Evans v Bartholomew [2007] NSWSC 1291 | Case summary

(1) The Court may allow out of the assets of any deceased person to the deceased person's executor, administrator, or trustee for the time being, in passing the accounts relating to the estate of the deceased person, such commission or percentage for the executor's, administrator's or trustee's pains and trouble as is just and reasonable, and subject to such notices (if any) as the Court may direct. 7 Part 78 r 5(1)(f) confers power on the registrar to exercise the power of the court under s86. 8 Although under UCPR r 36.11 the order of the court is taken to be entered on being recorded in the court's computerised court record system, as a matter of practice it is desirable that the order be taken out, particularly if there is to be an application for review of the decision. In the case of the first, second and third accounts, the files indicate that no order has ever been taken out passing the accounts and allowing commission and costs. Those orders have been made on each occasion. 9 The recent amendment to Div 5 of Pt 49 of the UCPR seems intended to make it clear that the review is not an appeal. In such circumstances it was held in The will of Sheppard [1972] 2 NSWLR 714 that the court can review all aspects of the findings of the registrar and is not restricted to interfering only if the registrar acted on some mistaken principle of law or mistake of fact. In that same case it was held that the court could have regard to all the material that was before the registrar, and that it should also have before it a report from the registrar setting out the reasons for the order made. The practice of obtaining the registrar's report is one which has continued to be followed in commission review applications and is an appropriate way of proceeding, particularly as in most such applications no reasons are given or required. 10 In commission applications the registrar or deputy registrar determining the matter will, as a matter of course, know if there have been previous accounts, and the amount of commission ordered on those accounts. Whether or not the registrar in the case of subsequent accounts considers or should consider that evidence, there can be no doubt that it is available to a judge on review. Mr Trebeck, counsel for the executors, submitted that the certificates of correctness of the first, second and third accounts should be considered, as should the affidavits of the executors in support of commission applications on the first and second accounts, as well as the application in support of commission on the third accounts, the subject of review. He also put into evidence certain advices from counsel and a private tax ruling, which were in fact before the court on the vouching of the first and second accounts and which the executors asked the court to consider and take into account in their application for commission on the second accounts. This request was made again on the application for the review. Accordingly, it is proper to consider the advices, which I have done. 11 Finally on procedural matters, I point out that while on a review the court determines the matter itself, that does not mean that regard should not be had to the report of the registrar and to the order for commission made. That is because these matters are dealt with as a matter of course by experienced registrars whose views are worthy of respect. In probate matters it has been held that there needs to be shown the registrar's decision is affect by an error to such an extent it should not stand: Estate of Sharman; Ex parte Verslius [1999] NSWSC 709 at [3]. The fact of such an error is not a precondition to the court conducting the review but is the practical working method of the review process in probate. I agree with that at least so far as it applies to commission claims. I appreciate this is somewhat contrary to the approach in Estate of Lindsay [2004] NSWSC 578 but in fact that decision shows the problems with any other approach. If a judge in exercising a discretion afresh without regard to the earlier decision came to a result even $200 more than the allowance by the registrar the appeal would be allowed and presumably costs awarded to the detriment of unrepresented beneficiaries. And if the judge came to a figure less than that awarded by the registrar the question would arise whether he should dismiss the appeal and substitute his figure. There are many authorities referring to the requirement to give proper weight to discretionary decisions by Registrars and Masters, particularly on questions of amount. It is sufficient to refer to Evans v Bartholomew [1935] AC 473 at 478 and Tidswell v Tidswell (No 2) [1958] VR 601 at 607. Facts 12 Mrs Peters died on 18 March 2003. Probate of her will dated 12 April 1991 and one codicil thereto dated 10 December 1993, was granted to the executors on 12 June 2003. The executors are Mr Creer, a solicitor and Mr Sheridan, a certified public accountant. Mr Creer practises as a sole practitioner and so does Mr Sheridan. Mr Creer employs no staff and Mr Sheridan employs one member of staff. The estate was of substantial value, being returned as having a value of about $32 million. The most substantial items making up that figure were a home at Hunter's Hill said to be worth $5.5 million, a share portfolio of $7,310,000 and shares in two private companies with a value of $16,684,055. These two private companies were investment companies respectively A H Peters & Co Pty Limited (A H Peters) and Norman Williams Pty Limited (Norman Williams). The value of the deceased's shareholding in those companies was respectively returned at $9,841,736 and $6,843,319. Some of the shares in A H Peters were held by Norman Williams but ultimately the deceased became entitled to all the assets of those companies distributed on a winding up. 13 The will of the deceased provided for a number of pecuniary legacies with the residue of the estate to be divided into 61 shares and distributed in varying parts among 24 beneficiaries including 12 charities, the charities taking the major benefit. 