Hillcrest (Ilford) Pty Ltd v Kingsford

Supreme Court of NSW|2010-04-14|Before: Biscoe AJ

CITATION : Hillcrest (Ilford) Pty Ltd v Kingsford (Ilford) Pty Ltd (No 2) [2010] NSWSC 285

DECISION : 1. Declaration that purported removal of plaintiff as trustee of Hillcrest (Harding) Trust by second defendant is of no effect; 2. Declaration that purported appointment of first defendant as additional trustee of Trust is of no effect; 3. Order that defendants withdraw caveat AF76146Q from title of "Hillcrest", 7433 Castlereagh Highway, Ilford, NSW; 4. Declaration that caveat of no effect; 5. Defendants to pay plaintiff's costs; 6. Liberty to apply re costs within two working days; 7. Exhibits may be returned

CATCHWORDS : TRUSTS - proper construction of power of appointment and removal of trustee in trust deed - whether trustee effectively removed - whether new trustee effectively appointed - whether caveat lodged by the latter of no effect because it had no caveatable interest - whether caveator required leave of the Court to lodge a second caveat - CAVEATS - whether caveator had caveatable interest - whether caveator required leave of the Court to lodge a second caveat

Conveyancing Act 1919 LEGISLATION CITED : Real Property Act 1900 Trustee Act 1925

Fitzwood Pty Ltd v Unique Goal Pty Ltd (2002) 188 ALR 566 Kooee Communications Pty Ltd v Primus Telecommunications Pty Ltd [2008] NSWCA 5 CASES CITED : Re Burton; Wily v Burton (1994) 126 ALR 557 Saxby Soft Drinks Pty Ltd v George Saxby Beverages Pty Ltd [2009] NSWSC 1486 Synergy Concepts Pty Ltd v Rylegrove Pty Ltd (in liq) (1997) 8 BPR 15,555 Taylor v Commonwealth Development Bank of Australia (1991) 11 BPR 21,033

TEXTS CITED : Mowbray et al, Lewin on Trusts, 18th ed (2008) Law Book Co at 13-44

Hillcrest (Ilford) Pty Ltd (plaintiff) PARTIES : Kingsford (Ilford) Pty Ltd (first defendant) Donald Trevor Harding (second defendant)

COUNSEL : D Sulan (plaintiff) T Harding (defendants)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

2010/00050000 HILLCREST (ILFORD) PTY LTD v KINGSFORD (ILFORD) PTY LTD AND ANOR JUDGMENT 1 HIS HONOUR: The plaintiff, Hillcrest (Ilford) Pty Ltd (HIPL), seeks:

(a) a declaration that the purported removal of HIPL as trustee of the Hillcrest (Harding) Trust ( Trust ) by the second defendant ( Trevor Harding ) is of no effect; (b) a declaration that the purported appointment of the first defendant, Kingsford (Ilford) Pty Ltd ( KIPL ), a company controlled by Mr Trevor Harding, as an additional trustee of the Trust, is of no effect; (c) an order that KIPL and Trevor Harding withdraw caveat number AF76146Q ( Second Caveat ) from the title of the property known as "Hillcrest", 7433 Castlereagh Highway, Ilford, NSW ( Property ); (d) a declaration that the Second Caveat is of no effect. 2 The issues turn upon the proper construction of the deed of settlement for the Trust dated 25 May 2000 (Trust Deed) and the law with respect to the lodgement of caveats, including certain provisions of the Trustee Act 1925 and the Real Property Act 1900. 3 There is some urgency in the determination of the dispute. By reason of KIPL lodging the Second Caveat, Suncorp-Metway Ltd, which holds a first mortgage over the Property, has asserted that HIPL is in breach of its mortgage. Accordingly, HIPL wishes to have the Second Caveat removed in order for it to rectify the position with Suncorp.

