Halfhide v Beaven

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

4612/02 - ANTHONY HALFHIDE & 4 ORS v ROBIN NEWTON BEAVEN & ANOR JUDGMENT The plaintiffs and their claims 1 The plaintiffs are the five children of the late Keith Watson Halfhide and the residuary beneficiaries under his will. By their statement of claim filed on 16 September 2002, the plaintiffs make certain claims in respect of 10 B class shares in the capital of Automated Data Services Pty Limited ("ADS") held by the deceased at his death. In consequence of the death, the shares devolved upon the first defendant to whom a grant of letters of administration with the will and codicil of the deceased annexed was made. The first defendant was (and is) the chairman of the board of directors of ADS. As administrator, he sold and transferred the shares to the second defendant, the managing director of ADS. It is the plaintiffs' case that the first defendant, in doing this, committed a breach of the duties owed by him as administrator and that the second defendant took with notice of, and was knowingly concerned in, the breach of duty (a claim that he "procured" the breach of duty was abandoned at the trial). The duties owed by the first defendant were pleaded in the statement of claim as follows (paragraph 12): "The first defendant as administrator of the Will and Codicil owed the plaintiffs duties: (a) To carry out the terms of the Will and Codicil (b) To safeguard and protect the interests of the plaintiffs as beneficiaries of the Residue (c) To protect and preserve the Residue (d) Not to dispose of the Shares for undervalue. Particulars of Duty The duties are imposed by the Will and the Codicil and the first defendant's obtaining letter of administration and the general law of trusts." 2 By his defence, the first defendant admitted this paragraph 12 but added: "… but says further that his primary obligation as administrator of the estate was at all times to act in accordance with the provisions of the Wills, Probate and Administration Act 1898, the Conveyancing Act 1919, the Trustee Act 1925 and the general law." 3 Paragraph 13 of the statement of claim (denied in the first defendant's defence) reads: "The first defendant, in entering into the agreement referred to in paragraph 10 and transferring the Shares to the second defendant, breached his duties to the plaintiffs. Particulars The Shares had, to the knowledge of the first defendant, a value greatly in excess of $2,250. The agreement and transfer was without the consent of the plaintiffs and against the express wishes of the plaintiffs." 4 It is important, for what follows, to note the duty and breach asserted. The plaintiffs do not say that the first defendant lacked the power to sell. Such a power is acknowledged. Their allegation is that he acted wrongfully in the way he exercised the power, and that he did so by selling

(a) for a price he knew to be much less than the value of the shares;

(c) against the express wishes of the plaintiffs. 5 The principal relief sought by the plaintiffs in their statement of claim is a declaration that the second defendant holds the shares on trust for the plaintiffs and an order that the second defendant transfer the shares to the plaintiffs. There is a claim, in the alternative, for damages against both the first defendant and the second defendant. The will, the codicil and the deed

6 The deceased died on 14 January 2000. Letters of administration with the deceased's will dated 25 February 1992 and a codicil dated 2 June 1995 annexed were, on 28 September 2001, granted to the first defendant in solemn form. No application was made in respect of a later purported will executed at a time when the deceased was afflicted by Alzheimer's disease. By the dispositive provisions of the testamentary instruments in respect of which the grant of administration was made, the deceased:

(a) gave all his A class shares in Wyntay Pty Ltd ("Wyntay") to the first defendant;

(b) gave all his shares, other than A class shares, in Wyntay to such of his children as survived him, in equal shares if more than one;

(c) gave all his A class shares in ADS to the first defendant; (d) gave his B class shares in ADS - (i) as to 10, to the first defendant; (ii) as to 10, to B P Hopkins (who, as it transpired, died before the deceased); and (iii) as to 10, to the Salvation Army (New South Wales) Property Trust ("Salvation Army");

(f) gave the sum of $50,000 to his trustee for the benefit of his sister, Gwyneth Baxter, and his brother, Alan Goldsmith, both of whom, however, died before the deceased;

(g) gave to ADS all "intellectual property" owned by him at his death; and

(h) gave the rest of his property to such of his children as survived him, in equal shares if more than one. 7 It should be explained at this point that the deceased was the originator of "The Red Book Service" by which, for reward, motor dealers, insurance companies, finance providers and other businesses interested in being kept abreast of values of second hand motor vehicles are provided with comprehensive information on that subject for a wide range of vehicles. The business of providing the service was conducted by ADS, but the deceased himself retained copyrights and other intellectual property. The second company named in the will, Wyntay, was a property owning and investing company the revenues of which were rents. The first defendant and Mr Hopkins were long-standing business associates and friends of the deceased. Each held a position within ADS. 8 The inventory annexed to the letters of administration shows that, apart from clothes and personal items, the deceased left no property beyond shares in Wyntay and ADS. The inventory shows 49,999 A class shares and 30 B class shares in ADS and 9 A class, 220,751 J class and 220,751 K class shares in Wyntay. So far as ADS is concerned, these shares represented the whole of its issued share capital, except for one additional B class share. That additional share was held by Wyntay. 9 On 4 April 2001, a deed was made among ADS, Wyntay, the deceased's widow (from whom he had been separated for about ten years before his death), the deceased's five children (the present plaintiffs) and the first defendant. The deed recited that disputes had arisen among the parties in relation to The Red Book Service business and rights to participate in the estate and that the parties intended that the deed should resolve "all disputes amongst them including all disputes amongst them regarding the assets of KWH", being the deceased. The purport of this deed, insofar as relevant for present purposes, was as follows:

Wyntay, the widow and the plaintiffs assigned to ADS all rights in the nature of intangible property relevant to the publication of The Red Book Service and released the other parties from any claim they might have had in relation to those rights (clause 2.1).

All other parties released ADS from any indebtedness arising from the declaration of a dividend of $8,629.12 on 15 November 1999 (clause 2.1(2)).

ADS released Wyntay from any indebtedness in excess of $150,000 under a loan made by ADS to Wyntay and secured by a mortgage of real property given by Wyntay (clause 2.1(3)).

It was provided that, after the first defendant became administrator of the estate of the deceased (there being, in clause 4.1, an agreement of all parties to consent to such a course), ADS would indemnify the first defendant for legal expenses up to $62,000 (clause 2.2(1)).

There was a covenant by Wyntay and ADS "to contribute 50% each of any costs not otherwise recoverable by RNB [ie, the first defendant] from the Estate of KWH [ie, the deceased] that arise or are incurred by RNB in relation to his appointment as Administrator of the estate of KWH" (clause 2.2(2)).

The first defendant covenanted that if appointed administrator he would cause the voting shares in Wyntay to be transferred to the plaintiffs, at the same time resigning as a director of Wyntay (clauses 2.3 and 2.4).

The first defendant covenanted that he would take all reasonable steps to alter the constitution of ADS "to the effect that all dividends declared by ADS are to be declared in equal sums in favour of all B class shares" (clause 2.5).

Clause 3.1 was as follows: "RNB acknowledges that in the event of a sale of some or all of his A class capital shares, he will treat the B class dividend shares equally and fairly from the proceeds."

