153 ER 385
Chianti Pty Ltd v Leume Pty Ltd [2007] WASCA 270
35 WAR 488
Chief Commissioner of Stamp Duties (NSW) v Buckle [1998] HCA 4
192 CLR 226
Clark v Inglis [2010] NSWCA 144
79 ATR 447
Collins v Benning (1700) 12 Mod 444
Source
Original judgment source is linked above.
Catchwords
153 ER 385
Chianti Pty Ltd v Leume Pty Ltd [2007] WASCA 27035 WAR 488
Chief Commissioner of Stamp Duties (NSW) v Buckle [1998] HCA 4192 CLR 226
Clark v Inglis [2010] NSWCA 14479 ATR 447
Collins v Benning (1700) 12 Mod 44488 ER 1440
Commissioner of Inland Revenue v Ward [1970] NZLR 1
Edwards v Lowndes (1852) 1 E & B 81165 ALR 680
Lawrie v Bankes (1858) 4 K & J 14270 ER 59
MSP Nominees Pty Ltd v Commissioner of Stamps [1999] HCA 5114 CLR 17
Re Baron Vestey's Settlement
208 CLR 516
Peters' American Delicacy Co Ltd v Heath [1939] HCA 2
150 CLR 535
Wood v Inglis [2009] NSWSC 601
Young v Queensland Trustees Ltd [1956] HCA 51
Judgment (21 paragraphs)
[1]
Sidebottom v Kershaw Leese & Co Ltd [1920] 1 Ch 154
Stage Club Ltd v Millers Hotels Pty Ltd [1981] HCA 71; 150 CLR 535
Wood v Inglis [2009] NSWSC 601
Young v Queensland Trustees Ltd [1956] HCA 51; 99 CLR 560
Texts Cited: A F Rath, Principles and Precedents of Pleading in the Supreme Court of New South Wales at Common Law (1961, The Law Book Co of Australasia Pty Ltd)
Category: Principal judgment
Parties: Robert William Fischer - First Appellant
John Jules Fischer - Second Appellant
Andrea Juliana Fischer Musser - Third Appellant
Sylvia Beth Fischer Kramer - Fourth Appellant
Nemeske Pty Limited - First Respondent
Lorand Loblay - Second Respondent
Karen Loblay - Third Respondent
Laura Musser Sloat - Fourth Respondent
Tobias Musser - Fifth Respondent
Eve Fischer Gregg - Sixth Respondent
Seth David Fischer - Seventh Respondent
Todd Musser - Eighth Respondent
Kathleen Elizabeth Fischer - Ninth Respondent
William George Marcel Fischer - Tenth Respondent
Corinne Ayers - Eleventh Respondent
Aaron Kramer - Twelfth Respondent
Marianne Fischer - Thirteenth Respondent
Representation: Counsel:
Mr N C Hutley SC/Mr R A Yezerski (Appellants)
Dr C J Birch SC/Mr B DeBuse - (First, Second and Third Respondents)
Solicitors:
S Moran & Co (Appellants)
Curwoods Lawyers (First, Second and Third Respondents)
File Number(s): CA 2014/120230
Decision under appeal Court or tribunal: Supreme Court of New South Wales
Jurisdiction: Equity Division
Citation: [2014] NSWSC 203
Date of Decision: 2013/177990
Before: Stevenson J
File Number(s): 2013/177990
[2]
[Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.]
[3]
Judgment
BEAZLEY P: I have had the advantage of reading in draft the reasons of Barrett JA. I agree with his Honour's reasons and the orders he proposes.
BARRETT JA: The first respondent, Nemeske Pty Ltd ("Nemeske"), was, at material times, the trustee of trusts created by a deed of settlement made on 24 June 1974 upon the establishment of the "Nemes Family Trust".
In proceedings brought in the Equity Division of the Supreme Court by the present appellants as plaintiffs, Stevenson J was called upon to decide whether, in consequence of certain action taken on 23 September 1994, Nemeske became indebted to the extent of $3,904,300 to Emery Nemes ("Mr Nemes") and his wife Madeleine Nemes ("Mrs Nemes") and whether an action in debt could be maintained by the estate of Mr Nemes who died in 2011. Mrs Nemes died in 2010. Any indebtedness to the estate would impact upon the value of the assets available for the trust beneficiaries.
The appellants contended at trial that the actions of 23 September 1994 (and related events) were not effective to make Nemeske indebted to Mr Nemes and Mrs Nemes. Their principal case concerned the legal efficacy of the steps taken at that time in purported exercise of a power undoubtedly exercisable by Nemeske as trustee. An alternative contention was that all Nemeske's powers (beyond those of a bare trustee) had ceased to be exercisable several months before it purported to act on 23 September 1994, with the result that the relevant power was then unavailable.
The central contentions both at trial and on appeal went to the following questions:
1. whether the actions of 23 September 1994 constituted a valid and effective exercise by Nemeske, in favour of Mr and Mrs Nemes, of a power to "advance or raise any part or parts of the whole of the capital or income of the Trust Funds and to pay or to apply the same as the Trustee shall think fit for the maintenance education advancement in life or benefit of any of the Specified Beneficiaries";
2. if so, whether Nemeske, as trustee, thereby became indebted to Mr Nemes and Mrs Nemes;
3. whether, in any event, a deed subsequently executed by Nemeske became the source of such indebtedness;
4. whether any such indebtedness was statute barred at the time the Equity Division proceedings were commenced; and
5. whether the appellants' claims were rendered untenable by reason of the circumstance that Nemeske was, by 23 September 1994, a bare trustee only as to the whole of the trust property and incapable of exercising the power referred to in (a) above.
[4]
Events of July to September 1994 and in 1995
Evidence about contemporary events was sparse. With the exception of Mr Lorand Loblay (who was 93 or 94 years old at the time of trial and had very little recollection of things that had happened some 20 years earlier), none of the persons directly involved gave evidence of relevant events. Most had died before the proceedings were commenced. As I have said, Mr Nemes died in 2011 and Mrs Nemes in 2010. Their only child, Patricia Nemes, died in 1980 without issue. A number of documents were admitted into evidence. Although some of them are unsigned, the parties proceeded on the footing that the documents are genuine and accurately reflect steps actually taken.
At material times, the sole asset held by Nemeske as trustee was a parcel of 10 B class shares in the capital of Aladdin Ltd ("Aladdin"). That company held shares in other companies which owned real property. In July 1994, Nemeske recorded in the books of account kept by it as trustee an "asset revaluation reserve" of $3,904,300. The shares in Aladdin, originally taken into account at a cost of $1,000, were, as at 31 July 1994, revalued to an amount of $3,905,300. The primary judge said that the relevant accounting entries were "created as a result of an assessment made by someone on behalf of the Trust that the assets of the Trust (being the Shares) should be re-valued …".
At a meeting of the directors of Nemeske held on 23 September 1994 and attended by Mr Gabriel Elliott and Mr Lorand Loblay, a resolution was passed in terms that one would immediately associate with a decision by directors of a company to pay a dividend to members. The resolution was as follows:
"RESOLVED that pursuant to the powers conferred on the Company as Trustee in the Deed of Settlement of the Nemes Family Trust:
That a final distribution be and is hereby made out of the asset revaluation reserve for the period ending 30th September 1995 and that it be paid or credited to:- the beneficiaries in the following manner and order:
The entire reserve, if any, to be distributed to:-
Emery George Nemes & Madeleine Nemes as joint tenants."
The parties agree that "30th September 1995" was a misprint and that the reference was to 30 September 1994.
A balance sheet as at 30 September 1994 recorded, on the assets side, the shares in Aladdin at $3,905,300. Liabilities were recorded as follows:
"NON-CURRENT LIABILITIES
Loan-Secured
E G & M Nemes $3,904,300.00"
[5]
The earlier event of May 1994
The earliest of the events already mentioned occurred in July 1994 (see [8] above). It is accepted by the parties that, a short time earlier, Mr Nemes had made an oral resolution the terms of which were recorded in minutes of a meeting of the directors of Nemeske held on 3 May 1994. The meeting was attended by Mr Gabriel Elliott and Mr Loblay, with Mr Nemes recorded as "in attendance". The minutes (signed by both Mr Elliott and Mr Nemes) record the following:
"This is to record an oral resolution made by EMERY GEORGE NEMES on the 3rd day of May, One thousand nine hundred and ninety four, in accordance with Clause 17 of the Settlement made the 24th day of June, One thousand nine hundred and seventy four between EMERY KARDOS and CHALLICE LIMITED and known as the NEMES FAMILY TRUST varying the provisions of the said Deed of Settlement by deleting from Clause (f) of the said Deed of Settlement the word "sixty" from the second line of the said clause and inserting in its lieu the word "eighteen".
Clause (f) of the first schedule to the trust deed is set out at [32] below. It defines "the Vesting Day". The primary meaning of that expression is "the day upon which shall expire the period of sixty years after the execution of this deed". The deed was executed on 24 June 1974. The period of sixty years referred to in the definition was thus the period ending on 24 June 2034. If Mr Nemes's oral resolution was effective to alter the terms of the trust by substituting "eighteen" for "sixty", the period referred to in clause (f) thereby became the period ending on 24 June 1992, being a date almost two years before Mr Nemes made the oral resolution.
As will be seen presently, the "Vesting Day" is the point at which the corpus or capital held by the trustee comes to be vested in particular beneficiaries so as to be held upon absolute trust for them.
[6]
The trust deed
It is necessary, at this point, to refer in some detail to the provisions of the trust deed.
The parties approached the controversy on the basis that, if action on or subsequent to 23 September 1994 was effective to cause Nemeske to become indebted to Mr Nemes and Mrs Nemes, it was the exercise of a power conferred by clause 4(b) that was the first step in the process that produced that result. The scope and effect of clause 4(b) must, of course, be approached by reference to the content of the deed as a whole.
Clause 1 of the deed directs that the "Trust Funds" (that is, the settled sum of $200 and "all other assets from time to time held by the Trustee hereunder") be held by the trustee "upon trust at the discretion of the Trustee to invest the proceeds in any investments hereby authorized" with power to transpose investments. This is, in terms, a direction concerning "proceeds", that is, no doubt, money derived from the "Trust Funds" as they exist from time to time.
It is clause 2 that declares trusts as such. It does so by reference to provisions in the first schedule. Clause 2 is as follows:
"The Trustee shall hold the Trust Funds and the investments for the time being representing the same subject to the trust's [sic] directions and discretions which are fully set out in the first schedule hereto."
The provisions in the first schedule prescribe, with the aid of definitions, the trusts upon which the Trust Funds are to be held. The provisions fall into three groups. Those in the first group (clauses (a), (b) and (c)) are concerned with income. The provisions in the second group (clauses (d) and (e) are concerned with corpus or capital. The third group consists of two definitions: a definition of the "Vesting Day" (clause (f)); and a definition of the "Specified Beneficiaries" (clause (g)).
