In fact, as will be explained below, as at 30 September 1994 the "loan" was not secured.
It was common ground that no money was paid to Mr and Mrs Nemes pursuant to, or following, the 1994 Resolution.
On 26 April 1995, Mr and Mrs Nemes (through a firm of accountants) engaged solicitors. The letter of instruction relevantly stated:
"• Most of the assets of Mr and Mrs Nemes are owned by companies the asset shares of which are owned by [Aladdin], a Norfolk Island company, the shares of which are owned by [the Trust].
…
• The assets in the whole group of companies has [sic] been revalued as at 1st July, 1994, this has led to an asset revaluation reserve being created in [the Trust], a copy of the balance sheet is enclosed for your reference.
• [The Trustee] in its capacity as trustee of [the 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 Trust].
Mr and Mrs Nemes would like to secure their loan to [the Trust], and it is in this matter that they require your assistance, as follows:-
• Make a debenture over the shares in [Aladdin] which [the 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] of the debenture on its shares.
…
The purpose of these transactions is for Mr and Mrs Nemes to secure control of their assets or estate. …"
As the letter records, the Nemes' instructions were that the asset revaluation reserve had been distributed to Mr and Mrs Nemes by "crediting the loan account of Mr and Mrs Nemes in [the Trust]". Put another way, the distribution was treated as creating a "debt" owed by the Trust to Mr and Mrs Nemes.
On 19 May 1995, the solicitors responded to the accountants. The letter from the solicitors recorded the instructions and then asked for further information:
"[The Trustee] as Trustee of [the Trust] owes monies to Mr & Mrs Nemes. Mr & Mrs Nemes wish to obtain security for the amount owing to them over the shares held by [the Trustee] … and for that purpose to obtain a debenture to be given by [the Trustee] over those shares.
The question arises as to whether that debenture will be a loan security within the meaning of the Stamp Duties Act of New South Wales and so liable for New South Wales loan security duty.
…
To enable us to prepare the necessary documentation would you please advise us:-
(a) The amount of the debt to be secured.
(b) Whether this is to be secured by a debenture to Mr & Mrs Nemes or whether there will be debentures to each of them for separate amounts.
(c) Details of the shares … to be dealt with."
On 19 June 1995, the accountants provided written instructions that the amount of the debt to be secured was $3,904,300, the debenture was to be to Mr and Mrs Nemes as joint tenants and the shares in Aladdin to be dealt with were the Shares.
On 28 June 1995, the solicitors forwarded documents to the accountants. The form of the transaction had changed. The solicitors stated that they had prepared the following documents for the accountants:
"1. A Deed of Charge in respect of the sum of $3,904,300.00 to be given by [the Trustee] as Trustee of [the Trust]. The Charge is over [the Shares] and in favour of Mr & Mrs Nemes as joint tenants. …
We have used a full form of Charge as it was easy to do so with less work involved.
…
2. Transfer of [the Shares] for execution in blank. …
…
We are returning to you the copies of the Memorandum and Articles of [the Trustee] and [Aladdin] and we also return the original Share Certificate in respect of [the Shares]. This Certificate should be held with the Deed of Charge when that is returned executed from Norfolk Island. …"
On 3 July 1995, the directors of the Trustee resolved that the Trustee execute a charge over the Shares in favour of Mr and Mrs Nemes as joint tenants in respect of $3,904,300 "repayable on demand which is the amount presently owing by [the Trust] to [Mr and Mrs Nemes] and also a Transfer in blank" of the Shares in support of the charge ("the Charge Resolution").
On 30 August 1995, a deed was made between the Trustee (defined as "the Mortgagor") and Mr and Mrs Nemes (defined as "the Mortgagee") ("the Deed of Charge"). The Recitals of the Deed of Charge relevantly recorded that:
(1) the "Trustee [held] Ten B Class Fully Paid shares in the capital of [Aladdin] (the mortgaged premises)";
(2) the Trustee was indebted to Mr and Mrs Nemes as joint tenants in the sum of $3,904,300; and
(3) for the purpose of securing repayment of that sum, the Trustee had agreed with Mr and Mrs Nemes to execute the Deed of Charge, pursuant to which the Trustee charged the Shares in favour of Mr and Mrs Nemes as joint tenants.