Given the context, it is clear that this refers to A class and B class shares in ADS rather than Wyntay. 9. Clause 4 dealt with the position of the Salvation Army under the will and codicil by providing that, subject to the first defendant obtaining a grant of letters of administration (a) the first defendant should offer $2,000 (or any other sum agreed by the parties) to the Salvation Army in lieu of the 10 B class shares bequeathed to the Salvation Army; (b) if the Salvation Army accepted such an offer, the first defendant should transfer those 10 B class shares to Mrs Hopkins, the widow of B P Hopkins to whom 10 B class shares had been bequeathed and who predeceased the deceased; and (c) if the Salvation Army did not accept such an offer (with the result, it appears to be assumed, that the 10 B class shares would be transmitted in satisfaction of the bequest), 10 new B class shares would be issued by ADS to Mrs Hopkins. 10. Clause 6.9(1) was as follows: "The Deed embodies all the agreements and understandings between the parties and supersedes all prior arrangements and understandings between them." Shares in ADS 10 I digress to refer briefly to the rights attaching to shares in ADS. The company was incorporated on 9 February 1979 under the Companies Act 1961. The memorandum of association stated that the capital of the company was $10,000 divided into 10,000 shares of $1.00 each. No provision of the memorandum or the articles of association adopted at the time of incorporation drew any distinction between different shares. The articles adopted the regulations in Table A of the Fourth Schedule to the Act of 1961 with modifications. It appears that the capital was increased to $1,000,000 by the creation of 990,000 further shares of $1.00 each in 1988. Action was taken in 1995 to amend the articles to provide for A class and B class shares. An article 7A as follows was inserted: "(1) The capital of the company shall be divided into: (a) 500,000 'A' class shares; and (b) 500,000 'B' class shares. (2) The holder or holders for the time being of 'A' class shares shall have the right on the winding up of the company or on the reduction of the capital of the company or otherwise to a return of capital but shall not have the right to participate in dividends. The holder or holders shall have the right to vote at any meeting of the company. (3) The holder or holders for the time being of 'B' class shares shall have the right, on the winding up of the company or on the reduction of the capital of the company, to a return of the capital paid up on the shares held by them but shall not otherwise participate in the capital of the company nor vote at any meeting of the company. The holder or holders of the said 'B' class shares may participate in dividends to the extent described in Article 99. (4) Subject to the Act, any preference shares may, with the sanction of an ordinary resolution, be issued on the terms that they are, or at the option of the company are liable to be redeemed. (5) The rights conferred upon the holders of the shares of any class issued with preferred or other rights shall, unless otherwise expressly provided by the terms of issue of the shares of that class, be deemed to be varied by the creation or issue of further shares ranking equally therewith." 11 Another new provision, article 99, was inserted at the same time. After that addition had been made (and having regard to the pre-existing provisions, including those in Table A made applicable), the regulations with respect to declaration and payment of dividends were as follows: "98. Subject to any preferential special deferred or other rights upon which any shares may be issued or may from time to time be held the Directors may from time to time declare dividends or interim dividends to be paid to members. 99. Dividends may be declared only in respect of shares in class 'B' and in this regard the company in general meeting may declare such dividends but no such dividend shall exceed the amount recommended by the Directors and the Directors shall have power to determine the dividend to be declared on individual shares and in this context they may declare dividends on any particular share or shares in class 'B' to the exclusion of other shares and at different rates on different individual shares in class 'B'. 100. No dividend shall be paid otherwise than out of profits or shall bear interest against the company."

The effect and implications of these provisions will be considered later. The state of the unadministered estate at the time of the sale 12 After the deed of 4 April 2001 had been executed, the first defendant obtained a grant of letters of administration as envisaged by the deed and certain other events contemplated by the deed occurred. In particular, there was correspondence with the Salvation Army which resulted in its disclaiming the specific legacy of 10 B class shares in ADS. At that point (after taking into account specific gifts about which no issue arises and disregarding other effects of the deed), the deceased's unadministered estate was in a state where

(a) the pecuniary legacy of $50,000 for the benefit of the deceased's sister and brother had lapsed, they having died before him;

(b) the specific legacy of 10 B class shares in ADS to B P Hopkins had lapsed, he having died before the deceased;

(c) the specific legacy of 10 B class shares in ADS to the Salvation Army had been disclaimed;

(d) there were in the hands of the administrator 20 B class shares in ADS (being those referred to in the preceding paragraphs (b) and (c));

(e) the pecuniary legacy of $10,000 in favour of the Salvation Army had not been paid; and

(f) the administrator had incurred certain administration expenses including, no doubt, items such as the expense of obtaining the grant of letters of administration and costs incurred as administrator in obtaining legal advice. 13 The deed impinged upon this position in relation to the unadministered estate in three ways. First, ADS agreed to indemnify the first defendant, as administrator, for legal expenses up to $62,000 being, according to the evidence, expenses associated with certain Protective List proceedings in relation to the deceased before his death. Second, Wyntay and ADS agreed to contribute in equal shares "any costs not otherwise recoverable by RNB [ie, the first defendant] from the Estate of KWH [ie, the deceased] that arise or are incurred by RNB in relation to his appointment as Administrator of the estate of KWH". Third, the parties were agreed upon a particular course of action in respect of the 10 B class shares in ADS bequeathed to but renounced by the Salvation Army. Only the third of these matters affected an estate asset. The other two were concerned with the protection of the administrator for legal expenses and other costs. Nothing in the deed purported to affect in any way the second parcel of B class shares in ADS (that is, the parcel the subject of the lapsed legacy in favour of B P Hopkins) or the pecuniary legacy of $10,000 to the Salvation Army.