Clause (a) of the first schedule begins:
"Until the vesting day to hold the Trust Fund upon trust as to the income thereof . . ."
It may be accepted that "vesting day" here is the equivalent of "Vesting Day" (as defined) and that "Trust Fund" means "Trust Funds" (as defined). The first direction in clause (a) of the first schedule concerning income is as follows (clause (a)(i)):
"to pay or apply the whole or any part of such income for or towards the maintenance education advancement or benefit of all or such one or more of the specified beneficiaries exclusive of the other or others of them in such shares and proportions as the Trustee in its absolute discretion may from time to time throughout any year determine."
[7]
Approach to the issues
Although Mr Nemes's oral resolution of 3 May 1994 pre-dated the events that began in July 1994 (referred to at [7] and following above), it is convenient to consider first the effect of those later events, assuming that the clause 4(b) power remained available beyond 3 May 1994. That is the approach that the primary judge took. Attention will then be given to the question whether, as a consequence of the oral resolution of 3 May 1994, the "Vesting Day" became 24 June 1992, with the result that, on that day and by virtue of clause (d) of the first schedule, the corpus or capital came to be held for such one or more of the "Specified Beneficiaries" as that clause identified.
It should be said at the outset that no good reason is suggested as to why, if the action taken on 3 May 1994 by Mr Nemes in the presence of Mr Gabriel Elliott and Mr Loblay was effective to make 24 June 1992 the "Vesting Day", Mr Elliott and Mr Loblay should, only a few months later, have proceeded on the clear footing that there had been no absolute vesting of the corpus or capital under clause (d) of the first schedule on that day (or at all) and that it remained open to Nemeske to exercise the clause 4(b) power in September 1994. One can only speculate. Perhaps the persons concerned became worried that the attempt to achieve retrospective vesting as at 24 June 1992 had miscarried and determined to proceed on the footing that no meaningful result had been achieved in May 1994. Perhaps they realized that the result of what had been done (if effective) was to divert the corpus away from Mr Nemes and Mrs Nemes and simply chose to ignore the matter. Perhaps the fact that the minutes of the meeting of 23 September 1994 are unsigned indicates that they were pro forma minutes and no resolution was actually passed - although that is not consistent with Mr Peter Elliott's letter to Mr d'Apice.
The basis on which the parties approached the litigation at first instance does not allow any conclusions to be reached on these possibilities. The parties agreed that all purported actions and transactions reflected by documents in evidence (unsigned though some were) were to be accepted as genuine and effective according to the terms of the documents. The primary judge's task was to approach matters on that basis. Despite an invitation by the respondents to do otherwise, this Court must proceed in the same way.
[8]
The clause 4(b) power - the judge's decision
The efficacy of the steps taken on 23 September 1994 is said by the respondents to derive from clause 4(b) of the trust deed. The appellants contend that those steps were not within the clause 4(b) description.
This Court does not have before it a submission (corresponding with that made below) that outright and unconditional crediting to a person does not represent application "for the maintenance education advancement in life or benefit of" the person. The matter therefore cannot be disposed of on the basis that there was no power to transfer value to Mr Nemes and Mrs Nemes outright and unconditionally (or to promise to do so), as distinct from deploying money or value in a particular way calculated to produce advantages for them.
Rather, the central submission of the appellants is that the steps taken on 23 September 1994 did not entail advancing or raising and payment or application, as envisaged by clause 4(b), of something to which the power conferred by that clause extended. The appellants argued on appeal, as they argued below, that the clause 4(b) power was a power to outlay assets forming part of the "Trust Funds" and that, as the only such assets at any relevant time were the shares in Aladdin, the only activity that clause 4(b) authorized was a transfer of at least some of those shares.
In Clark v Inglis [2010] NSWCA 144; 79 ATR 447, this Court decided that, for the purposes of a trust deed provision concerning distribution and allocation of trust "income" of a year, unrealized gains arising upon revaluation of investments in accordance with a policy of annual "marking to market" were properly treated as part of a year's income. No party now before the Court sought leave to argue that Clark v Inglis was wrongly decided. In concept, therefore, it must be accepted that an unrealized gain on revaluation is capable of being "income" as referred to in clause 4(b).
The appellants nevertheless argued at trial (as they did on appeal) that the determination of 23 September 1994 was not effective to cause anything (whether or not "income") to be advanced, raised, paid or applied and that the determination therefore had no legal effect of the kind envisaged and permitted by clause 4(b).
The judge held that the 23 September 1994 resolution making a "final distribution . . . out of the asset revaluation reserve" was, in reality, a resolution "to distribute to Mr and Mrs Nemes an amount of money equal to the value of the asset revaluation reserve, namely $3,904,300". He did so on the basis that the words "an amount equal to" should be regarded as added, so that the resolution read (with "1994" substituted for "1995" and omitting irrelevant words):
"That a final distribution be and is hereby made out of the asset revaluation reserve for the period ending 30th September 1994 and that it be paid or credited to the beneficiaries in the following manner and order:
An amount equal to the entire reserve...to be distributed to [Mr and Mrs Nemes] as joint tenants".
[9]
The clause 4(b) power - assessment
The power conferred by clause 4(b) is a power "to advance or raise" and "to pay or apply". The aspect empowering the trustee to "advance or raise" extends to "any part or parts of the whole of the capital or income of the Trust Funds", that is, the totality of the settlement sum of $200 "and all other assets from time to time held by the Trustee hereunder", whether of a capital or income nature. The aspect empowering the trustee "to pay or to apply" extends to "the same". While the power thus has two aspects, it is a single composite power involving several alternatives, namely, (a) advance and pay, (b) advance and apply, (c) raise and pay, and (d) raise and apply. And it is a power that extends to the whole or any part of the capital or of the income.
"Raise" is a term that usually describes the process by which money is obtained by means of property, usually through sale or mortgage. In Lawrie v Bankes (1858) 4 K & J 142; 70 ER 59, trustees who had power to "raise" money for an infant's maintenance and advancement out of a fund in which he had only a contingent interest sold part of the trust property in which that interest subsisted and bought the infant a commission in the army. "Advance", by contrast, is the process of using immediately money that is to hand but would, in the normal course, not be outlaid until some future time. The phrase "advance or raise" thus describes means of obtaining or appropriating for immediate use; and, as applied to "any part or parts of the whole of the capital or income of the Trust Funds", contemplates immediate deployment of any portion of the capital or income that, in the absence of that action, would remain to be dealt with in the future in some other way.
The single composite power is thus, in concept, a power to earmark or assemble capital or income for use and to use it. The purpose for which it may be used is, however, limited by the words "for the maintenance education advancement in life or benefit of" any of the specified beneficiaries. As I have said, the case presented in this Court does not dispute that, if the clause 4(b) power was otherwise validly and properly exercised, the attendant purpose was within the quoted words.
It is clear that Nemeske, as trustee, never held money to the extent of $3,904,300. It only ever held shares in Aladdin. But, according to the reasoning of this Court in Clark v Inglis (above), there was, at the time of the 23 September 1994 resolution, "income" of $3,904,300 as a result of the revaluation of the Aladdin shares. And even apart from that decision, there was a specifically recognized accretion in the value of trust assets which, if not "income", was "capital". The unrealized but expressly recognized accretion in the value of the shares to the extent of $3,904,300, whether of an income or a capital nature, was not comparable with a bag of currency or a credit balance at a bank. But it was part of the income or capital of the "Trust Funds". The clause 4(b) power therefore extended to it.
[10]
Notice under the clause 4(b) proviso - the judge's decision
There is then the question whether the particular action of the trustee was precluded by the proviso concerning the giving of notice to which clause 4(b) is subject (see [34] above).
The primary judge proceeded on the implicit footing that the application of $3,904,300 effected by the trustee's resolution of 23 September 1994 was an application of capital. I say this because the proviso to clause 4(b) is concerned only with the payment or application of capital to an extent greater than $10,000 and the judge proceeded to consider whether the requirement imposed by the proviso had been met.
If the application of $3,904,300 was an application of income of the kind recognized in Wood v Inglis (above), the proviso did not apply and the application represented a valid exercise of the clause 4(b) power whether or not consent had been given by the person or persons identified in the clause 4(b) proviso. If, on the other hand, the relevant application was an application of capital, the proviso was relevant. I proceed therefore on the assumption that compliance with the proviso was necessary.
As the primary judge recognised, the proviso to clause 4(b) raises the question whether notice must be given to all of the beneficiaries named in clause 15.2 or only to that beneficiary (or those beneficiaries) there named who, at the time of notification of the intended exercise of the clause 4(b) power, had the power of removal.
His Honour noted that, at the relevant time in 1994, Mr Nemes alone had the power to remove the trustee; and that it was common ground that notice was given to him. There was no evidence that notice was given to any of the other persons named in clause 15.2; and one of them (Mr Robert Fischer) gave evidence that no notice was given to him.
The judge said that the reference in the proviso might be to "all" (in the sense of "every one") of the beneficiaries who "may" (in the sense of "may at some time") exercise the powers; or to "all those" (in the sense of "such of those") beneficiaries who "may" (in the sense "presently have the power to") remove the Trustee. He determined that the latter was the correct construction.
As his Honour noted, clause 15.2 provided for a sequence of persons to have the power of removal, with the sequence being determined wholly by the death or mental incapacity of the person named earlier in the sequence: first Mr Nemes, then Mrs Nemes, then Patricia Nemes, then Ms Hegyi (Mrs Nemes's mother), and then the Fischers (children of a cousin of Mr Nemes). Only one person, or in the case of the Fischers a group of four persons jointly, was or were at any given time able to exercise the power.
[11]
Notice under the clause 4(b) proviso - assessment
If compliance with the proviso to clause 4(b) was necessary, the fact that notice of the kind envisaged by the proviso had been given to Mr Nemes alone was sufficient to constitute such compliance. The purpose of the proviso, clearly enough, is to ensure that the person or persons for the time being capable of removing the incumbent trustee and appointing a new trustee should have an opportunity of doing so before the incumbent trustee implements a stated intention of exercising the clause 4(b) power with respect to capital exceeding $10,000.
There is no cogent reason why persons not presently able to exercise the power of replacing the incumbent trustee and who may at some future time acquire that ability - or never do so - should be put on notice of the trustee's intended action. The judge was correct to interpret the proviso as he did.
[12]
Consequences of exercise of the clause 4(b) power - principles
As stated above, exercise of the clause 4(b) power by the resolution of 23 September 1994 caused the trustee's obligations with respect to the trust property to change so that, to the extent of $3,904,300, it was required to recognize and accommodate an immediate and absolute vested interest of Mr and Mrs Nemes.