The charge over the Shares was stated to be a first ranking fixed charge. The Trustee warranted to Mr and Mrs Nemes that, as Trustee, it was the owner of the Shares and had "good right and full power to charge" the Shares and that the Shares were "free from all encumbrances". The Trustee covenanted with Mr and Mrs Nemes:
"(a) That [the Trustee] and all persons having or lawfully or equitably claiming any estate or interest in [the Shares] or any part thereof will from time to time and at all times hereafter upon the request of [Mr and Mrs Nemes] and at the cost of [the Trustee] until sale and afterwards of the person or persons requiring the same make do and execute or cause to be made done and executed all such acts deeds and assurances whatsoever from all such persons for the purpose of more satisfactorily securing to [Mr and Mrs Nemes] the payment of the principal moneys and/or more satisfactorily assuring [the Shares] to [Mr and Mrs Nemes] or as [Mr and Mrs Nemes] may direct and in particular will whenever requested by [Mr and Mrs Nemes] so to do execute in favour of [Mr and Mrs Nemes] such legal mortgages transfers assignments or other assurances of all or any part of [the Shares] in such form and containing (in the case of mortgages or other assurances) such powers (including power of sale) and provisions (including the express exclusion of all Moratorium Acts and/or Regulations) as [Mr and Mrs Nemes] shall require.
(b) That [the Trustee] shall not at any time during the continuance of this security execute or create any mortgage lien charge or encumbrance over or affecting [the Shares] or any part thereof in favour of any person other than [Mr and Mrs Nemes] without the previous consent in writing of [Mr and Mrs Nemes]."
The Trustee also covenanted with Mr and Mrs Nemes to pay the sum to them on demand.
On the same day, 30 August 1995, an Australian Securities Commission "[n]otification of details of a charge" form was signed on behalf of the Trustee. The form recorded the liability as a "debt of $3,904,300.00 presently owing", the chargee as Mr and Mrs Nemes and the charged property as the Shares.
Mr and Mrs Nemes did not report the distribution in their tax returns in the 1994/1995 financial year.
The Trust accounts for the year ended 30 June 2003 were dated 25 May 2004. A Directors' Declaration which accompanied the financial statements stated that the Trust was "not a reporting entity" and that the "financial statements and notes present[ed] fairly the [Trust's] financial position as at 30th June 2003". The notes to the financial statements recorded a non-current secured "loan" of $3,904,300 from Mr and Mrs Nemes.
On 26 September 2011, Mr Nemes died. Mrs Nemes had predeceased him. No steps had been taken to seek payment of the amount said to be owing as a result of the 1994 Resolution or the Deed of Charge.
On 11 June 2013, the appellants commenced proceedings in the Supreme Court of New South Wales seeking declarations that the Trustee was not indebted to Mr Nemes' estate in the amount of $3,904,300. The Executors cross‑claimed alleging that the Trustee was so indebted and seeking judgment for that amount.
Previous decisions
The primary judge dismissed the appellants' claim and ordered judgment for the Executors on the cross-claim. The primary judge concluded that on the proper construction of the 1994 Resolution, the Trustee resolved to make an advance or distribution to Mr and Mrs Nemes pursuant to cl 4(b) of the Deed of an amount equal to the asset revaluation reserve of $3,904,300 and that the Trustee gave effect to that resolution by crediting Mr and Mrs Nemes' loan account with the Trustee in the same amount, thereby effecting the distribution.
The Court of Appeal dismissed the appellants' appeal. The Court of Appeal found that the 1994 Resolution was a valid and effective exercise of the Trustee's powers under cl 4(b) of the Deed. Barrett JA (with whom Beazley P and Ward JA agreed) stated:
"In the present case, [the Trustee], as trustee, expressly identified an unrealized accretion in value arising from revaluation of [the Shares] and therefore a particular share of the value of the trust assets. It then determined, by [the 1994 Resolution], 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." (emphasis added)
His Honour concluded:
"In summary, I am of the opinion that … [the Trustee], 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 approach adopted by the Court of Appeal should be rejected.
Issues
Was the 1994 Resolution a valid and effective exercise of the Trustee's power "to advance or raise … and to pay or to apply" the capital or income of the Trust Funds under cl 4(b) of the Deed?
If the answer to that question is yes, then two further issues arise: did making the 1994 Resolution and recording a liability of $3,904,300 to Mr and Mrs Nemes in the Trust accounts entitle Mr and Mrs Nemes to maintain an action for money had and received against the Trustee for that sum, and did the Trustee effectively covenant to repay that existing debt in the Deed of Charge?