The correspondence 14 From a starting point represented by the state of the unadministered estate and the impact of the deed provisions as just described, it is necessary to trace a chain of relevant correspondence. Most of that correspondence passed between the first defendant's solicitors (Braye Cragg) on the one hand and the first plaintiff (Anthony Halfhide) and his solicitors (M Rosenblum & Co) on the other. Also included in chronological order, however, is correspondence between Braye Cragg and the second defendant. 15 On 2 November 2001, Braye Cragg wrote to each of the plaintiffs and to the deceased's widow a letter as follows: " Re: Estate of the Late Keith Watson Halfhide We refer to the above matter and confirm that we act for the Estate of the late Keither Watson Halfhide and in particular the Administrator pursuant to Letters of Administration (with the Will annexed) in Solemn Form dated 28 September 2001. In accordance with the Will of the late Keith Watson Halfhide dated 15 February 1992 as amended by the Codicil dated 2 June 1995 we note that the deceased made specific bequests relating to shares in the companies, Automated Data Services Pty Ltd and Wyntay Pty Ltd. We note further that there are monetary bequests as follows: (a) The sum of $10,000.00 to the Salvation Army (NSW) Property Trust. (b) The sum of $50,000.00 to the Trustees to be used in a discretionary manner for Gwenneth Baxter and Alan Goldsmith. We are instructed it is unlikely that there will be sufficient monies available in the Estate to meet the gift to the Salvation Army. In this regard we propose to correspond with the Salvation Army to the effect that it may not [be] possible to meet this gift. With respect to the 10 'B' class shares in Automated Data Services Pty Ltd ('ADS') gifted to the Salvation Army we will correspond with the Salvation Army and offer an ex-gratia payment of $2000.00 or such other sum as the parties may agree in writing in lieu of the 10 'B' class shares. We will keep you informed of progress in this regard. We note that the deceased had a number of personal effects at the time of his death and we would be pleased if you would assist in identifying and locating those personal effects. If you are the recipient of the personal effects we would be pleased if you would notify our office to that extent and identify the effects which you hold in your possession. It is not intended that the Administrator or this office will deal with the effects otherwise than to locate and confirm that the intended beneficiaries have received the deceased's personal effects in accordance with his wishes. We understand that both Gwenneth Baxter and Alan Goldsmith predeceased the late Keith Watson Halfhide. We would be pleased if you were able to assists us by providing a copy of the Death Certificates. If you do not have a copy of the Death Certificates we will make application to the registry of Births, Deaths and Marriages to obtain a copies in this regard. We are instructed that Patrick Boris Hopkins who is the intended beneficiary of 10 class 'B' shares in ADS predeceased the late Keith Watson Halfhide. With respect to those 10 'B' class shares gifted to Patrick Boris Hopkins we wish to advise that they fall into the residue of the Estate and appear to be the only assets of the estate which are now not a specific bequest. We have advised the Administrator that those shares should be disposed of by way of sale and you are therefore formally invited to make an offer for the parcel of 10 'B' class shares in ADS either jointly or separately within 14 days. The Administrator has disqualified himself from making an offer for the shares. If there is no one in the immediate family to whom this offer has been made who takes up the offer, we have advised the Administrator to offer the shares on the open market. We have advised the Administrator that he is not obliged to accept your offer and can offer the shares on the open market to obtain the best possible price to meet the costs of the estate. We have requested David Hicks & Company to prepare any Income Tax Returns for the late Keith Watson Halfhide and to make application for a Tax File number for the Estate. We will complete the necessary tax returns for the Estate (if required) before the Administration is finalised. We enclose Standard Transfer Form and would be pleased if you would sign where indicated and return to our office. This will be processed in due course to transfer the shares in accordance with the will of your late father. Please note that the Form does not include the shares which fall into the residue of the estate referred above. If you wish to discuss any aspect of the above please do not hesitate to contact our office." 16 Rosenblum & Co wrote to Braye Cragg as follows on 22 November 2001: " Re: Estate of the late Keith Watson Halfhide In this matter we have had a conference with Mr. A.G. Halfhide on behalf of the members of the Halfhide family. We have asked that all correspondence to members of the Halfhide family concerning the Estate be to ourselves, however please advise your client that there is no reason why there should not be communications directly between himself and Mr. A.G. Halfhide as there has been in the past. Referring to your letter dated 21 November, 2001 sent to all the beneficiaries of the Halfhide family: 1. Page 1, paragraph (a): In respect of the payment to the Salvation Army there was more than 20 months between the date of death and the granting of Letters of Administration. Would not the Estate have earned dividend income from ADS and Wyntay Pty. Ltd. to pay this bequest? 2. With respect to the 10 'B' class shares in ADS we understand that the offer has been accepted by The Salvation Army. 3. Page 2: (a) Gwenneth Baxter and Alan Goldsmith are deceased and the dates of death have been advised to you. (b) In respect of the 10 class 'B' in ADS and the shares in Wyntay Pty. Limited, these are the subject of a Deed dated 4 April, 2001 executed by your client and our clients. A copy of the Deed is enclosed. 4. In respect of clauses 2.2, 2.3, 2.4 and 2.5 of the Deed, could you please advise us what steps have been taken to finalise the matters therein. 5. In respect of the 'A' class shares in Wyntay Pty. Limited, Mr. A.G. Halfhide has received a Share Transfer in respect of 9 'A' class shares transferring them to your client. These shares should have been transferred in accordance with the terms of the Deed (clause 2.3). Your early reply would be appreciated." 17 Braye Cragg's reply of 10 December 2001 included the following: "2. You are correct in that the 10 'B' class shares in ADS will not be taken up by the Salvation Army." "4. Thank you for your comments with regard to the 10 'B' class shares in ADS and the shares in Wyntay Pty Limited. We are aware of the terms of the Deed and will be addressing the terms of the Deed in due course." 18 On 13 December 2001, correspondence between Braye Cragg and the second defendant began. Braye Cragg wrote to the second defendant as follows: " Re: Estate of the Late Keith Watson Halfhide: Shares in Automated Data Services Pty Ltd We refer to the above matter and confirm that we act for the Administrator of the Estate of the Late Keith Watson Halfhide. We are instructed that Patrick Boris Hopkins who is the intended beneficiary of 10 'B' class shares in Automated Data Services Pty Limited predeceased the late Keith Watson Halfhide. With respect to those 10 'B' class shares gifted to Patrick Boris Hopkins we wish to advise that they fall within the residue of the Estate and we have subsequently advised the Administrators that the share should be disposed of by way of sale. We made a formal offer to the members of the family and in the absence of any response from the family now invite you to make an offer for the parcel of shares within 14 days of receipt of this correspondence. The Administrator, Mr Robin Beaven, has disqualified himself from making an offer for the shares. We would be pleased if you would respond within 14 days of the date of this letter within 14 days of the date of this letter as to whether you wish to make an offer for the shares. We appreciate that it is now the festive season and decisions of this nature can be awkward however an indication of your interest would be of great assistance. We look forward to hearing from you by return." 19 The first plaintiff himself wrote to Braye Cragg on 19 December 2001, purportedly for himself and his siblings. So far as relevant for present purposes, the letter said: "Why is it your opinion that the 10 B Class Shares should be offered for sale at 'the best possible price to meet the costs of the Estate' when both Automated Data Services Pty Ltd and Wyntay Pty Ltd have given joint undertakings to cover any shortfall in such costs under the Deed? In light of the terms of the Deed therefore, we cannot see why we are being invited to make an offer for the 10 B Class shares when their transfer has already been contemplated (and indeed paid for by way of the consideration given by us pursuant to the Deed) and dealt with." 20 The first plaintiff went on to propose that there "simply be a meeting of all parties to the Deed whereby the following takes place". He then set out a series of steps to be taken by various parties. Relevant for present purposes are: "Wyntay Pty Ltd does the following: 1. ….. 2. Acknowledges its obligation to pay 50% of the RNB costs of acting as administrator that are not recoverable from the Estate. 3. ….." ADS Pty Ltd does the following: 1. ….. 2. Acknowledge its obligation to pay 50% of the RNB costs of acting as Administrator that are not recoverable from the Estate. 3. Amends the Memorandum and Articles of Association of ADS so that dividends are declared in equal sums in favour of all 'B' class shareholders. R.N. Beaven does the following: 1. ….. 2. ….. 3. Agrees to the amendment of the Memorandum and Articles of Association of ADS so that dividends are declared in equal sums in favour of all 'B' class shares. 4. Treat the B Class shareholders equally and fairly from the proceeds of any sale of the 'A' class shares. 5. Offer $2000 for the 10 B Class shares which if accepted will be given to Nancy Hopkins, I note that this offer has already been made and accepted by Salvation Army." 21 The second defendant wrote to Braye Cragg on 21 December 2002 referring to Braye Cragg's letter of 13 December 2001 and saying: "I would advise that it is my intention to make an offer for the available shares in this company at the appropriate time." 22 Braye Cragg replied to the first plaintiff's letter of 19 December 2001 by letter dated 24 January 2002, copied to Rosenblum & Co. They made the point that the terms of the deed "complement and not displace the testamentary intentions of your late father as set out in the Will and Codicil". The letter also said, among other things: "6. With respect to the 10 class 'B' shares gifted to Boris Hopkins, we stated in our earlier correspondence that the shares fall into the residue of the estate. The Deed does not contemplate the transfer of the shares as they fall within the residue of the estate and therefore are dealt with under the terms of the Will. 7. The Deed covers the payment of legal costs associated with administering the estate. The Deed also provides that Wyntay Pty Ltd and Automated Data Services Pty Ltd will only contribute to costs that are not otherwise recoverable from the estate. There are no assets in the estate apart from the shares." 23 The first plaintiff wrote a letter to Braye Cragg dated 30 January 2002 which included the following, referring to the numbering in Braye Cragg's letter of 24 January 2002: "Point 6 and 7. Noted however it was my point that these share transfers should all be done contemporaneously as there are no other beneficiaries of the Estate to which the residue can be applied. Accordingly as Automated Data Services Pty Ltd and Wyntay Pty Ltd have both given undertakings to cover the legals associated with administering the Estate, it obviated the need to make an offer to buy the 10 B Class shares in ADS." 24 Braye Cragg wrote to the second defendant on 5 March 2002 inviting him to "make a formal offer for the shares in accordance with your correspondence received 2 January 2002" (apparently a reference to his letter of 21 December 2001 sent shortly before Braye Cragg's office closed for the Christmas - New Year break). On 15 March 2002, the second defendant wrote to Braye Cragg offering $2,250 ($225 per share). The letter was received by Braye Cragg on 20 March 2002. On 22 March 2002, Braye Cragg wrote to the second defendant conveying the first defendant's acceptance of that offer and asking for a signed transfer and cheque to be forwarded. This occurred shortly afterwards. 25 On 9 May 2002, Braye Cragg wrote to Rosenblum & Co outlining the position reached with respect to administration of the estate. The letter included the following numbered points: "5. The Salvation Army, as you are aware, has agreed not to accept the 10 'B' Class B shares in Automated Data Services Pty Limited. All other shares transfer under the terms of the Will and the Codicil, have been effected. We understand that shares have been transferred into the beneficiaries names." "7. An offer has been received and accepted for the residual asset of the Estate of 10 'B' Class shares in Automated Data Services and the funds are now available to the Estate. We anticipate that part of this money will be used to make the exgratia gift to the Salvation Army." 26 On 26 June 2002, Rosenblum & Co wrote to Braye Cragg dealing with a number of matters, including the following: "Prior to entering into the Deed dated 4 April 2001, Mr Beaven agreed in a conversation with Mr Anthony Halfhide that the 10 B class shares in ADS would be transferred to the Halfhide family. This was the consideration for our clients entering into the Deed. There has been an alleged agreement to deal with the shares in a manner other than this but no details have been given to the residuary beneficiaries who are entitled to same. Please supply us with the full details of what has transpired and the alleged agreement. Anthony Halfhide advises that there has been no consent by the directors to a transfer of the shares as he has received no notice of a meeting of the directors. Please advise your client that our clients as residuary beneficiaries take the position that they are entitled to the B class shares and if they do not receive a satisfactory response to our request for this information they will without further notice approach the Supreme Court of New South Wales for orders to protect their rights." 27 Referring specifically to item 7 in Braye Cragg's letter of 9 May 2002, Rosenblum & Co said: "Our clients require full details of the alleged Contract. Our clients as residuary beneficiaries are entitled to this information as these shares should have been transferred to them. Our clients assert that it is only because of the accounting treatment of the intercompany loan balance that there was a need to raise monies by the alleged sale of the shares." 28 Braye Cragg's reply to Rosenblum & Co was dated 23 July 2002 and, in relation to relevant matters, said: "With respect to the 10 class B shares in Automated Data Service Pty Ltd, we are instructed that no agreement was entered into regarding transfer of the shares with the Halfhide family. Clearly, if the transfer of the shares was contemplated by the parties prior to the execution of the Deed, the transfer surely would have been included as a clause within that Deed. The manner in which the 10 B class shares were to be dealt with by the estate has been clear and transparent and known to each of the beneficiaries. We refer to our correspondence to each individual beneficiary dated 2 November 2001. As we had received no response from the beneficiaries an offer was accepted from Les Groves to the sum of $2,250.00 for the shares. Part of the proceeds of sale of the shares to the sum of $2,000.00 was subsequently forwarded to the Salvation Army by way of gift and in accordance with the Deed. The balance funds are held in our Trust Account. We refer to clause 2.2(2) of the Deed 'WPL and ADS Covenant to contribute 50% to any costs not otherwise recoverable by RNB from the Estate of KWH that arise or are incurred by RNB in relation to his appointment as Administrator of the Estate of KWH' (emphasis added). Our client has incurred costs in that he has paid from his personal funds money to meet the costs of disbursements such as stamp duty assessed on the transfer of the shares. These costs will need to be refunded to our client. We further advise tat we will be making application for payment of commission to our client for his pain and trouble in administering the estate." The other evidence 29 Against the background of this correspondence, I turn to other aspects of the evidence. The first defendant deposed in his affidavit to having had Braye Cragg write to the deceased's children and widow in the first instance to ascertain their interest in purchasing 10 B class shares in ADS. This is a reference to Braye Cragg's letters of 2 November 2001. He further deposed that he received no offers from the children or the widow and then "made an offer to" the second defendant and Mr Perry (technically, of course, he invited them to submit offers). The second defendant was, as I have said, the managing director of ADS. Mr Perry was a director of long standing. The first defendant said that he approached these two persons because of their connection with ADS and their association with the deceased. He also said that he held the view that if the family members did not want the shares, either or both of the second defendant and Mr Perry may want them. Having received no response from Mr Perry and an offer of $2,250 from the second defendant, the first defendant spoke with Mr Edwards, an accountant with David Hicks & Co, his purpose being, as he put it, "to ascertain the reasonableness of the offer". The first defendant's affidavit continues: "On [sic] reliance of [sic] the advice received I accepted the offer of the second defendant and transferred the shares to him." 30 The first defendant's affidavit was supplemented by brief evidence in chief given at the trial, as follows: "WHITTLE: Q. Mr Beaven, you were appointed administrator of the estate of Mr Halfhide with a will in the codicil annexed to the letters of administration, is that right? A. I was.