Submissions that the trustee somehow exercised a power to borrow and, in some figurative sense, agreed to pay money to Mr and Mrs Nemes do not need to be pursued. Nor does the objection that nothing was paid or conveyed to the individuals. There was an application of capital or of income in such a way that the powers and duties of the trustee with respect to the applied capital or income ceased to be those generally prevailing by virtue of the trust deed and became instead the powers and duties applicable to and consistent with the holding of the trust fund upon trust to pay thereout $3,904,300 to Mr and Mrs Nemeske in satisfaction of an absolute entitlement on their part.
In Chianti Pty Ltd v Leume Pty Ltd (above) an issue arose as to the jurisdiction of the District Court of Western Australia to entertain a claim by a beneficiary against a trustee to recover sums that the trustee had determined to distribute to the beneficiary. The central question was, in broad terms, whether the claim was a claim in debt or a claim for equitable relief. The Court of Appeal considered in some detail not only the matters to which reference has already been made but also the circumstances in which a beneficiary may maintain an action at law against a trustee rather than relying on purely equitable rights.
Buss JA (with whom Martin CJ and Pullin JA agreed) approached the matter by posing the question "when is a trustee liable to a beneficiary in debt or for money had and received?" After referring to the development of the action for money had and received from indebitatus assumpsit, Buss JA set out (at [60] - [61]) extracts from three cases which should be quoted in full.
His Honour first quoted what was said by Lord Campbell CJ In Edwards v Lowndes (1852) 1 E & B 81; 118 ER 367 (at ER 370):
"It may be taken as settled that, where the parties stand to each other in the relation of trustee and cestui que trust, and the trustee is under no other legal liability than that which arises from that relation, no action at law for money had and received can be maintained against him, though he has money in his hands which under the terms of the trust he ought to pay over to the cestui que trust, but which he still holds in the character of trustee only. It is unnecessary to refer upon this proposition to other authorities than that of the well considered judgment delivered by Baron Rolfe in Pardoe v Price (16 M & W 451). If, indeed, the trustee, by appropriating a sum as payable to the cestui que trust, or otherwise, admits that he holds it to be paid to the cestui que trust, and for his use, the character of the relation between the parties is changed; and the trustee does not hold it as a trustee properly so called, but as a receiver for the plaintiff's use, who may maintain an action at law for money had and received, founded on the approbation to his use and the liability thence arising. There are many cases that are founded upon this principle, from Allen v Impett (8 Taunt 263), to Roper v Holland (3 A & E 99); and these have reference to earlier decisions."
[13]
Consequences of exercise of the clause 4(b) power - assessment
The question whether Nemeske, as trustee, became indebted to Mr Nemes and Mrs Nemes so that they could bring an action at law against it was squarely raised by a cross claim filed by Mr Nemes's estate (as well as Nemeske's application for a declaration that it is not indebted).
Before the primary judge, it was accepted by the representatives of Mr Nemes's estate that the estate's cause of action arising out of the 23 September 1994 resolution itself (which was described in the minutes of a meeting of the directors of the trustee of 3 July 1995 as being "repayable on demand") was out of time and statute barred by reason of s 14 of the Limitation Act 1969 (NSW). The estate did not seek to rely on any account stated or acknowledgement by Nemeske in financial statements or like documents. Rather, it based its debt claim on the deed of charge dated 30 August 1995 and, in particular, on Nemeske's covenant in clause 5 of the deed (see [15] above) to pay Mr and Mrs Nemes "on demand" the "principal moneys", that is, according to recital D, the sum of $3,904,300.
A question addressed by the primary judge is whether the covenant in clause 5 created a new and independent obligation of Nemeske to pay the stated sum. His Honour held that it did. That conclusion is challenged on appeal, the contention being that there was no antecedent debt and therefore that the charge secured nothing. That proposition is advanced by reference to what was said by Hely J in HCK China Investments Ltd v Solar Honest Ltd [1999] FCA 1156; 165 ALR 680 at [258]:
"The proposition that a mortgage cannot exist in the absence of a debt or some other obligation is not novel. In Jacobson v Williams (1919) 48 DLR 51 a purported mortgage was executed to secure repayment of a loan which was never advanced. Walsh J stated (at 57):
'If the question is asked "How much is owing on this mortgage?" the answer undoubtedly would be "nothing" …'.
For this reason his Honour held that the mortgage was null and void and directed that it be removed from the alleged mortgagor's certificate of title.
G M Industries Pty Ltd (in liq) and the Companies Act (1980) ACLC ¶40-665 is a somewhat similar case. In that case a company attempted to grant a charge over its assets to secure a loan which was never made. Needham J held (at 34,424):
'The purported creation of a charge over property to secure a debt where there is no debt and no contractual liability to raise one is, in my opinion, an act without legal effect. The very nature of a charge is a security for a debt or other legal or equitable obligation. One cannot have a charge in vacuo.'
In that case the charge was simply annihilated."
[14]
The power to create the charge
It is contended on appeal, as it was before the primary judge, that there was, in any event, no power for Nemeske, as trustee, to create the charge over the Aladdin shares that it purported to create by the instrument of 30 August 1995.
The respondents point to certain provisions of the trust deed as the source of necessary power. The provisions in question are very general and do not refer to mortgaging or charging property. None of them can be regarded as authorizing the giving of security over trust property. Reliance is also placed on s 38 of the Trustee Act which states that, where a trustee is authorised by the trust instrument or by law to pay or apply capital money for any purpose or in any manner, the trustee has "power to raise the money required by sale, conversion, calling in, or mortgage of all or any part of the trust property for the time being in possession held upon the same trusts as the capital money". Although s 38 featured in argument about the correct characterisation of the effect of the resolution of 23 September 1994, Nemeske was in fact at no relevant time in a position where it "required" funds in order to "pay or apply capital money". Even accepting that, by virtue of s 5 of the Trustee Act, "mortgage", for the purposes of that Act, includes any security for money, s 38 was not the source of any power for Nemeske to create the charge over the Aladdin shares that it purported to create by the instrument of 30 August 1995: the section allows the creation of a mortgage to raise money for closely confined purposes: Re Suenson-Taylor's Settlement Trusts [1974] 1 WLR 1280. It does not allow the grant of security merely to cause some pre-existing unsecured obligation to be secured. It follows that there was no authority for Nemeske to subject the shares to the security by which it purported to encumber them by the deed of 30 August 1995.
The consequence of the lack of power to charge the Aladdin shares may well be that the shares were not effectively encumbered in favour of Mr and Mrs Nemes. For present purposes, that consequence is unimportant. The covenant in clause 5 of the instrument of 30 August 1995 existed independently of the charge. It cannot be suggested that the trustee lacked power to confirm by separate covenant the debt obligation already owed by it. I therefore proceed on the basis that Nemeske, as trustee, had power to give the clause 5 covenant, even though it had no power to subject the Aladdin shares to the charge purportedly created by the instrument of 30 August 1995.
[15]
The status and effect of the clause 5 covenant
As the primary judge recognized, a covenant to pay "on demand" means, in the ordinary course, that a debt exists immediately the covenant is given and not merely when demand is made; and if that was the position under clause 5, the limitation period of 12 years under s 16 of the Limitation Act would have expired in August 2007. But, on the view the judge took, the clause 5 covenant, viewed in the context of the whole of the instrument of 30 August 1995, became the source of a debt only if and when demand was made, with the result that the limitation period did not begin to run until payment was demanded.
The primary judge quoted, in this connection, the following passage in the judgment of Fullagar J in Ogilvie v Adams [1981] VR 1041 at 1049:
"There is a long-settled rule of construction that, where there is a present debt between the parties to a contract to repay money, and the only terms as to repayment of the debt are to be spelled out of a promise to repay on demand, or out of a statement that the money is to be repaid or repayable on demand (or on request), an instantaneous cause of action, upon the very creation of the contract, arises in the lender. Whether one calls it a rule of law or not does not seem to me to matter. The only reason why I have chosen the expression 'rule of construction' is because other words or terms may appear in the contract which may be in the circumstances sufficient to show an intention that the cause of action is not to arise until some actual demand or some form of demand is made or until some period after demand has elapsed."
The primary judge held that the instrument of 30 August 1995 showed "an intention that the cause of action is not to arise until some actual demand or some form of demand is made". That intention was regarded as manifested by clause 7(a) the opening words of which were as follows:
"That the principal moneys hereby secured or intended so to be shall at the option of the Mortgagee and notwithstanding any delay or previous waiver of the right to exercise such option immediately become payable without the necessity for any demand or notice upon the Mortgagor and notwithstanding that the Mortgagee shall or may have exercised partially or entirely the power of sale herein contained or implied and this security shall immediately at the option of the Mortgagee become enforceable and also at the like option the right of the Mortgagor to deal for any purpose with any of the mortgaged premises or other the property and assets hereby charged shall forthwith cease upon the happening of each of any of the following events namely …"
[16]
Subsequent acknowledgement
Mr Nemes's estate contended at trial that, if the limitation period applicable to the clause 5 covenant had expired before it filed its cross-claim on 26 September 2013, it could nevertheless sue on the cause of action derived from the covenant because Nemeske had, within the limitation period, confirmed that cause of action. On the view the primary judge took (that is, that the cause of action arising from the clause 5 covenant did not accrue until demand was made), it was unnecessary for his Honour to decide that question. He nevertheless considered it and upheld the estate's contention. On appeal, the appellants challenge that conclusion.
Section 54(1) of the Limitation Act is in these terms:
"Where, after a limitation period fixed by or under this Act for a cause of action commences to run but before the expiration of the limitation period, a person against whom (either solely or with other persons) the cause of action lies confirms the cause of action, the time during which the limitation runs before the date of the confirmation does not count in the reckoning of the limitation for an action on the cause of action by a person having the benefit of the confirmation against a person bound by the confirmation."
Section 54(2) provides that a person confirms a cause of action "if, but only if" the person does one of several things, one of which is: "acknowledges, to a person having (either solely or with other persons) the cause of action, the right or title of the person to whom the acknowledgment is made". Section 54(4) states that an acknowledgment for the purposes of s 54 "must be in writing and signed by the maker". Under s 54(6)(a), a person is, for the purposes of s 54, bound by a confirmation "if, but only if . . . the person is a maker of the confirmation". In the case of a company, therefore, it is necessary to find a written confirmation binding on the company as maker.