4 Steven Harding is the son of Trevor Harding. From about 1989 they were in partnership as farmers and graziers along with Margaret Harding, Steven Harding's mother (Trevor Harding's wife). Trevor Harding and Margaret Harding divorced in 1992. 5 On 16 January 1998, Trevor Harding and Steven Harding entered into a new written partnership agreement. About a year later Steven Harding moved to live and work in Melbourne. 6 In about April 2000, Trevor Harding notified Steven Harding that the Property was for sale. He proposed that they purchase it, that Steven Harding and his family move back from Melbourne and that Steven Harding work full time for the partnership. Steven Harding agreed. 7 On the advice of accountants, the Property was purchased by HIPL as trustee of the Trust. The Trust was settled on 25 May 2000. The named beneficiaries of the Trust are Trevor Harding, Steven Harding and Kim Harding (Steven's wife). 8 Steven Harding, Kim Harding and their three children have lived on the Property since about September 2001. 9 A dispute arose between Steven Harding and Trevor Harding about the operation of the partnership. During the dispute, Trevor Harding made a statement to the effect that if Steven Harding applied his share of the proceeds of sale of another property which they co-owned to reduce the loan incurred by the Property, he would use his power of appointment under the Trust Deed to "put [Steven] out of Hillcrest".

11 By letter dated 8 July 2008 addressed to the directors of HIPL, Trevor Harding purported to appoint KIPL as an additional trustee of the Trust, and upon the appointment remove HIPL as the current trustee of the Trust.

12 On 15 July 2008, the solicitor for HIPL wrote to Trevor Harding disputing the validity of the purported appointment of KIPL and the purported removal of HIPL as trustee of the Trust.

13 In November 2008 proceedings were commenced in the Supreme Court for orders for the winding up of the partnership.

14 In a document dated 2 December 2008, Trevor Harding set out minutes of a meeting of directors of KIPL (he was the only director) recording a resolution that KIPL accepts its role as trustee of the Trust forthwith.

15 In around March 2009, the Supreme Court proceedings were resolved by a Settlement Deed. Clause 8 of the Settlement Deed provided: "While ever Steven is living at the property Hillcrest' Ilford NSW he shall ensure that payments due under Suncorp loan...for the Hillcrest' property are paid and shall indemnify Trevor against all Liabilities of whatever nature, however arising, actual or contingent, in respect of Suncorp loan...for the `Hillcrest' property". 16 However, also in March 2009, Trevor Harding "as Director of" KIPL lodged a caveat on the title of the Property (First Caveat). The nature of the estate or interest was recorded in the First Caveat as follows: "The caveator is the registered proprietor of the land pursuant to a notice of appointment dated 2 December 2008." 17 The First Caveat led to a round of correspondence. Ultimately a lapsing notice was issued. Trevor Harding or KIPL did not bring an application to maintain the First Caveat. On about 22 October 2009, the First Caveat lapsed. 18 On 8 October 2009 Trevor Harding, "as Appointor of" the Trust, and KIPL, "to confirm matters which occurred on the 8th July 2008 and subsequently" executed a deed of appointment and revocation which stated that it confirmed the appointment of a new trustee (KIPL) on 8 July 2008 and forthwith on that same day the removal of HIPL as trustee for the Trust (Appointment Deed).

19 On 26 October 2009, KIPL lodged a Second Caveat on the title of the Property. The Second Caveat is the subject of these proceedings. The nature of the interest in the Second Caveat was recorded as: "Equitable Estate in Fee Simple

Service of notice on Hillcrest (Ilford) Pty Limited on or about 8 July 2008 of the appointment of the caveator as an additional trustee and the removal of Hillcrest (Ilford) Pty limited as trustee of the Hillcrest (Harding) Trust". 20 Annexure A to the Second Caveat referred to the Appointment Deed. 21 Steven Harding only became aware of the Second Caveat in January 2010 when he received a notice from Suncorp. This led to a further round of correspondence and, ultimately, the commencement of these proceedings.

HIPL AND KIPL 22 The current directors of HIPL are Steven Harding and Kim Harding (Steven Harding's wife). 23 The current shareholders of HIPL, with 24 shares each, are Trevor Harding, Steven Harding and Kim Harding. 24 Trevor Harding is the sole director and shareholder of KIPL.

