such right. It is a fact that Ms Ellison made the request, as it is a fact that Sandini and Wavefront executed a share transfer. These facts do not mean that Ms Ellison was exercising a right when she made the request, nor that Sandini was complying with a duty when it executed the share transfer form. As the Commissioner said, this aspect of the respondents' argument is circular (Ms Ellison could direct the transfer of the shares to Wavefront because she was the equitable owner of them and Ms Ellison was the equitable owner of the shares because she could so direct the transfer).
173 For these reasons I am not satisfied that the orders of 21 September 2010 effected a change in the ownership of 2,115,000 owned by Sandini in its capacity as the trustee of the KRUT within the meaning of s 104-10(2) of the ITAA 1997. As a result, CGT event A1 did not occur on the making of the orders of 21 September 2010.
174 CGT Event A1 occurred, however, on either the execution of the share transfer form by Sandini or, at the latest, the subsequent registration of the share transfer. As noted, however, the share transfer form was executed in favour of Wavefront as transferee, not Ms Ellison and Wavefront became the registered owner of 2,115,000 MIN shares. This leads to the next issue involving the operation of s 126-15(a) of the ITAA 1997.