Mr Nemes's estate contended at trial that Nemeske acknowledged to Mr and Mrs Nemes their right and title to the cause of action in respect of the sum of $3,904,300 by means of the "Directors' Declaration" which accompanied the financial statements of Nemeske for the year ended 30 June 2003 and stated that those financial statements and the notes to them "presents [sic] fairly the trust's financial position as at 30 June 2003". The financial statements contained an entry in the same terms as that in the 30 June 1996 accounts set out at [11] above recording a "loan" of $3,904,300 by Mr and Mrs Nemes. The primary judge noted that there was no dispute that Mr and Mrs Nemes had notice of whatever appeared in the financial statements. The only question, therefore, was whether the particular passage in the accounts, as adopted and confirmed by the Directors' Statement, constituted an acknowledgement by Nemeske of the right or title of Mr and Mrs Nemes to the debt there mentioned.
[17]
Conclusions on the rights of Mr and Mrs Nemes
I pause to summarise my conclusions to this point, as follows:
1. Nemeske, by the directors' resolution of 23 September 1994, duly exercised the clause 4(b) power by advancing and applying income or capital to the extent of $3,904,300 for the benefit of Mr and Mrs Nemes jointly.
2. As a consequence of that exercise of the clause 4(b) power, Nemeske held the trust property upon trust to pay thereout to Mr and Mrs Nemes the sum of $3,904,300.
3. Mr and Mrs Nemes obtained, in the first instance, a vested equitable interest accordingly. They were jointly entitled. Because of subsequent acknowledgement by Nemeske, a cause of action in debt accrued to Mr and Mrs Nemes. Again, they were jointly entitled.
4. In particular, a right of action at law derived from the deed of 30 August 1995 but became statute-barred in August 2007 unless, before that date, Nemeske had acknowledged the cause of action in accordance with s 54 of the Limitation Act.
5. The Directors' Declaration dated 25 May 2004 in respect of the financial statements of Nemeske for the year ended 30 June 2003 constituted such an acknowledgment.
6. Because of that acknowledgment and the effect of s 54, the debt action brought by Mr Nemes's estate (he being the survivor of himself and his wife) was not statute-barred when the cross-claim initiating that action was filed on 26 September 2013.
7. Subject to any contrary position created by the oral resolution of 3 May 1994, the primary judge therefore correctly concluded that Mr Nemes's estate was entitled to judgment for $3,904,300 against Nemeske.
By notice of contention, the respondents argued that certain estoppels were operative against Nemeske and in favour of Mr and Mrs Nemes in relation to the $3,904,300 debt - in essence, estoppel by deed and estoppel by convention. In view of the conclusion I have reached regarding the estate's cause of action in debt, I leave the estoppel argument to one side.
The estate's entitlement to judgment for $3,904,300 upon the debt claim will, of course, be defeated if, as the appellants contend, Mr Nemes's oral resolution of 3 May 1994 was effective to cause the corpus of the Trust Funds to vest in "Specified Beneficiaries" on 24 June 1992. It is to that matter that I now turn.
[18]
The 3 May 1994 resolution - the judge's decision
The question about the efficacy of Mr Nemes's oral resolution of 3 May 1994 turns on the interaction of clause 17 of the trust deed and the definition of "Vesting Day" in clause (f) of the first schedule. The power of variation given to Mr Nemes by clause 17 extended to "such trusts or provisions hereof as he may determine" and was a power that was available to be exercised "notwithstanding anything to the contrary herein contained". By clause (f) of the first schedule, the trustee was empowered to fix as the Vesting Day a date before the earlier of 24 June 2034 and the expiry of the relevant Royal life.
The primary judge held, in effect, that a specific power to accelerate the Vesting Day was given to the trustee by clause (f), while the power of variation conferred by clause 17 on Mr Nemes was a general power which was subservient to the specific power in such a way that acceleration of the Vesting Day was beyond its scope and the specific power alone was available to deal with that matter.
His Honour said that it would be "an extraordinary thing if Mr Nemes (or indeed the Trustee) could vary the Vesting Day retrospectively". In either event, the result would mean that any intervening acts of Nemeske as trustee (for example as to the distribution of income) would be set to nought. In addition, a retrospective variation of the Vesting Day by Mr Nemes would deprive Nemeske of its power as trustee to determine the disposition of the corpus or capital of the estate under clause (d) of the first schedule. The judge considered it improbable that the parties to the trust deed intended that it have this effect. He concluded that Mr Nemes's power under clause 17 did not enable him to vary the Vesting Day.
[19]
The 3 May 1994 resolution - assessment
The problem with this analysis, as the appellants point out, is that the clause 17 power is expressed to exist and be exercisable "notwithstanding anything to the contrary herein contained". Those words destroy any supremacy that the clause (f) power of the trustee to vary the Vesting Day may be thought to enjoy because it is a specific power. Clause 17, by its own terms, has ultimate supremacy.
The riposte of the respondents is that, even if this is so, it does not mean that Mr Nemes's oral resolution was effective to make the Vesting Day 24 June 1992. Mr Nemes's clause 17 power was exercisable "[a]t any time and from time to time prior to the Vesting Day" but the effect of his exercise of the power by oral resolution (if it had any effect) was to make the Vesting Day a day almost two years before his purported exercise of the power, with the result that the exercise (if otherwise effective) was to make the day on which the power was supposedly exercised a day after the Vesting Day (as amended) so that the power expressed to be exercisable only before the vesting day was not capable of being exercised at the time it was purportedly exercised.
This argument does not adequately deal with matters of timing. Immediately before the oral resolution was made on 3 May 1994, the Vesting Day was the earlier of 24 June 2034 and the expiration of an as then unascertained Royal life. That was also the position immediately before the oral resolution was made. It was not until the oral resolution was complete that the Vesting Day became 24 June 1992 (assuming that the variation was in other respects valid).
Central to the question about the scope of the clause 17 power, as it relates to the particular matter, are the consequences that the purported exercise, if valid, produced. Examination of those consequences may shed light on the extent of the power.
If Mr Nemes's action of 3 May 1994 was effective to cause 24 June 1992 to be the Vesting Day, clause (d) of the first schedule operated on 3 May 1994 to cause the trustee to have held the capital of the trust fund, as from 24 June 1992, for the persons who were, on 24 June 1992, the persons there identified. Clause (d) identifies, as what might be termed a primary group, persons determined by the trustee not less than 30 nor more than 60 days before the Vesting Day. In default of such determination, the beneficiaries are the issue of Patricia Nemes. In default of that, the beneficiaries are the issue of the "Specified Beneficiaries" defined by clause (g) of the first schedule.
[20]
Conclusion
The appeal should be dismissed with costs.
WARD JA: I have had the opportunity of reading in draft the comprehensive reasons of Barrrett JA, with which I agree. For the reasons his Honour gives, the appeal should be dismissed with costs.
[21]
DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.
Decision last updated: 11 February 2015
Parties
Applicant/Plaintiff:
Fischer
Respondent/Defendant:
Nemeske Pty Ltd
Legislation Cited (3)
Companies (New South Wales) Code Limitation Act 1969(NSW)
The Equity Division proceedings were constituted in such a way that certain persons who were within the trust deed's definition of "Specified Beneficiaries" sued on behalf of the trustee and the claims so made were defended by Mr Nemes's executors. This was seen as an appropriate course because the contest concerning entitlement to a large part of the value of the assets in the hands of the trustee was, in substance, a contest between Mr Nemes's estate (he being the survivor of the two persons in whose favour the particular power of the trustee was supposedly exercised on 23 September 1994) and the persons who, as "Specified Beneficiaries", stood to gain if there had been no effective exercise of the power in favour of Mr and Mrs Nemes.
It is clear, for reasons about to be mentioned, that any such "loan" was not "secured" at 30 September 1994
Mr Gabriel Elliott, one of the directors of Nemeske, was a partner in the chartered accountancy firm G A Elliott & Co. On 26 April 1995, Mr Peter Elliott, another member of that firm, wrote to Mr John d'Apice of Makinson & d'Apice, solicitors. The letter, so far as relevant, was as follows:
"As we discussed on the telephone, with regard to the abovenamed, please find following the information requested:
Most of the assets of Mr and Mrs Nemes are owned by companies the asset shares of which are owned by Aladdin Limited, a Norfolk Island company, the shares of which are owned by the Nemes Family Trust.
Mr and Mrs Nemes, together with several others, are beneficiaries of the Nemes Family Trust, a copy of the trust deed is enclosed for your reference.
The trustee of the Nemes Family Trust is Nemeske Pty Limited, a copy of the Memorandum and Articles of Association is enclosed for your reference.
The assets in the whole group of companies has been revalued as at 1st July, 1994, this has led to an asset revaluation reserve being created in the Nemes Family Trust, a copy of the balance sheet is enclosed for your reference.
Nemeske Pty Limited in its capacity as trustee of the Nemes Family Trust held a meeting at which it was resolved to distribute the asset revaluation reserve to Mr and Mrs Nemes jointly, a copy of the minute is enclosed for your reference.
The above distribution was made by way of crediting the loan account of Mr and Mrs Nemes in the Nemes Family Trust.
Mr and Mrs Nemes would like to secure their loan to the Nemes Family Trust, and it is this matter that they require your assistance, as follows:-
Make a debenture over the shares in Aladdin Limited which the Nemes Family Trust owns as security for the loan by Mr and Mrs Nemes, together with signed blank share transfers.
Advise on the stamp duty and legal implications of registering the debenture with the register of deeds.
Advise Aladdin Limited of the debenture on its shares.
Advise on any related matter you consider relevant.
The purpose of these transactions is for Mr and Mrs Nemes to secure control of their assets or estate. Should you have any further questions with regard to the foregoing please contact the undersigned."
On 30 August 1995, a deed was made between Nemeske ("the Mortgagor") and Mr Nemes and Mrs Nemes ("the Mortgagee"). The recitals were as follows:
"A. The Mortgagor is the Trustee of the Nemes Family Trust (the 'Nemes Family Trust').
B. Aladdin Limited is a company incorporated in Norfolk Island and having its share register situated in Norfolk Island.
C. The company as such Trustee is the holder of Ten B Class Fully Paid shares in the capital of Aladdin Limited (the mortgaged premises).
D. The Mortgagor is indebted to the Mortgagee as joint tenants in the sum of Three Million Nine Hundred and Four Thousand Three Hundred Dollars Australian ($3,904,300.00) (the principal monies).
E. For the purpose of securing repayment of the principal moneys the Mortgagor has agreed with the Mortgagee to execute this Deed of Charge pursuant to which the Mortgagor charges the mortgaged premises as hereinafter set forth in favour of the Mortgagee as joint tenants."
Operative provisions included the following:
"1. The Mortgagor as Trustee as aforesaid hereby expressly charges in favour of the Mortgagee as joint tenants by way of first charge the mortgaged premises.