The 1994 Resolution and the cl 4(b) power
Clause 4(b) of the Deed empowered the Trustee "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" for the maintenance, education, advancement in life or benefit of Mr and Mrs Nemes.
By the 1994 Resolution, the Trustee resolved that pursuant to the powers conferred on it in the Deed:
"a final distribution be and is hereby made out of the asset revaluation reserve for the period ending 30th September, 199[4] 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:-
[Mr and Mrs Nemes]
as joint tenants." (emphasis added)
But did the 1994 Resolution "advance or raise any part or parts of the whole of the capital or income of the Trust Funds" and then "pay or … apply" that capital or income of the Trust Funds for the maintenance, education, advancement in life or benefit of Mr and Mrs Nemes? The answer is no.
Resolution of this appeal depends on recognising that there is a real and radical difference between an asset and its value. The conclusions reached by the primary judge and the Court of Appeal and the Executors' argument in this Court depended upon treating the two - asset and value - as interchangeable concepts. They are not.
No capital or income of the Trust Funds
First, it is necessary to identify "the capital or income of the Trust Funds" the subject of the 1994 Resolution.
The 1994 Resolution purported to deal with "the asset revaluation reserve" and to distribute "the entire reserve if any". But the asset revaluation reserve was not "part of" "the capital or income of the Trust Funds".
The "asset revaluation reserve" was an accounting entry which recorded, in the accounts of the Trust, an unrealised accretion in the value of the Shares at a particular point in time. That value was subject to fluctuation given the nature of the underlying assets. Indeed, the 1994 Resolution recognised the uncertain value of the asset revaluation reserve by resolving that "[t]he entire reserve if any, [was] to be distributed" (emphasis added). The asset revaluation reserve was not an asset or a pool of funds from which amounts could be withdrawn and paid.
On 23 September 1994, the date of the 1994 Resolution, the only property relevantly held by the Trust was the Shares. The property available for advancement and removal from the Trust was the Shares and only the Shares. The value of the Shares could not be realised until the Shares were used or dealt with in some way. Of course, as at 23 September 1994, the total capital value of the Trust might be described as about $4 million in the same way one might describe the value of any share portfolio at a particular date. But "value" is not property held by the Trust.
However the Trustee described it, the Trustee did not deal with any capital of the Trust Funds. Nor did the Trustee deal with any income from any trust asset. All it dealt with was a bookkeeping entry intended to reflect change in the value of an asset. How accountants treat these things is interesting, but irrelevant to the resolution of this appeal. It is not to the point to enquire how accountants would permit or require financial statements to be prepared in such a way as gives a true and fair view of the value of an asset at balance date. It may nonetheless be observed that the balance sheet prepared after the impugned resolution showed, as was the fact, that the assets of the Trust (relevantly, the Shares) remained unaffected by the 1994 Resolution. The Shares continued to be held on the terms of the original settlement under the Deed.
The Court of Appeal, in reliance on Clark v Inglis, stated that "it must be accepted that an unrealized gain on revaluation is capable of being 'income' as referred to in clause 4(b)". That statement should not be accepted. As counsel for the Executors correctly submitted, Clark v Inglis was no more than an example where an advance was made by a trustee under the terms of a particular deed and which was effected by (and capable of being effected by) a loan back. The discretionary trust there was distinguishable from the Trust here in crucial respects. First, the trustee of the discretionary trust was given a binding discretion to determine whether any property or moneys held by it constituted capital or income. Second, there was no direction which required income and profits to be paid, transferred or handed over to any beneficiary. Third, the terms of the trust deed were in other respects significantly different. This appeal is about the terms of this Deed and the 1994 Resolution. Clark v Inglis may be put to one side.
Nothing advanced or raised
Second, even if, contrary to the view formed, the asset revaluation reserve was capital or income of the Trust Funds, the 1994 Resolution was not an exercise of the power in cl 4(b) of the Deed "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" that capital or income (emphasis added).
By the terms of the 1994 Resolution, the directors of the Trustee resolved to make "a final distribution … out of the asset revaluation reserve" for the year ended 30 September 1994 and that the "entire reserve if any" be "paid or credited to" and "distributed to" Mr and Mrs Nemes. Does that constitute an exercise of the power under cl 4(b) of the Deed "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" that capital or income (emphasis added)?
Clause 4(b) is a composite power. It was common ground that there were four possible alternative means by which the power could be exercised - advance and pay; advance and apply; raise and pay; raise and apply.