14 The first accounts covered the period from the date of death to 19 April 2004. During that period capital realisations amounted to $16,095,701 and income collections $251,341. The capital realisations were for the most part the proceeds of sale of the Hunter's Hill home and shares in public companies. Commission was allowed to the executors at the rate at 0.5% on capital realisations and 4% on income collections, the total being $90,478. The second accounts covered the period from 20 April 2004 to 19 April 2005. In that period there were capital realisations of $119,321 and income collections of $92,235. Commission was allowed at 2% on the corpus and 4% on income collections, totalling $6,075. 15 The certificate of correctness of the third accounts and supplementary accounts covering together the period 20 April 2005 to 30 June 2006 was signed on 31 July 2007. It certified capital realisations of $8,001,981 and income collections of $10,611,539. I will return to this but suffice to say the capital realisations, apart from about $3,000, came from the proceeds of the winding up of the two private companies, and $10,235,566 of the income collections amount represented payment of undistributed profits held in reserve accounts in the two companies. Deputy Registrar Haggett heard and determined the application for commission. He allowed it in a lump sum of $120,000. In his report, which is dated 12 October 2007, the learned Deputy Registrar said among other things that he considered the certificate of correctness to be incorrect as he thought that so far as part of the distribution received on winding up of the two companies was credited to the income account it should have been treated as corpus. He said: At the commission hearing I questioned Mr Creer about the large income component and the court is referred to the transcript annexed to this report and marked "A": as highlighted. As a company is a separate legal entity I took the view that income received by the companies (through investments etc) was income in the hands of the companies and that when the companies were liquidated then it was capital in the hands of the estate. Accordingly, irrespective of the components that made up the assets of the company, it seems fairly clear that proceeds of the liquidation of a company is a capital item and not income. With the benefit of hindsight I should have formally directed that the certificate of correctness be amended. 16 I am not at all certain that one deputy registrar can direct that a certificate signed by another deputy registrar be amended without consent of the certificate signatory, nor perhaps without consent of or hearing the executors. As a matter of general law surplus assets of a company divisible on dissolution, including those forming a reserve fund of undistributed profits, are capital receipts in the hands of the receiving shareholder: IRC v Burrell [1924] 2 KB 52; Hill v Permanent Trustee Company of New South Wales Limited [1930] AC 720 at 749. For the purposes of taxation s47(1) of the Income Tax Act 1936 provides that distributions by a liquidator of such reserve funds are deemed to be dividends subject to tax, to the extent they represent income derived by the company. Section 47(1A) extends such deeming process to capital gain. Such deeming provisions do not turn capital into income. The certificate should be amended and I will so order. I should add that notice was given to the executors that I was considering this and offering an opportunity to them to make submissions but they indicated they did not wish the matter relisted for that purpose. However, I consider Deputy Registrar Haggett was correct, although had the companies declared dividends to take out the undistributed profits those dividends would of course have been income in the hands of the executors. 17 This was a matter of considerable significance to the executors and to the beneficiaries, as I will explain. The executors obtained advice from Mr Mark Richmond, a barrister experienced in tax law, on the most tax effective way of distributing the assets of the private companies. It was very detailed advice in which it is not necessary to go in detail. In short, counsel advised that if the companies were placed into liquidation and the assets were distributed to the executors as trustees after the estate was fully administered, then the retained profits subject to tax and capital gains tax would be taxable in the hands of the beneficiaries entitled to them and not in the hands of the trustees. So far as the charities were concerned, the result of this was that they would receive their distributions tax free. So far as the other beneficiaries were concerned, such method of distribution could be of considerable advantage to them depending upon their other income and could not be to their disadvantage. Counsel advised that it was necessary to wind up the companies in a particular manner to obtain full benefit of franking credits and for other reasons. The plan recommended by counsel was that A H Peters should be wound up first, after which distributions to Norman Williams could then be distributed through its winding up to the beneficiaries. 18 Mr Richmond gave his advice on 12 August 2004. He gave a supplementary advice on 15 November 2004, which was to be used in connection with an application to the Commissioner for Taxation for a ruling. In fact a favourable private ruling was obtained on 5 April 2005. 19 The affidavit in support of the application for commission on the first accounts referred to the retaining of Mr Richmond as part of the work in that period which was incorrect but it did go to explain the uncollected assets. Apart from briefing counsel the consideration and work on this subject commenced around the end of 2004. 