2. This charge shall be and operated as a first fixed charge over mortgage premises.
…
5. The Mortgagee [sic; scil "Mortgagor"] covenants with the Mortgagor [sic; scil "Mortgagee"] that the Mortgagor will pay to the Mortgagee the principal moneys on demand by the Mortgagee."
As recital C made clear, the "mortgaged premises" consisted of the 10 B class shares held by Nemeske in the capital of Aladdin which were, of course, trust property.
Clause (a)(ii) and clause (a)(iii) of the first schedule contain provisions with respect to income not paid or applied under clause (a)(i). It will be necessary to refer to those provisions in some detail presently.
Clause (b) of the first schedule is concerned with recording of determinations made under clause (a). Clause (c) says that the trustee's powers under clause (a) are subject to the rule against perpetuities and the rule against accumulations.
Clause (d) of the first schedule - the first provision in what I have called the second group - is concerned with the fate of the corpus or capital on the Vesting Day:
"The Trustee shall stand possessed of the capital of the Trust Fund on the vesting day for all or such one or more of the Specified Beneficiaries as are then living exclusive of the other or others in such shares and proportions as the Trustee in its absolute discretion may determine within a period of not less than thirty and not more than sixty days before the vesting date and in default of any such determination by the Trustee upon such trust for any issue of PATRICIA GAY NEMES per stirpes in equal shares and proportions as Tenants in Common as shall be living at the vesting day and in default of such issue, upon trust for any issue of all the Specified Beneficiaries per stirpes in equal shares and proportions as Tenants in Common as shall be living at the vesting day."
Clause (e) of the first schedule requires the trustee to give notice of any clause (d) determination to the persons named in clause 15.2. If any such person makes written objection:
"they shall nullify such determination and in their absolute discretion on or within the ten (10) days immediately preceding the vesting day alter or reaffirm by way of novation or refrain from making any such determination."
The reference here to "they", although in the plural, seems clearly enough to be a reference to the trustee.
Clause (f) of the first schedule (the first of the definition provisions) defines "the Vesting Day" as follows:
"'The vesting day' shall mean the day upon which shall expire the period of sixty years after the execution of this deed or the period of twenty-one years from the death of the last survivor of the descendants now living of His Late Majesty King George VI or such earlier date as the Trustees may by resolution appoint, whichever shall first occur provided however that in respect of any such appointment by the Trustee of a vesting date, such appointment shall be made orally and the sole and conclusive evidence thereof shall be constituted by the Trustee in a record in writing of such resolution having been made by them, such record to be signed by the Trustee."
Clause (g) of the first schedule defines the "Specified Beneficiaries". They are Mr Nemes, Mrs Nemes, their daughter Patricia, eight other named persons, any child, children, grandchild, grandchildren or other issue of Patricia Nemes, any child, children, grandchild, grandchildren or other issue of six of the eight named persons and the husband or widower of Patricia Nemes.
The provisions in the body of the deed are largely concerned with powers of the trustee. Clause 3 deals with investment powers. Clause 4 confers a range of powers. Of particular relevance, for present purposes, is clause 4(b) to which reference has already been made. Clauses 4(a) and 4(b) are as follows:
"The Trustee may from time to time exercise any one or more of the following powers that is to say: -
(a) During the minority of or pending the vesting in any child who may be contingently entitled to apply the whole or such part or parts as the Trustee shall think fit of the income of the contingent presumptive discretionary or expectant share of such child for or towards his or her maintenance education benefit or advancement in life and with power to pay the same to the parent or parents or guardian or guardians of such child for the purposes aforesaid or to any other person whom the Trustee shall think fit without the Trustee being responsible to see to the application thereof.
(b) At any time or times to advance or raise any part or parts of the whole of the capital or income of the Trust Funds and to pay or to apply the same as the Trustee shall think fit for the maintenance education advancement in life or benefit of any of the Specified Beneficiaries PROVIDED HOWEVER that where it is intended to advance or raise and pay or apply any part or parts or the whole of the capital in excess of Ten Thousand Dollars ($10,000) for the advancement in life or benefit of any one or more of the Specified Beneficiaries the Trustee shall give written notice of such intention to all those contingent presumptive discretionary or expectant beneficiaries who may exercise the powers conferred by Clause 15.2 of this instrument at least thirty (30) days prior to such advancing or raising and payment of application of such capital."
Next, clause 15.2 should be set out:
"In addition to the abovenamed modes EMERY GEORGE NEMES or in the event of his death or mental incapacity MADELEINE NEMES and in the event of her death or mental incapacity PATRICIA GAY NEMES and in the event of her death or mental incapacity ILONA HEGYI and in the event of her death or mental incapacity JOHN JULES FISCHER, ROBERT WILLIAM FISCHER, ANDREA MUSSER SYLVIA BETT FISCHER surviving for the time being, jointly shall have the power to remove replace or appoint in addition a trustee or trustees at any time. Such power shall be exercised in writing signed by the said EMERY GEORGE NEMES or MADELEINE NEMES or PATRICIA GAY NEMES or ILONA HEGYI or the survivors for the time being of JOHN JULES FISCHER, ROBERT WILLIAM FISCHER, ANDREA MUSSER SYLVIA BETT FISCHER jointly, respectively."
The opening words of clause 15.2 are explained by the fact that clause 15.1 creates a separate power to replace the trustee.
Finally, it is necessary to set out clause 17:
"At any time and from time to time prior to the vesting date EMERY GEORGE NEMES or in the event of his death MADELEINE NEMES or in the event of her death PATRICIA GAY NEMES may subject as hereinafter provided in his or their absolute and unfettered discretion notwithstanding anything to the contrary herein contained by writing under hand or by deed or by an oral resolution vary such trusts or provisions hereof as he may determine in any manner whatsoever provided however that no such power of variation shall be exercised so as to confer any share or further share or benefit or further benefit as the case may be on or interest in or under, the Trust Funds on the Settlor or the Trustee or EMERY GEORGE NEMES or MADELEINE NEMES or PATRICIA GAY NEMES or their respective estates and executors administrators or successors or upon any person other than one of the Specified Beneficiaries and provided further that no such power of variation shall extend to the trusts hereof in relation to the income of the Trust Fund derived up to the date of exercise of such power of variation and provided further that any such power of variation shall be exercised subject to the rule of law known as the Rule against Perpetuities' and the rules of law in relation to accumulation of income and so that the trusts hereof as so varied shall be read subject to and so as not to contravene such Rules against Perpetuities and the Rules of Law in relation to accumulation of income."
The trust deed is not a model of the draftsman's art. Among several inelegancies is a practice of defining a particular term in words commencing with upper case letters or with lower case letters and then using those words with the initial letters sometimes in the case corresponding with that used in the definition and sometimes in the other case. In the discussion that follows, defined terms will be rendered with upper case initial letters regardless of the way in which they actually appear in the deed, unless a provision of the deed is being quoted verbatim.
The primary judge then turned to the question whether, as a matter of fact, the accounting entries of 30 September 1994 - involving the recording, under the heading "Non-current Liabilities", of a $3,904,300 "loan" to Mr and Mrs Nemes - were sufficient to give effect to the trustee's resolution to make a "distribution" of $3,904,300 to those persons. He noted that Mr Peter Elliott's letter of 26 April 1995 to Mr d'Apice stated that the distribution "was made by way of crediting the loan account of Mr and Mrs Nemes"; and that this was consistent with the 30 September 1994 accounts. His Honour also noted that the respondents adduced no expert accounting evidence to suggest that Mr Elliott's statement in the letter of 26 May 1994 was mistaken or that the 30 September 1994 accounting entries were not effective "to distribute capital to Mr and Mrs Nemes".
The judge referred to the fact that a trustee has power to borrow funds for the purposes of the trust even if there is no express power in the trust instrument and that a particular (but limited) power to raise money by "mortgage of all or any part of the trust property" is conferred by s 38 of the Trustee Act 1925 (NSW). The absence of evidence that the trustee actually paid cash to Mr and Mrs Nemes was not seen by his Honour as "an impediment to the conclusion that a distribution was made and an indebtedness created in the manner I have set out". He was of the opinion that, having regard to what was said in Wood v Inglis [2009] NSWSC 601 (and, on appeal, in Clark v Inglis, above), a trustee may make a trust distribution by crediting the beneficiary's loan account.
For these reasons, the primary judge concluded that the actions of 23 September 1994 were effective to cause Nemeske, as trustee, to be indebted to Mr and Mrs Nemes to the extent of $3,904,300.
Although, as I have said, the clause 4(b) power is a power to earmark or assemble income or capital for use and to use it, the availability of the power at any given time does not depend on there being in the trustee's hands at that time cash (or equivalent) of the relevant amount. A hypothetical example will illustrate the point. Assume that trust assets at the start of a given year consist wholly of houses let to tenants and that, during that year, rents of $1 million are received and represent the whole of the income of the year. Assume further that, on the last day of the year, $1 million is spent on buying another house so that, at the end of the year, the trust assets are again wholly real property. If the trust instrument directs that each year's income be applied in a particular way, the trustee is duty bound to apply $1 million in that way; and the fact that that sum is not readily available in cash does not alter the duty.
The central question in the present case is whether the trustee's determination of 23 September 1994 that "the entire reserve" - that is, the whole of the unrealized accretion recognized and quantified by the process of revaluation - be "distributed to" Mr and Mrs Nemes was, as contemplated by clause 4(b), a determination that that capital or income should be advanced or raised and paid or applied by allocation to Mr and Mrs Nemes. Any temptation simply to dismiss the determination as a misguided attempt to apply company law concepts in a quite different trust setting must be resisted. It is necessary to decide whether words obviously drawn from a company law context had meaning in the trust context in which they were employed.
It is instructive to refer, at this point, to the decision of the Court of Appeal of Western Australia in Chianti Pty Ltd v Leume Pty Ltd [2007] WASCA 270; 35 WAR 488. That case concerned a discretionary trust. The trust deed empowered the trustee to "pay, apply or set aside" the income of any accounting period "for any one or more of the General Beneficiaries" in existence at the time of the trustee's determination. The deed provided that a determination to pay, apply or set aside income might effectually be made and satisfied by placing the amount to the credit of the relevant beneficiary in the books of the trust. It was also stated that any amount set aside for any beneficiary should cease to form part of the trust fund and was to be held by the trustee as a separate trust fund on trust for that person absolutely.
In respect of each of several years, the trustee resolved that so much of the year's income as had not been otherwise paid or applied was applied for the benefit of stated persons in stated amounts, with the application being "effected by crediting the said amounts to such beneficiaries in the books of the trust". It was held that the effect of each such resolution was that the trustee held the amount relevant to each named person upon trust for that person absolutely. The person's interest in the sum was not subject to any contingency or condition which might defeat the person's entitlement. It was vested both in interest and in possession. The particular provisions of the trust deed concerning crediting in the books of the trust played some part in that decision.