Construction of the Trust Deed 25 Before construing the power of appointment and removal contained in clause 7 of the Trust Deed it is helpful to have in mind certain other clauses in the Trust Deed, as follows:

(a) in the parties section of the Trust Deed, HIPL is defined as the "Trustee"; (b) by cl 1(1) "Appointor" is defined as "the person entitled under the provisions of this deed to appoint or remove a trustee"; and "the Trustee" is defined as "the Trustee or any subsequent trustee for the time being of the Trust"; (c) in cl 3(1)(a) Trevor Harding, Steven Harding, and Kim Harding are named as beneficiaries; (d) by cl 3(3)(a)(ii) the Trustee is empowered with the consent of the Appointor to declare that a person or class of persons is no longer to be included as a beneficiary; (e) by cl 5(2)(a) until the Trust is wound up the Trustee is possessed of the capital of the Trust for one or more of the beneficiaries "in such shares or proportions as the Trustee in its discretion shall at any time or times determine in the manner provided in this clause." (f) by cl 13(1)(b) the Trust is to be wound up 80 years from the date of the Trust Deed (unless the Trustee otherwise determines). 26 The Trust Deed at cl 7 deals with the appointment and removal of a trustee. Relevantly, cl 7 is in the following terms: "7(1) The power to appoint a new trustee in the place of an existing trustee or in addition to and jointly with an existing trustee and the power to remove a trustee shall subject to the following provisions of this clause be vested in:

(a) DONALD TREVOR HARDING during his lifetime (the 'First appointor'); and

(b) on and from the death of the first appointor in STEPHEN JOHN HARDING ('the second appointor')...

7(5) The power to appoint a new trustee as in this clause contained shall not be exercised in favour of the Settlor, the person exercising the power of appointment...

7(6) The power to appoint or remove a trustee may be exercised by memorandum under hand or by deed, and where the Trustee is a corporation shall be approved by resolution of its directors..." 27 It is clear that the power of appointment in cl 7(1) is fettered by both cl 7(5) and cl 7(6). 28 There has been no resolution of the directors of Hillcrest approving the appointment of an additional trustee or the removal of HIPL as trustee. 29 Two issues arise:

(a) whether HIPL may be removed as trustee of the Trust in the absence of a resolution of the directors of HIPL; and (b) whether Trevor Harding may appoint a company controlled by him (KIPL) as trustee in the place of HIPL.

Purported removal of HIPL as Trustee 30 The appointment power in cl 7(1) is to be exercised "subject to the provisions of this clause". Included in those provisions is cl 7(6). Clause 7(6) provides that where the Trustee (ie HIPL) is a corporation (which it is) then any appointment or removal of a trustee must be approved by resolution of the directors of the Trustee. There has been no resolution of the directors of HIPL approving its removal as Trustee. Therefore, in my opinion, the purported removal of HIPL was not in accordance with cl 7(6) and was of no effect. 31 Trevor Harding does not contest that this is the ordinary construction of the language of cl 7(6). However, he submits that such a construction leads to a commercially idiotic outcome and therefore it should be recognised that it contains a drafting error. He submits that it should be construed as though the word "new" appears before the word "Trustee" or as though the words "or remove" were not there. I reject the submission.

32 In principle, words may be deleted or inserted in such a fashion as to make a document sensible without recourse to any doctrine of rectification: Saxby Soft Drinks Pty Ltd v George Saxby Beverages Pty Ltd [2009] NSWSC 1486 at [10]-[11] quoting (inter alia) Meagher, Gummow and Lehane's Equity: Doctrines and Remedies (4th ed) at [26-040]. However, the principle does not amount to permission for judicial rewriting of provisions to accord with the result said by one party to accord with commercial reality, namely its financial interests: Kooee Communications Pty Ltd v Primus Telecommunications Pty Ltd [2008] NSWCA 5 at [27]. 33 The cl 7(6) fetter is understandable given that once the Trustee and the Appointor are in effect the same person, that person has the power to exclude beneficiaries and to wind up the Trust. If Ronald Harding has become both the Appointor and (through his one man company KIPL) the Trustee, he can remove Steven Harding and his wife as beneficiaries and wind up the Trust. The objective background of the creation of the Trust was that, Steven Harding, at Trevor Harding's request, agreed to the purchase of the Property and relocated with his family to live on the Property and work full time for the partnership. Viewed against that background, the ability of him and his wife to control the Trustee can be seen to be an important part of the arrangement by which the Property was purchased.

