Flinn v Fearne

SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

2003/98 CHERYL ANN FLINN & ORS -v- AUDREY EDITH FEARNE JUDGMENT

1 MASTER: These are proceedings under the Family Provision Act 1982. By summons filed on 9 April 1998 the plaintiffs, Cheryl Ann Flinn, Wendy Kay Fritsch, Toni Patricia Roose and Janelle Sylvia Lancaster, claim an order for provision for their maintenance and advancement in life out of the estate of their late father, Garry William Fearne (to whom I shall refer as "the deceased"), and, further, an order pursuant to section 23 on the Family Provision Act, "designating as notional estate certain property which was the subject of a prescribed transaction". 2 The deceased died on 8 November 1996. He left a will dated 7 November 1996. By that will the deceased appointed the defendant, Audrey Edith Fearne, as executor and gave to the defendant the entirety of his estate absolutely. 3 The deceased had been married twice. The four plaintiffs are the children of his first marriage. The deceased and his first wife were subsequently divorced. The defendant was the second wife of the deceased. Of his marriage to the defendant was born another daughter Michelle Kathleen Fearne, who is presently aged fifteen. 4 The hearing of the substantive proceedings was fixed for 29 September 1999. On the day preceding that date the parties requested that the matter be listed before me for mention and directions. The purpose of that mention was to enable the Court to be informed of the fact that the actual estate left by the deceased was not of any great significance, and that unless there were to be designated as notional estate of the deceased (as sought by prayer 2 in the summons) certain assets, consisting of an omnibus business conducted in the environs of Wagga Wagga, there would be no fund available to meet any order for provision to which any or all of the plaintiffs might ultimately establish an entitlement. 5 Accordingly on 28 September 1999 the plaintiffs made application, to which the defendant consented, for the determination, pursuant to Part 31 rule 2 of the Supreme Court Rules, of a separate question before the hearing of the substantive proceedings, such separate question being in respect to the existence of a prescribed transaction. 6 I acceded to that application and made the following orders: 1. I order, pursuant to Part 31 rule 2 of the Supreme Court Rules, that the question set forth in the document entitled "Separate Question" initialled by me and filed in Court this day be decided separately from any other question in the proceedings.