It is clear, however, that income may be "applied" by a process of crediting even in the absence of provisions of the kind just mentioned. In Re Baron Vestey's Settlement; Lloyds Bank Ltd v O'Meara [1951] Ch 209, the trust instrument required trustees to "pay or apply the income" of the trust fund for the support or benefit of any one or more of named persons, "such payment or application" to be made in such shares, in such manner, and on such terms, as the trustees should in their discretion think fit. The trustees resolved that income should "belong to" certain beneficiaries in certain proportions or amounts; and it was held that the trustees had thereby "applied" that income. Sir Raymond Evershed MR said (at 219 - 220):
"[I]s a provision, to take John Vestey's case, that £12,000 shall belong to John Vestey an application for his benefit? If the question be fairly posed in that way, it seems to me impossible to give any but an affirmative answer. It is surely for his benefit that the trustees should resolve that £12,000, which it was in their discretion to apply to any one of a considerable number of persons, should belong to John Vestey. Therefore, with all respect to Harman J, unfettered I think by In re Peel, I come to the conclusion that the first part of this resolution did amount to an application for the benefit of the infants."
The effect of that decision was stated as follows by North P of the New Zealand Court of Appeal in Commissioner of Inland Revenue v Ward [1970] NZLR 1 at 15:
"I read Vestey's case therefore as laying down the principle that if a trustee takes the necessary step of exercising a power to 'pay or apply' income for the benefit of infants, who only have a contingent interest in the income, it is immaterial whether the income is immediately used for the benefit of the infants and is sufficient if it is allocated to them in terms which make the parts of the income so allocated the separate property of each infant."
As Buss JA noted in Chianti Pty Ltd v Leume Pty Ltd (above) at [72], the decision in Inland Revenue Commissioner v Ward was that a resolution deliberately arrived at and recorded is of itself sufficient to effect an immediate vesting of a specific part of the trust income. The trustee's determination in Inland Revenue Commissioner v Ward was that a particular part of the income be held to the credit of four contingent beneficiaries in equal shares.
In the present case, Nemeske, as trustee, expressly identified an unrealized accretion in value arising from revaluation of the Aladdin shares and therefore a particular share of the value of the trust assets. It then determined, by the resolution of 23 September 1994, that that accretion or share should be used immediately (that is, "advanced") rather than being left to be dealt with in the fullness of time. The accretion or share formed part of either the "capital" or the "income" of the "Trust Funds". The trustee's resolution that the identified portion of the "capital" or "income" (described, perhaps inaptly, as the "asset revaluation reserve" that stood in the books at $3,904,300) be "distributed to" Mr and Mrs Nemes caused capital or income to be dealt with in a way contemplated by clause 4(b), that is, by being "applied" for the benefit of those two persons. The specific setting aside or appropriation that the resolution effected by means of the words "be distributed to" - which carried precisely the same connotation as the words "shall belong to" in Vestey's case - did not result in any cash payment or change in ownership of specific property. But it did cause the trustee's obligations with respect to the trust assets to change so that, to the extent of $3,904,300, the trustee was required to recognize and accommodate an immediate and absolute vested interest of Mr and Mrs Nemes.
There is nothing anomalous about the concept that a trust fund is held, to an extent defined in money terms, for one beneficiary to the exclusion of others even though the assets in the trustee's hands do not include money of the relevant amount. It was held in MSP Nominees Pty Ltd v Commissioner of Stamps [1999] HCA 51; 198 CLR 494 at [8] that redemption of units of a unit trust under a provision fixing a "price" for the redemption was a process that effectuated, fulfilled or realised the unitholder's rights and interests in respect of the trust fund and caused that unitholder to have "at least, an absolute right to the price for the redemption". The trustee thus came to hold the trust fund upon trust to pay thereout to the particular beneficiary the amount to which that beneficiary had an absolute right; and that position prevailed regardless of the nature and composition of the trust assets. As Brennan CJ, Toohey, Gaudron, McHugh and Gummow JJ observed in Chief Commissioner of Stamp Duties (NSW) v Buckle [1998] HCA 4; 192 CLR 226 at [48]:
"The entitlement of the beneficiaries in respect of the assets held by the trustee which constitutes the 'property' to which the beneficiaries are entitled in equity is to be distinguished from the assets themselves."
In summary, I am of the opinion that, subject to the point concerning the proviso to clause 4(b) about to be addressed, Nemeske, on 23 September 1994, advanced and applied capital or income of the Trust Funds to the extent of $3,904,300 by due exercise of the power conferred by clause 4(b).
The judge considered it unlikely that the parties to the trust deed intended that notice under the clause 4(b) proviso should be given to all the persons named in clause 15.2 (or their legal representatives) who were no longer qualified to exercise the power by reason of their death or mental incapacity. The reference in clause 4(b) to the person who "may exercise the power", combined with the succession of "power holders" prescribed in clause 15.2, suggested to the judge that the intention was that the proviso should require notice only to the current "power holder" as that person (or those persons) would be the only party (or parties) authorised to remove the trustee at the relevant time (if that was thought appropriate) following revelation of the trustee's intended application of capital.
Buss JA next quoted from the judgment of Griffith CJ in R v Brown [1912] HCA 6; 14 CLR 17 (at 25):
"The action for money had and received lay whenever the defendant had received money which in justice and equity belonged to the plaintiff and when nothing remained to be done except pay over the money. Even in the case of an express trust, if nothing remained to be done but pay over money, the trustee by his conduct, as for instance by admitting that he had money to be paid over, might make himself liable to this action: See Pardoe v Price (16 M & W 451), at p 458. When money is paid by one person to another to be retained by him until the happening of a given event and no longer, an implied obligation arises to repay it when that event happens. This may be called a 'trust' in one sense. But it is none the less a legal obligation to pay the money, and may be enforced as such. I do not know any definition of debt that does not include such an obligation."
Buss JA also referred to the following statement by Gummow J in Roxborough v Rothmans of Pall Mall Australia Ltd [2001] HCA 68; 208 CLR 516 (at [67]):
"With respect to express trusts it was settled by 1852, when Edwards v Lowndes (1852) 1 E & B 81 at 89 [118 ER 367 at 370]. was decided, that it was only at the stage when there remains nothing to the trustee to execute except the payment over of money to the beneficiary, or the trustee admits the debt, that an action for money had and received might lie at the suit of the beneficiary against the trustee; in other respects, in the courts of law the trustee was treated as the absolute owner and the beneficiary's remedy was exclusively in a court of equity which might give effect to equitable set-offs and other equitable defences available to the trustee. The trust which had not been wholly performed was treated as analogous to the 'open' contract, that is to say, one not discharged; at that earlier stage, the action for money had and received did not lie]."
A footnote to that passage approves the following proposition concerning the action for money had and received stated in A F Rath, Principles and Precedents of Pleading in the Supreme Court of New South Wales at Common Law (1961, The Law Book Co of Australasia Pty Ltd) at 28:
"A cestui que trust or legatee may sue the trustee or executor under this count where the latter admits that he holds trust moneys or a legacy as a debt payable to the former."
In order for an action at law to be maintainable by the beneficiary against the trustee, something more is necessary than the circumstance that the latter is under an unconditional and absolute equitable obligation to account to the former. It must be found that the trustee has "stated an account" or "admitted himself to the plaintiff that he held any sum of money in his hands payable to him absolutely" (these are words used by Pollock CB in Bartlett v Dimond (1845) 14 M & W 49; 153 ER 385). In Chianti Pty Ltd v Leume Pty Ltd itself, Buss JA held that relevant admissions had been made by the trustee in annual financial statements. The factual circumstances (which concerned distributions by the trustee of the SJRF Trust to the trustee of the RF Trust) were summarised by his Honour as follows (at [30]):
"In summary, no funds have been paid to the respondent in its capacity as trustee of the RF Trust, or in any other capacity. According to the financial statements, although the relevant amounts have been distributed, they remain under the control of the appellant as trustee of the SJRF Trust. The notes to the financial statements show that the funds distributed to the RF Trust were accumulated in a 'Beneficiaries' Loan Account' for the financial years ended 30 June 1996 and 30 June 1997, in a 'Beneficiaries' Current Account' for the financial years ended 30 June 1998 through to 30 June 2002, and as an 'Unpaid Beneficiary Entitlement' thereafter."
Buss JA's opinion (at [77]) was that, when the description "Unpaid Beneficiary Entitlement" in the financial statements was read in conjunction with the trust deed provision concerning distributions and the evidence of what had actually been done with respect to such distributions, there was an admission or acknowledgement of an obligation to pay on demand. His Honour added the following important observation (also at [77]):
"Although it is unnecessary to determine this point, my examination of Edwards v Lowndes and the other cases in the line of authority referred to in Meagher, Gummow & Lehane's, Equity Doctrines & Remedies (4th ed, 2002) [1-215] and Gummow J's reasons in Roxborough [67], does not indicate that it is essential, for there to be a binding admission in relation to an amount owing by a trustee to a beneficiary, that the relevant amount is held as, or represented by, cash at bank or some other monetary sum when the alleged admission is made."
That, it seems to me, is entirely consistent with the nature of the action for money had and received. The action is not a proprietary action by which a plaintiff seeks specific restitution of or access to a fund. It is a personal action in which the plaintiff sees a money judgment against the defendant regardless of the nature and state of the defendant's assets or even if he or she has none.
This is not a case in which a charge was created to secure a loan that was never made. The charge was created in August 1995 in order to secure what was said to be pre-existing indebtedness of $3,904,300. The question is whether that indebtedness then existed. The answer, having regard to the principles explained in Chianti Pty Ltd v Leume Pty Ltd (above) is that, before August 1995, Nemeske as trustee had, by book entries made in consequence of the action of 23 September 1994, admitted and acknowledged itself to be indebted to Mr and Mrs Nemes in the sum of $3,904,300 and that, because an action for money had and received was accordingly maintainable, there was in truth a pre-existing debt as the charge recited.
The primary judge took the view that, because clause 7(a) identified events upon which the principal moneys "shall at the option of the Mortgagee . . . immediately become payable without the necessity for any demand or notice upon the Mortgagor", the clause indicated that, in the absence of both such an event and "demand or notice upon the Mortgagor", no cause of action in debt existed.
That view of matters is, in my respectful opinion, incorrect. Clause 7(a) obviously identifies circumstances in which the principal moneys were to be payable without any demand by the mortgagee. But that served merely to reinforce the nature of the clause 5 debt as one which, in the ordinary course of events, was payable on demand. Clause 7(a) had that reinforcing effect because it impliedly confirmed the need for demand unless one of the specified events had happened. When the two clauses are considered together, the debt is seen to be one that was payable on demand or on earlier occurrence of one of the clause 7(a) events.