Q. And you yourself read that will and that codicil both before and after you were appointed administrator? A. Yes sir.

Q. Did you seek any legal advice as to the meaning of the will? A. Yes, I did.

Q. Who from? A. Solicitors Cleach [scil. Clinch] Neville Long I think it was.

Q. And did you seek any advice as to the realisation of the assets and their application to the various duties that you had as administrator? A. Yes, I did.

Q. And who did you seek that from? A. From you and from Pauline Tregenza of Braye Cragg.

WHITTLE: I'm going to ask this question in terms of substance rather than exact words.

WHITTLE: Q. What was the substance of that advice? A. It concerned the 10 B class shares that had become part of the residual estate. Your advice to me was that if there were liabilities in the estate, it was my duty to try and sell the shares to meet those liabilities and further that in any negotiations with the family, it was also my duty to bring that matter to their attention." 31 In the course of cross-examination, the first defendant was tested on a number of matters, including legal advice he had received as to his duty to sell 10 B class shares to provide funds to meet debts and expenses, as well as the pecuniary legacy of $10,000. It became obvious that the first defendant was somewhat confused as to the respective operations of the will and the deed, which is, to my mind, an understandable position for a layman. He viewed the two together as a package. At all events, it is clear that he was working on the basis of what he genuinely believed to be legal advice to the effect that he was entitled to pay $2,000 out of estate assets to meet the foreshadowed gift to the Salvation Army and that it was his duty to realise the 10 B class shares in order to meet that payment plus other debts and expenses. He also seems to have been under the impression that he did not need to pay the pecuniary legacy of $10,000 to the Salvation Army. It is not necessary to canvass either the objective validity of these propositions or the accuracy of the first defendant's understanding of legal advice given to him. The plaintiffs' claims are advanced on the footing that a power of sale had arisen and that the first defendant, as administrator, was justified in selling. The matters in issue in the proceedings go to the propriety of the actions taken in effecting the sale. 32 The evidence as a whole, including cross-examination of both the plaintiff and the first defendant, shows that, while the Braye Cragg letters of 2 November 2001 represented the only intimation by the first defendant to the members of the deceased's family of the first defendant's willingness to entertain an offer for the purchase of the 10 B class shares, the general issue of what might happen to those shares had been the subject of a conversation between the first plaintiff and the first defendant at a meeting on 17 October 2000. The first plaintiff testified that he had said at that meeting that he wanted a clause in the deed (then in the course of being formulated) to the effect that the 10 B class shares that would have gone to Mr Hopkins were to be transferred to the Halfhide family; and that the first defendant responded to the effect: "It isn't necessary to include such a clause. The shares will be transferred to you when I become an administrator. You'll have to trust me on that one."

The first defendant denies that the conversation took that form. The version in his affidavit is: "At that meeting, I said words to the effect of: 'The 10 B class shares in ADS which were to go to Pat Hopkins will be an asset of the estate and may have to be sold to meet the liabilities of the estate'. AGH said, "There won't be any liabilities so the shares will be part of the residuary estate'." 33 It is inherently improbable that the conversation was in the terms related by the first plaintiff and that any concept of "You'll have to trust me on that one" would have been accepted by the first plaintiff in an atmosphere where so many other aspects of the estate's assets and administration that were regarded as important to him and his family members had been recorded in detail in the deed. There is no reason why they would have been content to trust the first defendant on that aspect while tying him down on so many others in the deed. I am satisfied that the deed's "entire agreement" clause meant what it said. I am also satisfied, however, that a conversation to the effect of the first defendant's evidence did take place and demonstrated to the first defendant that the first plaintiff had an expectation and desire that the 10 B class shares would pass to him and his siblings. 34 Reverting to the invitation conveyed to the family members by the Braye Cragg letter of 2 November 2001, the evidence shows that the response of the first plaintiff, ostensibly on behalf of himself and his siblings, was to say that a sale was unnecessary because, under the deed, the first defendant was protected against costs and therefore did not need to raise money for that purpose by selling the shares. This, it seems to me, was consistent with what the first defendant says was said by the first plaintiff on 17 October 2000. The message was conveyed clearly and confirmed by the first plaintiff's letter to Braye Cragg dated 19 December 2001. Braye Cragg's reply of 24 January 2002 noted that the covenants by Wyntay and ADS to protect the first defendant in respect of costs referred only to costs not otherwise recoverable from the estate. But the first plaintiff, in his letter of 30 January 2002, showed that he continued to regard the existence of those covenants as obviating the need to sell the 10 B class shares. 35 It is also relevant to note that Braye Cragg's letter of 24 January 2002 to the first plaintiff purporting to deal with the first plaintiff's contention that there was no need to sell did not say that offers to buy the shares had been invited from other parties (as had happened by 13 December 2001) or that the second defendant had expressed interest (as had happened by 21 December 2001). 36 I turn now to the evidence concerning the sale to the second defendant. It became clear in the course of his cross-examination that he misinterpreted the correspondence. Whereas, by Braye Cragg's letter of 13 December 2001, he was invited to make an offer, he apparently took this to be a request for an expression of interest. He replied on 21 December 2001 by saying that he would wish to make an offer "at the appropriate time" and then sat back to await developments. 37 The first defendant was asked in cross-examination why he waited until early March 2002 to have his solicitors write to the second defendant inviting him to make an offer. His response was: "So that the family would have as much time as possible in winding up the estate to make an offer if they needed to, if they wished to." 38 The cross-examination continued: "POWELL: Q. You know that at the end of January Mr Halfhide, and asserting to speak for the other members of his family, had said that there was no need for the family to make an offer? A. That was his opinion, yes.

Q. And you never wrote back and said: Well, we have a different opinion, you do need to make an offer, did you? A. I thought we had explained the position very clearly in the letters.