2. I grant leave to the plaintiffs to join such additional defendants as they may be advised. 7 The Separate Question was in the following form: Whether the deceased entered into a prescribed transaction in regard to the property being the assets of G & K Fearne Family Trust, such that the Court is entitled to designate any property of the G & A Fearne Family Trust notional estate of the deceased. 8 When the matter came on for hearing on 29 September 1999 the plaintiffs by consent filed in Court an amended summons, naming five additional defendants, those additional defendants being the companies involved in the conduct of the omnibus business to which I have already referred. 9 In accordance with the desires of the parties in that regard, the hearing was confined to a determination of the separate question. It was recognised that if that separate question were to be decided in the affirmative, then it would be necessary for the matter to be stood over for a further hearing in relation to the question of whether or not assets should be designated as notional estate of the deceased, that latter question requiring an exercise of the discretion of the Court, and requiring also a consideration of the substantive claims of the plaintiff (since assets should be designated as notional estate only to the extent that there is not available actual estate to meet any order for provision which the Court ultimately might decide should be made in favour of one or more of the plaintiffs (section 28(1) and (2) of the Family Provision Act)). 10 Section 22 of the Act defines a prescribed transaction. Concerning that section it has been said, "It is obvious that the legislature has cast the net very wide, in pursuit of its goal of providing adequate provision in favour of eligible person": Kavalle v Burbidge (1998) 43 NSWLR 422 at 441 per Mason P. 11 Jonhold Pty Limited (one of the additional defendants joined in the amended summons) is the trustee of the G & A Fearne Family Trust, created by a deed of trust dated 30 December 1991. Under the terms of that deed and in the events which have happened the deceased was until his death the Nominator named in that deed, being designated as such by Schedule Five to the deed. 12 Under the terms of that deed the trustee has discretionary powers to dispose of the income of the trust in favour of "nominated beneficiaries" or "eligible beneficiaries" (each of those phrases being defined in clause 3 of the deed) --- clause 4; and, in certain circumstances (but only with the consent of the deceased, as the Nomonator), the capital --- clause 19 (p) and (u). 13 As the Nominator the deceased during his lifetime had the power to remove the trustee from its position as trustee and to appoint any person as trustee in its place, and to appoint any person as an additional trustee (clause 13). Further, the power to designate "nominated beneficiaries" from the class of "eligible beneficiaries" reposed in the deceased as the Nominator (clause 3(h)). 14 It was submitted on behalf of the plaintiffs that the effect of the foregoing provisions of the deed was to give to the deceased de facto, although indirect, control of the trust and of its assets. Further, that in the exercise of his powers under the deed the deceased as the Nominator could have procured the transfer to himself of the corpus of the trust assets, by finding and appointing a trustee who would in that regard have been prepared to do his bidding. 15 However, the deceased did not before his death exercise the foregoing powers to cause the corpus of the trust assets to be transferred to him. 16 It was submitted on behalf of the plaintiffs that the failure of the deceased to exercise that de facto control of the trust in order to procure a transfer to himself of the corpus of the trust assets constituted a prescribed transaction under section 22(1)(a) of the Family Provision Act. Upon the deceased's death that power of control passed to the defendant, the office of Nominator, held by the deceased during his lifetime, thereupon devolving upon her. 17 It was submitted on behalf of the plaintiffs that the conduct of the deceased in failing to exercise what was described by the plaintiffs as being the de facto power to appoint, or dispose of, property, before his death in such a way as to cause the corpus of the trust assets to be transferred to him (and thus to form part of his estate upon his death) constituted a prescribed transaction of the nature described in section 22(1)(a) of the Act, and also of the nature described more particularly in section 22(4)(a)(ii) of the Act. 18 Section 22(1) provides, relevantly, A person shall be deemed to enter into a prescribed transaction if --- (a) on or after the appointed day he does, directly or indirectly, or omits to do, any act, as a result of which - (i) property becomes held by another person (whether or not as trustee); or (ii) property becomes subject to a trust, whether or not the property becomes in either case so held immediately; and … 19 Section 22(4) provides, relevantly, In particular and without limiting the generality of subsection (1), a person shall, for the purposes of subsection (1)(a), be deemed to do, or omit to do, an act, as a result of which property becomes held by another person or subject to a trust if --- (a) he is entitled, on or after the appointed day, to exercise a power to appoint, or dispose of, property which is not in his estate but the power is not exercised before he ceases (by reason of death or the occurrence of any other event) to be so entitled and, as a result of the omission to exercise the power and of his death or the occurrence of the other event --- (i) the property becomes held by another person (whether or not as trustee) or subject to a trust (whether or not the property becomes in either case so held immediately); or (ii) another person becomes (whether or not immediately) or, if he was previously entitled, continues to be, entitled to exercise the power; … 20 Whilst recognising that whatever powers the deceased might have had under the deed to effect a disposition of assets of the trust were indirect powers, the plaintiffs relied upon the decision of the Court of Appeal in Kavalle v Burbidge (in particular, the judgment of Mason P, with whom Meagher JA agreed). 