These matters go, however, only to the question of the time at which or event upon which the debt was payable. They do not go to the existence of the debt or, more precisely, of the cause of action in debt. It is relevant to refer, in this connection, to what was said by Dixon CJ, McTiernan and Taylor JJ in Young v Queensland Trustees Ltd [1956] HCA 51; 99 CLR 560 at 566:
"A loan of money payable on request creates an immediate debt. Speaking of a promissory note payable on demand Parke B in Norton v Ellam (1837) 2 M & W 463; 150 ER 839 at 840, said: 'It is the same as the case of money lent payable upon request, with interest, where no demand is necessary before bringing the action. There is no obligation in law to give any notice at all; if you choose to make it part of the contract that notice shall be given, you may do so. The debt which constitutes the cause of action arises instantly on the loan. Where money is lent, simply, it is not denied that the statute begins to run from the time of lending'."
The members of the High Court said that this had been settled by the end of the seventeenth century. They referred to Collins v Benning (1700) 12 Mod 444; 88 ER 1440 where, in an action of indebitatus assumpsit, the plaintiff declared on a promise to pay on demand, the defendant pleaded the Statute of Limitations and the plaintiff demurred to the plea on the ground that no action was maintainable until demand was made. The decision of the court was:
"If the promise were for a collateral thing, which would create no debt till demand, it might be so; but here it is an indebitatus assumpsit, which shews a debt at the time of the promise, therefore the plea is good."
The primary judge was, in my opinion, correct when he held that the debt created by the clause 5 covenant was payable on demand but incorrect in his view that, in the absence of demand, no cause of action in debt accrued to Mr and Mrs Nemes. The co-existence of clause 5 and clause 7(a) served simply to confirm that the clause 5 covenant was a covenant to pay on demand to which the principle in Young v Queensland Trustees Ltd (above) applied. The relevant cause of action accrued to Mr and Mrs Nemes on 30 August 1995 and became statute barred in August 2007.
It was submitted at trial that, as the debt allegedly acknowledged was a debt to Mr and Mrs Nemes and they were directors of Nemeske when the 30 June 2003 accounts were prepared, the accounts (and the declaration) did not constitute confirmation of the debt. That submission was advanced on the footing that accounts of a defendant company do not provide confirmation in circumstances where the plaintiff is a director or officer of that defendant and therefore in a position to control the preparation of the accounts. The submission was based on Re Coliseum (Barrow), Ltd [1930] 2 Ch 44 and Re Transplanters (Holding Company) Ltd [1958] 1 WLR 822. The primary judge noted that it had there been held that entries in a company's balance sheet did not constitute an acknowledgment of debt by the company because, in the first case, the relevant confirmation was as to directors' fees and had been made by the board of directors and, in the second case, the acknowledgement had been made by the director who claimed to have lent money to the company. In each case case, the interest that the relevant directors had in the transaction recorded in the books precluded treatment of the content of the accounts as an acknowledgement by the company itself.
The primary judge held (at [190] - [191]) that the case before him was distinguishable:
"In this case, the circumstances are different. At the time that the Trustee's accounts for the financial year ending 30 June 2003 were published it had four directors: Mr and Mrs Nemes, Mr Moses and Mr Loblay. The accounts were certified to be correct by Mr Moses and Mr Loblay, and not by Mr or Mrs Nemes. Neither of Mr Moses or Mr Loblay had any interest in the existence or otherwise of any indebtedness of the Trustee to Mr and Mrs Nemes.
In those circumstances, I see no reason why I should not treat the acknowledgment in the balance sheet of the debt as one made by the Trustee and thus as a confirmation of the debt for the purposes of s 54 of the Limitation Act."
Nemeske contends on appeal that this conclusion was erroneous.
The Directors' Declaration included in the financial statements for the year ended 30 June 2003 is dated 25 May 2004. At that point, as the judge found, the directors were Mr Nemes (appointed 15 July 2003), Mrs Nemes (also appointed 15 July 2003), Mr Loblay and Mr Aslan Moses. The appellants contend that Mr and Mrs Nemes were, at all material times, in a position to control what was recorded in the accounts. They rely particularly on evidence of Mr Loblay that he was not involved in the day-to-day management of Nemeske, that he did not know who prepared the accounts or who determined that they were correct and that it was Mr Nemes who exercised control over the company at all times. The appellants submitted that it should be inferred that the content of the financial statements was determined by Mr Nemes.
It is true that the Directors' Statement forming part of the 30 June 2003 accounts carries the signatures of Mr Loblay and Mr Moses only, but the following appears immediately before their signatures:
"This declaration is made in accordance with a resolution of the Board of Directors of the trustee company."
That may mean that Mr Nemes and Mrs Nemes, the other two directors in office when the Directors' Statement was signed, were, as it were, implicated in the signing of the statement and therefore in the formulation of the content of the accounts in such a way as to preclude treatment of that content as an acknowledgement by the company. In that connection, Mr Nemes's estate drew attention to the decision of the High Court in Stage Club Ltd v Millers Hotels Pty Ltd [1981] HCA 71; 150 CLR 535. It was there held that directors who signed a company's balance sheet, although they were thereby performing a statutory function, had done so as agents of the company. Gibbs CJ referred to a number of English cases that had proceeded on the assumption that the directors signed as agents for the company, the matter having apparently been regarded as too clear to warrant discussion. Two balance sheets were relied on. The later was signed by two directors of whom one was the person seeking to rely on the company's acknowledgement of debt. The earlier balance sheet, however, was signed by two directors of whom neither was the person seeking to rely on the acknowledgement. Wilson J (with whom Aickin and Murphy JJ agreed) noted that the principles in Re Coliseum (Barrow), Ltd (above) and Re Transplanters (Holding Company) Ltd (above) might preclude reliance on the later document. However, no such difficulty attended reliance on the earlier balance sheet which was not signed by the director who claimed to be a creditor. The statement was regarded as signed on behalf of the directors, with the board having "collective agency . . . in the management of the company", exercisable by the signatures of two of its members. The document, when signed, had the character of the company's document.
Let it be assumed that, as the appellants contend, Mr and Mrs Nemes were party to the formulation of the financial statements to which the Directors' Declaration referred - indeed, that Mr Nemes was their architect. That circumstance cannot gainsay the proposition that the signatures of Mr Moses and Mr Loblay as directors were effective to cause the company to be bound by the acknowledgement in the financial statements. According to the Directors' Declaration, the financial statements presented the financial position fairly and the declaration itself had been made in accordance with a resolution of the board of directors. The declaration thus made it clear that a resolution of the board of directors had confirmed the existence, at 30 June 2003, of a debt of $3,904,500 to Mr and Mrs Nemes. Under the constitution of Nemeske (which adopted, with minor amendments, the provisions in Table A in Schedule 3 to the Companies (New South Wales) Code), a director was precluded from voting in respect of "any contract or proposed contract with the company in which he is in any way, whether directly or indirectly, interested or in respect of any matter arising out of such a contract or proposed contract". It was further provided that, if a director voted in contravention of that regulation, "his vote shall not be counted".
Acknowledgement in 2003 of the indebtedness of Nemeske to Mr and Mrs Nemes sourced in the covenant in the 30 August 1995 deed was, of its nature, a matter "arising out of" the contractual promise of the company to the individuals represented by that covenant, with the result that, if they had voted on the resolution, their votes would not have been counted. That, coupled with the fact that Mr Moses and Mr Loblay signed the Directors' Declaration made in accordance with a resolution of directors, warrants an inference that not only the signing of the Directors' Declaration but also the decision-making of the board of directors that underlay the declaration and the financial statements which it verified were matters dealt with by Mr Moses and Mr Loblay and that any involvement of Mr and Mrs Nemes was legally inoperative.
For these reasons, in my view, the primary judge's decision on this part of the case was correct and must be upheld. By virtue of s 54 of the Limitation Act, the limitation period applicable to the cause of action on the covenant in clause 5 of the 30 August 1995 deed began to run afresh from 25 May 2004.
The trustee obviously did not make any determination not less than 30 nor more than 60 days before 24 June 1992. It follows that, if that were the Vesting Day, no primary group of beneficiaries then existed. Patricia Nemes died in 1980 unmarried and without children. The first default group, consisting of her issue, therefore did not exist at 24 June 1992 or at 3 May 1994 (or at any other time). Some of the named individuals in the clause (g) definition of "Specified Beneficiaries" had children at 24 June 1992, so that the second default group may be taken to have existed at that time and at 3 May 1994.
What the evidence does not disclose is whether there was any change in the composition of the second default group (issue of Specified Beneficiaries) between 24 June 1992 and 3 May 1994. Such change could have occurred because, during that period, issue of one or more Specified Beneficiaries came into being or died.
There is a question whether the clause 17 power of amendment was sufficient to allow to be destroyed and overridden the expectations of the "Specified Beneficiaries" as to corpus, based on clause (d), as they existed immediately before 3 May 1994. There is a general principle that powers of appointment are exercisable prospectively only. Thus, if property is held for a wife for life and, after her death, for such of the children of her marriage as her widower should appoint and no appointment is made for a long time after her death, the widower cannot, by a delayed exercise of the power, retrospectively divest income from the default destination it reached in the absence of earlier exercise of the power. In In re Master's Settlement [1911] 1 Ch 321, it was held that, until the default right to receive income was intercepted by the donee of the power of appointment, the trustees were bound to pay it to those enjoying the default right.
The power under consideration here, however, is a power of variation or amendment; and it is a power that came into existence upon the execution of the deed and therefore at the same time as all rights, interests and expectations that arose from and had their source in provisions of the deed.
The capacity of such a power to effect deprivation of accrued or vested rights is suggested by cases about the constitutions of companies and like bodies. In Pepe v City and Suburban Permanent Building Society [1893] 2 Ch 311, an early case of that kind, the plaintiff, a holder of fully paid shares, had given notice of withdrawal under the rules. Subsequently, but before the plaintiff received repayment, the society altered the rules to give the directors power to pay off in priority members not having more than £50 to their credit. The alteration was held valid even though in some sense it took away the vested right of the plaintiff. Chitty J said (at 313 - 314):
"It was part of the plaintiff's contract with the society that the rules might be altered . . . . The plaintiff's counsel says rightly that when the plaintiff gave notice of withdrawal he had a vested right to be paid according to the then existing rule, but this does not settle the question, because there existed also against him the power of altering the rule, so that the question assumes this form, that he had a vested right liable to be divested by any later rule they passed. It may be wondered that the society should have such a power, but it may be greatly for the benefit of all concerned to make alterations."