34 I conclude that there is in fact nothing commercially idiotic or absurd resulting from the ordinary construction of the language of cl 7(6) that I have adopted, and that Trevor Harding's proposed insertion or deletion of words goes beyond any permissible process of construction.

35 The result is that whilst Steven Harding and his wife control HIPL, they cannot be put out of the Property by Trevor Harding purporting to effect a change in the trustee of the Trust. Purported appointment of KIPL as Trustee 36 In my opinion, the purported appointment of KIPL was also of no effect for two reasons. First, in my opinion, under cl 7(6) of the Trust Deed, it required the approval of a resolution of the directors of HIPL. There was no such resolution. 37 Secondly, in my opinion, it was contrary to the prohibition in cl 7(5) of the Trust Deed that the power of the Appointor to appoint an additional trustee cannot be exercised "in favour of ...the person exercising the power of appointment". 38 The power in cl 7(5) is generally consistent with authority to the effect that the removal and appointment power must be exercised for the benefit of beneficiaries, not for the benefit of the person upon whom the power is conferred: see Mowbray et al, Lewin on Trusts, 18th ed (2008) Law Book Co at 13-44. In Fitzwood Pty Ltd v Unique Goal Pty Ltd (2002) 188 ALR 566 (reversed on other grounds at [2002] FCAFC 285) Finkelstein J held, at [98]: "I am prepared to accept that a power of removal of a trustee may be a fiduciary power that must be exercised for the benefit of the beneficiaries and not for the benefit of the donee of the power, at least when the donee is not a beneficiary, although much will depend upon the terms of the trust instrument: Re Skeats' Settlement (1889) 42 Ch D 522 at 526; [1886-90] All ER Rep 989 at 990; Inland Revenue Commissioners v Schroder [1983] STC 480 at 500." 39 Earlier, in Re Burton; Wily v Burton (1994) 126 ALR 557 at 559-560 Davies J held: "When the power is contained in a deed of trust, the donee of the power is even more constrained to act in the interests of the persons for whose benefit the power was conferred. Thus, in Re Skeats' Settlement (1889) 42 Ch D 522, Kay J held that, as a power of appointing new trustees was fiduciary power, the donee of the power may not exercise it so as to appoint to himself. At 527, his Lordship said: …the universal rule is that a man should not be judge in his own case; that he should not decided that he is the best possible person, and say that he ought to be the trustee. Naturally no human being can be imagined who would not have some bias one way or the other as to his own personal fitness, and to appoint himself among other people, or excluding them to appoint himself, would certainly be an improper exercise of any power of selection of a fiduciary character such as this is.

See also Re Newen; Newen v Barnes [1894] 2 Ch 297 at 308-9. Statutory provisions, such as s 6(3) of the Trustee Act 1925 (NSW), which permit such an appointment to be made, do not affect the underlying equitable principle. 40 By s 6(3) and (10) of the Trustee Act, an appointor may appoint itself as a new trustee, subject to the terms of the trust instrument: "(3) The person to be appointed a trustee may be the person, or one of the persons, by whom or with whose consent the appointment is or may be made. … (10) The provisions of this section relative to a person nominated for the purpose of appointing new trustees apply, whether the appointment is to be made in a case specified in this section or in a case specified in the instrument, if any, creating the trust, but where a new trustee is appointed under this section in a case specified in that instrument, the appointment shall be subject to the terms applicable to an appointment in that case under the provisions of that instrument." 41 Trevor Harding is the sole director and shareholder of KIPL, the purported new or additional trustee. The only evidence as to why he wished to appoint KIPL is in a conversation between him and Steven Harding where Trevor Harding said that he would exercise his power as appointor to "put [Steven Harding] out of [the Property]". 42 In my opinion, the relationship between Trevor Harding and KIPL was such that the purported appointment of KIPL was "in favour of the…person exercising the power of appointment". The prohibition in cl 7(5) of the trust deed is not limited to an appointment of the person exercising the power of appointment. The prohibition extends beyond that by the words "in favour". Those words should be given their normal meaning. The Macquarie Dictionary (3rd ed) gives the following meaning to "in favour of": "in support of; on the side of; to the advantage of". Similarly, the Shorter Oxford Dictionary (5th ed) gives the following meaning to "in favour of": "on behalf of, in support of, on the side of, to the advantage of".