Q. And yet you say you waited until March because you wanted to give them more time to make an offer? A. Well, I certainly wanted to give them the maximum time and I'm not absolutely sure there wasn't some delay in Braye Cragg Cragg processing that.

Q. But you weren't expecting an offer, were you, after Mr Halfhide letter of 30th of January 2002, were you? A. No." 39 The first defendant was also cross-examined about the circumstances in which the offer of the second defendant was received and accepted. He said, as did the second defendant in his evidence, that there had been no discussion between them as to the value of the shares or the price that the second defendant might offer. No other element of the evidence suggests otherwise. It is clear nevertheless that the second defendant approached the matter from a position of some knowledge. He had a copy of the will and codicil and was aware of the terms of the deed which he had read: ADS, of which he was managing director, was, after all, a party to the deed. The second defendant was thus aware of the arrangement under which the Salvation Army was to be offered a gift of $2,000 (or such other sum as the parties to the deed might agree) in place of 10 B class shares. He said that he used the amount of the gift to the Salvation Army as a guide in setting his offer price at $2,250, having previously sought advice from his own accountant who had expressed the view that the shares were of minimal value. I accept that the first defendant, having informed the second defendant in general terms that he would be approached by the solicitors about the possibility of his buying the shares, then left the process to be worked out between the solicitors and the second defendant, with the first defendant's own role confined to receiving reports from and giving instructions to the solicitors. I also accept that the second defendant then dealt with the solicitors without reference to the first defendant, although, of course, on the basis of his own knowledge of the surrounding circumstances gained from the sources I have mentioned. 40 The second defendant's offer (by letter dated 15 March 2002) reached Braye Cragg on 20 March 2002. Their letter to the second defendant accepting his offer was sent on 22 March 2002 in accordance with instructions given by the first defendant on 20 or 21 March 2002. The first defendant conceded that, before May 2002, he did not inform the first plaintiff (or, for that matter, any of the plaintiffs) or Rosenblum & Co that the second defendant had been invited to make an offer, that he had made an offer, that that offer had been accepted or that a sale of the 10 B class shares to the second defendant for $2,250 had been concluded. The first defendant deposed in his affidavit, as I have said, that he spoke to Mr Edwards, the accountant, about the value of the shares after receipt of the second defendant's offer and before acceptance of it. It emerged in cross-examination that his conversation with Mr Edwards probably took place at an earlier time. At all events, Mr Edwards' view (to the effect that the B class shares were of little value) was in the first defendant's consciousness when he gave his solicitors instructions to accept the second defendant's offer of $2,250. Legal principles relevant to the first defendant's conduct 41 Certain basic principles need to be recognised before any attempt is made to consider the propriety of the sale effected by the first defendant. First, the estate was, at the material time, an unadministered estate (since there were unpaid testamentary expenses and an unpaid pecuniary legacy), with the result that no residuary beneficiary had an equitable interest in any particular asset forming part of the residue, although each had a chose in action capable of being invoked for any purpose connected with the proper administration of the estate and being enforceable for that purpose accordingly against the administrator: Commissioner of Stamp Duties (Queensland) v Livingston [1965] AC 694 (PC). Second, the shares in the hands of the first defendant which, in the events that happened, were not disposed of by the will or were subject to the gift that was disclaimed were available to meet testamentary expenses and debts and, subject to that, to meet the pecuniary legacy. Third, the first defendant, as executor, possessed in relation to those shares a power of realisation described as follows in "Williams, Mortimer and Sunnucks on Executors, Administrators and Probate (being the 18th edition of Williams on Executors and the 6th edition of Mortimer on Probate)" (2000) at p.678: "It is a general rule of law and equity that a representative has an absolute power of disposition over all the personal estate of his testator or intestate; and that such estate when so disposed of cannot be followed by creditors, much less by legatees, either general or specific. This rule is based on the principle that the executor administrator is, in many cases, driven to realise the assets, in order to perform his duty in paying debts and distributing the estate; and no one would deal with an executor or administrator if liable afterwards to be called to account." 42 Fourth, the shares were the property of the first defendant but, in exercising his power of realisation, he was subject to fiduciary constraints. These matters are dealt with in the judgment of Ungoed-Thomas J in In re Hayes' Will Trusts [1971] 1 WLR 758 at 764-5: "It is well established that the estate being administered by a personal representative is the personal representative's property. Of course he has fiduciary duties with regard to it and their performance will be secured by the court; and he may be made liable for breaches of his fiduciary duties. But no legatee, devisee or next-of-kin has any beneficial interests in the assets being administered. His position is quite different from that of a trustee, who holds property for beneficiaries and has a duty to hold the balance evenly between the beneficiaries to whom the property belongs and for whom the trustee holds it. It does not necessarily follow that the duty of an executor in the course of administering the estate is subject to the trustee's duty of holding the balance evenly between the beneficiaries. Whether he has such a duty has to be independently considered in the light of his own different fiduciary functions and obligations: see Commissioner of Stamp Duties (Queensland) v. Livingston [1965] A.C. 694, 707, 708. Those functions are to get in the testator's estate, preserve its properties, discharge its liabilities and distribute the resulting net assets. The legal personal representatives would in due course be concerned to obtain a proper discharge for the net assets and thus to ascertain who were entitled to them and to ensure that the assets were distributed to those entitled. But even then they would not be concerned in the course of acting as legal personal representatives with any conflicting interests of beneficiaries under testamentary trusts but only with the trustees of that trust; and not the less so even if they themselves happen to be such trustees. In our case there is not even the possibility of argument that the farms were in the personal representatives' hands freed of administration and merely held for distribution; and therefore held by the legal personal representative on trust for the beneficiaries. Such an argument would be plainly contrary to the established facts. So the legal personal representative functions, so far at any rate as they arise in our case, are functions which relate to the process of ascertaining the net assets available for distribution and not at all functions in the distribution itself." 43 The fiduciary constraints to which I have referred are analogous to those embodied in the common law concept of devastavit, described by Williams, Mortimer and Sunnucks in terms taken from Bacon's Abridgement (Executors, I, 1) as: "a mismanagement of the estate and effects of the deceased, in squandering and misapplying the assets contrary to the duty imposed on them …" 44 Fifth, the standard of care to be exercised by an administrator in effecting a sale for purposes of administration may be regarded as the equivalent of that expected of a trustee exercising a power of sale, although considerations relevant to the competing interests of classes of beneficiaries will not intrude in the case of a legal personal representative. The standard of care includes the exercise of diligence in inviting competition and in pursuing a course of conduct of the kind that an ordinary prudent person would apply in managing his or her own affairs. Formulations based on a supposed duty to "obtain the best price" or "not to sell at an undervalue" must, I think, be approached with care. Such absolutes tend to be illusory. The emphasis is on responsible, methodical and prudent behaviour undertaken according to an informed appreciation of the subject matter and the market environment in which it is to be sold. In In re Cooper & Allen's Contract for sale to Harlech (1876) 4 ChD 802, Jessel MR said: "It is the duty of trustees for sale to sell the estate to the best advantage they can, that is the manner most beneficial to the cestuis que trust."

Harvey J added, in Permanent Trustee Co v Angus (1917) 17 SR (NSW) 364: "Regard must be paid to the method of sale adopted by ordinary prudent vendors of their own property in this country, who are anxious to dispose of their property to the best advantage."