The same principle was recognised and applied in Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656 (creating a lien on shares), Sidebottom v Kershaw Leese & Co Ltd [1920] 1 Ch 154 (expelling a shareholder) and Shuttleworth v Cox Brothers & Co (Maidenhead) Ltd [1927] 2 KB 9 (disqualifying a director) - cases to which Latham CJ referred in Peters' American Delicacy Co Ltd v Heath [1939] HCA 2; 61 CLR 457 at 480 when stating the principle that "where the rights of members of the company depend only upon the articles it is possible to alter the rights of members or of some only of the members by altering the articles"; and "[t]he fact that an alteration prejudices or diminishes some of the rights of the shareholders is not in itself a ground for attacking the validity of an alteration". Latham CJ also said:
"Any other view would, in effect, make unalterable and permanent any articles of association which conferred rights upon a class of shareholders, or possibly upon any shareholder, if they or he desired that those rights should continue to exist unchanged. It is plainly not the law that the fact that an alteration of articles alters the rights or prejudices the rights of some shareholders is sufficient to prevent the alteration from being validly made."
In Gra-Ham Australia Pty Ltd v Perpetual Trustees WA Ltd (1989) 1 WAR 65, the Full Court of the Supreme Court of Western Australia held that the same principle applied to a power of modification conferred by a unit trust instrument and exercisable by the trustee and manager of the unit trust scheme with the approval of a resolution of unitholders. In purported exercise of that power, an alteration was made to the provision specifying the amount to be paid to a unitholder upon redemption of the holder's units. A sum based on current realizable value was substituted for one based on value at a date at least seven days before the redemption request was made. Several unsatisfied redemption requests existed at the time the modification was made. If the action of the trustee and manager was effective to alter the rights of the holders who had made those requests, they would receive redemption proceeds substantially less than those receivable under the provisions in force when they made their requests.
The decision that the alteration in question was duly made in exercise of the relevant power proceeded on the footing that the power was contractual in nature. Malcolm CJ said (at 85):
"If, upon the proper construction of the contract, the power of amendment includes a power to amend so as to defeat accrued rights, an amendment made in the bona fide exercise of the power will be valid and binding in accordance with its terms."
In the present case, there is no basis on which the power to amend can be regarded as a contractual power: see, for example, AF & ME Pty Ltd v Aveling (1994) 14 ACSR 499.
It may be accepted that a power of amendment can be framed in such a way that bona fide exercise of it will defeat accrued but unsatisfied rights. But an amendment cannot take away (or somehow call back) an interest in property that has already passed or been created. I take this to be the import of Young CJ in Eq's observation in Global Custodians Ltd v Mesh [2002] NSWSC 47 (at [122]) that the exercise of a power to amend cannot affect any vesting which has already taken place, since the power to alter the trusts is itself an interest in the trust and its exercise cannot affect an already vested interest.
There is, in my view, no need to pursue these matters. The power of variation conferred by clause 17 is comprehensive. There is no generally expressed prohibition upon retrospective variation. But there is, as counsel for the respondents pointed out, a specific limitation which is of particular relevance to the matter at hand. The power of variation is qualified by the following proviso to clause 17 itself:
"and provided further that no such power of variation shall extend to the trusts hereof in relation to the income of the Trust Fund [sic] derived up to the date of exercise of such power of variation."
The message conveyed by this proviso is that the power to vary does not extend to any variation that alters the trusts in relation to income of the trust estate derived before the power is exercised - in this case, 3 May 1994. It is therefore necessary to ascertain the trusts applying to income derived up to that date, as they emerge from the unamended terms of the trust, and to see whether different trusts would apply to that income if the variation purportedly made by the 3 May 1994 resolution were effective to cause 24 June 1992 to be the Vesting Day.
The trusts with respect to income are defined by clause (a) of the first schedule referred to at [25] to [27] above. That clause (a) consists of three sub-clauses. Clause (a) as a whole commences with the words "Until the vesting day" and is in these terms:
"Until the vesting day to hold the Trust Fund upon trust as to the income thereof:
(i) to pay or apply the whole or any part of such income for or towards the maintenance education advancement or benefit of all or such one or more of the specified beneficiaries exclusive of the other or others of them in such shares and proportions as the Trustee in its absolute discretion may from time to time throughout any year determine.
(ii) Any such income not paid or applied pursuant to sub-clause (i) hereof for all or such one or more of the Specified Beneficiaries exclusive of the other or others of them in such shares and proportions as the Trustee in its absolute discretion may from time to time throughout any year determine shall be held by the Trustee upon the trusts herein declared whereupon the trusts directions powers and discretions herein expressed shall apply to the said income not so paid or applied as fully as if the same had been paid transferred or conveyed to the Trustees at the time of the execution of these presents and the same shall thereafter be deemed to be included in the meaning of the term 'the Trust Funds' wherever herein used.
(iii) In default of any determination having been made by the Trustee for payment application or distribution of the whole or for any part of the income of the Trust Funds (hereinafter called 'the undistributed income') as hereinbefore provided for, for the then current year ending on the thirtieth day of June prior to midnight on the twenty-ninth day of June of that year or within such further time as the Commissioner of Taxation may approve in respect of a determination for the year so ended pursuant to Section 101 of the Income Tax Assessment Act 1936-1971 or any other relevant section or any rule or regulation in that respect or where a determination has been made under sub-clause (ii) of this clause but the accumulation of any balance as provided therein would be void by reason of contravening the rule of law in respect of accumulation of income, then the Trustee shall hold the undistributed income upon trust for such of those contingent presumptive discretionary or expectant Beneficiaries who may exercise the powers conferred by clause 15.2 of this instrument and as shall be living at the end of such year and if more than one as tenants in common in equal shares."
The drafting of these provisions is not ideal. It seems clear enough, however, that sub-clause (i), although not referring in explicit terms to the income of a particular period, is concerned with the income of a year ending on 30 June. I say this for three reasons. First, the trustee determination with respect to income for which sub-clause (i) makes provision is one made "from time to time throughout any year". Secondly, sub-clause (iii) is concerned with the situation where the trustee has not made any determination for payment or distribution of the whole or any part of the income "for the then current year ending on the thirtieth day of June". Thirdly, income, of its nature, necessarily belongs to a period.
Understood in this way, sub-clause (i) permits, but does not compel, the trustee to determine how the income of a given year ending on 30 June is to be paid or applied. We do not know whether Nemeske, as trustee, made any such determination in respect of income of the year to 30 June 1993, being the full financial year that fell between 24 June 1992 and 3 May 1994. If it did not, a provision of clause (a) other than sub-clause (i) operated in respect of the income of that year.
The question whether, in the absence of any sub-clause (i) determination, it was sub-clause (ii) or sub-clause (iii) of clause (a) that applied to the income of the year to 30 June 1993 is one of some difficulty. If there was no such determination, the whole of that income was, as referred to in sub-clause (ii), "income not paid or applied pursuant to sub-clause (i) hereof"; in addition, however, the situation in relation to the year's income was as described by the opening words of sub-clause (iii): "In default of any determination having been made by the Trustee . . . as hereinbefore provided for". If sub-clause (ii) operated upon the income of the relevant year, that income was, in effect, added to corpus and became part of the subject matter to which clause (d) of the first schedule applied. If, on the other hand, it was sub-clause (iii) that applied to that income, the trustee held the income, pursuant to that sub-clause, upon immediate trust for the persons identified in sub-clause (iii) itself. On either basis, the income of the year in question ceased to be at the discretionary disposal of the trustee and particular persons obtained expectant or more immediate interests in it.
Let it be assumed that, by virtue of the resolution of 3 May 1994, the terms of the trust were modified so that, from that point, all references to the Vesting Day became references to 24 June 1992. On that footing, clause (a) of the first schedule, as operative on and after 3 May 1994, stated that the income of the Trust Fund was held "until" 24 June 1992 (but not thereafter) on the trusts set out in sub-clauses (i), (ii) and (iii). The only income that it was possible for the trustee to hold "until" 24 June 1992 was income derived before that date. A person cannot hold "until" yesterday something that the person obtains today. It follows that, if the resolution of 3 May 1994 caused 24 June 1992 to be the Vesting Day, the terms of the trust, in the varied form in which they applied after 3 May 1994, contained no provision defining the trusts upon which income derived after 24 June 1992 was held, including the income of the year to 30 June 1993.
Let it be further assumed that a particular person claimed that, because the trustee made no sub-clause (i) determination in respect of the income of the year to 30 June 1993, he or she was entitled, as one of several tenants in common in equal shares pursuant to sub-clause (iii), to part of the income of that year. If that claim was made on 1 January 1994, the person concerned could argue with some degree of confidence that, because the Vesting Day lay in the future both at the end of the relevant year and at the time of the making of the claim, sub-clause (iii) applied to the income of the year. But if the claim was made on 1 January 1995 and, at that point, the action of 3 May 1994 had caused the Vesting Day to be 24 June 1992, the person concerned would be forced to accept that, because clause (a) as a whole applied to income only "until" 24 June 1992, sub-clause (iii) of that clause did not give him or her any interest in income of the year to 30 June 1993.
The terms of the trust, as they stood immediately before 3 May 1994, defined the trusts applicable to income "until" the earlier of 24 June 2034 and the end of an unascertained Royal life but, as supposedly varied on 3 May 1994 and in force thereafter, made no provision as to the trusts applicable to income derived after 24 June 1992. The effect of the purported variation was that the trusts in clause (a) of the first schedule applied to income derived not later than 24 June 1992 but not to that part of the income derived before 3 May 1994 that was derived after 24 June 1992. It follows that any such variation was one that, in terms of the proviso to clause 17, altered "the trusts hereof in relation to the income of the Trust Fund [sic] derived up to the date of exercise of such power of variation", the "date of exercise of such power of variation" being 3 May 1994. The variation was therefore precluded by the proviso to clause 17 set out at [135] above.
It may be that there was, in fact, no trust income in the period from 24 June 1992 to 3 May 1994 or in any other period before the latter date. That would not alter the conclusion stated. The proviso precludes alteration of the terms of the trust in relation to income derived before the alteration and pays no attention to the question whether any income was in fact derived before the alteration.
For reasons different from those that commended themselves to the primary judge, therefore, I consider to be correct his Honour's conclusion that there was no valid or effective exercise of the clause 17 power of variation by the oral resolution made by Mr Nemes on 3 May 1994.
The appellants contend that, in that event, the resolution should be regarded as effective to make the date of the resolution itself (3 May 1994) the Vesting Day. As the respondents submit, there is simply no basis for construing the resolution in that way. A person who determines that "eighteen" should be substituted for "sixty" in a provision referring to a period of 60 years does not indicate an intention that the applicable period should be 19 years 10 months and 10 days.