43 It follows that the appointment of KIPL contravened cl 7(5) and was of no effect.

44 HIPL also submits that any appointment for the purpose of removing Steven Harding and his family from the Property was not an act for the benefit of the beneficiaries and, therefore, the purported appointment of KIPL was beyond the power contained in cl 7(5) of the Trust Deed. The submission is based on the statement made by Trevor Harding referred to at [41] above and the absence of evidence of purpose from Trevor Harding. It is unnecessary to rule on this submission. The Second Caveat 45 Two issues arise with respect to the lodging of the Second Caveat.

(a) whether KIPL had a caveatable interest at the time it lodged the Second Caveat; and (b) whether the lapsing of the First Caveat meant that KIPL was required to obtain leave of the court under s 74O of the Real Property Act 1900 before lodging the Second Caveat.

Caveatable interest 46 The interest claimed by KIPL in the Second Caveat is an "equitable estate in fee simple": see [19] above. 47 As I have decided the issues regarding the construction of the Trust Deed in favour of HIPL with the result that the purported appointment of KIPL as a trustee was ineffective, KIPL has no interest in the Property and therefore no caveatable interest. 48 Even if KIPL had been effectively appointed as a new or additional trustee of the Trust, in my view, by reason of certain provisions of the Trustee Act, it does not presently have an interest in the Property.

49 Sections 6(1) and 12 of the Trustee Act provide that any instrument recording the appointment of a new trustee may be registered with the Registrar-General in the manner and on payment of the fees prescribed by regulation under the Conveyancing Act 1919.

50 Sections 9(1), (4) and (7) of the Trustee Act provide: " 9 Vesting

(1) Where a new trustee is appointed, the execution and registration of the deed of appointment shall without any conveyance, except as otherwise provided in this section, vest in the persons who become and are the trustees for performing the trust, as joint tenants and for the purposes of the trust, the trust property for which the new trustee is appointed. … (4) In the following cases the property shall not vest until the appropriate transfer is executed and registered so that the property is duly transferred, that is to say, in the case of: (a) any property comprised in a mortgage for securing money subject to the trust, where the property is not either land subject to the provisions of the Real Property Act 1900 or land conveyed on trust for securing debentures or debenture stock, (b) (Repealed) (c) any property a conveyance of which is required to be registered by or under any Act, whether of this State or otherwise, other than the Acts mentioned in subsections (3) and (3A). … (7) If any property does not vest under this section until transfer or registration, the execution and registration of the deed of appointment, or of the deed or deeds of consent and retirement, as the case may be, shall nevertheless vest the right to call for a transfer of the property, and to sue for or recover the property." 51 Sections 9(1) and (4) of the Trustee Act have the effect that until the deed of appointment is registered, any land does not vest in the new trustee. By s 9(7), the execution and registration of the deed of appointment vests the right to call for a transfer of property.

52 These sections were explained in Synergy Concepts Pty Ltd v Rylegrove Pty Ltd (in liq) (1997) 8 BPR 15,555 at 15,557 by Santow J: "However, on 30 September 1992, Synergy was by deed (the deed) appointed trustee of the Bryant family trust in substitution for Rylegrove. That deed was not stamped and registered with the Registrar-General until 17 April 1997. It does not follow that the appointment of Synergy in replacement of Rylegrove as trustee is deferred from taking effect until 17 April 1997, as the appointment is not dependent on the statutory power to appoint and remove trustees under the Trustee Act 1925 (NSW): see s 6(1) of the Trustee Act and Jacobs' Law of Trusts in Australia by R P Meagher and W M C Gummow, Butterworths 1997 at 377 (contrasting the position in other States).