I regard these criteria as equally applicable to a legal personal representative undertaking a sale of estate assets for purposes of administration. Assessment of the first defendant's conduct 45 One aspect of the plaintiffs' claims may be disposed of at once. As I have said, the allegation of the plaintiffs is that the first defendant acted wrongfully in exercising his power of sale because of three factors: first, that he sold for a price he knew to be much less than the value of the shares; second, that he sold without the consent of the plaintiffs; and, third, that he sold against the express wishes of the plaintiffs. The second and third aspects do not represent any valid basis for complaint. A legal personal representative's power to sell for the purposes of administering an unadministered estate is in no way dependent on the consent or wishes of the residuary (or any other) beneficiaries. The beneficiaries have a right to have the estate properly and duly administered but that does not entail any right to determine how, for what price or to whom a sale is to be made. 46 There is, however, one respect in which I consider that a finding of failure to adhere to the required standards of conduct is warranted. The position the first defendant took in the proceedings is that he invited an offer for the shares from the plaintiffs, allowed what he considered to be ample time for them to make such an offer and, when no such offer was forthcoming, sought offers from the second defendant and Perry and then sold to the second defendant at the price offered by him, taking the view that that price was a proper price in light of the view expressed to him orally by Mr Edwards as to the value of the shares. 47 Such an approach overlooks a significant matter. As the defendant knew, the plaintiffs (or, at least, the first plaintiff as the purported representative of all) had an expectation of receiving the shares as residuary beneficiaries. That had been made clear to the first defendant by the first plaintiff in the conversation of 17 October 2000 - and they were, after all, the children of the founder of the company. The plaintiffs (or, again, the first plaintiff purportedly on behalf of all) said in specific response to the letters of 2 November 2001 from Braye Cragg inviting them to submit an offer for purchase, that there was no need to sell the shares since the deed took care of expenses that would otherwise be a burden on residue so that it was unnecessary for the sole item of property making up the residuary estate to be converted into cash. These understandings, conveyed to the first defendant through his solicitors by the first plaintiff's letter of 19 December 2001 and repeated in the first plaintiff's letter of 30 January 2002, were no doubt incorrect understandings. But that is beside the point. The letters showed that the plaintiffs (or, at least, the first plaintiff) had an expectation of receiving the shares without having to buy them. 48 A prudent prospective seller, focussed on the need to effect any sale in an advantageous way, would not have acted as the first defendant did. Such a prudent prospective seller, realising that the plaintiffs, who had an expectation of receiving the shares, were under a misapprehension that there was no need for the shares to be sold, would have recognised that the absence of any offer to purchase or other expression of interest in purchasing by the plaintiffs was a product of the misapprehension. The prudent prospective seller, having recognised that the plaintiffs, who, to his knowledge, wished to own the shares, were actuated by a misapprehension in the response they made to his invitation to treat, would have taken steps to dispel their misapprehension. He would have done so not because of any duty he owed to them. Rather, he would have seen that the prospects of effecting a sale advantageous to the estate would be enhanced by making it clear to persons known to be desirous, to some degree, of owning the shares that their belief that a sale was unnecessary was wrong, with the result that there would be a sale if a buyer could be found willing to pay a price judged by the administrator to be a proper price. Had the plaintiffs been told this, there is a possibility that they would at least have considered making an offer to purchase. 49 When the first defendant received the second defendant's offer on 20 March 2002, he had, for the first time, an indication of what someone was prepared to pay for the shares. Acting prudently and with due regard for the nature of his duties, he should then have considered whether it might be possible to obtain a more favourable sale, particularly as the benchmark of $2,250 that had then been set was, in absolute terms (and without regard to views as to value), within the reach of potential buyers even of relatively modest means. Instead, on that very day or the next day, he instructed his solicitors to accept the second defendant's offer. And he did so without having taken any step to communicate again with the plaintiffs on the subject of possible purchase by them after the first plaintiff's letter of 30 January 2002 reasserted that there was no need for the shares to be sold. It was, of course, no part of the first defendant's functions as administrator exercising his power of sale to be concerned that one buyer rather than another might be more compatible with him as a co-shareholder in ADS; nor, I might say, is there evidence to suggest that any such consideration entered into his decision-making. But it is nevertheless clear that he had, but did nothing to pursue, an opportunity to seek to negotiate a price greater than $2,250 with persons who, to his knowledge, wished to be the owners of the shares. It was in not recognising and following up that opportunity that the first defendant failed to live up to the standards properly to be expected of a fiduciary in the circumstances. He failed to cover all the ground necessary to ensure that the sale he in fact made was to the best advantage reasonably to be had in the particular circumstances. 50 Having said that, I should add that I do not think that the first defendant's conduct deserves criticism on any wider basis. In particular, the closely held nature of the company, its unusual capital structure and the nature of the B class shares (of which more will be said presently) would not have warranted a wide-ranging search for potential buyers. I think that, in the particular circumstances, it was open to the first defendant to confine his efforts to persons with some connection with ADS, as he did. What he failed to do was to investigate sufficiently within the confined group with a view to making a sale to the best advantage reasonably achievable. 51 My conclusions with respect to the first defendant is, in summary, that he acted in a way that fell short of the standards of conduct to which he was subject as administrator effecting a sale for the purposes of administration when he sold 10 B class shares to the second defendant at $2,250 without having taken steps to ascertain whether the plaintiffs, disabused of their misapprehension and aware that a sale was to be made regardless of their view that it was unnecessary, would have made an offer at a higher price. Legal principles relevant to the second defendant's conduct 52 It is therefore necessary to consider consequences. That inquiry is best undertaken, however, after an examination of the claims made by the plaintiffs against the second defendant. The statement of claim, after pleading in paragraph 10 the sale of the shares by the first defendant to the second defendant for $2,250, said in paragraph 14: "In entering into the agreement referred to in paragraph 10 above the second defendant knowingly participated in and procured the first defendant's breaches of duty. Particulars The second defendant was aware, or ought to have been aware, that the Shares had a value greatly in excess of $2,250. The second defendant was aware the Shares were held beneficially for the plaintiffs."

(As I have said, the "and procured" part of this claim was ultimately not pressed.) 53 The claim is thus a "knowing participation" claim of the kind associated with Barnes v Addy (1874) LR 9 Ch App 583. The second defendant, in his defence, denied the allegations in paragraph 14 of the statement of claim. The second defendant also says in the defence that if the sale and transfer of the shares to him by the first defendant amounted to a breach of a duty owed to the plaintiffs by the first defendant, the second defendant entered into the transaction "in good faith without notice of any alleged breach of duty". The defence of a bona fide purchaser of the legal estate without notice of an equity to avoid is thus pleaded so as to form the basis of proving that defence: see Barclays Bank plc v Boulter [1997] 2 All ER 1002. 54 It is necessary now to consider the nature of the liability sought to be imposed by the plaintiffs on the second defendant. In particular, it is necessary to consider the mental state necessary to make someone liable on that basis. In Cadwallader v Bajco Pty Ltd [2002] NSWCA 328, Heydon JA (with whom Santow JA and Gzell J agreed) referred to "a quite rigorous test of liability" established in Royal Brunei Airlines Sdn Bhd v Tan Kok Ming [1995] 2 AC 378, as explained in Twinsectra Ltd v Yardley [2002] 2 AC 164, being a test of "realisation by the defendant that his conduct was dishonest by the ordinary standards of reasonable and honest people". Heydon JA then noted that, in this country: "A more appropriate starting point for an assessment of the tests for secondary liability would be the decisions of this court in and since DPC Estates Pty Ltd v Grey and Consul Developments Pty Ltd [1974] 1 NSWLR 443 and of the High Curt in that case: Consul Developments Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373." 55 The approach taken in Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373 was that a third party involved in a transaction with a fiduciary might be visited with constructive trust liability on the basis of breach of duty by the fiduciary if the third part had been guilty of objective dishonesty. The Court of Appeal has said that honest but negligent (or innocent) failure to inquire is insufficient to attract liability: see United States Surgical Corp v Hospital Products Ltd [1983] 2 NSWLR 157 and Akhil Holdings Ltd v Banque Commerciale SA (unreported, NSWCA, 15 November 1988). In the present case, I do not consider it necessary to undertake any extensive exploration of these matters. This is because, on the evidence, the second defendant can in no way have been aware of the particular breach of duty on the part of the first defendant - nor is there any basis on which he might have been expected to undertake any form of inquiry potentially relevant if the correct view of the law is that some form of constructive notice or knowledge is as relevant in this field as actual notice or knowledge. Assessment of the second defendant's conduct 56 The second defendant knew nothing about the circumstances in which the first defendant embarked upon the sale of the 10 B class shares beyond what he obtained from the will and codicil, the deed and the letters he received from Braye Cragg. He made it clear in his evidence (as did the first defendant) that, although the first defendant had said that the second defendant would be approached by the solicitors, there was otherwise no discussion between them as to the potential transaction. There was thus no way in which the second defendant could or should have known that the lack of offer on the part of the plaintiffs (something of which he was aware from first letter he received from the solicitors, being the letter of 13 December 2001, and which, in the absence of contrary indication, he was entitled to regard as continuing to the time when he made his offer) was accompanied by failure of the first defendant to disabuse the plaintiffs of the understanding that there was no need to sell the shares. Based on what he read in the letter from Braye Cragg, the second defendant accepted that an offer had been made to the family but no response had been received. There was no reason whatsoever why he should not have believed this and formed an opinion that the plaintiffs were not interested in buying. 57 In these circumstances, there is simply no basis on which to find that the second defendant was aware of the breach of duty or ought to have been aware of it. This is because he was unaware of (and could not have been expected to inquire about) the reason why the plaintiffs had not made an offer to buy. To the extent that it is necessary for the second defendant to prove that he was a bona fide purchaser of the shares without notice of the circumstances activating an equity in favour of the estate by reason of the first defendant's breach of duty, he must be seen to have discharged that onus. 58 The conclusion with respect to the second defendant is that no basis has been shown for holding him liable as a constructive trustee in respect of the 10 B class shares purchased by him from the first defendant. There is no equity in the plaintiffs requiring him to transfer those shares to them. Even if some complicity on his part had been shown, the most that he could have been compelled to do is to return the shares to the first defendant so that they might assume their rightful position as assets of the estate. Nor would there have been an equity requiring disgorgement to the plaintiffs even if the first defendant, instead of being the legal personal representative in respect of an unadministered estate had, as a trustee, held the shares on trust for the plaintiffs subject to a power of sale. Consequences of first defendant's breach of duty 59 I return, then, to the consequences that follow from the breach of duty by the first defendant. With the possibility of relief in the form of an order depriving the second defendant of the shares discarded, the most the plaintiffs may expect is to see the estate have the benefit of an appropriate form of equitable compensation. It is to be emphasised, however, that any such compensation would be due to the estate to be applied in carrying out the remainder of the administration. The compensation would not, as claimed in the plaintiffs' statement of claim, accrue too them as residuary beneficiaries. 60 This last point is, at a technical level, sufficient to dispose of these proceedings. The plaintiffs, as beneficiaries, claim damages. Even on the view of matters most favourable to their case, they cannot have any such entitlement, as they have no more than a right of the Livingston kind to insist upon due and proper administration - a right which, in the circumstances at hand, cannot be productive of an award of damages (equitable or otherwise) in their favour and can only see the administrator brought to account by the court in such a way as will see him make good to the estate anything that needs to be made good to counteract the effects of the breach of duty. 61 I proceed nevertheless to consider whether there are grounds for requiring the first defendant to compensate the estate. The general principle, in causing a fiduciary to render equitable compensation, is, as Justice Gummow said in "Compensation for Breach of Fiduciary Duty" in Youdan (Ed), "Equity, Fiduciaries and Trusts" (1998), that: "equity acts not to restore what the plaintiff has lost, for nothing has been lost, but to deprive the fiduciary of a gain made in breach of an obligation to eschew undisclosed conflicts between his duty to his principal and self interest."