21 The President said, at 451, A "power to…dispose of property" is not a technical term of law. In context it must mean something more than a traditional power of appointment, assuming that the latter concept were limited in any presently relevant way. 22 His Honour then proceeded to consider a number of relevant judicial authorities. 23 It must, however, be recognised that the decision in Kavalle v Burbidge was essentially a decision upon its own facts, dealing with the legal rights of a testator in the context of the law of Liechtenstein, and the specific legal powers vested in the testator in that case (see the judgment of Mason P at 451E), which are to be distinguished from the powers vested in the deceased in the instant case. Whereas, in Kavalle v Burbidge there was a legal duty imposed upon Mr Defago, the trustee, to act in accordance with the directions of the testator, in the instant case there was no such legal duty imposed upon the trustee to act in accordance with the directions of the deceased. 24 There is no doubt, in the instant case, that the deceased during his lifetime, in his capacity as the Nominator, had the power, to remove the trustee named in the deed and to appoint another trustee of the G & A Fearne Family Trust. It seems to me, however, that that power is very different from the power of de facto control of the trust asserted by the plaintiffs to have reposed in the deceased. Indeed, the entire basis of that assertion of de facto control appears to depend upon assumptions, firstly, that the deceased would be able to find another potential trustee who would be amenable to the dictates of the deceased, and, secondly, that any such entity or person, when appointed trustee, would disregard his duties as a trustee (see Jacobs' Law of Trusts in Australia, 6 ed (1997), 51, paragraph 265; 409, paragraphs 1609ff). 25 It was submitted on behalf of the defendant that the deceased held his power in a fiduciary capacity and that he could exercise it only in such a fiduciary capacity. Whether or not that was so, it is abundantly clear that the deceased could not have properly given, and the trustee could not have properly received, a direction that the trustee dispose of the trust property. The most that the deceased could have done was to remove the nominated trustee and to appoint as a new trustee a person or entity whom the deceased might have expected would act in accordance with his direction. (It was suggested on behalf of the plaintiffs that the deceased could even have appointed as such new trustee a company controlled by the plaintiff.) 26 Nevertheless, there could be no certainty that either the original trustee or any replacement thereof appointed by the deceased would necessarily have acted in accordance with such a direction by the deceased, since the conduct of the trustee, were he merely to have acted as directed by the deceased, without independently carrying out his duties and exercising his discretion (in the manner described in the foregoing passages from Jacobs), would have constituted on the part of the trustee a clear breach of trust. (If the deceased had appointed as a replacement trustee a company which he himself controlled, it is possible that any disposition of trust property to the deceased by such a trustee would have been in contravention of clause 18(a)(ii) of the deed.) 27 It seems to me that a clear distinction must be drawn between, on the one hand, the conduct of the deceased in failing to exercise his powers as the Nominator, and, on the other hand, the conduct of the trustee. It is all very well for the plaintiffs to say that the deceased could have dismissed the trustee and could have appointed a fresh trustee who would be malleable and would act in accordance with the wishes of the deceased. Nevertheless, the essential question is whether the deceased himself entered into a prescribed transaction, not whether the trustee, by his failure to do anything, allowed the property to remain subject to a trust. 28 It will be appreciated that the only omission of the nature referred to in the description of a prescribed transaction contained in section 22(1) to which the plaintiffs can point is the omission on the part of the deceased before his death to remove the present trustee and to appoint as a replacement trustee some other person or entity whom the deceased might have expected would act in accordance with his wishes. 29 The foregoing observation in relation to subsection (1) of section 22 has equal application to subsection (4) of that section. Further, the submissions of the plaintiffs concerning that latter subsection disregard the introductory phrase "he is entitled" appearing in paragraph (a) thereof. In the instant case the deceased was not "entitled… to appoint, or dispose of, property". The extent of his entitlement was limited to his power as the Nominator to remove from office the trustee and to appoint a replacement trustee. 30 Accordingly, I am not satisfied that the deceased entered into a prescribed transaction in regard to the property being the assets of the G & A Fearne Family Trust. It follows, therefore, that the separate question will be answered in the negative. 31 I make the following orders: 1. I answer as follows the separate question ordered to be decided separately from any other question in the proceedings: No. 2. I order that the plaintiffs pay the costs of the defendant of the hearing in respect to the aforesaid separate question. 3. I grant leave to the defendant to proceed forthwith to assessment of the foregoing costs. 4. I stand the matter over to Monday, 25 October 1999 before the Registrar, for directions.

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