Under the Deed, the power to raise was distinct from the power to advance. The power to raise was a process by which money or funds could be obtained by dealing with property, usually through sale or mortgage. That construction is reinforced by the other clauses in the Deed. It is accepted that this power was not exercised by the Trustee.
The power of advancement in the Deed was directed to a different end. Exercise of the power of advancement removes the property advanced from the original settlement. The power of advancement might be exercised by moving the property to a new trust (a resettlement of part of the trust for the benefit of one or more named objects) or by simply transferring the property directly to the beneficiary without the process of cash advancement and sale. But whatever mechanism is adopted, the power operates by altering the proprietary interests in the property advanced so that the property is no longer property of the trust. It involves more than a notional "earmarking" of property for specific beneficiaries.
What then was advanced (ie removed) from the corpus of the Trust Funds so that it could be paid or applied? The answer is nothing. As noted earlier, the assets of the Trust (the Shares) remained unaffected by the 1994 Resolution. The Shares continued to be held on the terms of the original settlement under the Deed. The Trustee, exercising the power of advancement, did not purport to confer on Mr and Mrs Nemes any interest in any of the Trust Funds.
What is necessary is that the resolution effects an immediate vesting of absolute title to some property held on trust in a beneficiary. The 1994 Resolution did not do that. And simply crediting amounts to a beneficiary in the Trust's accounts was not sufficient to effect an immediate vesting of a specific part of the capital or income of the Trust Funds. The power to advance in cl 4(b) was not exercised because no part of the Trust Funds was separated from the corpus of the Trust to be paid or applied.
Nothing paid or applied
Did the Trustee exercise the power "to apply", it being common ground that no money was paid to Mr and Mrs Nemes pursuant to, or following, the 1994 Resolution? The answer is no.
The power to apply was not exercised because there was no change in the beneficial ownership of any asset of the Trust. The asset revaluation reserve, or the accretion in value of the Shares, was never an asset of the Trust. At all times, the only assets of the Trust recorded in the balance sheet were the Shares and the settlement sum.
Even if the Trustee had purported to effect the distribution by a resettlement - settling a new trust for Mr and Mrs Nemes absolutely for $3,904,300 worth of the Shares - that trust would fail for want of certainty of subject matter. The value of the Shares necessarily fluctuated. The money value alone would be an insufficiently certain criterion to identify what specific portion of the Shares was held on the new trust. The proportion of the value of the Shares accounted for by the amount of $3,904,300 was subject to change from time to time, as reflected by the nature of the underlying asset, the nature of the asset revaluation reserve and the terms of the 1994 Resolution. A trust for $3,904,300 worth of the Shares would be uncertain because at no time would it be possible to know which of the Shares was covered by the trust and to what extent. In any event, it was common ground that there was no resettlement.
It is then necessary to address the propositions that "income may be 'applied' by a process of crediting" it to a beneficiary and that a resolution to "apply" trust income by crediting it effects "an immediate vesting of a specific part of the trust income" in the beneficiary. Those propositions do not assist in the resolution of this appeal.
First, as seen earlier, there was no income the subject of the 1994 Resolution and no distribution or advancement of income. Second, the cases cited by the Court of Appeal to support those propositions are not authority for them.
In re Baron Vestey's Settlement; Lloyds Bank Ltd v O'Meara is authority for the proposition that a trustee can "apply" the income or capital of a discretionary trust by resolving to vest the absolute beneficial ownership of property held on trust in one or more of the discretionary objects of the trust. Vestey is not authority for the more general proposition that a trustee can "apply" income (or capital) simply by crediting it to a beneficiary in the accounts of a trust.
In Vestey, the discretionary objects of the trust had no immediate right to possession of any asset of the trust under the deed. Clause 7 of the trust deed conferred a mandatory power on the trustees to "pay or apply the income of [the] fund … unto or in any manner for the support or benefit of all or any one or more of the following persons for the time being in existence". A sum of money was held "in hand" by the trustees. The trustees resolved that a specified proportion of that sum "shall belong" to certain beneficiaries. Notwithstanding that resolution, the trustees also resolved to accumulate the amount pursuant to s 31 of the Trustee Act 1925 (UK). The issue was whether the first resolution was a valid and effective exercise of the power to apply in cl 7. The Court of Appeal held that the resolution was an effective exercise of the power to apply the income of the trust and that the effect of the resolutions was to "give to each [beneficiary] a specific portion of the income" so that in the exercise of the trustees' discretion "each one of these [beneficiaries] became absolutely entitled to a particular sum of money so appropriated, and … those appropriated sums have now become part of the [beneficiaries'] respective estates".