The same notion was expressed in United States Surgical Corp v Hospital Products Ltd (above) in the observation that a fiduciary "must answer for his default according to his gain". 62 But that approach is not apt in this case. The first defendant, being the relevant fiduciary, has made no gain. The default consists, in essence, of having failed to give the estate the chance of realising more than $2,250 for the 10 B class shares by disabusing the plaintiffs of their incorrect belief that there was no need to sell, and thereby stifling the potential for the plaintiffs to give tangible expression to their desire to own the shares by submitting an offer. By reason of the sale actually made to the second defendant (which, in accordance with my earlier findings, cannot be undone), it is now not possible for the estate to be made whole (if it has suffered at all) otherwise than by a monetary award. No issue of causation arises: to the extent that there is anything to be made whole at all by reason of the loss of the chance to sell to the plaintiffs, it must be laid at the feet of the first defendant. Any such loss "would not have occurred if there had been no breach of duty": O'Halloran v R T Thomas Family Pty Ltd (1998) 45 NSWLR 262 per Spigelman CJ. 63 I have before me evidence as to the market value of the 10 B class shares from experts in share valuation called by the plaintiffs and the first defendant. They are agreed on the appropriate method of determining market value. Each has valued the shares according to accepted methodology based on predictions as to future dividends and ascertainment of the net present value of the dividend stream. The two experts have, however, reached very widely divergent results. The plaintiffs' expert, Mr Jugmans of Horwath (NSW) Pty Limited, was of the opinion that 10 B class shares had a value of $120,000 at the relevant time. The first defendant's expert, Mr Hall of Lonergan Edwards & Associates Limited, considered the value to have been "nominal, so that the $2,250 offered was an adequate market price for these shares". The differences between them are attributable to different views as to the likely availability of profits within ADS in the future, having regard to market conditions and needs for capital for matters such as possible overseas expansion; as well as differences of opinion as to the extent to which any hypothetical buyer would be deterred by the unusual distribution of rights between the A class shares and the B class shares. Implicit in the latter are assumptions or views as to the extent to which profits (if any) could be accumulated virtually indefinitely in the face of the possibility of proceedings by a B class shareholder under ss.232 and 233 of the Corporations Act 2001 (Cth) or otherwise to compel the payment of dividends. 64 I do not think it necessary to come to any firm view about precise value, although it is useful to note several points emerging from the provisions of the constitution of ADS to which I have already referred. First, all shares, both A class and B class, are expressed to have the right upon a winding up to a return of capital (presumably, having regard to the pre-1998 provenance of the provisions, the sum of $1.00 per share). Second, the A class shares carry a right to participate beyond that level in a winding up but the B class shares do not. Third, the A class shares carry voting rights at meetings of the company but the B class shares do not. Fourth, the right to receive dividends in accordance with article 99 is enjoyed by the B class shares as a class to the exclusion of the A class shares. 65 A fifth matter concerning the A class and B class shares requires more extensive discussion. Article 98 vests the power of declaring dividends in the directors. Article 99, however, after saying that dividends may be declared only in respect of B class shares, provides that "in this regard the company in general meeting may declare such dividends" [emphasis added]. The reference to "such" dividends is, quite clearly, a reference to dividends to be declared in respect of B class shares, being the only dividends allowable, having regard to article 99. This means, in my view, that the power of declaring the specified and only form of dividend allowed by the constitution is exercisable exclusively by the company in general meeting pursuant to the particular provision in article 99 and that the general provision in article 98 as to the declaration of dividends, being a general provision that was in force when the particular provision in article 99 was adopted, was superseded and put into abeyance upon the adoption of article 99. 66 Sixth, however, the directors still have an important and powerful part to play in relation to the declaration of dividends. The power of the company in general meeting in relation to the declaration of a dividend is a power to declare a dividend of an amount not exceeding that recommended by the directors. It follows that there can be no valid declaration unless there is a recommendation of the directors and the recommended amount is not exceeded. The directors also possess a second power relevant to the declaration by the company in general meeting, being a power "to determine the dividend to be paid on individual shares" (necessarily, B class shares) and "in this context they may declare dividends" on B class shares in the exclusionary or discriminatory way stated. The effect of this, it seems to me, is that the power of the company in general meeting to declare dividends can only be exercised, in relation to a particular dividend, if the directors have identified the B class shares in respect of which the dividend declaration is to be made (which may be all of them or some one or more only) and specified the rate of dividend applicable to each. The word "declare" in the phrase "and in this context they may declare dividends", referring to the directors, does not, in my opinion, refer to the process of declaring dividends confided to the company in general meeting. It refers, rather, to a distinct power, confided to the directors, of allocating a rate or rates of dividend to shares in respect of which the directors determine that dividends are to be paid. 67 I have dwelt on these matters because it is important to appreciate the patterns of power and influence within ADS. The directors play the key role I have described in determining the maximum amount of any dividend and the way in which the distributable sum is to be divided among the holders of B class shares. It is then for the company in general meeting, by the votes exercised exclusively by such holders of A class shares as choose to vote, to determine whether a dividend equal to or less than the amount recommended by the directors will actually be declared. If the decision of the company in general meeting is positive, the total amount declared will be distributed among the holders of the B class shares in the way the directors have decided. The company in general meeting (effectively, the votes cast by holders of A class shares) also plays a pivotal part in determining the composition of the board of directors under article 64: "64. The Company may from time to time by ordinary resolution: (a) Increase or reduce the numbers of Directors; (b) Remove any Director from office; (c) Appoint a new Director to replace a Director whose office has been vacated pursuant to these Articles; or (d) Appoint an additional Director or additional Directors."

The only other provision with respect to board composition enables the directors themselves to appoint a person to be a director, either to fill a casual vacancy or as an addition to the existing director, but within the number fixed by the constitution (article 68). 68 The capacity of the holder or holders of the A class shares to regulate the flow of dividends to the holders of the B class shares as a group is both clear and significant. A recommendation by the board of directors the composition of which is entirely within the power of the holders of the A class shares is the only constraint, apart from legal constraints existing outside the constitution. Absent winding up, a holder of B class shares has no financial rights under the constitution except the right to receive such dividends, if any, as are given by the combined actions of A class shareholders and the directors.