20 It should be understood that on an application by executors for commission the practice is to set out the work done during the period covered by the accounts and the pains and trouble during that period with commission being allowed on collections during that period. Some of the work might not result in corpus or income collections during the period as the fruits of that work might come in a later period. There can be an overlap of matters to be taken into account, particularly in big estates such as this one. Normally there is no problem because the collections result from the work in the period of the particular accounts. It is not possible to be precise about this other than to say that consideration of the recommended actions to obtain the most beneficial results for the beneficiaries took place for the most part during the period of the second accounts, but the actual winding up and the receipt of the moneys occurred during the period of the third accounts. The total distributions to charitable organisations as a result of the procedure were some millions of dollars more than the amount which they would have received had the scheme not been followed and earlier distributions been made from distribution of company dividends or earlier winding up. The point about all of this is that while a lot of pains - meaning responsibility, anxiety and worry - and some of the trouble - meaning work - was involved or done on the question of the winding up of the two private companies during the period of the second accounts, there were no collections during that period relevant to that work and even if some small allowance was made for that work in the commission allowed on the second accounts it was in no way sufficient when the whole of the collections and the work is taken into account over the total period of the second and final accounts. 21 I turn again to the report of the deputy registrar. He gave reasons for awarding a lump sum rather than a percentage. He said that as all assets had been collected and for the most part distributed there would be no need for further accounts. He referred in his report to the annexed transcript where the following discussion took place: DEPUTY REGISTRAR: … In other words what I'm saying is, is there a necessity to file further accounts with the court. CREER: I took the view that that was a matter for the court not for the executors. DEPUTY REGISTRAR: No, it's a matter for the executors. As far as I'm concerned once all assets have been collected and the executors have been paid commission in collecting the assets then from the court's point of view that's the end of the matter. The rest is up to the executors to basically sort out the balance of the estate as far as taxation goes and then make the final distributions and if there's obviously professional costs to be paid then so be it. 22 At that stage there was a misunderstanding about money not distributed. It seems the amount was about $1.8 million and of that amount $1.2 million was to be distributed in the following week to an infant beneficiary, who by then would have reached the age of 18 years. 23 In the past it was the practice of the registrar to require further accounts if there were large amounts found still to be distributed and if it appeared that further costs were to be charged. Very often the solicitor or accountant executor entitled to charge professional costs under a will would undertake to the court to make no further charge for such costs and a lump sum order for commission would then be made with no order requiring further accounts. In the present case I am of the view, having regard to the large estate, that if the executors undertake to make no further charges for professional work other than for taxation returns there is no need for further accounts. In ordinary circumstances this is a matter of judgment best left to the registrar in a particular case but in saying that I do not accept it is a matter only for the executor, as the learned Deputy Registrar appeared to indicate. 24 In Spence v Spence [2003] NSWSC 1232 I set out my views on cases where lump sum commissions were appropriate and I will not repeat them. The Deputy Registrar said: When asked Mr Creer indicated that all assets had been collected. Again the court is referred to the transcript as to the filing of further accounts. At no time did the executors indicate that they proposed to file further accounts nor did they seek a period of time in which to do so. Therefore there was no reason to be bound by the decision of Spence and allow a percentage rate on capital and income. I felt that due to the severe doubt in my mind about the figures in the certificate of correctness, it was more appropriate to award commission as a lump sum. 25 I consider that to be a reasonable decision irrespective of whether the certificate should be amended particularly as it was the fruits of the earlier work that came to hand during the period of the third accounts. The final two paragraphs of the Deputy Registrar's report to the court are as follows: Paragraph 5 of the affidavit in support of commission clearly sets out the pains and trouble in liquidating the two companies. The liquidation involved the collection of a large sum of money and the necessary responsibility that goes with it. The executors are a solicitor and an accountant and sought appropriate professional advice concerning the liquidation of the companies to maximise the return to beneficiaries. I took into account the responsibility of deciding whether to liquidate the companies and overseeing the process. I also took into account that Section 86 of the Probate Act allows commission for pains and trouble as executors but not as company directors. Accordingly I took into account whatever pains and trouble flowed from their office as executors in respect of the companies. This was all taken into account when arriving at a lump sum figure.