This is because the appointment was made pursuant to the trust instrument, not in reliance on the statutory power. Thus it is agreed that the appointment was made pursuant to c1 16 of the trust instrument (JBI) by 'the appointor' under it. It follows that the appointment was effective from 30 September 1992, when made under the instrument. However, vesting of Killarney in the trustee still depends on later registration of the necessary conveyance (s 9(4) of the Trustee Act), which has yet to occur. Furthermore, vesting of the right to call for a transfer of the property only occurred upon registration of the deed of appointment: s 9(7) of the Trustee Act." 53 As far as the evidence discloses, the Appointment Deed has not been registered. It follows that the Property has not vested and KIPL has no interest, or no caveatable interest, in the Property.

The requirements of section 74O 54 Pursuant to s 74O of the Real Property Act, where a caveat has lapsed, the caveator must obtain the leave of the Court before lodging a subsequent caveat if the interest is based on the same facts as the first caveat. 55 The application of the section was described in Taylor v Commonwealth Development Bank of Australia (1991) 11 BPR 21,033 at 21,039-21,040 by Young J (as his Honour then was) as follows: "Section 74O of the Real Property Act says that a caveat which has been lodged to replace a caveat which has lapsed under s 74J has no effect if it is lodged on the same grounds as the previous caveat unless the court has made an order giving leave for the caveat to be lodged. It does seem to me that the second caveat may well have been lodged on the same grounds as the earlier caveat. Although the particulars in the schedule to the new caveat show that the documents supporting the second caveat were different to those supporting the first caveat, it seems to me that essentially the one transaction was being relied on by the bank for both caveats. As R A Woodman and K G Nettle point out in para 740.2 of their Torrens System in NSW , Law Book Co, Sydney, (release 7), the problem with the section is that it is very difficult indeed for the Registrar-General to gauge whether a second caveat is on the same grounds, especially where the caveats are differently worded.

In my view the section is aimed at situations where a second caveat is replacing a former caveat which was lodged to protect the very same interest and it does not matter whether the evidence supporting that interest is differently stated in the two documents. Accordingly, in my view the second caveat has no effect." 56 Trevor Harding submits that s 74O is inapplicable for two reasons. First, he says that the caveators were not the same because he was the caveator under the First Caveat, whereas KIPL was the caveator under the Second Caveat. I disagree. In the First Caveat he was identified as the caveator but only "as Director of" KIPL: see [16] above. In fact, he was the only director. Clearly, the First Caveat was lodged on behalf of KIPL. Secondly, Trevor Harding submits that the interest in the Second Caveat is not based on the same facts as the First Caveat because it referred to the Appointment Deed which was not executed until after the First Caveat. The Appointment Deed stated that it confirmed the appointment of KIPL and the removal of HIPL as trustee of the Trust on 8 July 2008. The First Caveat said that the caveator was "the registered proprietor of the land pursuant to a notice of appointment dated 2 December 2008". It is an odd description but it appears to be the document referred to at [14] above recording a resolution of KIPL directors (ie Trevor Harding) that it accepts its role as trustee of the Trust. The Second Caveat said that the interest was an equitable estate in fee simple by virtue of the Appointment Deed and by virtue of the fact of the notice to HIPL of 8 July 2008: see [11] and [19] above. It is arguable, and I am inclined to think, that the interest identified in the Second Caveat was not based on the same facts as the First Caveat. If that is correct, then s 74O has no application. It is unnecessary to express a concluded view on this point because I have upheld the plaintiff's contention that KIPL has no caveatable interest.

(a) the purported removal of HIPL was of no effect because it was not approved by resolution of the directors of HIPL in accordance with cl 7(6) of the Trust Deed; (b) the purported appointment of KIPL, a company controlled by Trevor Harding, was of no effect because it was not approved by resolution of the directors of HIPL in accordance with cl 7(6) of the Trust Deed, and because it was contrary to the prohibition in cl 7(5); and (c) the Second Caveat is bad because KIPL has no caveatable interest. 58 The plaintiff has been successful. Costs should follow the event. The plaintiff indicated that if it were successful, it may seek more than the usual costs order. Therefore, I propose to grant liberty to apply in relation to costs within two working days.

59 The Court makes the orders set out at [1] above. The defendants are to pay the plaintiff's costs. There will be liberty to apply in relation to costs within two working days. The exhibits may be returned.

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