69 These factors point, in my opinion, towards a profoundly depressing factor in assessing the value of the B class shares. Anyone buying such shares would have to be prepared to fight hard not only to obtain dividends - even to the extent of instituting oppression proceedings - if the holders of the A class shares were unwilling to volunteer them, but also to prevent moves to enlarge the dividend sharing class by further issues of B class share or the attaching of dividend rights to A class shares - both of which would be achievable solely by the actions of the holders of the A class shares (and the directors installed by them), subject only to scrutiny against standards involved in concepts of fraud on the minority and in the statutory provisions involving oppression and the like. There was also sufficient evidence about poor past profitability, winds of competition in Australia, the need to explore overseas expansion opportunities (something that had been undertaken) to support the conclusion that the financial future of ADS was uncertain, with the possibility that such profits as might be derived being prudently retained to meet commercial exigencies, so that, if the prospect of dividends were to arise at all, it would be at some unpredictable future time. All this means that an ordinary investor having no prior connection with ADS would be most likely to prefer to put his or her money into some other more certain venture - unless, of course, the price were sufficiently low to accommodate fully the significant uncertainties of the commercial future and the virtual stranglehold of the holder of the A class share. 70 Much was made in the case put for the plaintiffs about the possibility of dividends being "unlocked" by proceedings under ss.232 and 233 of the Corporations Act. Three things need to be said about that. First and as the case law shows (see, for example, Re G Jeffrey (Mens Store) Pty Ltd (1984) 9 ACLR 193, Re Sam Weller Ltd [1990] 1 Ch 683, Re D G Brims and Sons Pty Ltd (1995) 16 ACSR 559), a court will be very reluctant to interfere with a decision of directors and voting shareholders to retain and conserve profits unless their stated commercial reasons for so doing are seen to be quite untenable. Second, recourse to such a remedy is in no way a sound basis for the adoption, in any process of valuation, of an assumption as to steady dividend flow. It is simply unrealistic to think that proceedings would be brought and pursued to a successful conclusion on the yearly or half-yearly basis that would fit such a model. Third, a common outcome in cases brought under those sections is an order for winding up which, in this particular company, would see a return of $10 on 10 B class shares unless there were additional relief of some kind. These factors, to my mind, make it very difficult to approach the valuation question in any wholly orthodox way. 71 In view of these factors, I would favour the view of value given in the expert evidence led by the first defendant which generally coincided with that expressed by Mr Edwards to the first defendant around the time of the acceptance of the second defendant's offer, namely, that the 10 B class shares were of little value. That being so, the B class shares were likely to have had an appeal only to potential buyers already connected with ADS. The second defendant was, of course, the managing director. He explained in his evidence part of the rationale that caused him to submit the offer that the first defendant accepted. He explained that people with whom ADS did business had expressed some concern about instability following the death of the founder. I quote from his cross-examination: "POWELL: Q. You weren't interested in finding out what they were worth in March 2002? A. If I could say your Honour my affidavit says that buying the shares wasn't for any investment purposes. Wasn't my primary motive. My primary motive, as I said in my affidavit, was that our major clients had indicated to me and because of all the litigation that had taken place with ADS over a period of years, the company was seen as being a little erratic and some of our major clients, who wanted to billed our information into their systems, wanted the security of knowing that the company was going on. A couple of those major clients indicated to me that when I became managing director, they would be more comforted if I was a shareholder. So the occasion arose later on. I took advantage of that.

It wasn't done for any reasons of investment or anything else. The main reason was to become a small shareholder in the company to have that security for those major clients.

Q. Well when you say a small shareholder, the 10 B class shares give you just under a third of the shares, a third of the dividend shares? A. Well they're a very unattractive share. They have no voting rights. They have no capital rights. They have a dividend if you're lucky." 72 There is no evidence as to why the plaintiffs wished to see the 10 B class shares pass to them in specie as residuary beneficiaries. It may be that they wished to have an interest in the company their father had founded - a desire apparently not shared by him, given the specific bequests of shares in the will and codicil in such a way that none passed to his children, coupled with a statement made by him to the first defendant before death that he did not wish his children to have any shares in ADS. That some kind of sentimental value was seen as inhering in the B class shares is suggested by the arrangement in the deed that Mrs Hopkins, the widow of a long-serving employee, should be given the 10 B class shares bequeathed to the Salvation Army, if disclaimed - failing which 10 new B class shares should be issued to Mrs Hopkins, apparently for nothing or for some nominal consideration. This confirms that no one regarded B class shares as inherently valuable apart from the sentimental value to which I have referred. 73 It is necessary for the court to do the best it can on the evidence to come to a view as to the value to the estate of the lost opportunity to receive from the plaintiffs an offer for the purchase of the 10 B class shares. There is no direct evidence of the views the plaintiffs then held as to the value of the shares in late 2001 and early 2002. A statement by the first plaintiff of a belief that the shares had a value of $325,000 was made in his affidavit in chief a considerable time later when he had every reason to assert a high value. There are, however, two significant factors providing indirect evidence. In the events that happened, there were two parcels each of 10 B class shares which, although the subject of specific bequests, remained undisposed of in the administrator's hands. One was the parcel bequeathed to Mr Hopkins, the other the parcel bequeathed to and disclaimed by the Salvation Army. Both these fell into residue and, leaving to one side the effects of the deed, were assets in the fate of which the residuary beneficiaries had an interest, subject to the incidence of debts and testamentary expenses. The plaintiffs were content for one parcel to be made the subject of a gift to Mrs Hopkins. There is nothing in the evidence to suggest that the plaintiffs saw that as involving a serious erosion of the residue which, after payment of debts expenses, they would enjoy. Had they regarded B class shares as having any appreciable worth (particularly if it were of the order of $325,000 - or even the $120,000 that ultimately appeared in the report of their expert), it is likely that they would have had serious reservations about the particular gesture of goodwill towards Mrs Hopkins. The second point is that the plaintiffs also became active participants in the arrangements that saw the Salvation Army offered a $2,000 donation upon its disclaiming the testamentary gift of 10 B class shares. By doing so, they either deliberately acquiesced in a course of deceiving the Salvation Army by hiding the fact that the shares were worth more than one hundred and sixty times (alternatively, about sixty times) the donation offered or proceeded on the footing that $2,000 was a reasonable substitute. I see no reason to think that they sought to become party to a deception, with the result that it is the latter possibility that should be accepted. 74 The opportunity to receive an offer from the plaintiffs for the purchase of the 10 B class shares eventually sold to the second defendant must be regarded as having had some value to the estate, at least theoretically. But I cannot, on the evidence, regard it as having had any value greater than that commensurate with the price the second defendant paid. Had the first defendant, after receiving the second defendant's offer, approached the plaintiffs and asked whether they were prepared to better it, they, disabused of their belief that the shares were to pass to them anyway and motivated by their desire to have a stake in the company founded by their father, may have offered a higher price. And the second defendant, in turn, may have been willing to better whatever the plaintiffs offered, given his desire to introduce stability into the ownership structure of a kind he understood customers to be seeking. But I cannot, on the evidence, regard any of this as otherwise than purely speculative or as involving any appreciable value potential, particularly in light of the plaintiffs' willingness to see Mrs Hopkins given an equivalent parcel of shares merely as a gesture of kindness and to allow the Salvation Army to give up another equivalent parcel in the context of a gift of $2,000. 75 The evidence does not allow me to conclude that the value of the opportunity for the estate to solicit an offer of purchase from the plaintiffs was anything more than nominal or token. It follows that, even if the proceedings were constituted in such a way as to involve a claim that the first defendant, as administrator, make good to the estate the value of the lost opportunity to receive such an offer from the plaintiffs, there would be no basis on which the court could conclude that any sum should be paid so as to make the estate whole in that respect. But, of course, the proceedings are not constituted in that way. The plaintiffs' secondary claim is for an order that the first defendant pay damages (which I regard as including equitable compensation) to them by way of vindication of a wrong done to them. For reasons I have mentioned, such breach of duty as the first defendant committed did not give rise to a right to such an order in favour of the plaintiffs. Disposition of proceedings 76 The plaintiffs' claims against both the first defendant and the second defendant are dismissed with costs. **********

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