In arriving at the award that I made I looked at the total amount of some $18M that was collected. If one was to apply 1%, the figure would be $180,000. A figure of 0.5% would be $90,000. I regarded $180,000 as being far too excessive and $90,000 as being inadequate and arrived at $120,000 as being an appropriate amount to compensate the executors for their pains and trouble. 26 The executors have been directors of the companies and the major shareholders in one and the only shareholders in the other. Generally speaking they did what they did in those companies to benefit the estate. It is not to the point that they might have been able to obtain director's fees as they did not obtain them. In any event, if they had then the ultimate result would have been a lesser distribution to the estate. It was really as part of their work and responsibility as executors that they held the positions which they did. It was the members of the companies who placed them into voluntary liquidation. Although it is not entirely clear I do not find any error in what the report says. If an accountant executor, entitled to charge professional charges, makes no charge for accounting work but does the work, he is entitled to have that work taken into account on the application for commission. That is probably what Deputy Registrar Haggett meant when discussing the work with the companies. In any event it is the basis on which I approach the matter. 27 I turn to the final paragraph. It is easy to criticize the reasoning, or lack of it, but in fact, as I explained in Spence, an acceptable approach is to look at reasonable percentages but then to fix a lump sum. The question is whether the sum of $120,000 is a reasonable allowance for the pains and troubles of the executors. 28 In their affidavit in support of the application for commission sworn 22 May 2007, the executors, as required, gave details of the work done by them during the period of the accounts. This was, of course, in summary form as is proper, but in essence it involved placing the two companies into liquidation in proper order, obtaining payment of the proceeds of the winding up of both companies and distributing those amounts to the beneficiaries. There were two distributions, the first made when the distribution from A H Peters was received and second when the distribution from Norman Williams was received. Apart from that work, there was other work involved with questions of valuations for capital gains tax and other purposes and there was work involved in collecting income from accounts established for infant beneficiaries or for the deposit of funds pending distribution. 29 As I pointed out in Walters re Estate of Dibbs [2006] NSWSC 1277, in recent times, particularly where real estate is concerned, large amounts of money are sometimes received by executors of estates through capital realisations. The same applied with this estate on the first accounts and in respect of the period in question for collection of the proceeds of the deceased's interest in the two private companies. In considering a proper remuneration for executors in such cases and taking into account what has ordinarily been the percentage allowed for capital collections and income collections, which is between 0.25 and 2 percent on corpus realisations and between 2 and 4 percent on income collections, the figures can seem very large because the amounts involved are very large, due largely to inflationary pressures over the last 20 or 30 years. To a large extent this has been dealt with by reducing the commission percentages which would have been allowed 25 or 30 years ago to bring about a reasonable result. However, it must also be borne in mind that inflation has depreciated money value in the same way over those 25 years. In most estate accounts there is no problem about this and in deciding what is reasonable. For big estates such as this the matter requires careful consideration of the particular facts. Scales of the type called the Barr Smith scale; Re Barr Smith [1920] SALR 380 or those set out in Vance: Vance: The Law and Practice in Victoria and an Examination of the Case Law of Australia and New Zealand Relating to Executors Commission, 1969 have very limited relevance in 2007. 30 Different cases based on different facts set out various matters which require consideration on the particular facts in making appropriate allowance for commission. For instance in The Will of Sheppard it was stated by Helsham J at page 720: So far as the quantum of the estate is concerned it seems to me again that the relevant consideration is, not the size of the estate, but what activities have been carried out in relation to it during the period covered by the appellants. I do not think it a correct approach to say that because an estate is in excess of a certain amount, or likely to be in excess of a certain amount when fully realized, therefore commission in excess of a certain percentage is not to be allowed, even though the amount realized during any particular period covered by the accounts may be only a fraction of the total realizable value of the estate taken as a whole. Where corpus realizations of the order of $400,000 were accomplished with considerable effort and diligent attention by the executors I do not think that the question of the amount of the commission should be judged having regard to the fact that there have been large sums resulting from previous realizations of portions of the estate and that there may be other sums in respect of the realization of which they may in the future be entitled to claim commission. It seems to me that the proper approach is to put a value upon the pains and trouble of the executor with reference to the particular accounts. 31 Other cases such as Patterson v Holloway [2003] VSC 298 state that the size of the estate and capacity to pay is a relevant consideration, but when attention is given to the facts there it is apparent there was only one set of accounts and the value of the estate was really the value of the assets collected. In Patterson the trial judge set out a list of the matters to be taken into account which appears to have been taken from Vance at pages 188-190. These are well known and I will not set them out. They would not necessarily apply in all cases, but they are a helpful guide. 32 The grounds of appeal, which are set out in the further amended notice of motion, although no longer required, can be shortly stated as follows, (a) that the income component on the certificate should not have been treated as capital (I assume the purpose of this was because, in general higher percentages are allowed on income than capital); (b) that the Deputy Registrar erred in excluding consideration of work as company directors; (c) that insufficient regard was given to the pains and troubles having regard to the size, complexity and work done and judgment exercised; and, (d) that if the funds received on winding up were capital, the amount allowed was manifestly inadequate. As stated I intend to amend the certificate. I have already dealt with the matter of the company directors and said that that work was a matter to be taken into account but it is not apparent that the registrar erred in this. 33 When the certificate is corrected the capital realisations would amount to $18,237,487 and income collected $376,033. 34 The $120,000 allowed as commission would be approximately 0.66% of the total receipts. As I have said it is important for a judge on review to pay proper regard to the decision of a deputy registrar accustomed to dealing with the many applications to pass accounts to allow commission. It is important not to substitute one view of what is reasonable for another. A significant variation in my view indicates that the original decision was flawed or unreasonable. 35 As I explained in Spence the starting point is usually to look at the result if appropriate percentages were applied as if there would be further accounts and then to make appropriate adjustments to award a proper lump sum. Where there are life estates lump sums would rarely be appropriate, as the commission would have to be apportioned, but in such cases there would usually be further accounts. In this particular case income collections were limited to interest collected from Macquarie Bank, the deposits bringing about that interest having been made during earlier periods. I would have considered that commission would be awarded on income at the rate of 3% being $11,280. That would not have been the percentage had the income been as stated on the certificate. On considering the percentage on capital realisations, having regard to the large figure, care and the work involved in carrying the recommended plan into effect and the advantage obtained by the beneficiaries, but remembering that it was the liquidator who wound up the companies and that it was counsel who recommended the scheme put in place so that, to some extent, it was his trouble and the executors' work, I would have fixed on a percentage of 0.75% which would have brought about a figure of $136,781. I would have added to that in this case the $11,280 being a total figure of $147,061 and then considered what figure, bearing that in mind, would be an appropriate figure to award as a lump sum and come to a tentative figure of $150,000. The registrar on the other hand looked at 0.5% of $18 million being $90,000 and 1% of that figure being $180,000. He thought the former too low and the latter too high and fixed on $120,000 but, with respect, there was no articulated basis for that and the decision paid no regard to the actual income collected. 36 As a matter of practical common sense commission usually moves in bands of 0.25% on corpus and 0.5% on income. To produce an amount which is approximately 0.66% of total realisations is not something that I would encourage. The normal bands should be adhered to and considered when fixing lump sums which should then be adjusted to round figures. 37 In lump sum matters on final accounts there is sometimes added some small amount for work which it is recognized remains to be done in making a final distribution or in connection with final tax matters. However, any such amount should be small because if there is work other than final distribution and tax returns there should be further accounts. Bearing in mind all these matters and the fact that the testatrix having a large estate, appointed two experienced professional people to administer it, who will share the commission and considering the tentative figure of $150,000, I consider that the appropriate allowance for commission is a lump sum of $155,000, the variation being so significant that the original order should not stand. The appropriate order therefore is that the order be varied and the executors be allowed commission in a lump sum of $155,000 for their pains and troubles for the period covered by the third and supplementary accounts. The costs awarded by the Deputy Registrar are not under challenge. As I think is an appropriate practice the decision would be subject to the executors undertaking not to make any charge for professional costs other than for preparation of income tax returns. That undertaking has been given. It will be necessary to make provision for the costs of this appeal which I consider should either be determined now or be subject to moderation by the registrar.

Evans v Bartholomew

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