The facts in this appeal are different. Here, the Trustee did not have funds "in hand", there was no change in the beneficial ownership of any asset of the Trust and the Trustee did not resettle part of the Trust Funds for the benefit of Mr and Mrs Nemes.
Similarly, in Commissioner of Inland Revenue v Ward, North P of the New Zealand Court of Appeal held that a resolution that certain money should "be held for the credit of" four children in equal shares effected by book entries in the trust accounts was an effective exercise of a power to "apply" trust income. However, in reaching that conclusion, North P held that the effect of the resolution was to make the money "the separate property" of each child. In other words, the income was "applied" when it ceased to be held under the prior trust and became the absolute property of each child.
Reference should be made to Chianti Pty Ltd v Leume Pty Ltd. It does not assist because the relevant trust power was "to pay, apply or set aside" trust income (emphasis added). The phrase "set aside" was defined in the trust deed to include "placing sums to the credit of the beneficiary in the books of account of the Trust". The trust deed further provided that amounts set aside in this way would "cease to form part of the Trust Fund and … [would] thenceforth be held by the Trustee as a separate trust fund on trust for that person absolutely". Accordingly, while Chianti involved the exercise of a power of advancement by crediting trust income to a trust account, it turned on the specific power to set aside, not the power to "apply" trust income or capital.
As will be apparent, the fundamental difference between Vestey, Ward and Chianti and the present appeal is that whereas in those three cases absolute title to trust assets was transferred or vested, the 1994 Resolution did not have the effect of transferring or immediately vesting absolute title to any of the Trust Funds. That is, the Trustee did not, by the exercise of the power to "advance or raise … and to pay or to apply" in cl 4(b) of the Deed, purport to confer an absolute beneficial interest in Mr and Mrs Nemes in any property held by the Trust. And none of Vestey, Ward or Chianti is authority for the proposition that a power to "apply" trust capital or income can be exercised without altering the beneficial ownership of the property the subject of the advancement. Here, the Shares relevantly comprised the whole of the capital and income of the Trust Funds. Title to the Shares had to be altered in some way in order for the capital or income of the Trust Funds to be paid or applied.
Finally, even if the purported distribution of the "entire reserve if any" to Mr and Mrs Nemes recorded in the 1994 Resolution created some equitable obligation in favour of Mr and Mrs Nemes, that would not assist the Executors. It would not assist them because unless a specific power in the Deed can be identified which permitted or empowered the Trustee to take that equitable obligation (however it is described) and convert it into a legal debt owed by the Trust to Mr and Mrs Nemes which would warrant the creation of the charge referred to in the Deed of Charge (with the potential to affect all specified beneficiaries), the legal obligation cannot provide the basis of exoneration out of the Trust for the benefit of Mr and Mrs Nemes (and now the Executors).
Conclusion
In the case of this Deed, "the identity of those who might receive income or capital, the amounts they might receive, the period or duration of the trusts, the content from time to time of the fund impressed with those trusts, and the very terms of the trusts themselves all depended wholly or significantly upon the exercise of, or the failure to exercise, powers bestowed by the [Deed] upon the [Trustee]". Here, the Trustee failed to exercise effectively the power to advance and to apply in cl 4(b) by the 1994 Resolution.
That the debt recorded in the Trust accounts could only have been satisfied out of a sale of the Shares does not provide an answer to an ineffective exercise of the cl 4(b) power by the Trustee. The "risk" that the value of the Shares might fall below the debt recorded emphasises that nothing was advanced or applied by the Trustee.
The text and purpose of cl 4 attaches precise legal effect to dealings with the capital and income of the Trust Funds. That precision is more than a mere formality. Specific legal meaning has been given to terms such as "advance", "raise", "pay" and "apply", so that, upon the exercise of a power such as that contained in cl 4(b), one can ascertain precisely the effect that the exercise of the power has on the capital and income of a trust. Unless provisions such as cl 4 are construed, are exercised and operate according to their terms, the potential for imprecise or wrongful dealings with trust property may be increased. Imprecise and wrongful dealings with trust property concern and affect not only a trust, its trustee and its beneficiaries but also third parties dealing with that trust.
It remains to consider the other arguments advanced by the Executors.
Action for money had and received
The next issue is whether making the 1994 Resolution and recording a liability of $3,904,300 to Mr and Mrs Nemes in the Trust accounts entitled Mr and Mrs Nemes to maintain an action for money had and received against the Trustee for that sum, and whether the Trustee effectively covenanted to repay that existing debt in the Deed of Charge.
The Executors' claim for money had and received to recover the debt secured by the charge referred to in the Deed of Charge cannot succeed. First, there was no effective charge as there was no debt to secure. A charge is a security for a debt or other legal or equitable obligation. As the Court of Appeal acknowledged, one cannot have a charge in a vacuum. Here, there was no debt to secure. The Deed of Charge was without legal effect.
Second, a beneficiary may maintain an action for money had and received against a trustee only where there remains nothing for the trustee to do except to pay over the money to the beneficiary and the trustee admits itself to be indebted to the beneficiary. But, in this appeal, the first limb was absent because the 1994 Resolution did not vest any asset of the Trust in Mr and Mrs Nemes.
Put another way, so long as the Trust continued, no action for money had and received was maintainable by Mr and Mrs Nemes against the Trustee until such time as the Trustee came to hold some asset on bare trust for them and admitted as much to them. At no time did the Trustee hold anything on bare trust for Mr and Mrs Nemes. The Shares continued to be held by the Trust, as recorded in the balance sheet of the Trust.
Further, where, as here, a trustee maintains active duties as trustee and does not hold the relevant assets on a bare trust, a claim for money had and received is not maintainable, because otherwise beneficiaries could use the claim to circumvent the equitable defences available to trustees.
Estoppel
The Executors also relied upon estoppel by deed and estoppel by convention.
The Executors submitted that by executing the Deed of Charge (which included Recital D and the cl 5 covenant), the Trustee was estopped from denying the legal effectiveness of the Deed of Charge because the Deed of Charge operates according to its terms as a legally effective instrument or because, on its execution, the Deed of Charge perfected the creation of a debt owed by the Trustee as trustee of the Trust to Mr and Mrs Nemes or, at the very least, because it constituted the exercise of the power under cl 4(b) of the Deed. These submissions should be rejected.
First, estoppel by deed does not arise because, for the reasons set out above, the Deed of Charge was legally ineffective. The Deed of Charge was without legal effect because there was no debt to secure.
Next, the amount allegedly loaned by Mr and Mrs Nemes was, in fact, never received by the Trust. In equity, no estoppel could arise in respect of a receipts clause in a deed (such as Recital D in the Deed of Charge) where the money recited to have been received was not, in fact, paid or where the loan recited to have been advanced was not, in fact, made. The execution of the Deed of Charge could not, and did not, perfect the creation of a debt owed by the Trust to Mr and Mrs Nemes.
Similarly, the Deed of Charge could not perfect the exercise of the power under cl 4(b) of the Deed recorded in the 1994 Resolution. Neither the Deed of Charge nor the Charge Resolution was made in the exercise of the power under cl 4(b) of the Deed.
Third, in relation to both estoppel by deed and estoppel by convention, an estoppel by a trustee in relation to a beneficiary cannot bind other beneficiaries unless the other beneficiaries participate in the conduct giving rise to the estoppel. Here, it was not contended that the other specified beneficiaries of the Trust were precluded from contending that what the Trustee did was beyond power and that the Trustee had no right of indemnity against the Trust Funds.
Fourth, there can be no estoppel by convention. Estoppel by convention is a doctrine whereby parties who have conducted their relations with each other on an agreed or assumed state of affairs (adopted as the conventional basis of their relationship) will, in proceedings against one another, be estopped from denying that agreed or assumed state of affairs. It is not dependent on the existence of a deed, or even writing. Here, the Executors seek to take the notion of holding the parties to the Deed of Charge to the "agreed or assumed state of affairs" stated in that Deed of Charge and then extend that "agreed or assumed state of affairs" to the Trust and other Specified Beneficiaries of the Trust. That is not permissible. Estoppel by convention is limited to the parties to the conduct relied upon in proceedings against one another. That is not this appeal.
In this appeal, it is both unnecessary and undesirable to address the unresolved debate about whether Australia recognises three categories of estoppel and, if it does, the extent to which this division should remain and how it might be applied.
Conclusion and orders
The appeal should be allowed and the Executors should pay the appellants' costs in this Court. The orders of the Court of Appeal made on 11 February 2015 should be set aside and, in lieu thereof, the following orders should be made: