The plaintiff, Ms Kim Jaeger, and the first defendant, Mr Stephen James Bowden, are the only children of the late Mrs Adelaide Emily Bowden.
In conformity with the approach adopted by all parties at the hearing, as the dispute involves members of the Bowden family, I will, without any disrespect, refer to the family members by their forenames, where convenient.
Adelaide died on 8 February 2012. Kim is the executor of Adelaide's estate, under a will executed by Adelaide on 11 December 2008, and sues the defendants in these proceedings in that capacity.
As Kim makes the present claim to recover moneys that she claims Adelaide was entitled to at the date of her death, it will be convenient to refer to the claimant as Adelaide. I will refer to Kim personally, where the reference is to her capacity as Adelaide's executor or to her personally.
In essence, Adelaide claims that she was entitled to an accounting by Stephen in relation to a partnership in which they were engaged, concerning what was initially the operation of a hotel business. The hotel was sold by Stephen, and Adelaide claims that Stephen wrongly applied the proceeds of sale in a manner that requires him to account to her. She also claims that the annual accounts for the partnership were prepared in a way that did not correctly record her partnership entitlements; in respect of matters such as drawings, revaluations of assets, entitlement to rent, capital gains and other matters.
The second defendant, Ms Jane Louise Bowden, known as Louise, was at the time that most relevant events occurred, the wife of Stephen. Stephen and Louise are now divorced. Louise is sued primarily on the basis that she has been a director, or a director and shareholder, of companies that have received properties that are impressed with trusts, which were acquired in breach of fiduciary duty by Stephen. She is also sued on the basis that she received some of the proceeds of sale of the Hotel.
It is convenient to refer next to the seventh defendant, Ritz Restaurants (Hurstville) Pty Ltd, which was at all material times the trustee of a trust called the Bowden Family Trust No 1 (the "Trust"). I will refer to the seventh defendant as the 'Trustee'.
The other defendants, being the third to sixth defendants, and the eighth to tenth defendants, are all companies owned and controlled by members of the Bowden family. Adelaide claims that the corporate defendants received some of the proceeds of the sale of the Hotel. Stephen has at all material times been a director of the corporate defendants.
Stephen's legal representatives in the proceedings also act and appear for the corporate defendants. Generally, it will only be necessary to refer to the position of Stephen and Louise, as the principal defendants. Where necessary, the separate position of the corporate defendants will be addressed.
At the hearing, Mr Newlinds SC appeared with Mr Beaumont SC and Mr Bannan for Kim, as executor of Adelaide's estate. Mr Willmott SC appeared with Mr Philips for Stephen and the corporate defendants. Mr Wheelhouse SC appeared with Mr Auld for Louise.
[2]
Contents
The complexity of these reasons for judgment makes it convenient for me to list the contents as follows:
Preliminary observations Par 12
The Primary Facts Par 18
The issues raised by the pleadings Par 78
Statement of claim Par 79
Defence of first defendant Par 102
Defence of second defendant Par 127
Defences of remaining defendants Par 147
Reply to first defendant's defence Par 148
Reply to second defendant's defence Par 155
Cross claim by first defendant Par 158
Defence to cross claim by second defendant Par 161
Cross claim by second defendant Par 164
Defence to cross claim by second defendant Par 175
Order for separate determination Par 180
Expert forensic accountants' reports Par 203
Financial statements Par 233
The AE & SJ Bowden partnership financial statements Par 237
The Bowden Family Trust No 1 financial statements Par 286
Application of balance of proceeds of sale of Hotel Par 300
Payments made to Adelaide under cl 6.2 of the Principal Deed Par 302
The Trust Deed Par 319
The terms of the Partnership Par 323
The alleged July agreement Par 334
The alleged November 2003 constructive trust Par 382
Validity of the Principal Deed and the Deed of Assignment Par 392
The correspondence Par 396
Effect of documents Par 424
Effect of Deeds and Management Agreement Par 433
The Principal Deed Par 437
The Deed of Assignment Par 481
The Family Deed Par 486
The Divorce Deed Par 488
The Management Agreement Par 490
Was the application of the proceeds of sale of the Hotel Par 499
authorised?
Implied term Par 544
Conventional estoppel Par 553
Alleged collateral agreement Par 603
Inconsistency between July Agreement and Deeds Par 605
Alleged authorisation by Adelaide of Stephen's conduct Par 609
Utility of partnership accounting Par 630
Notice by Louise of breach of fiduciary duty Par 648
Issues arising out of Adelaide's will covenant and will Par 676
Breach of covenant to leave interest in replacement Par 686
investment to Stephen
Shares in Bowden Property Investments Pty Ltd Par 690
Entitlement to proceeds of present proceedings Par 696
Construction of cl 3(a) of will admitted to probate Par 695
Simple or compound interest Par 710
Conclusion Par 731
[3]
Preliminary observations
The pleadings in this matter have raised a significant number of complex and difficult questions. There have been many amendments to the pleadings, both formal and informal, and a number of concessions were made during the hearing and final addresses. It has not been an easy matter to identify all of the questions that remain in issue.
As I will explain in more detail below, the court was persuaded to make orders for the determination of some issues separately and before others. The form of the orders made would suggest that all questions of liability were to be determined in the present hearing, and the quantification of any claims for damages, equitable compensation, or an account of profits, would occur in a later hearing, if any parties were found to be entitled to those remedies.
As I will also explain, by reason of what may have been a misunderstanding, or a shift in the course of the proceedings, I am not satisfied that the course of the present hearing has allowed me to decide all issues concerning the liability of all of the parties. That outcome appears principally to have arisen out of the fact that the hearing evolved, in part, into a claim that Adelaide is entitled to an accounting from Stephen, as the accounting party in a partnership, before further steps are taken in the hearing of the proceedings (where a partnership account may be distinguished from a claim for an account of profits against a defaulting fiduciary). A consequence of this evolution was that Adelaide and Stephen put their expert accounting evidence before the court as evidence of their claims, but not as proof of the facts and opinions contained in the expert reports. An effect of this development was that facts that I have considered are essential to the determination of questions; such as: (a) the true effect of the crucial terms of the relevant deeds; (b) whether Stephen breached fiduciary duties that he owed to Adelaide; and (c) a number of subsidiary, but important questions, such as whether at relevant times Louise had notice of any breaches of fiduciary duty by Stephen, are questions that cannot be properly dealt with on the existing evidence.
Furthermore, in my view, the parties pleaded the terms of the relevant deeds that are crucial to the determination of the primary dispute between the parties, but made little or no submissions as to how the court should construe the terms relating to the underlying material facts, which, as I have said, were not in any event considered in depth, in part because the matters considered by the accounting experts were not explored in the evidence.
In these reasons for judgment, I have dealt with all of the questions that I believe can properly be determined, on the basis of the evidence and submissions as they stood at the end of the hearing. I have made provisional findings of fact, and partially considered questions of construction of the relevant deeds, up to the point where I have become concerned that I should stop, and propose to give the parties an opportunity, in response to these reasons for judgment, to make further submissions as to the future conduct of these proceedings. That is plainly an unusual course, but I have taken the view that it might be very damaging to the interests of the parties, if I proceeded to make a final determination of all issues, in circumstances where it has become apparent to me that the description of the separate issues to be determined in the present hearing may have become blurred; where, possibly as a result of that blurring, the parties have not addressed all relevant factual issues; and the parties have not in any detailed or comprehensive way addressed what I consider to be the crucial construction issues. Shortly put, if I go further in this judgment than the parties expect me to go, and decide questions that they consider are still the subject of debate, I may jeopardise my capacity to determine the remaining questions, in a way that is fair to all parties.
As will be seen below, I propose to direct the parties to confer and to bring in short minutes to deal with: (a) the orders that should now be made as a result of the issues decided in this judgment; (b) the orders that should be made concerning the determination of issues considered provisionally in this judgment, but not determined (including whether those issues should be decided on the basis of the evidence and submissions presently before the court, or whether that determination should be deferred until a later stage, following further evidence and submissions); and (c) the orders that should be made for the determination of the remaining issues in the proceedings.
[4]
The primary facts
The primary facts were not contentious, and it will be convenient to set them out, in order to provide a proper foundation for a consideration of the issues raised by the pleadings.
In 1979 Adelaide and her late husband, Thomas, together with Stephen and Kim and her husband, Peter, acquired from Tooth & Co Ltd the goodwill (the "Goodwill") and hoteliers licence (the "Licence") of the Hurstville Ritz Hotel at 350 Forest Road, Hurstville (the "Hotel"). Adelaide and Thomas jointly acquired a one-third interest; Kim and Peter acquired a one-third interest; and Stephen acquired the final one-third interest.
The Hotel business was run by Adelaide, Thomas, Stephen, Kim and Peter in partnership (the "Partnership"). The Partnership was informal, and its terms were not set out in any document.
In about February 1982, Kim and Peter withdrew from the Partnership, and at that time Stephen became entitled to a 50% interest, and Adelaide and Thomas jointly held the remaining 50%.
Adelaide ceased playing an active role in the management of the Partnership or the Hotel from about 1985.
From 1987, Stephen held a power of attorney granted by Adelaide, and following the death of Thomas, Stephen made all decisions with respect to the management and administration of the Partnership and the Hotel business, including where necessary signing documents on Adelaide's behalf in exercise of the power of attorney.
In 1990, the partners bought from Tooth & Co Ltd the freehold interest in the land upon which the hotel stood, that is, 350 Forest Road, Hurstville (the "Freehold"), subject to the lease that had earlier been acquired. I will call the Goodwill, the Licence and the Freehold, all being assets necessary for conducting the Hotel business, the "Hotel Assets". At about the same time, they acquired neighbouring properties at 346 and 348 Forest Road in the names of Butlers Bridge Pty Ltd and Kettleswell Pty Ltd respectively (being the third and fourth defendants). Stephen and Thomas each held one share in both companies, and they and Adelaide were their directors.
In 1992, Stephen, Thomas and Adelaide bought the property at 1A Barrett Street, Hurstville, in the names of Stephen, as to one half, and Thomas and Adelaide, as to the other half.
In 1994, Thomas died, and his interest in the Goodwill and License of the Hotel, the Freehold, and the Partnership vested in Adelaide as his sole beneficiary.
From that time, the Hotel business was operated in partnership by Adelaide and Stephen in equal shares.
In about 1994 or 1995, Adelaide told Stephen that she did not want to be involved in the Hotel business anymore, and that he could take care of all matters relating to the business, using the power of attorney where necessary.
In 1994 and 1995, there was a downturn in the trading of the Hotel, and Stephen found it difficult to make payments of principal and interest to the bank which had loaned the money for the purchase of the Hotel. Stephen and Adelaide both had to sell assets in conjunction with a refinancing of the debt, and a change of banker to the National Australia Bank (the "NAB"). Following the sale of their residential properties, Stephen and Louise lived with their children in a rented apartment, and Adelaide lived in a garage at her sister's home.
Stephen was required to work such long hours that in early 1995 he suffered a physical breakdown, and was admitted to hospital for a week; but on discharge he was required to resume his usual duties at the Hotel, working 18 hours a day, seven days a week.
From 1 July 1998, the accounts for the Partnership, the Trust, the Trustee, and all related entities were prepared by Mr John Morrison, an accountant, who was a nephew of Adelaide.
On 29 June 1998, Adelaide and Stephen entered into a lease of the Freehold in favour of the Trustee, as trustee of the Trust, on a monthly tenancy, at a monthly rental of $41,666.67 (i.e. an annual rent of $500,000) (the "Lease"). Under the terms of the Lease, Adelaide and Stephen licensed to the Trustee the use of the business name, the Goodwill (including the Licence) and the conduct of the Hotel business.
Also on 29 June 1998, the Trustee appointed Stephen as manager of the Hotel business, with full and unfettered control of the conduct of the business, and agreed that Stephen would hold the licence for the Hotel on its behalf.
The Trustee was formally appointed as trustee of the Trust on 1 July 1998.
From 1 July 1998 (up until 30 September 2007), all of the income received from the operation of the Hotel by the Trustee was paid into the accounts of the Trust, and any profits were distributed by the Trustee in accordance with its discretion under the relevant trust deed.
Between 1 July 1998 and 31 August 2007, the Partnership did not operate its own bank account, and instead the bank account operated by the Trustee with the NAB was used for the Partnership's transactions.
It was Mr Morrison's practice, when preparing the annual accounts, not to record interest charges on any loans between the Partnership and the Trust.
In October 1998, Stephen assisted Adelaide to acquire a home unit at Broadbeach on the Gold Coast for $750,000. The deposit of $75,000 was paid by the Trust. A sum of $600,000 was borrowed from the NAB. Due to her age, the bank would not lend the money to Adelaide as the only borrower. The NAB would only make the loan if the home unit was purchased in the joint names of Adelaide and Stephen, and both were jointly liable for the borrowing. Adelaide was unhappy that Stephen's name would be on the title, but that could not be avoided. Stephen wrote a letter to Adelaide, dated 15 October 2008, in which he stated, among other things, that he held his 50% share in the home unit on trust for Adelaide.
In about 1998, the New South Wales Government increased the number of poker machines that the Hotel could operate from 15 to 30. The number of poker machines operated by the Hotel was increased to 30.
According to Stephen, from about 1984 to 1998, Stephen gave Adelaide weekly payments of between $500 and $750 from her share of the profits of the Partnership, and after 1 July 1998, by distributions from the Trust (where funds were available to do so). Following the increase in the number of poker machines to 30, the revenue of the Hotel increased, and the Trust began to distribute $1,000 per week to Adelaide.
In October 2000, Stephen, at Adelaide's request, employed Kim and Peter to work at the Hotel, at a salary package of $216,000 per year, which was paid out of the Trust. In about mid-November 2000, Stephen assisted Kim and Peter to acquire a home unit in Rose Bay for a price of $1,160,000. The deposit was paid by the Trust. The loan of $928,000 that was borrowed from the NAB was serviced by distributions made by the Trust. The Trust also paid the monthly lease fee of $2,039.09 on a vehicle leased for Kim.
In January 2001, Stephen dismissed Kim and Peter from their employment at the Hotel, because of disagreements with Louise. At Adelaide's request, Peter caused the Trust to continue to pay Kim and Peter $2,000 per week, together with the mortgage payments on the Rose Bay property of $1,654 per week, as well as the lease payments on the vehicle.
Following the dismissal, Stephen became estranged from Kim and Peter.
Adelaide decided that she would like to use her equity in the Partnership to make a gift to Kim and Peter, during her lifetime, to enable them to buy a suitable business. Adelaide asked Stephen to assist, and Stephen arranged for Mr Morrison to find a suitable motel business.
Starting in about March 2003, discussions took place between Adelaide and Stephen, about Stephen buying out Adelaide's share in the Partnership. With the assistance of Mr Morrison, Stephen obtained advice from a tax adviser, Mr Stephen Davidson, and a partner at the firm of solicitors then known as Blake Dawson Waldron, Mr Philip Wiseman. Stephen discussed the significance of that advice with Adelaide, and on 1 July 2003, a meeting occurred at the Hotel between Adelaide, Stephen, Kim, Peter and Mr Morrison. At the end of the meeting, the persons present signed minutes of the meeting (the "July Minutes"). Thereafter, as agreed at the meeting, lawyers were instructed, principally Mr Wiseman, to prepare documentation to implement the matters decided at the meeting, in accordance with the advice that had been given. The meaning and effect of the advice, the discussions prior to the meeting, the matters discussed in the meeting, and the July Minutes are controversial. I will defer a more detailed discussion of these matters until after I have considered the issues raised by the parties in their pleadings.
In November 2003, drafts of four deeds and a management agreement were prepared. Adelaide, Kim, Peter and Mr Bullen signed a version of these documents. Stephen, however, was unhappy with some of the terms of two of the deeds, and gave instructions to Mr Morrison to prepare revised versions of the documents. Stephen executed and initialled a set of the documents that included the revised documents. The set of documents executed by Stephen was not executed by the other parties. Adelaide and Stephen are agreed as to the identity of the documents that took effect. Louise challenges that position, and indeed argues that the deeds and the management agreement were not valid. This is another contentious issue, which will be addressed below.
On 13 November 2003, Adelaide made a will in contemplation of the execution of the documents (the "2003 Will") by which Adelaide gave all of her interest in the Hotel, including the Hotel companies, the Freehold and the Goodwill to Stephen, and the residue of her estate to Kim.
Kim and Peter found a motel at Gosford that they wished to buy before Christmas 2003. They, together with Adelaide and Stephen, agreed on the basis of the family arrangement made in July, that Kim and Peter should enter into a contract to purchase the motel. They did so, and Stephen arranged for the Trust to pay the deposit of $60,000 and stamp duty of $98,794, in the expectation that he would be repaid on completion of the agreement that was then proposed to be implemented in accordance with formal documents that were then in the course of being drafted.
Putting aside the issue of the identification of the relevant documents, and the validity of the transaction, the following documents were executed in November or December 2003:
1. Undated deed between Adelaide, Stephen and Kim, which dealt with the management of the Hotel; the possible future sale of the Hotel; the will of Adelaide; covenants by Kim and Stephen that they would not challenge Adelaide's will; family arrangements concerning the provision of certain entitlements to Adelaide; the relinquishment by Adelaide and Kim of any entitlement to distributions from the Trust; and the responsibility for the liabilities of the Hotel business (the "Principal Deed").
2. Deed dated 30 December 2003 between Adelaide and Stephen, by which Adelaide assigned to Stephen the half of her interest in the Partnership, the Goodwill and the Licence that she had inherited from Thomas, but not the other half, or her half interest in the Freehold (the "Deed of Assignment").
3. Undated deed between Adelaide, Mr Bullen (who was Adelaide's companion), Kim, Peter and Stephen, by which the parties covenanted that they would not challenge the part of Adelaide's will that gave Adelaide's remaining interest in the Hotel to Stephen, including under the Family Provision Act, which was then in force (the "Family Deed").
4. Undated deed between Louise, Stephen and Adelaide, under which Louise covenanted, in the event of her divorce from Stephen, not to seek to obtain part of Stephen's interest in the Hotel by means of Family Court orders (the "Divorce Deed").
5. Undated management agreement between Adelaide, Stephen and the Trustee, appointing Stephen as the managing partner of the Partnership, and giving Stephen the exclusive authority to manage the Partnership and the Hotel (the "Management Agreement").
I will refer to the four deeds described in the preceding paragraph collectively as the "Deeds".
It is the meaning and effect of these documents that will primarily govern the determination of the issues between the parties. In outline, the defendants contend that, by reason of an agreement contained in the July Minutes; an agreement made in November 2003 when the family committed to the purchase of the motel by Kim and Peter; or by the Deeds and the Management Agreement; Adelaide assigned the full legal and beneficial interest in half of her Partnership interest to Stephen, and agreed to hold her legal interest in the other half, and her legal interest in the Freehold, on trust for Stephen. Alternatively, if Adelaide did not agree to hold her remaining interest on trust for Stephen, she agreed to relinquish her interest in any of the profits of the Partnership or the Trust. The defendants say that, if there was no agreement as they contend, Adelaide became bound by a conventional estoppel, which prevented her from asserting that she continued to have any beneficial interest in any of the Hotel assets. (This summary ignores a number of differences in the arguments put by Louise, on the one hand, and the other defendants, on the other). Adelaide, on the other hand, contends that she remained entitled beneficially to her half of the interest in the Partnership, the Goodwill and the Licence that she retained, and also her half interest in the Freehold, and accordingly to the profits of the Partnership.
It will be necessary to set out the terms of the July Minutes, the Deeds and the Management Agreement below, and to carry out a detailed analysis of the meaning and effect of those documents. For present purposes, it will assist with the understanding of this statement of primary facts, and the analysis of the pleadings that follows, if I refer in broad terms to a number of matters dealt with in the Deeds and the Management Agreement:
1. The Principal Deed appointed Stephen to be the managing partner of the Partnership, with power to manage not only the Partnership, but the Freehold and all assets associated with the Hotel business.
2. Adelaide covenanted to make a will, under which she would leave to Stephen all of her interest in the Partnership, the Goodwill, the Licence, the Freehold, and her shares in the Trustee and three other of the corporate defendants that owned assets connected with the operation of the Hotel (the "Hotel Companies"), that she did not assign to Stephen under the Deed of Assignment.
3. Under the Principal Deed, Adelaide consented to Stephen selling the Hotel business and the Freehold, subject to a particular condition. Stephen was given the authority to invest the proceeds of sale in a replacement investment. In that event "the provisions of clause 1 of [the Principal Deed (concerning Stephen's control of the Hotel business)] shall apply to the replacement investment mutatis mutandis".
4. The Principal Deed required Stephen to pay out the mortgage secured on Adelaide's Gold Coast home unit, and to transfer his interest in the title to her.
5. It also contained an undertaking by Stephen to ensure that Adelaide would, during her lifetime, continue to receive Stephen's support, in relation to the costs of her ongoing lifestyle, including distributions of profits from the Hotel business or distributions from the Trust.
6. Adelaide and Kim agreed by the Principal Deed that Stephen would be free to distribute any income from the Trust to his immediate family, and they relinquished any entitlement they had to distributions of income or capital from the Trust.
7. As stated above, under the Deed of Assignment, Adelaide assigned to Stephen the one half of her interest in the Hotel assets that she had inherited from Thomas, but not the remainder of her interest, including any of her interest in the Freehold. The price was $3 million (or, as Louise submits, $2,825,000).
8. The Principal Deed contained a recital that Adelaide intended to pay a substantial part of the price she received under the Deed of Assignment to Kim, to enable her to acquire a business. In fact, Adelaide intended to make a gift of $2 million to Kim from the $3 million she was to receive.
9. The Management Agreement contained the specific terms of Adelaide's appointment of Stephen as the managing partner of the Partnership. Of particular importance, it empowered Stephen to grant or extend the existing lease under which the Partnership leased the Hotel assets to the Trust at a non-commercial rent, which had the effect that the profits of the Hotel business were earned in the Trust and not the Partnership.
The price of $3 million provided for in the Deed of Assignment was determined on the basis that the value of the Goodwill, the Licence and the Freehold was $20 million. To that amount the value of various Hotel assets were added, and then the amount of all of the liabilities of the Hotel business, whether owed by the Partnership or the Trust, were deducted, giving a "net share value" of approximately $12 million. A quarter share was rounded down to $3 million. This approach to the determination of the price did not value the Goodwill, the Licence and the Freehold separately. Consequently, Adelaide agreed to sell half of her interest in the Partnership, the Goodwill and the Licence for a price that reflected one quarter of the net value of all of the Hotel Assets.
The transactions contemplated by the Deeds were completed on 22 December 2003. Stephen arranged for new borrowings of $12 million to refinance all of the existing secured debts of the Partnership and the Trust, and to make all of the payments required to complete the transactions. Nine million dollars was borrowed from the NAB, secured on the Hotel assets owned by the Partnership, and $3 million was borrowed from the NAB, secured on a home unit at Newtown owned by the Trust. After repayment of the existing loans, various payments totalling $2 million were made on behalf of Kim and Peter, $1 million was retained for Adelaide, and $491,155.24 was used to pay out the mortgage on Adelaide's Gold Coast home unit. Stephen was repaid the amounts that he had drawn out of the Trust to enable Kim and Peter to enter into the contract to buy their motel. The balance of the funds was used to pay various transaction costs.
As Adelaide was not paid the $1 million immediately, the deeds were held in escrow by Mr Wiseman until the payment was made, and the escrow condition was satisfied on about 29 March 2004.
Thereafter, until 2007, Stephen managed the Partnership, the Hotel and the Trust in substantially the same way as had happened before the execution of the Deeds and the Management Agreement.
Stephen caused the Partnership and the Trust to pay regular amounts of income to Adelaide; to pay the related income tax; and also to pay Adelaide's sundry living expenses. These payments will be considered in more detail below.
In 2007, Stephen caused the Partnership to enter into an option for the purchase of the Hotel for a price of $52 million. Stephen executed the documentation under his power of attorney on behalf of Adelaide.
There was a term in the option agreement that the Hotel would be operated by the Partnership at the time of completion of any contract for sale, as the Partnership would be the vendors. Accordingly, at the end of September 2007, the lease granted by the Partnership to the Trust was terminated, and for a period of about a month between the termination and the completion of the contract of sale, the Hotel business was operated by the Partnership.
On completion of the contract of sale on 29 October 2007, the net purchase price of $42,327,116 was paid into the Partnership's bank account.
Mr Morrison, with the authority of Stephen, caused that amount to be paid immediately into the Trust's bank account, for the purpose of ensuring that any interest income was earned by the Trust, rather than the Partnership, as that would facilitate the minimisation of income tax. Following the payment of certain debts of the Partnership, including a debt owed to the Trust, as at 30 June 2008, the Trust was indebted to the Partnership in the sum of $28,394,241.
Thereafter, over the period of a number of years, Stephen, with the assistance of Mr Morrison, conducted the affairs of the Partnership and the Trust in the belief that he was the beneficial owner of all of Adelaide's remaining interest in the Partnership, and could deal with the assets of the Partnership as he saw fit. The financial dealings that were undertaken using the proceeds of sale of the Hotel are complex, and will be considered below in relation to the annual financial statements of the Partnership and the Trust. For the present, it will be sufficient to say that Stephen caused part of the money to be paid out of the Trust to beneficiaries associated with himself and Louise; part to be loaned to the trustee of a trust in which he and Louise were the primary beneficiaries; and part to be drawn down by himself from his partners' funds in the accounts of the Partnership.
Adelaide learned of the completion of the sale of the Hotel assets soon after it occurred on 29 October 2007. Almost immediately, she made demands to Stephen and Mr Morrison for her share of the sale proceeds. Her demands were expressed on the basis that she expected to receive an appropriate share of what was, in practical terms, the windfall that arose out of the sale of the Hotel for $52 million in 2007, when the family understood it was only worth $20 million in 2003. Stephen and Mr Morrison took the stance that Adelaide was not entitled to any additional share of the capital profit, and that her rights were extinguished by the payment of the $3 million in 2003. Adelaide apparently repeated her demands on a number of occasions.
On 6 December 2007, Mr Peter Kilmurray, who was Adelaide's solicitor, wrote a letter to Stephen. He referred to Adelaide having become aware of the sale of the Hotel, and said that Adelaide was the 25% owner of the Partnership, and a 50% owner of the Freehold. He referred to the 2003 transactions, and asked to be provided with a copy of all documents executed by Stephen under the power of sale granted by Adelaide. He then said:
Finally, our client was recently advised by you that the sale of the Hotel had been finalised. Our client requests a full accounting of the sale proceeds and therefore a copy of the settlement statements and any associated statements is also requested.
Mr Kilmurray pursued the issue in correspondence, both with Stephen and Clayton Utz, who were then the solicitors for Stephen. In a letter to Clayton Utz dated 11 December 2007, Mr Kilmurray pointed out Stephen's obligations under cl 6.2 of the Principal Deed, which was the term that required Stephen to support Adelaide's lifestyle expenses. Mr Kilmurray repeated his request in a letter to Clayton Utz dated 31 March 2008. Clayton Utz sought instructions from Stephen, but apparently received none. Stephen did not make any response to the requests made by or on behalf of Adelaide.
Mr Morrison prepared annual financial statements for the Partnership, which reflected the view of Stephen and Mr Morrison, that Stephen was the beneficial owner of all of the assets of the Partnership, and that he was entitled to deal with the proceeds from the sale of the Hotel for his own benefit, to the exclusion of Adelaide, save in respect of his continuing obligation under the Principal Deed to provide for Adelaide's lifestyle expenses.
Unlike the procedure before the Hotel was sold, when Stephen signed the Partnership accounts on behalf of Adelaide, by exercising his power of attorney, for a number of years after the sale, Stephen and Mr Morrison met with Adelaide for the purpose of explaining the Partnership's accounts, and arranging for Adelaide to sign those accounts personally. Adelaide did so, notwithstanding that she apparently continued to ask for her share of the sale proceeds of the Hotel.
Stephen continued to pay, and Adelaide continued to accept, the payments that had been described in the Principal Deed as "lifestyle" payments. As will be seen below, some of these payments were substantial, and it appears that payments were made from time to time on the basis that Stephen was relatively liberal in meeting requests made to him by Adelaide.
This state of affairs continued until Adelaide's death on 8 February 2012.
Apparently upset by Stephen's refusal of her request for a share in the proceeds of sale of the Hotel, Adelaide executed a new will on 17 March 2008, which relevantly, revoked the will that she executed as required by the Principal Deed, and made a gift of her interest in the Hotel, by cl 3(a), in the following terms:
All sums of money owing to me from the sale of the commercial property known as "The Hurstville Ritz Hotel"… and all interest due and to become due in respect thereof and my interest in all securities, if any, for the same to my daughter KIM FRANCES JAEGER and my son STEPHEN JAMES BOWDEN as shall survive me for 30 days, and if more than one then equally as tenants in common.
Adelaide made a further will on 11 December 2008, which made the same gift in cl 3(a) as had the 17 March 2008 will.
On 5 February 2010, Bowden Company Pty Ltd (the ninth defendant) purchased the Cabramatta Inn Hotel for a price of $22,799,658.
Louise commenced proceedings in the Family Court of Australia for a property settlement and maintenance. She filed an amended initiating application on 20 September 2010. Stephen and Adelaide were joined as respondents.
On 5 August 2010, the solicitors representing Stephen in the Family Court proceedings wrote a letter to Louise's solicitors in which they said: "You will note from the information below that our client's mother, Adelaide Emily Bowden… has a significant interest in the overall asset pool". The letter contained the following statement, in par 12.6:
In October 2007, the Ritz Hotel was sold for $52 million… Our client held 75% interest in the goodwill of the Ritz Hotel with Mrs Bowden Snr holding the remaining 25%. The Husband and Mrs Bowden Snr held an equal 50% interest in the Freehold. After payment of sale expenses, liabilities and Capital Gains Tax, Mrs Bowden Snr's net entitlement from the sale proceeds of the freehold and leasehold were approximately $11,943,881.
Stephen and Adelaide both filed affidavits in opposition to Louise's application. Stephen swore an affidavit on 24 September 2010. In par 113, he said:
I do not know how much is owed to my mother from the asset pool however which may be in the vicinity of between $4,000,000 to $12,000,000. I have engaged Walker Wayland Chartered Accountants to independently calculate my mother's entitlement from the asset pool…
In pars 13 to 16 of her 28 September 2010 affidavit, Adelaide noted the statement made in Stephen's solicitors' letter that has been extracted above; agreed that she was entitled to 50% of the proceeds of sale of the Freehold, and 25% of the proceeds of sale of the Goodwill; and said that she had not at that stage quantified her entitlement. She claimed to be entitled to a trust over any assets acquired with her share of the proceeds of sale of the Hotel.
On 7 February 2011, Hurstville Property Investments Pty Ltd (the eighth defendant), being a company owned and controlled by Stephen and Louise, repurchased the Hotel for $32,627,187.
[5]
The issues raised by the pleadings
It will now be appropriate to analyse the issues raised by the parties' pleadings. I will do so in perhaps more detail than might otherwise be thought necessary. That is because the issues are complex, and the structure of the pleadings - in particular the defences - does not assist in making the issues transparent. Further, there have been a significant number of amendments, some formal, and some informal. Some matters alleged by parties have also been abandoned during the hearing or submissions. I have made orders for the separate determination of some questions. As I have said above, it appears to me that the line dividing the separate questions to be determined, from those that have been deferred, has become blurred. It has therefore been necessary for me to pay particular attention to the way in which the parties have pleaded their cases.
[6]
Statement of claim
Adelaide seeks the following relief in par 1 of the relief claimed:
An order that the Defendants account to the Plaintiff in her capacity as executor of the estate of the late Adelaide Bowden for the profits of the late Adelaide Bowden's share of the Partnership assets properly payable to her between the date of the execution (sic) Deeds in 2003 and the date of her death on 8 February 2012.
At the hearing, Adelaide abandoned her claim for an account for the period between the execution of the Deeds in 2003 and the date of completion of the sale of the Hotel on 29 October 2007, and confined her claim to the period between that date of sale of the Hotel and the date of her death. The reason given for that abandonment was that cl 6.5 of the Principal Deed had the effect that Adelaide relinquished her entitlement to distributions from the Trust.
In pars 2 and 3 of her claim for relief, Adelaide seeks orders charging the assets of the defendants with the amount found to be owing to her following the accounting process, or alternatively, declarations that the defendants hold their assets on trust for Adelaide, insofar as those assets were directly or indirectly acquired with assets or profits properly belonging to Adelaide.
Adelaide seeks, in par 4, an order for all necessary accounts and enquiries to enable her to trace and recover the assets and profits referred to in the preceding paragraphs.
Alternatively, by par 5, Adelaide seeks an order that the defendants pay her equitable compensation.
Finally, Adelaide seeks interest and costs.
The statement of claim does not at this stage elaborate how the charges or trusts should be applied in relation to individual assets owned by the defendants, and I assume that Adelaide proposes that such an elaboration will be deferred until after she has made her election to seek an account of profits, or alternatively equitable compensation, and after the further accounts and enquiries have been carried out, in order to enable her to plead her claim specifically.
Adelaide pleads the duties owed by Stephen to her in par 17 of the statement of claim, in the following terms:
By reason of each and either of:
(a) the Partnership between [Adelaide] and [Stephen]; and
(b) the terms of the Deed pleaded in paragraphs 14 and 16 above,
[Stephen] owed a duty to [Adelaide] at all material times between 2003 and the death of [Adelaide] on 8 February 2012:
(i) to account to [Adelaide] for any profits made by the Partnership, including the profits of the Hotel business until its sale on 29 October 2007, and thereafter the profits of any other subsequently purchased business, as well as the profits from the sale of the Hotel; and
(ii) not to make an unauthorised profit, from his position of partner in the Partnership, or from his position of managing partner of the Partnership.
I should note that the terms of "the Deed" pleaded in pars 14 and 16 are said to be terms of the Deed of Assignment, whereas in fact the terms pleaded in par 16 are terms of the Principal Deed. Nothing turns on this, as the proceedings were conducted on the basis that, assuming their validity, all of the Deeds took effect in accordance with their terms.
Paragraph 16(c) pleads the terms of cl 2.1 of the Principal Deed, which I consider to be crucial to the determination of the issues in this case. That provision has the effect that, in the event that the Hotel was sold, and the proceeds of sale invested in a replacement investment, the provisions of cl 1 of the Principal Deed, by which Stephen was appointed managing partner, would apply to the replacement investment mutatis mutandis.
As I have noted above, Adelaide now only seeks to enforce a duty that she alleges was owed to her by Stephen for the period from 29 October 2007.
Looking at par 17(b)(i), Adelaide alleges that Stephen was obliged to account to her for any profits made by the Partnership after 29 October 2007, and the profits of any subsequently purchased business, as well as the profits from the sale of the Hotel. As will be seen, the Partnership did not make any significant profits after the sale of the Hotel. The Partnership made a substantial capital profit from the sale of the Hotel. The Trust earned significant income from on-lending part of the money loaned by the Partnership to the Trust. However, because the Partnership's loan to the Trust was interest-free, the Partnership did not make profits "from any subsequently purchased business".
At this stage, I merely flag that it is not clear to me that par 17(b)(i) properly captures the events that followed the sale of the Hotel. The Partnership did not make any profits from its business activity after that date. It is not a matter of accounting for such profits, but whether Stephen had a duty to the Partnership to make profits that it did not make. Further, the reference to "the profits from the sale of the Hotel" appears to be a reference to the capital profit that occurred on the sale. The statement of claim does not appear to deal with the significance of the provision in Adelaide's 2003 will whereby her interest in the capital of the Hotel was left to Stephen.
Adelaide alleges, in pars 18 and 19, that Stephen and Louise knew the matters that gave rise to the duty to account, and that the corporate defendants did also, as Stephen, or alternatively Stephen and Louise, was the directing mind and will of those defendants. The statement of claim does not specify exactly, what it was that Stephen and Louise knew.
There is an allegation in par 20 concerning the period up to 29 October 2007. In essence, Adelaide alleges that Stephen caused the Trustee to operate and receive the profits of the Hotel Business rather than the Partnership, and that Stephen and the Trustee have breached their duty to account to Adelaide in respect of her full entitlements to the profits of the Hotel business. As Adelaide abandoned the allegation in sub-par (a), concerning Stephen's causing the Trustee to receive the profits of the Hotel Business, it is not clear that the remaining sub-paragraphs have any continued operation, as they appear to be dependent upon sub-par (a).
Paragraphs 21 to 24 deal with the sale of the Hotel on 29 October 2007. Paragraph 22 contains the allegation of the duty owed by Stephen to Adelaide. Kim advised during the hearing that the paragraph should be read as if the words underlined had been added to the original paragraph.
By reason of the matters pleaded in paragraphs 12 to 17 above, [Stephen] has a duty to account to [Adelaide] for the profits earned on her capital account from 2007 to date of the said sale in proportion to her 25% interest in the Partnership assets including the goodwill of the Hotel business and licence and her 50% of the freehold (that is, in the sum of approximately in the order of $11,943,881 plus interest).
By adding the interpolated words, Adelaide appears to be confining her claim to the profits that should have been earned on her share of the capital of the Partnership between 29 October 2007 and the date of her death.
Adelaide alleges in par 23 that Stephen has failed to account to Adelaide for her full entitlement to the profits.
In par 24, Adelaide alleges that Stephen and Louise caused the eighth defendant, Hurstville Property Investments Pty Ltd, to repurchase the Hotel using funds from the Partnership's sale of the Hotel that were paid to it by the Trustee.
Paragraph 25 pleads the liability of the defendants, either as accounting parties, or parties who were knowingly in receipt of assets and funds that are traceable to a breach of fiduciary duty by Stephen. Adelaide no longer pursues the allegation in par 25(b), which concerns the period between 1 July 2003 and 29 October 2007.
Paragraphs 26 to 29 allege, in summary, that on or about 5 February 2010, Stephen and Louise caused the ninth defendant, Bowden Company Pty Ltd, in its capacity as trustee of the Cabramatta Bare Trust, to purchase the Cabramatta Inn Hotel for $22,800,000, using $7,720,000 of funds known by Stephen, Louise and the ninth defendant to have ultimately been borrowed from the Partnership.
Finally, in par 29, Adelaide alleges that the defendants are liable to account to her. Her particulars claim that her total entitlements were in the order of $11,002,300 as at 8 February 2012, less partial repayments of $5,255,133, giving an approximate entitlement of $5,747,176 plus interest. These amounts are now overstated, as Adelaide has abandoned her claim for the period between 20 to December 2003 and 28 October 2007.
As I understand the statement of claim, Adelaide's claim that Stephen is obliged to account to her is based upon the fact of the Partnership being in existence after the sale of the Hotel, and Stephen continuing to be the managing partner. That is, Stephen's obligation to conduct the business of the Partnership in a manner that would have caused additional profits to be distributable to her was an incidence of the existence of the Partnership. It thus arose automatically, and was reinforced by the terms of the Principal Deed, under which Stephen was the sole managing partner. As I have noted above, Adelaide pleaded the effect of cl 2.1 of the Principal Deed, but appears to assert that the only consequence of cl 1 continuing to apply, mutatis mutandis, was that Stephen continued to be managing partner.
[7]
Stephen's second further amended defence
During the hearing, the operative defence filed by Stephen was his second further amended defence. In final submissions, a document described as Stephen's third further amended defence was handed to the court, in order to illustrate aspects of his defence that Stephen had abandoned, by means of amendments to the second further amended defence.
First, Stephen responded, in par 3 of his second further amended defence, to the allegation in par 13 of the statement of claim, that the relevant parties entered into the Deeds, by alleging (primarily in par 3(1)(b)(iv)) that, based upon the proper construction of identified provisions in the Deeds and the Management Agreement, Adelaide "agreed to relinquish her beneficial interest in and any rights attaching to the remaining Adelaide Interests in favour of" Stephen, "in lieu of which", Stephen agreed to transfer his interest in the Gold Coast unit to Adelaide unencumbered, to pay her lifestyle costs, and to indemnify her in relation to all debts of the Hotel business.
Thus, Stephen claimed that the combined effect of the relevant provisions of the Deeds and the Management Agreement was that, upon completion of the transaction, Adelaide only retained the legal title to her remaining interest in the Partnership and the Hotel, and that Stephen had the entire beneficial interest.
Secondly, Stephen responded, in par 4, to the allegation in par 14 of the statement of claim that Adelaide assigned to him by the Deed of Assignment, for the consideration of $3 million, one half of her interest (namely 25%) in the Partnership, but not her 50% interest in the Freehold, by alleging that Stephen and Adelaide entered into an agreement on 1 July 2003. Stephen gave particulars, being the conversation that occurred at the meeting on 1 July 2003, and the July Minutes. The most significant term of what Stephen described as the "July Agreement" is that, during her lifetime, Adelaide would hold her remaining interest in the Hotel on trust for Stephen: see par 4(d)(i)(D). Stephen alleged that the July Agreement was a final agreement, to which the parties "intended to be bound immediately while agreeing to have the terms restated in writing which was to be fuller or more precise but not different in effect": see par 4(d)(i)(D)(aa). Alternatively, Stephen said that the parties to the July Agreement "had agreed completely upon all of the terms of their agreement and intended no departure from or addition to those terms, but made performance of those terms conditional upon the execution of formal documents": see par 4(d)(i)(D)(bb). In either event, Stephen said that the whole of the July Agreement was made on or about 1 July 2003, and "to the extent of any inconsistency between the oral terms and any subsequent written part, the oral terms take precedence": see par 4(d)(i)(D)(cc).
Put in simple terms, Stephen claimed that a final agreement was made on 1 July 2003, a term of which was that Adelaide would hold her remaining interest in the Hotel on trust for Stephen, and the terms of that agreement prevailed over any inconsistent terms contained in the Deeds and the Management Agreement.
Stephen also responded to the allegation in par 14 of the statement of claim, by claiming an entitlement to rectification of the Deeds, based upon "the premises" referred to in par 4(d)(i)(D)(ee).
The amendments to his defence contained in the document called third further amended defence of the first defendant involve, in essence, Stephen abandoning (a) his claim that either the Deeds or the July Agreement had the effect that Adelaide would hold her remaining legal interest in the Partnership and the Hotel Assets on trust for Stephen; and (b) his claim that, to the extent that the Deeds do not have that effect, they should be rectified.
The effect of the various amendments to the second further defence, relating to the manner in which Adelaide would continue to hold her remaining interest in the Partnership and the Hotel Assets, was that, although Adelaide did not agree to hold that interest on trust for Stephen, she did "relinquish" any rights attaching to her remaining interests in favour of Stephen (pars 3(b)(iv) and 4(d)(dd)(1)).
This amendment gives rise to a question about the legal effect of Adelaide continuing to have the beneficial ownership of her remaining interest in the Partnership and the Hotel Assets, in circumstances where she has relinquished any rights attaching to that interest. That is a question that will require consideration below.
Stephen further responded to the allegation, in par 14 of the statement of claim, by alleging, in par 4(d)(ii)(A) to (F), that Adelaide made representations in the period April to 1 July 2003 (called the "Adelaide Representations"), and by alleging, in par 4(d)(ii)(G) to (I), that the Adelaide Representations led to "a common understanding and, or in the alternative, an agreed assumption" (called the "Common Understanding and Assumption") on a number of matters.
Summarising those matters, Stephen said that there was a Common Understanding and Assumption that Adelaide had relinquished her beneficial interest in her remaining interest in the Hotel, and would hold it on trust for Stephen, and that Stephen would be free to distribute any income from the Trust or the Hotel business, without any obligation to account to Adelaide in respect of that distribution.
Stephen then said that the Deeds do not reflect the terms of the Common Understanding and Assumption: see par 4(d)(ii)(I)(aa).
This allegation leads to another claim that the Deeds should be rectified. That claim has also now been deleted.
A second consequence of the Common Understanding and Assumption alleged was that Adelaide is estopped from asserting, in summary, that any agreement reached is inconsistent with the Common Understanding and Assumption; Adelaide had any entitlement to any profits of the Hotel business or the Trust; or that she had not relinquished any beneficial interest in her remaining interest in the Hotel: see par 4(d)(v).
These allegations appear to distil into the proposition that Adelaide is prevented by a conventional estoppel from asserting that the Deeds gave her any continuing rights to receive any benefits from the retained interest in the Hotel.
In the document called third further amended defence, Stephen has deleted the allegations that supported his claim that Adelaide is estopped from asserting that she retained the beneficial ownership of her remaining interest after the Deeds were entered into. Stephen maintains, however, his claim that she is estopped from (a) asserting that any agreement was inconsistent with the Common Understanding and Assumption; (b) asserting that she had any entitlement to profits or distributions with respect to any sale of the Hotel, or that Stephen had any duty to account in relation thereto; and (c) denying that she had "relinquished any beneficial interest in and rights attaching to", her remaining interest in favour of Stephen: see par 4(d)(v)(B). (The court can but wonder what the legal significance could be of Adelaide's having retained her beneficial ownership of her remaining interest, but having relinquished that beneficial interest in and the rights attaching to it to Stephen).
Stephen repeats this theme in response to a number of other subsequent paragraphs of the statement of claim.
In par 10(b), Stephen admits that monies from the sale of the Hotel were paid to the Trustee, but says that such payments were made from 23 to 29 October 2007. In final submissions, Stephen accepted that the monies were paid to the Trustee on the same day that they were received by the Partnership.
In par 11, Stephen alleges that Adelaide did not at any time demand any account of any profits derived from the sale of the Hotel, and that she thereby waived any entitlement to an account. As has been noted above in the outline of the primary facts, that claim is clearly false, as Adelaide made many claims to be given her share, and her solicitor on at least one occasion appears to have demanded an account on her behalf.
Stephen admits, in par 16, that the ninth defendant purchased the Cabramatta Inn Hotel on about 5 February 2010 for the sum of $22,800,000, with funds derived in part from the sale of the Hotel.
In par 18, Stephen pleads various terms of the Management Agreement and the Principal Deed whereby he was given authority to manage both the Partnership and the Freehold and other aspects of the Hotel business (and, in particular, cl 2.1 of the Principal Deed, which provided that the provisions of cl 1 of the Principal Deed were to apply mutatis mutandis to any replacement investment, if the Hotel was sold). He says that he carried out his duties as managing partner in accordance with the covenants contained in the Principal Deed and the Management Agreement, both in respect of the Hotel and the Cabramatta Inn Hotel.
This aspect of Stephen's defence involves a claim that, in causing the remaining proceeds of the sale of the Hotel to be lent to the Trust on a non-interest bearing basis, and then causing the Trust and the Partnership to apply that money in the manner that I will set out below, when considering the annual accounts of the Partnership and the Trust, Stephen was acting in accordance with the Deeds and the Management Agreement mutatis mutandis to the way those documents operated before the sale of the Hotel.
This allegation suggests that Stephen takes the stance that both the Hotel, after its repurchase, and the Cabramatta Inn Hotel, were replacement investments under cl 2.1 of the Principal Deed.
Stephen then says, in par 18(d), that between 1 July 2003 and the death of Adelaide, he complied with his obligations, and in particular distributed to her from the profits of the Hotel business, and distributions from the Trust, between 14 October 2003 and 31 March 2012, amounts totalling $6,714,228.87, together with a superannuation payment of $179,946. Particulars of these amounts are set out in the schedule to the defence.
Finally, Stephen pleads, in pars 19 to 20AA, a claim based upon Adelaide's failure to comply with the covenants in the Principal Deed, concerning her promise to leave to Stephen in her will, her remaining interest in the Hotel, or any replacement investment. It will be convenient to deal with this claim separately below.
[8]
Louise's third further amended defence
Louise filed a third further amended defence at the close of the hearing.
Louise claims that, from 30 December 2003, Adelaide ceased to act as a director of any of the Hotel Companies and the Trustee, and denies that Adelaide was a director from that time, and says that Adelaide held the issued shares registered in her name in trust for Stephen: see pars 2 to 8.
Louise then claims, in par 12(c)(i), that Adelaide held her equitable interest in the Partnership, the Hotel business, the Freehold and the Hotel Companies not conveyed by the Deed of Assignment, on a constructive trust for Stephen. The constructive trust arose "after" Stephen caused the trust to make the payments necessary to purchase the motel for Kim and Peter; Adelaide made her will dated 13 November 2013; Stephen conveyed his interest in the Gold Coast unit to Adelaide, and versions of the executed Deeds and the Management Agreement were exchanged.
Alternatively, Louise alleges, in par 12(c)(ii), that Adelaide is estopped from denying that she had transferred to Stephen her equitable interest in the Partnership, the Hotel business, the Freehold and the Hotel Companies following the events referred to in the preceding paragraph.
Louise pleads, in par 13, that different versions of the Principal Deed were executed by Adelaide and Kim on the one hand, and by Stephen on the other. Louise also admits that a version of the Deed of Assignment was executed by Stephen. Louise does not admit that each of the Deeds was executed by each of the parties on the dates alleged, and in the form alleged. The effect of this non-admission is not entirely clear, but it is clear that at the hearing Louise alleged that the Principal Deed and the Deed of Assignment were invalid, and of no force or effect. In the case of the Principal Deed Louise alleged that the document executed by Adelaide and Kim contained different terms to the document executed by Stephen. Louise claimed that the Deed of Assignment was a fabrication being part of a document signed by Adelaide, and part of a document signed by Stephen.
Louise says, in par 13(a)(c), that the version of the Divorce Deed that she executed is of no legal effect, as it is contrary to the Family Law Act 1975 (Cth). Louise does not appear to have made anything of this allegation in her final submissions.
Louise alleges, in par 13(d), that Adelaide, Stephen and Kim entered into an agreement in or about July 2003. The essence of the agreement was that Stephen would acquire the whole of Adelaide's interest in the Hotel, the Partnership, the Hotel Companies and the Hotel Freehold, as contemplated by the terms of the July Agreement, the primary covenants contained in the Principal Deed and the Management Agreement. Louise says this was done, "[s]o as to avoid excessive stamp duty and the triggering of capital gains tax liability for which [Adelaide] would be liable, [Adelaide] would transfer her interest… in the following way [and then listed the terms]: see par 13(d)(i)(2). Louise continues in par 13(d)(i)(2)(i):
The parties made a final agreement on or about 1 July 2003 that made performance of one or more of the terms conditional on execution of formal documents, and although formal documents were executed, they did not purport to contain the whole of the agreement or replace the earlier agreement.
Louise says that the July Agreement was evidenced by writing (listed in par 13(d)(ii)); conversations between Adelaide, Stephen and Kim on about 1 and 3 July 2003 (listed in par 13(d)(iii)); and conduct (listed in par 13(d)(iv)). It is to be noted that Louise includes in the conduct, steps taken by Stephen in relation to the purchase of the motel for Kim and Peter, which included paying for the motel in the period up to 22 December 2003.
Alternatively, to the allegation that the parties entered into the July Agreement, Louise alleges, in par 13(e), that Adelaide, Stephen and Kim entered into an agreement on 30 December 2003 containing the same terms as the July Agreement. Louise provides the same particulars as for par 13(d).
As a further alternative, Louise alleges, in par 13(f), that on 30 December 2003, Adelaide, Louise (this may have been intended to be a reference to Stephen) and Kim made a collateral agreement to that contained in the Deed of Assignment, whereby Adelaide transferred to Stephen her equitable interest in the Hotel Business, the Partnership, including the Freehold, and the shares in the Hotel Companies. Again the same particulars are provided as for par 13(d).
Next, in pars 13(g) and (h), Louise alleges a conventional estoppel case in similar terms to that alleged by Stephen. The crucial representations allegedly made by Adelaide are pleaded in par 13(g)(iv), (v) and (vi) as follows:
[Adelaide] held only a legal interest in the Hotel Business including the goodwill and the licences, the Partnership, the Freehold Land, and shares in the Hotel Companies;
[Adelaide] held the entirety of her interest in the Hotel Business including the goodwill and the licences, the Partnership, the Freehold Land and the shares in the Hotel Companies beneficially on behalf of [Stephen];
[Stephen] was under no obligation to account to [Adelaide] or [Kim] for the profits or the capital derived from the Hotel Business, the Partnership, the Hotel Freehold, or the shares in the Hotel Companies…
In substance, Louise alleges, in par 13(h)(x)(2), that Adelaide is estopped from denying that, at all times from 30 December 2003, Adelaide held on behalf of Stephen the whole equitable interest in her remaining share of the Hotel and related assets, or asserting that the agreement reached was inconsistent with the Common Understanding and Assumption.
Louise pleads, in par 17, that Stephen's duty to account to Adelaide was limited to satisfying the obligation contained in cl 6.1 of the Principal Deed, and that the obligation to account was satisfied by Stephen making the payments pleaded by Stephen in par 18 of his defence.
Louise admits that the Hotel was repurchased with part of the net proceeds of its sale (par 24), but does not admit that the Cabramatta Inn Hotel was purchased with part of those monies (par 26).
In par 30, Louise pleads a number of matters in answer to the whole of Adelaide's claim, which I will summarise as follows. First, Louise denies that Stephen has failed to account to Adelaide, and says in par 30(b):
that to the extent [Stephen] was required to account to [Adelaide] alleged he did so account.
It is not entirely clear, but this appears to be an allegation that there have been settled accounts as between Adelaide and Stephen.
Secondly, Louise claims that, by reason of the fact that Adelaide accepted the benefits provided to her by Stephen in purported compliance with his obligations under the Principal Deed, and the fact that, in breach of her covenant to make a will leaving her remaining interest in the Hotel, or any replacement investment to Stephen, she revoked that will and made a new will that was inconsistent with her covenants, she "comes to the Court with unclean hands and should be refused the relief she claimed": par 30(f).
As was the case with Stephen's defence, I will defer consideration of Louise's defence in pars 30 to 33 based upon Adelaide's obligation to leave her remaining interest in the Hotel to Stephen.
By her third amendment to her defence, Louise added a further par 34. In that paragraph, she claims that, if any versions of the Deeds are valid and enforceable, the versions executed by Stephen and Louise take effect, and not the different versions executed by the other parties.
She also claims that the effect of the Deeds that were valid and the Management Agreement was that Adelaide held her remaining interest "in name only" and on trust for Stephen.
[9]
Defences of the remaining defendants
The remaining, corporate defendants each put on short form defences in which they admit, do not admit, or deny, relevant paragraphs of the statement of claim alleging claims against them. The corporate defendants do not admit that Stephen and Louise were their directing minds and wills, or that they knew recipients of any relevant monies.
[10]
Reply to Stephen's second further amended defence
Adelaide's reply is a lengthy document that, with respect, contains a number of responses that are counter arguments, rather than necessary allegations of fact in reply. I will restrict this summary to matters raised in the reply that, in my view, were properly included in that pleading, and I will defer consideration of the matters relevant to the dispute concerning Adelaide's revocation of the 2003 will, and her making of an inconsistent will.
First, in par 1, Adelaide says that Stephen is estopped from propounding the construction of the Deeds set out in his defence, or contending that there was any Common Understanding and Assumption, by reason of: (a) recitals included in each of the Deeds; (b) cl 6.5 of the Deed of Assignment, which is what is commonly termed an 'entire agreement' clause; and (c) a recital and terms contained in the Management Agreement, that in various ways expressly provide that Adelaide continued to hold a beneficial interest in the Hotel, after the execution of the Deeds and Management Agreement.
Secondly, Adelaide says that Stephen is bound by his conduct in accepting the versions of the Deeds executed by Adelaide, Kim and others; so that those versions, rather than alternative versions executed by Stephen, are the Deeds that take effect. Stephen conceded this point during the hearing (but Louise did not).
Thirdly, the obligations on Stephen, in cll 6.1 and 6.2 of the Principal Deed, in no way derogated from Adelaide's rights to receive an accounting in respect of her remaining interest in the Hotel (par 1B).
If the July Agreement was binding, it was discharged and was of no further effect upon the execution of the Deeds (par 1DA).
If there was any Common Understanding and Assumption, as alleged by Stephen, any convention that arose in consequence was terminated by Adelaide in about 6 November 2007, when she demanded an account of the profits of the sale of the Hotel (par 1E).
Adelaide demanded an account following the sale of the Hotel, in letters by her solicitor to Stephen dated 6 November 2007 and 31 March 2008, and by her response filed in the Family Court of Australia proceedings between Stephen and Louise (par 1F).
[11]
Amended reply to Louise's second further amended defence
Adelaide replied to Louise's defence by making the same allegations as she did in her reply to Stephen's defence, concerning Stephen being estopped from asserting the construction of the Deeds, and the Common Understanding and Assumption (par 1A).
In response to Louise's claim that she was not at the time of receipt of any funds on notice that their receipt was a breach of fiduciary duty, Adelaide pleads that Louise was put on notice by a letter from Stephen's solicitors to her solicitor dated 5 August 2010; Stephen's affidavit in the family law proceedings sworn 23 September 2010; and Adelaide's affidavit in the same proceedings sworn 28 September 2010 (par 1B).
Adelaide further pleads that, to the extent Louise received sums as a volunteer, she is liable to account for them irrespective of whether she had notice of any breach of fiduciary duty (par 1B(b)).
[12]
Stephen's amended first cross claim
First, Stephen seeks a declaration and order to require Adelaide to transmit the shares in the Hotel Companies to her, on the ground that she holds the shares on a constructive trust for him. As this claim seeks to enforce Adelaide's will covenant I will defer consideration of it at this stage.
Secondly, Stephen has made a claim for rectification of the Deeds, which he has subsequently abandoned.
Thirdly, Stephen makes a claim, in par 4C, that Adelaide must repay the sum of $413,000, as she received that amount in excess of her entitlement to be paid ongoing lifestyle costs under cl 6.2 of the Principal Deed.
[13]
Amended defence to amended first cross claim
It is not necessary, at this stage, to deal with Adelaide's response to Stephen's claim concerning Adelaide's will covenant.
In response to Stephen's claim for a repayment of $413,000, Adelaide in substance responds, in par 1H, by saying that Adelaide only assigned half her interest in the Goodwill to Stephen, and retained the balance of her interest in the Hotel. Her entitlement under cl 6.2 of the Principal Deed was a distinct and separate right to her entitlement to share in the profits of the Hotel; therefore Adelaide is not obliged to repay any alleged overpayment.
Further, Adelaide pleads, in par 1H(f), that Stephen's claim for repayment of the $413,000 is statute barred, under s 14(1)(a) and s 23 of the Limitation Act 1969 (NSW).
[14]
Louise's Second cross claim
Louise makes three alternative claims against Adelaide in her second cross claim.
First, Louise repeats the allegations she made in her defence about Adelaide making the representations that gave rise to the alleged Common Understanding and Assumption (par 1).
She then says that, on 1 June 2012, in reliance on the representations and the Common Understanding and Assumption, she made a binding financial agreement with Stephen, under s 90D of the Family Law Act 1975 (Cth), in which she agreed to indemnify Stephen in relation to 50% of any liability to Adelaide, found as a result of these proceedings (pars 2 and 3).
If Adelaide has departed from the representations and the Common Understanding and Assumption, and Louise is found to be liable to indemnify "the first cross defendant" (a mistake for Stephen), Louise claims damages in a sum equal to the amount of the indemnity (par 4).
The basis of Louise's claim for damages, if Adelaide has departed from the representations and the Common Understanding and Assumption, is not made clear in the cross claim.
Secondly, Louise pleads that Adelaide represented, on 13 November 2003, that she had executed a will whereby she had left to Stephen her interest in the Goodwill and Licence of the Hotel, her interest in the Partnership, her interest in the Freehold, and her interest in the Hotel Companies. Further, that she would not revoke that will, and in the event that the Hotel was sold and the proceeds of the sale invested in a replacement investment, Adelaide covenanted with Stephen that she would execute a codicil or a new will, whereby she would leave to Stephen her interest in the replacement investment (par 5).
Louise says that, in reliance on those representations, she made the binding financial agreement with Stephen on 1 June 2012 (pars 6 and 7).
Louise then makes, in par 8, the same claim for damages as is made in par 4. If Adelaide is found to have departed from the 13 November 2003 representations, or the Common Understanding and Assumption, then Louise is obliged to indemnify "the first cross defendant".
Thirdly, Louise alleges that, by the Divorce Deed, Adelaide covenanted that she would not revoke her will, and would execute a codicil or a new will to leave to Stephen her interest in any replacement investment (par 9).
In breach of the covenant, Adelaide revoked her will on 11 December 2008, and executed a new will that did not contain the gift to Stephen required by Adelaide's covenant (par 10); and the breach of covenant has caused Louise to suffer damage (par 11).
Louise seeks damages, including exemplary damages, and damages equal to the cost of defending Adelaide's claim.
[15]
Defence to Louise's second cross claim
In her defence to Louise's cross claim, Adelaide repeats various allegations made elsewhere in her pleadings, and makes the following positive allegations.
First, Adelaide says that Louise knew, at the time she made the binding financial agreement that Adelaide had changed her will, and Louise cannot have relied upon, or reasonably have relied upon, any of the representations alleged in the cross claim (par 3(c) and (d); par 6(b); and par 7(b)).
Secondly, any representations made by Adelaide were superseded by the Deeds (par 5(b)).
Thirdly, to the extent that Louise contends that Adelaide has assigned an interest in land, there is no writing for the purposes of s 23C or s 54A of the Conveyancing Act 1919 (NSW) (par 13).
Adelaide also makes the response to the claim based upon Adelaide's will covenant in par 13. As stated above, I will consider this issue separately below.
[16]
Orders for separate determination
At a directions hearing that occurred on 10 September 2015, before the commencement of the hearing, I was asked by Kim to make an order for the separate determination of some issues in the proceedings, before the determination of other issues.
It appears from the short judgment that I gave on 10 September 2015, that I understood that what the parties - Kim in particular - wanted to achieve, was a determination of whether Stephen should be ordered to give an accounting to Adelaide, and for that purpose, it would be necessary for her at the hearing, to prove that Stephen was an accounting party. Further, that there was also a sufficient likelihood that a balance would be due to her following an accounting that it would be appropriate for the court to order that Stephen account to her: See Hancock v Rinehart [2015] NSWSC 246 at [338]. I indicated that I would make orders generally in the form of short minutes of order provided to me by Kim, but gave the parties time to discuss the detail of the orders.
On 16 September 2015, I was advised by Kim's counsel that the defendants had agreed to the court making orders in the same terms as those previously handed up, save for an addition that is not presently relevant.
There was then some discussion about whether the proposed orders made it sufficiently clear "that the threshold question [is] whether the plaintiff is entitled to an account". Counsel for Louise said that the only issue he had "was whether or not it was clear that the threshold question, namely whether any money at all was owing, was part of a liability case". I responded by saying that my recollection of what was said on the previous occasion was that "the plaintiff had implicitly acknowledged that in order to justify orders for accounts the plaintiff had to at least establish that some money was due without at all quantifying it".
On 16 September 2015 I made the following orders, in accordance with short minutes of order handed to the court by Kim:
1. Subject to order 2, at the hearing commencing on 2 November 2015, the Court will determine the whole of the plaintiff's statement of claim filed 2 May 2013, the defendants' defences thereto and the plaintiff's replies to the defendants' defences.
2. In the event that the Court determines that the plaintiff is entitled to an account of profits or equitable compensation, the quantification of any such entitlement is to be determined separately and after the hearing commencing on 2 November 2015, in a manner to be the subject of further consideration by the parties and, to the extent necessary, further order by the Court.
3. At the hearing commencing on 2 November 2015, the Court will determine the whole of the second defendant's second cross claim filed 12 November 2013, and the plaintiff and the cross defendant's defence thereto.
4. Subject to order 5, at the hearing commencing on 2 November 2015, the Court will determine the whole of first defendant's amended first cross claim filed 30 October 2014, and the plaintiff and the cross defendant's defence thereto.
5. In the event that the Court determines that the first defendant is entitled to damages or equitable compensation, the quantification of any such entitlement is to be determined separately and after the hearing commencing on 2 November 2015, in a manner to be the subject of further consideration by the parties and, to the extent necessary, further order of the Court.
Order 1 requires the court to determine the whole of the issues in Kim's statement of claim, subject only to the qualification in order 2. Order 3 requires the court to determine the whole of the issues raised by Louise's cross claim, and the defences to that claim. Order 4 requires the court to determine the whole of the issues in Stephen's cross claim, and the defences to that claim, subject only to the qualification in order 5.
The qualification in order 2 applies "in the event that the court determines that [Kim] is entitled to an account of profits or equitable compensation", in which event the quantification of the entitlement shall be determined subsequently. Order 5 creates a similar qualification in relation to Stephen's cross claim, but is expressed in relation to an entitlement to "damages or equitable compensation".
My principal concern is the effect of these orders in relation to the claim made by Kim. It will be convenient, for the sake of clarity, for me to repeat the relief sought in par 1 of Kim's summons:
An order that the Defendants account to the Plaintiff in her capacity as executor of the estate of the late Adelaide Bowden for the profits of the late Adelaide Bowden's share of the Partnership assets properly payable to her between the date of the execution Deeds in 2003 and the date of her death on 8 February 2012.
This claim is expressed in terms of a claim for an order that Stephen account to Kim for the profits made by the defendants from Adelaide's share of the Partnership assets. The claim expressly contemplates that the court will find what Adelaide's share of the Partnership assets was; what profits were made by the defendants from the use of the Partnership assets, and make an order that the defendants account to Kim as Adelaide's executor, for the share of profits due to Adelaide.
Kim alleges in par 22 of her statement of claim (which is set out in full as notionally amended in par 94 above) that Stephen had a duty to account to Adelaide for the profits earned on her capital account from 2007 to date, on Adelaide's share of the Partnership assets. Paragraph 23 contains an allegation that Stephen has breached that duty.
Kim claims in par 4 of the relief claimed: "All necessary accounts and enquiries to enable [Kim] to trace and recover the assets and profits referred to above".
Kim's claims for relief do not appear clearly to seek an order for accounts to be taken, whether in the form of a common account, or an accounting on the footing of wilful default: see the helpful explanation of these terms in Meagher, Gummow and Lehane; Equity Doctrines & Remedies (5th edition - Heydon, Leeming and Turner editors) at [23-030].
It is likely that Kim wants an order from the court that Stephen at least account to her on the wilful default basis, which would involve a determination not only of all sums and assets actually received by Stephen, but also all sums and assets that Stephen would have received but for his wilful default.
Kim does not in her statement of claim, in terms, allege that Stephen has been guilty of wilful default, but she does appear to allege the factual basis of such a claim in her statement of claim.
Order 1 is framed in a manner that asks the court to order the defendants to account to Kim for Adelaide's share of specific profits required to be identified in the proceedings. The claim has much in common with the form of relief that Equity may grant as a remedy in aid of common law intellectual property rights: see Meagher, Gummow and Lehane at [26-050].
Kim does seek in order 4 an order for "accounts and enquiries", but that remedy is sought "to trace and recover the assets and profits referred to above", not to determine the amount that Stephen, or the other defendants, is obliged to pay to Adelaide.
Kim seeks by order 5, in the alternative, an order that the defendants pay equitable compensation to her, in respect of breach or knowing receipt of assets received in breach of Stephen's fiduciary duties to Adelaide. If Adelaide elects to pursue this remedy, it would have the benefit described in Meagher, Gummow and Lehane at [23-030], that Kim would receive compensation for the breaches of fiduciary duty that she may succeed in establishing in these proceedings, directly and without going through the whole accounting process required by an order for an accounting by Stephen, as an accounting party to Adelaide.
It may be fair to say that it is doubtful that Kim initially sought an order for accounts either on a common account basis, or a wilful default basis,
It seems clear, however, from statements made by counsel for the parties and the court, at a directions hearing on 17 September 2015, that all concerned understood that the separate issue was to be whether, to use Kim's counsel's words: "the matter that the plaintiff must prove is whether or not she is entitled to an account and whether or not the evidence shows that she is entitled to a sum, albeit it is not necessary or appropriate to quantify that sum with precision".
As late as the beginning of his final oral submissions, senior counsel for Kim said: "The first point is, we say that Stephen is an accounting party, on our case… So, that's why we say this is a claim by a person entitled to an account against an accounting party…" (T 282). On the next page he said: "Prayer 1 is the relief we seek and have always sought, and that is an order that the defendants account to the plaintiff for the profits of the late Adelaide Bowden's share of the partnership assets properly payable to her…" He immediately followed that submission with the statement: "Properly understood, the relief in prayer 1 only has a basis in law or equity if it be understood to be a full account of all credits and debits between the parties, and that is what we seek".
I have come to the view that the wording of the orders made on 16 September 2015, concerning the determination of separate questions, may not clearly delineate the issues that are required to be determined at the initial hearing, from those that were required to be deferred. If it is true that Kim seeks an accounting from Stephen on a wilful default basis, she is required to establish a wilful default sufficient to support an order for Stephen to account on that basis. Yet order 1 of the orders for the determination of separate questions requires the court to determine all issues raised by the statement of claim and defences, save only for the quantification of the amount that might be payable by the defendants to Kim on an account, or by way of equitable compensation. That would appear to extend to the profits made by Stephen, or the other defendants, as a result of Stephen's breach of fiduciary duty.
There is no need for the court at this stage to resolve any doubts that may have been introduced as a result of the wording of the orders for the determination of separate questions. It will be in the interests of the parties to consider this issue in relation to whether or not there is a need to reformulate the orders.
One potential difficulty that has arisen, concerns the way that the expert forensic accounting evidence prepared on behalf of Kim and Stephen has been used in the proceedings.
[17]
The expert forensic accountants' reports
The parties have commissioned expert forensic accounting evidence. Mr Bill Jansen has prepared a number of expert reports on behalf of Adelaide, and Ms Jennifer Exner has prepared a report on behalf of Stephen. The two experts have also prepared a joint report, in which they have noted areas of agreement, and provided further explanation of their positions on the issues on which they differ.
In summary, the accounting experts start with the Partnership's annual financial accounts, and consider whether proper accounting principles require adjustments to those accounts in favour of Adelaide. They then consider whether or not Adelaide was entitled to receive payment from Stephen, on the basis that Stephen ought to have caused the Partnership to earn profits on Adelaide's adjusted Partners' Funds, which he did not do. The accounting experts also express opinions about the sources of funds for the acquisition of the Cabramatta Inn Hotel, and the repurchase of the Hotel. They appear to me to have carried out this last exercise, by analysing the financial accounts and ledgers of the various entities, and have not necessarily followed the cash from the proceeds of sale of the Hotel to its ultimate destination.
Initially, the parties proposed that the accounting experts would be called after the evidence of all lay witnesses. However, the hearing evolved in a way that led to the accounting experts not being called to give evidence at all during the hearing. It seems likely that some uncertainty as to the purpose for the hearing influenced the course taken by the parties. The transcript shows the idea developed that, if the purpose for the hearing was only to determine whether or not Adelaide was entitled to an order for a partnership accounting, then it was only necessary for Adelaide to satisfy the court that Stephen was, as her partner, an accounting party, and that it was likely that some amount of money would be found owing to her following the completion of the accounting. It therefore would follow that it would not be necessary at this hearing for Adelaide to prove the actual amount that Stephen was liable to pay her.
Initially, it was suggested that the parties might be able to distil the evidence from the accounting experts' reports that was required to be tendered for the purpose of the hearing. It is not necessary to recount the evolution of the issue in detail. The point was ultimately reached where it was suggested to the court that the court needed to understand the accounting issues, and to see what the competing positions of the parties were, but it did not need to determine any of those issues. They would be matters for the accounting process, if an order to that effect was made by the court. The suggestion that the parties would edit the accounting experts' reports was apparently abandoned, and ultimately Kim sought to tender the whole of the accounting experts' reports "as evidence of what the experts said … to show [the court] what the issues [are] that have been joined between the parties, which can illuminate what is, and what is not within the pleadings" (T 315).
Stephen either agreed with, or acquiesced in that course. Louise objected to the court's receiving the accounting experts' reports on any basis, for the reason, as I understand it, that the evidence in the reports is in fact irrelevant, because the court should not find that Stephen is an accounting party in respect of Adelaide.
As this issue arose only on the second last day of the hearing, during the addresses of counsel, I did not make an immediate ruling, and said that I would defer dealing with whether the court should receive the accounting experts' reports on any basis, and if so on what basis.
I have decided, in conformity with the position taken by Kim and Stephen, that I should receive their accounting experts' reports, but only on the basis that they provide detailed particulars of the positions respectively taken by Adelaide and Stephen, concerning the proper outcome of any process of partnership accounting as between those two parties.
In the event, the accounting experts' reports have not formally been received into evidence, and the experts have not given evidence, or been cross-examined.
The course that the parties decided to follow has, however, had what I regard to be a significant consequence, concerning the ability of the court finally to determine all of the questions that are required to be decided by the orders for separate determination that I have considered above.
Although there is some detailed evidence concerning the affairs of the Partnership and the Trust, and concerning how the net proceeds of sale of the Hotel were dispersed, that evidence takes the form of accounting records, which have not been the subject of expert explanation, or detailed submissions by the parties. I propose to consider that evidence below, although I feel constrained to treat my conclusions as being provisional, because issues to which the evidence relates have not fully been contested by the parties yet.
I have taken the view that the manner in which the Partnership and the Trust were operated, and the circumstances in which the net proceeds of sale of the Hotel were dispersed, have great importance to the manner in which the Deeds and the Partnership Agreement should be construed, and the crucial question of whether Stephen was authorised to disperse those funds in the manner in which he did is to be answered. Furthermore, questions as to whether particular defendants had notice of any breach of fiduciary duty by Stephen will depend upon findings as to the circumstances in which funds were received by those defendants, including the time of receipt.
The short point is that the parties' decision that the accounting experts' evidence should only be put before the court on a limited basis, akin to the provision of particulars, and the consequent absence of any exploration concerning, in particular, the disbursement of the proceeds of sale of the Hotel, have had the unexpected consequence of limiting the ability of the court finally to determine a number of questions, which the parties may expect that the court will determine in the course of the present hearing.
It will be necessary for me to return to this issue below, after I have considered the issues that have been affected by the course that the evidence has taken.
As a separate matter, it will be appropriate to make a number of observations about Mr Jansen's primary report, insofar as it throws light on the manner in which Kim puts her case. In doing this, I am responding to Kim's invitation to treat Mr Jansen's evidence as particulars of her case. I will not deal with Ms Exner's report, as that is a matter for another day. I am conscious that Mr Jansen, in response to Ms Exner's report, has made a number of adjustments to the opinions expressed in his primary report. I have ignored the detail, as for the moment I am only looking at the structure of Kim's claim.
Mr Jansen sets out, in par 2 of his executive summary, a table showing his calculation of Adelaide's entitlement up to 31 May 2014, on the assumption that interest should be calculated on a simple basis, using the court pre-judgment rate as follows:
Net entitlement
25% on the sale of the Hotel Goodwill on
29 October 2007 4,477,151
50% on the sale of the Hotel Freehold on
29 October 2007 12,209,257
Current account due to AB from the Partnership
as at the date of death 373,120
Profits from the Hotel Business - 25% 3,888,145
Share of additional rent from the Hotel Freehold
- 25% 484,500
Interest from 20 to December 2003 to 8 February 2012
- Simple 7,570,310
29,002,483
Deduct capital sales proceeds due to SB on
8 February 2012 (16,686,408)
Less payments to AB (4,893,591)
Net entitlement 7,422,484
Interest from 9 February 2012 to 31 May 2014: 1,228,675
Total (inc interest to 31 May 2014) 8,651,159
Mr Jansen then sets out an equivalent table, in which he makes the same calculations, save that he determines interest using the same rates, but on a compound basis. The total, including interest up till 31 May 2014, is a sum of $13,396,006.
As I understand it, these calculations are intended to establish Adelaide's entitlement, if Kim elects the remedy of equitable compensation.
Mr Jansen calculates the amounts payable to Adelaide on sale of the Goodwill and the Freehold, having regard to the amounts allocated to those assets under the contract whereby the Hotel was sold for $52 million (see pars 46 to 52 of his principal report). The amounts represent 25% and 50% of the respective portion of the sale price attributable to the Goodwill and the Freehold.
Mr Jansen appears to assume that the whole of Adelaide's share of the proceeds of sale of the Goodwill and the Hotel were assets from which Adelaide was entitled to earn an income. He does not appear to have allowed for the repayment of debts of the Partnership, other than any debts that were repaid before the net sale price was received.
The amount of $373,120 said to be due on Adelaide's current account as at the date of her death, is an assessment based upon the partnership's annual accounts, starting with the opening balance as at 1 July 2003, and taking into account all receipts and profits credited to Adelaide. Mr Jansen has not yet been given an opportunity to explain this calculation in the witness box. As I understand it, it proceeds upon the basis that each partner was entitled to withdraw the amount standing to that partner's credit in the Partners' Funds account. That is at least consistent with the manner in which Stephen made substantial drawings out of his Partners' Funds.
The profits from the Hotel business of $3,888,145 relate to the period between the date of the Deeds, which is taken to be 22 December 2003, and the date of Adelaide's death (see pars 60 to 65).
Adelaide has abandoned the part of this claim that relates to the period up to 29 October 2007, when the Hotel was sold, as she accepts that the profit was made in the Trust, and, by cl 6.5 of the Principal Deed, she relinquished her claim to any distribution from the Trust.
Mr Jansen appears to have proceeded upon the basis that, for the whole of the period, Adelaide was entitled to a 25% share of the Hotel profit, even if it was earned by the Trust rather than the Partnership, and this included a credit for 25% of the loss incurred by the Trust in owning a home unit in Newtown, which was used solely for the benefit of Stephen and his family.
Mr Jansen does not make clear the basis of his view that Adelaide was entitled directly to a share of 25% of the Hotel profit made by the Trust, and does not appear to take into account the discretion given to the Trustee by the Trust Deed to make distributions to eligible beneficiaries.
The amount of $484,500, for a 25% share of additional rent from the Freehold, seems to assume that, as Adelaide remained the owner of 50% of the Freehold, she was entitled to be paid directly, as lessor, 50% of the rent, whereas she had only been treated as being entitled to receive 25% of the profit made by the Partnership, as she only retained 25% of her interest in the Goodwill.
Again, Mr Jansen has not made the basis of his opinion clear. One thing that is clear is that Adelaide and Stephen's interest in the Freehold was treated in the Partnership annual accounts as if it was a partnership asset. That appears to have been part of the partners' strategy to avoid earning unnecessary income in the Partnership, which would produce profits liable to income taxation. It is not clear on the evidence whether the Freehold was a partnership asset, or whether it was not. In either event, Adelaide has not made a case that she was entitled to receive income as a lessor of the Hotel, in a manner that would require a reconstitution of the annual accounts of the Partnership over a period of many years.
The most significant aspect of Mr Jansen's report, however, is the way that he has treated Adelaide's entitlement based upon her interest in the proceeds of sale of the Hotel.
The amount of interest of $7,570,310 (in the simple interest calculation) covers all of Adelaide's entitlements from 22 December 2003 to 8 February 2012. I assume that a substantial part of that interest is interest on the two components of Adelaide's entitlement to the proceeds of sale of the Hotel from 29 October 2007 to 8 February 2012. Mr Jansen has therefore proceeded on the basis that Adelaide was entitled to a return on the full amount of her share in the proceeds of sale of the Hotel, from the date of the sale to the date of her death, after which she was obliged to credit Stephen with the full amount of her share in the capital generated by the sale of the Hotel, by reason of the fact that she had agreed to leave her remaining interest in the Goodwill and the Freehold to Stephen in her will.
This aspect of Mr Jansen's report appears to proceed upon the basis that Adelaide was entitled to a commercial return on the whole of her share in the sale proceeds of the Hotel from the date of the sale.
One of the principal issues in these proceedings is whether or not Adelaide in fact had this entitlement. The accounting exercise undertaken by Mr Jansen does not itself provide any basis for determining that Adelaide had that entitlement.
[18]
Financial statements
As I have said above, it will be necessary for the court to have some understanding of the way in which the Partnership and the Trust worked, and the manner in which the net proceeds from the sale of the Hotel were dispersed, in order to properly decide the questions that are before the court.
The court has evidence of the annual financial accounts of both the Partnership and the Trust from about 1999. Some accounts are missing; particularly those for the years immediately preceding Adelaide's death.
Consideration of the annual financial accounts must suffer from the shortcoming that it only allows comparisons as at annual balance dates. Nonetheless, as will appear below, it is possible to glean considerable information from the annual accounts.
I have tended to avoid considering the ledgers and similar accounting material that is in evidence, as that material would be better understood with the assistance of the expert accountants, and the parties' submissions.
[19]
The AE & SJ Bowden partnership financial statements
The evidence includes the annual financial accounts of the Partnership for the years 2000 to 2010. The financial accounts for the 2000 year include figures for the 1999 year.
There are three relevant periods. The first is the period from 1999 to 2003, before the execution of the Deeds and the Management Agreement. That was the period in which the Partnership continued to operate in the same manner as it had operated historically. The second is the period from 2004 to 2007, during which the Deeds and the Management Agreement operated, before the sale of the Hotel. The third is the period from 2008 to 2010, after the Hotel had been sold.
The annual accounts for all years from 2000 to 2008 (the latter being the year during which the Hotel was sold) treat the Freehold, and the neighbouring properties owned by the Hotel Companies, as if they were partnership assets.
The accounts do not identify any capital, in the strict sense of that term, as having been contributed by each of the partners. There is no separate capital account. There is an account called "Partners' Funds" that has an opening balance; adds partnership profits (losses); adds the amount of capital revaluations and gains; deducts drawings; and then gives the closing balance at the end of the accounting period.
[20]
The first period - 1999 to 2003
The accounts for this period were prepared by Mr Morrison on the instructions of Stephen. Such of the accounts as were signed, were signed by Stephen on behalf of Adelaide in the exercise of his power of attorney. The evidence establishes that Stephen was the sole person in control of the Partnership and the preparation of the Partnership's accounts.
During this period, the Partnership earned relatively small profits - being $7,891.03, $28,815.03, $184, $1,416.77 and $4,660.48 respectively. The profits were trading profits, except in the 2001 and 2002 years. In those two years, the Trust distributed sums of $450,000 and $495,000 to the Partnership, apparently to ensure that the Partnership did not suffer a loss as a result of large depreciation write-offs that occurred in those years.
The profits were divided equally between the two partners to reflect the equal shares in the Partnership.
For reasons that are not disclosed in the evidence, Stephen's Partners' Funds were $3,845,589.54, and Adelaide's were $1,687,810.77 as at 30 June 1999. This simply represents the opening position based upon the available evidence.
The 2003 annual accounts record a capital revaluation that increased each partner's Partners' Funds by $4,812,885.94.
Substantial drawings from each partner's Partners' Funds occurred over this period. Different amounts were drawn by each of the partners, as follows:
Stephen - $627,582.24, $2,304,245.42, $12,955.42, $500,000, $785,000
Adelaide - $822,450.12, nil, $837,952.71, nil, $785,000
The evidence does not explain the significance of these drawings. The appearance is that the partners withdrew money from the Partnership as drawings, in part following a capital revaluation.
[21]
The second period - 2004 to 2007
The income of the Partnership was small in each year - $26,886.06, $20,562.27, $25,832.38 and $5,487.50.
In each year Adelaide was treated as a partner entitled to income. The income was split between Stephen and Adelaide 75% to 25%.
Stephen made capital drawings as shown in Partners' Funds as follows - $850,926.52, $1,860,000, $1,200,000 and $2,450,389.43.
The only capital drawing attributed to Adelaide was $3,675,000 in the 2004 year. This amount represents the sum of the $3 million that Stephen was required to pay Adelaide for a quarter of the Goodwill under the Deed of Assignment, plus the amount needed to pay out the mortgage on Adelaide's Gold Coast home unit, plus, apparently, associated costs. The debit of this amount from Adelaide's Partners' Funds had the effect that Adelaide paid the amount that the Deeds required Stephen to pay to her, from her own money. The parties' expert forensic accountants are agreed that this amount should be credited to Adelaide's account, and debited to Stephen's account.
As I have noted above when recording the principal facts, the Partnership borrowed $9 million on the security of the Hotel to fund completion of the Deeds. The Partnership's accounts, in the period between completion of the Deeds and the Sale of the Hotel, show that the Partnership paid substantial amounts of interest. In each year this interest was simply treated as a Partnership expense against income, before the relatively small profit was determined. As a consequence, Adelaide effectively bore a share of the cost of the interest that was payable on the $3,675,000 part of the borrowing that was used to pay that amount on Adelaide's account, for the benefit of Stephen. There is some force in Mr Jansen's view that Stephen's Partners' Funds should have been debited with the interest paid on the amount borrowed to enable him to perform his obligations under the Deeds.
The drawings by Stephen led to his Partners' Funds being as follows, at the balance date for each of the years - $4,472,064.35, $3,641,302.38, $1,796,724.08, $8,616,094.37 and $6,169,824.57. Notwithstanding such drawings, Stephen's Partners' Funds increased substantially between 2005 and 2006.
Adelaide's Partners' Funds were not adjusted in the same way. It was $408,499.03 at closing date in the 2005 accounts, and remained the same at opening date in the 2006 accounts.
The increase between the 2005 and 2006 years in Stephen's Partners' Funds may be explained as follows. In the 2005 accounts, Stephen's closing capital balance as at 30 June 2005 is $1,796,722.08, but in the 2006 accounts, the opening balance as at 30 June 2005 is $11,641,302.38. This increase is explained by a revaluation of the Goodwill, whereby the value was increased by $8 million. This increase was reflected in the 2006 accounts by an increase in the opening value of the Goodwill as at 30 June 2005 in this amount (which was not reflected in the closing balance in the 2005 accounts).
On the face of matters, the benefit of the revaluation of the Hotel's assets should have been split between Adelaide and Stephen, and not credited entirely to Stephen's Partners' Funds. Mr Jansen expresses the opinion that $4 million should have been credited to each partner's Partners' Funds. My provisional understanding is that Stephen's expert forensic accountant, Ms Exner, does not dispute that this adjustment should be made, although she does not accept that Adelaide has suffered any loss because the adjustment was not made. (Mr Jansen deals with the circumstances in which the Partnership's accounts were varied to make this capital revaluation in par 7 of his 19 December 2014 report in reply. He suggests that the change was made retrospectively after the 2005 accounts were prepared. It is not necessary, at this stage of the proceedings, for the court to deal with this issue).
Adelaide became entitled to profits of $6,721.51, $5,140.57, $6,458.09 and $1,371.87. It appears that those amounts were not paid to Adelaide, but were added to her Partner's Funds.
[22]
The third period - 2008 to 2010
Contrary to the earlier practice, arrangements were made for Adelaide to sign the 2008 accounts personally.
Due to the fact that the purchaser of the Hotel required that the Partnership be the vendor, the prior arrangement whereby the Partnership leased the Hotel to the Trust, so that any significant profits were made by the Trust, was terminated, and the Partnership was then required to operate the Hotel for the period immediately before the sale. In that period, the Partnership made a profit from ordinary activities before income tax of $345,218.48 (compared to $5,487.50 for the prior year). (Interestingly, bar sales were $88,093.47, and, in the same period, poker machine clearances were $464,688.20, of which $173,923.40 was paid as gaming taxes).
Although I have classified the 2008 accounts as being within the third period, the profit referred to in the preceding paragraph was earned before the sale of the Hotel was completed.
The profit was divided as to $191,923.65 to Stephen and $153,294.83 to Adelaide. The ratio of 55.6% to 44.4% is not explained.
Adelaide's share of the profit was not paid to her as income, and was added to her Partners' Funds.
Both Stephen and Adelaide were credited with half the capital gain on the sale of the Hotel, being $12,849,840.71 each.
Stephen's Partners' Funds were debited with drawings of $2,561,600.61 and drawings for motor vehicle of $1,178,850.27. Adelaide's Partners' Funds were debited with drawings of $272,374 and drawings for motor vehicle of $36,922.48.
The 2008 annual accounts naturally reflect the sale of the Hotel during the year, and the financial consequences of the Partnership ceasing to own the Hotel assets. Following the sale of the Hotel, the principal asset of the Partnership is recorded as a non-current loan to the Trust of $28,394,241. The loan made by the Partnership to the Trust did not bear interest. (The total interest received by the Partnership in the 2009 year was only $34,677.33).
The difference between the net sale price of the Hotel (an amount of $42,327,116, according to Adelaide's expert forensic accountant, Mr Jansen), and the amount of the loan made to the Trust, is explained in part by the fact that the Partnership was indebted to the Trust, as shown in the accounts as at 30 June 2007, in the amount of $8,175,730.60. The Partnership also had non-current liabilities as at 30 June 2007 that totalled $10,673,383.06. These liabilities were apparently repaid out of the sale proceeds of the Hotel.
The Partnership accounts show that the debt to the Trust of $8,175,730.60, which was repaid out of the proceeds of sale of the Hotel, was accumulated in the following way. It was as low as $1,193,231.42 as at 30 June 2001 and gradually built up to the final amount as at 30 June 2007. In the period after the execution of the Deeds, the partners made drawings as follows:
Stephen Adelaide
2004 850,926.52 3,675,000.00
2005 1,860,000.00 -
2006 1,200,000.00 -
2007 2,450,389.43 -
6,361,315.95 3,675,000.00
These drawings were substantially made possible by an unrealised capital revaluation, and had to be funded. They were apparently funded primarily by the making of loans from the Trust to the Partnership. Thus, even though the Partnership owned the profit-making Hotel business, the profits were made by the Trust, and then loaned to the Partnership, to enable the partners to make drawings against unrealised capital gains.
The debts of $10,673,383.06 that were repaid were owed to external creditors, and included the $9 million borrowed from the NAB.
The 2009 accounts that are in evidence have not been signed.
The partnership made a loss of $13,413.52, which was divided as to $10,060.14 to Stephen and $3,353.38 to Adelaide. The ratio is 75% to 25%. The principal cause of the loss appears to be the fact that the total interest received, including on the loan made to the Trust, was only $34,677.33.
The 2009 accounts effect a retrospective revision in the shares of Adelaide and Stephen in the capital gain on the sale of the Hotel that was included in the 2008 accounts. As I have stated above, each partner was credited with $12,849,840.71. That position was changed for the figures in the 2008 accounts that were set out in the 2009 accounts. The altered split was $17,829,783.39 to Stephen, and $7,869,898.02 to Adelaide. Adelaide was therefore given 30.6% of the capital gain. In his primary report dated 20 May 2014, Mr Jansen, in par 50, calculated that Adelaide was entitled to $16,686,408 of the $42,327,116 net proceeds of sale of the Hotel, which is a percentage of 39.5%. It is not necessary at this stage of the proceedings to determine whether Adelaide should have been credited with a greater amount of the capital gain than she was given, but there does appear to be a basis for concluding that she should have been given more.
There was a reduction in Partners' Funds from $28,586,446.66 (2008) to $7,482,006.40 (2009).
This reduction is reflected in a decrease of the loan to the Trust from $28,394,214 (2008) to $7,430,793.83 (2009).
Stephen's total drawings from his Partner's Funds were $17,432,357.64. Over the same period, Adelaide's drawings consisted of 2008 income tax of $3,630,669.10, and PAYG instalments of $28,000.
Stephen's drawings of $17,432,357.64 are described in the 2009 accounts as follows:
Drawings (888,875.24)
Drawings, Motor Vehicles -
Drawings, 2008 Income Tax (2,997,475.00)
Drawings, PAYG Instalments (129,969.00)
Drawings, AL & TR Superannuation (96,000.00)
Drawings, Bowden Superannuation Investment Fund (1,100,000.00)
Drawings, BankWest Gold Term Deposits (8,000,000.00)
Drawings, Westpac Private Bank Deposits (4,070,038.40)
Drawings, Commsec Investments (150,000.00)
The decrease in the loan owed by the Trust to the Partnership appears in large part, to reflect a partial repayment of that loan by the Trust to fund these drawings, as well as the drawings made by Adelaide.
The affidavit that Stephen swore in the Family Court proceedings provided an explanation of the drawings made in the 2009 year for the benefit of himself and his family. Stephen said that in June 2009 the moneys in the NAB term deposit were distributed to the beneficiaries of the Trust, and placed on term deposit with the NAB as follows:
Kettleswell 1,531,565.00
Bowden Trust 5,525,652.00
Bowden Property Investments 2,422,737.00
Bowden Hotel Investments 2,042,331.00
Butlers Bridge 1,975,870.00
Stephen, Louise and children ($2 million each) 8,000,000.00
Stephen, Louise and children ($1 million each) 4,000,000.00
Total 25,498,155.00
In addition, shares valued at $448,297 were purchased through Commsec, and a superannuation contribution of $1,100,000 was paid. The ultimate total was $27,046,452.
Payment of $3,630,669.90 was made out of Adelaide's Partners' Funds to pay her share of the capital gains tax on the sale of the Hotel, and $28,000 was paid on her behalf as PAYG instalments.
The 2010 accounts that are in evidence are also not signed.
There was no income or expenses recorded for the Partnership for this year.
It appears that the Partnership ceased to operate, save for its holding of the loan to the Trust, which increased over the year from $7,430,793.83 (2009) to $16,663,287.45 (2010).
Stephen's drawings from his Partners' Funds totalled $3,721,821.91. The amount of Stephen's Partners' Funds was substantially increased, by what appears to be a reversal from the prior year of two drawings in favour of Stephen described as "Drawings, BankWest Gold Term Deposits" ($8,738,105.76) and "Drawings, Westpac Private Bank Deposits" ($4,084,421.04).
Adelaide's drawings from her Partners' Funds were $52,000, less an apparent income tax credit of $2,692.16, plus drawings described as PAYG of $20,000.
[23]
The Bowden Family Trust No 1 financial statements
The evidence included annual financial statements for the Trust for the years 2000 to 2012, except for 2005. The figures for that year can be found in the 2006 accounts.
Over the period up to about September 2007, the Trust operated the Hotel business, and the Trust's profit and loss statements reflect that fact.
Speaking generally, in each year distributions were made in respect of the whole of the profit to various beneficiaries of the Trust, in amounts determined by the Trustee. Although Stephen and Adelaide were directors of the Trustee, Stephen signed the accounts exercising his power of attorney from Adelaide. The balance sheets each year include current liabilities, which include liabilities to the beneficiaries of the Trust. They also include substantial liabilities to external creditors. In each year, a substantial part of that Trust's assets was represented by the debt owed by the Partnership to the Trust.
From the 2004 year, the Trust's annual accounts were signed by Stephen and Louise as directors of the Trustee.
Also from the 2004 year, the balance sheets include a non-current asset, being a unit at 12-18 O'Connell Street, Newtown, which was valued in the accounts for that year at $2,943,472.55. The Trustee owed $3 million to the NAB secured on the title to that property. Mr Jansen says that the Newtown property was only used for the benefit of Stephen and his family, so that Adelaide was entitled to be credited with a proportion of the costs incurred by the Trust in holding that property. As the Trust is a discretionary trust, and its assets are separate to those owned by the Partnership, Mr Jansen's claim may be doubtful. However, that is not a matter that is required to be resolved at this stage of the proceedings.
By the time of the 2007 accounts, apart from the Newtown property and the debt relating to it, the assets and liabilities of the Trust were primarily represented by the debt due to the Trust from the Partnership ($8,175,730), and a debt to beneficiaries of the Trust and external creditors ($8,855,242). The amount owed to beneficiaries was:
Stephen 84,346.61
Louise 75,000.00
Butlers Bridge 1,972,142.27
Kettleswell 1,578,815.95
Bowden Hotel Investments 2,161,412.49
Bowden Property Investments 2,050,727.83
Total 7,922,475.15
The Trust's accounts for the 2009 year show that the Trust's liabilities to beneficiaries and external creditors (other than the mortgagee of the Newtown property) had been reduced from $8,060,889.01 to $273,549.51. Of the amount owed to beneficiaries of the Trust as at 2008, $7,676,384.49 had been repaid.
As I have noted above, the amount of the debt owed by the Trust to the Partnership had been reduced from 28,394,000 $241 to $7,430,793.83, which was used primarily to fund the payment of the drawings made out of Partners' Funds during that year.
It therefore appears that, while the Partnership owned the Hotel, the profits from its operation were earned in the Trust, and the Trust made distributions of the profit earned each year to its beneficiaries. However, a substantial part of those distributions were in fact not paid out, but was treated as debt owed to the beneficiaries. A substantial part of the cash represented by the profits was loaned to the Partnership, to fund drawings by the partners. After the Hotel was sold, and the Partnership had realised its assets into cash, that cash was loaned to the Trust. Part of the money loaned was used to pay out the debts due by the Trust to the beneficiaries. A substantial part was also repaid to the Partnership, to fund the substantial drawings that occurred during the 2009 year.
Between 2009 and 2010, the debt owed by the Trust to the Partnership increased from $7,430,793.83 to $16,663,287.45. Apparently, this increase in the amount loaned by the Partnership to the Trust was funded by the reversal in the drawings made by Stephen between the 2009 and 2010 years, which I have considered above, when discussing the Partnership's accounts. I cannot be entirely sure, on the limited evidence before the court, as to the true significance of this apparent reversal.
The Trust's 2010 accounts include, as an asset, a debt of $7,720,478.68 owed to the Trust by the Bowden Superannuation Investment Fund.
That loan was in substance funded by the increase in the loan made by the Partnership to the Trust.
Mr Jansen has stated in his primary report that the Cabramatta Inn Hotel purchase was funded in part by a loan of $7,720,479 from the Trust, and $2,179,179 from the Bowden Superannuation Investment Trust.
He also said that the re-purchase of the Hotel was partly funded by a payment of $1,525,000 from the "Bowden group of companies"; $4,600,000 from Butlers Bridge Pty Ltd (the third defendant); $1 million from Stephen (formerly Bowden Trust); and $403,407 from Commsec share proceeds (Bowden Trust).
[24]
Application of balance of proceeds of sale of Hotel
It is not possible to be precise in determining how the proceeds of sale of the Hotel were applied, after all debts to external creditors of the Partnership were repaid, using only the annual accounts of the Partnership and the Trust. The reports prepared by the parties' accounting experts contain more detailed conclusions, based upon the ledgers and other information.
However, in broad terms, the evidence shows that the remainder of the proceeds of sale of the Hotel were applied in the following way:
1. $8,175,730.60 was repaid by the Partnership to the Trust in 2008, at the time when the Partnership transferred the cash in its bank account from the sale of the Hotel to the Trust. This payment repaid a debt which the Partnership had incurred primarily in funding drawings by Stephen, plus the incorrectly debited amounts that Adelaide was entitled to receive under the Deeds, against unrealised revaluations of the Goodwill.
2. A total of $8,060,889.01 was used by the Trust to repay debts owed to beneficiaries of the Trust, in the years 2009 and 2010, where those debts represented distributions of the profits of the Trust declared in favour of those beneficiaries, but not paid.
3. A substantial amount represented drawings by the Partners that were funded by a partial repayment of the loan made by the Partnership to the Trust out of the proceeds of the sale of the Hotel. I have not attempted to calculate this amount precisely, but it includes drawings of $17,432,357.64 made by Stephen in 2009, $9,100,704.89 of which appears to have been reversed in 2010. It also includes drawings debited to Adelaide in 2009 of $3,658,669 for the payment of tax.
4. The reversal of the drawings made by Stephen in 2010 lead to an increase in the amount of the loan by the Partnership to the Trust, which was used to fund the making of a loan by the Trust to the trustee of the Bowden Superannuation Investment Trust, to provide partial funding for the purchase of the Cabramatta Inn Hotel.
5. I have not attempted to determine whether any payments made by the Trustee, in repayment of debts due to any of the corporate defendants in respect of distributions of profit that were not paid, can be traced into the amounts used to repurchase the Hotel.
[25]
Payments made to Adelaide under cl 6.2 of the Principal Deed
It is Stephen's case that, after Adelaide received the exclusive, unencumbered title to the Gold Coast home unit required by cl 6.1 of the Principal Deed, the only continuing entitlement she had was to receive "the costs of her ongoing life style" provided for in cl 6.2. It will be convenient to set out that provision:
6.2 Notwithstanding anything to contrary contained in this Agreement, Steve undertakes with AB to ensure that AB will during her lifetime continue to receive the support of Steve in relation to the costs of her ongoing life style including distribution of profits from the Hotel business or distributions from any Trust associated with the Hotel business.
Stephen alleges (as does Louise) that in fact, Stephen caused Adelaide to receive, during her lifetime, all of the funds that she was entitled to receive under this provision (indeed, as has been seen above, Stephen alleges that Adelaide was paid some $413,000 more than she was entitled to).
Stephen gave evidence of these payments at pars 169 to 172 of his affidavit sworn on 28 August 2014. The evidence took the form of a list of categories and amounts of payments, and evidence on information and belief from Mr Morrison, involving schedules of payments made to Adelaide between 14 October 2003 to 29 October 2007, and between 30 October 2007 and 31 March 2012. Those schedules, together with the individual annual worksheets, are contained in the Court Book at pages 1516 to 1552A.
For the first four-year period, the schedule shows that Adelaide was paid a total of $854,887.27. This amount is divided into three categories over the four years, being weekly income ($220,250), lifestyle payments ($450,040.32) and taxation ($184,596.90).
The schedule also initially debits Adelaide with having received partnership income ($19,692), trust distributions ($173,000) and dividends ($275,000), giving a total of $467,692. Those amounts have, however, been deducted from Adelaide's receipts, on the basis that they were "non-cash", meaning "refers to Trust and Partnership Distributions that were not paid as cash. They represent bookkeeping transactions only therefore have been deducted from Total Payments. Dividend payments in some years were also non-cash payments".
Adelaide was apparently paid a regular weekly income, which was generally $1,000. On my calculations, the lifestyle payments primarily included an assortment of the odd type of bills such as owners corporation fees, rates, legal fees, insurance premiums and the like that require payment from time to time, in the ordinary course of most people's lives. However, on my calculation, of the $450,040.32, some $119,252.84 can be identified as payments to Kim or her family, and most likely an additional $100,000 that is described as "cash payment re-allocation beneficiary", although that may not be correct. An amount of $32,130.32 was paid for a round the world holiday for Adelaide, Kim and Kim's daughter.
It is apparent that payments made in favour of Kim and her family, most likely at the request of Adelaide, have been treated as being part of the lifestyle costs of Adelaide.
It is clear from the work papers that the lifestyle costs were not paid on any regular basis, and I would infer that, if Adelaide requested a particular payment be made, then provided it was reasonable, Stephen or Louise would make the payment. In that sense, the implementation of cl 6.2 of the Principal Deed involved ongoing negotiation and agreement between Adelaide and Stephen.
The schedule for the five-year period after the sale of the Hotel suggests that total payments of $5,837,788.31 were made to Adelaide.
In the same format as for the prior schedule, this amount was made up of weekly income ($227,000), lifestyle payments ($191,716.55), taxation ($3,819,071.76), trust distributions ($1,172,000), and dividends ($500,000).
It appears that a total of $218,588, which I assume includes partnership distributions of $146,588, have been deducted in reaching the $5,837,788.31 figure, because they were not paid to Adelaide in cash.
The worksheets show that the amount of the $1,172,000 trust distributions was all paid, in three payments, to entities associated with Kim, and the relevant annual accounts for the Trust describe those payments as "share of profit".
The total dividends of $500,000 ($250,000 in the 2010 year and $250,000 in the 2011 year) are treated as being actual payments to Adelaide. Receipts of those amounts were declared as income in Adelaide's income tax returns for the relevant years.
It is not clear why the dividends have been included in the schedule, as under the Principal Deed, Adelaide did not transfer to Stephen her shares in the companies that issued the dividends. Adelaide may have received this money, but there appears to be no reason why it should be treated as being within the payments required to be made by cl 6.2 of the Principal Deed.
Of the total taxation payments of $3,819,071.76, the sum of $3,670,142.25 represents Adelaide's share of the capital gains tax that was incurred on the sale of the Hotel. That is not a payment to Adelaide under cl 6.2 of the Principal Deed. In fact, it is consistent with Adelaide remaining the beneficial owner of her interest in the Hotel after the completion of the Deeds.
If the amount of $4,170,142.25, made up of the capital gains tax and the dividends, is deducted from the total payments of $5,837,788.31, the balance is $1,667,646.06 over the five-year period. Of this amount, $1,172,000 is represented by trust distributions to Kim and her family. The balance paid to Adelaide is $495,646.06.
The schedule for the second period also shows that the so-called lifestyle payments were irregular. If one includes the payments made to Kim and her family, on the basis that Adelaide requested the payments to be made, the point is reinforced that the lifestyle payments were not paid on the basis of any formula, but were a matter for agreement between Adelaide and Stephen from time to time.
[26]
The Trust Deed
The Trust was established by a discretionary trust deed dated 19 May 1986.
The Trust Deed, by cl 3, required the Trustee, until the distribution date (the period of 80 years from the date of the Trust Deed or 20 years after the death of the last survivor of the descendants then living of King George VI, or such earlier date as the Trustee shall appoint), or the prior death of the Appointor (Stephen), to pay the income of the Trust to one or more of the Beneficiaries and the Eligible Beneficiaries, as the Trustee in its absolute discretion shall determine.
The Trustee was not given the power to distribute the capital of the Trust Fund until the distribution date (cl 4).
The only power given to the Trustee to apply any part of the capital of the Trust Fund was a power contained in cl 16 to apply the whole or any part of the income and capital of the Trust Fund toward the maintenance, education, benefit, or advancement of any Beneficiary or Eligible Beneficiary.
[27]
The terms of the Partnership
There was no written partnership agreement, and no specific oral terms of a partnership agreement have been proved.
It is, however, possible to infer terms agreed by the partners, or created by their customary dealings.
Stephen was the managing partner, with sole discretion to make decisions in the ordinary business of the partnership. Adelaide gave Stephen the power of attorney, and withdrew from day-to-day participation in the business of the Partnership. Adelaide acquiesced in Stephen causing the Partnership's accounts to be prepared by Mr Morrison, and his signing of the accounts on her behalf in exercising his authority under the power of attorney given.
The partners agreed that the Freehold (even if it was not strictly a Partnership asset) would be treated as a Partnership asset for the purposes of the accounts, and depreciation would be accounted for in the Partnership accounts. It may be noted that it is not clear whether the Freehold was a Partnership asset. Section 21 of the Partnership Act 1892 (NSW) provides that, unless the contrary intention appears, property bought with money belonging to a firm is deemed to have been bought on account of the firm. The Partnership's accounts that were in evidence do not go back far enough to show clearly whether or not the Freehold was paid for out of the profits of the Partnership. It appears that the properties owned by the Hotel Companies were also treated as being assets of the Partnership in its accounts.
There was an agreement that the Partnership's assets would be deployed in a manner that attracted the least income tax, by taking advantage of the Trust structure, and the taxation rules then in place. There was also an agreement that the Partnership's assets, treated as the Freehold and the Goodwill and related licences, would be leased or licensed to the Trust from month to month at an uncommercial rate.
However, there were other relevant implicit features of the Partnership agreement, before the execution of the Deeds and the Management Agreement in late 2003. It must be remembered that, although Adelaide did not take any part in the day to day operation of the Partnership business, she remained an equal partner, and her interest might be bequeathed to a person outside the Partnership, such as Kim, upon Adelaide's death. Adelaide's interest in the Partnership was her own private asset.
It was a feature of the Partnership that all assets remained under the control of the Partnership, in the sense that the Partnership could reassert its right to operate the Hotel business by terminating the Trust's tenancy on short notice.
All that the agreement between the partners that the profit from the Hotel Business should be earned in the Trust effected, was to move the profit earned by the Hotel business to the Trust. The value of the Hotel remained in the Partnership (as was reflected in the revaluations that occurred from time to time of the Goodwill in the Partnership's annual accounts).
This arrangement was reinforced by the terms of the Trust Deed, which provided primarily for the distribution of the Trust's income, and that was the way that the Trust was used.
Stephen's powers as managing partner did not extend to selling the Partnership's assets, without the consent of Adelaide. Stephen owed a fiduciary duty to Adelaide to manage the Partnership's business in the best interests of the partners, and not in his own interests. Stephen was not entitled to apply the Partnership's assets to earn profits for himself (outside the agreed arrangement for the Trust to earn any profits from the operation of the Hotel business).
To the extent that the Partnership continued to exist after the date of the Deeds and the Management Agreement, the Partnership was governed by its existing terms, save to the extent that those terms were varied by the Deeds and the Management Agreement. The Deeds and the Management Agreement did not necessarily displace all of the pre-existing terms.
[28]
The alleged July Agreement
It is necessary to consider the terms of the minutes of the meeting signed by Stephen, Adelaide, Peter, Kim and John Morrison on 1 July 2003 (the "July Minutes").
The defendants all submitted that the July Minutes created a binding agreement between the parties, which continued to have effect after the Deeds were executed at the end of 2003.
Initially, all of the defendants claimed that the July Minutes record an agreement by the family that Stephen would immediately gain the effective ownership of the whole of Adelaide's interest in the Hotel, to the extent that Adelaide would only retain the legal title to her interest, and would hold that interest on trust for Stephen.
That position is the foundation for Louise's case that, even if the July Minutes did not record a binding agreement, an agreement on the terms contained in the July Minutes came into effect in November 2003, when the family members committed themselves to the agreement, by Stephen arranging for the Trust to pay the price for the acquisition by Kim and Peter of the motel, and Adelaide making the will contemplated by the July Minutes. Louise argues that the November Agreement had the effect that Adelaide held her remaining interest on trust for Stephen, because that was what had been agreed in principle in the July Minutes. It is apparently for that reason, that Louise argues further that the Principal Deed and the Deed of Assignment were invalid, because, if that were true, the only effective agreement would be the July Agreement, or if that were not binding, the November Agreement.
I have recorded above that, at the hearing, Stephen changed his position to abandon his initial claim that the July Minutes evidence a binding agreement, under which Adelaide agreed to hold her remaining interest on trust for Stephen. Instead, Stephen claims that the effect of the agreement was that she relinquished her entitlement to the benefits of her continuing beneficial ownership of her remaining interest.
I do not accept that the July Minutes created a binding agreement. To so find would be to ignore the clear and express words in the final paragraph that: "We understand this does not represent a legally binding document but represents a confirmation of matters discussed and agreed". There is no basis, as at 1 July 2003, for the court to ignore this expression of the mutual intention of the signatories.
Stephen and Louise made submissions contrary to the conclusions stated in the preceding paragraph.
Stephen submitted, in his written opening (par 3.7), that the present case is an example of the fourth type of case, in addition to the three mentioned in Masters v Cameron (1954) 91 CLR 353 at 360-362, and which was identified by McClelland J (as his Honour then was) in Baulkham Hills Private Hospital Pty Ltd v GR Securities Pty Ltd (1986) 40 NSWLR 622 at 638, which was approved on appeal at (1986) 40 NSWLR 631. That is, that the parties were content to be bound immediately and exclusively by the terms which they had agreed upon, whilst expecting to make a further contract in substitution for the first contract, that may contain, by consent, additional terms.
As I have said, Louise adopted the additional position that the terms in the July Minutes became binding on the signatories thereto, by reason of events that occurred in November 2003, whereby "the parties evinced an intention to be immediately bound by the terms previously recorded in the note prepared by Morrison while at the same time proposing that the terms be restated in documents to be drawn by their respective lawyers which would be fuller or more precise but not different in effect" (written opening par 2.4).
I remain of the view that the court should apply the statement by the signatories that they understood that "this does not represent a legally binding document". That is a straightforward expression, readily intelligible by laypersons. The July Minutes clearly record an agreement in principle, and I would accept that all of the signatories had a firm intention to proceed with the proposal. However, they recognised that formal and technical legal documents had to be prepared to implement their proposal, and they reserved the right to review the documents, and if unexpected difficulties emerged, to withdraw if satisfactory solutions could not be agreed.
While each case will depend upon its own facts, it would be difficult for the court, in the face of the wording of the final paragraph of the July Minutes, to find that the parties did indeed intend to be immediately bound. That would be a difficult finding to make, unless the wording of the document, or the surrounding circumstances, clearly suggested that the parties had that intention. However, in my view, even if I am wrong, and the parties did have an intention to be bound immediately, the wording of the July Minutes, and the surrounding circumstances, do not justify a finding that the parties intended that the terms of the formal documentation could not depart from the principles of the agreement that were relatively informally stated in the July Minutes.
Although the family received legal advice as to the appropriate structure for the transactions before the meeting 1 July 2003, the natural conclusion to be drawn from their decision that their agreement should be formally documented, is that they acknowledged the possibility that the need for variations to what was contained in the July Minutes may become apparent during the course of the lawyers' drafting of the formal documentation.
It will now be appropriate to analyse the wording of the July Minutes, as that document clearly records the terms of the agreement that the family had agreed in principle on 1 July 2003. It may arise, when the terms of the formal documentation are considered, that some of the matters agreed in principle may properly be taken into account in the construction of that documentation, on the basis that it forms part of the surrounding circumstances, or demonstrates the commercial purpose of the documentation.
I will first note the significant wording in the July Minutes, and then, at the end, bring together my conclusions as to the substance of the agreement made in principle by the family that is relevant to the present dispute.
It will be convenient to interpolate observations concerning the significance of particular parts of the July Minutes into the document, as the process of analysis will be simpler if the observations are made in context.
The July Minutes commence as follows:
BOWDEN ESTATE PLAN
MINUTES OF MEETING
BACKGROUND
AB wishes to sell her 50% interest in the Hotel property to SB in order to 'free up' funds to provide for Kim & Peter to purchase a business. In addition AB would like to have access to her own cash funds, as well as her desire to own the Gold Coast property in her own name and for the unit to be unencumbered. SB would like to have future certainty of ownership of the hotel property. (Emphasis added)
This initial paragraph expresses Adelaide's purpose in participating in the proposed transaction. It records her wish to sell her 50% interest, but does not identify the time at which the sale would occur. The expression of Stephen's desire to have certainty of ownership refers to the future and not to the present.
The July Minutes then continue:
Finally, if in the event that AB continues to have part ownership of the hotel, how can AB be satisfied that she is not also personally liable for the debts of the Hotel group.
This paragraph contemplates that it may be necessary for Adelaide to continue to have part ownership. It therefore, contemplates expressly that the implementation of the transaction may result in Adelaide continuing to be an owner until her death. In that event, she wishes to avoid being personally liable for the debts.
Then:
The purpose of the meeting is to work out the best way of achieving the above scenario without incurring excessive debt levels, income tax, stamp duty, current and future capital gains tax liabilities - not to mention excessive legal costs, the possible forced hotel sale, and the sale of the hotel out of the Bowden name, if the event of a future family conflict.
This paragraph records a second purpose of the meeting, which was to achieve the primary purpose of determining the appropriate way to dispose of Adelaide's 50% interest, but to do so in a manner that minimised transaction costs, including capital gains tax and stamp duty. Though perhaps a subsidiary purpose, it was crucial to achieving the primary purpose, because the evidence shows that Stephen did not have the financial capacity to borrow the $6 million necessary to immediately acquire the whole of Adelaide's interest, or to fund the additional stamp duty and capital gains tax that would be incurred if he did so.
The July Minutes next provide:
To satisfy all parties' needs we would determine the current value of the hotel property, less net debts, and then allocate a fair 50/50 split of AB's interest in the hotel. Essentially AB is determining her desired estate split of her 50% interest in the Hotel, in the living, to Kim & Peter now, and for SB at a later date. (Emphasis added)
This paragraph records the 'essence' of Adelaide's determination of the splitting of her estate during her lifetime between her two children, and not necessarily the precise form of the division of her estate; and importantly, describes the division in favour of Kim as happening "now", and that in favour of Stephen as happening "later". Later can only mean on Adelaide's death.
Then:
Ideally on the basis of the net valuation method (assuming a $20.00m hotel value - to be evidenced by a valuation): Kim and Peter would be provided with $2.0m, AB would receive $1.0m and own the Gold Coast property in her name (with the $600,000 debt paid out), and SB have 100% ownership of the Hotel property, goodwill, assets, and group companies at a later date. (Emphasis added)
This paragraph expressly reinforces the statement made in the preceding paragraph, that Stephen would have the 100% ownership "at a later date", being Adelaide's death.
The July Minutes continue:
In addition SB would be liable for all associated financing costs, stamp duty, bank establishment fees, valuation, and legal fees associated with the agreed transaction in respect of the Hotel and the Gold coast property. Also SB agrees to continue AB's 'lifestyle' expenses.
The reference in this paragraph to the continuation of Adelaide's 'lifestyle' expenses introduces a concept that may be inherently uncertain, and even if not strictly uncertain, is clearly indefinite. It may be a reference to Adelaide's living expenses at the time of the July Minutes. However, expenses of that type are likely to be elastic, in relation to such matters as health and age. The reference to 'lifestyle' expenses does not address the issue of who was to decide the expenses that were to be continued.
The July Minutes then set out the proposal:
THE PLAN
In order to best maximise the above desired scenario the following would need to occur, in order to minimise legal/stamp duty costs, income tax, and capital gains tax liabilities
SB to acquire 25% of AB's Hotel goodwill now, but agrees through her 'Hotel Will', that SB is to have full ownership of the hotel freehold property, goodwill, assets, and group companies upon the event of her death.
That is, although AB is agreeing to sell only 25% of her goodwill share now per a contract for sale, she is effectively selling her entire 50% freehold land and building share and her 50% goodwill share. The reason for this approach is to eliminate excessive stamp duty cost and avoid triggering capital gains tax issues on a future disposal/sale. Technically AB's name will still be attached to the hotel property (Emphasis added).
The proposition that Kim is to receive her share now, and Stephen is to have full ownership upon Adelaide's death, is again reinforced.
The highest the July Minutes come to a statement that Stephen was immediately to become the owner of half of all Adelaide's interest is found in the words "she is effectively selling her entire 50%", although it must be acknowledged that the reference to Adelaide's "name" still being attached to the Hotel tends to support the submission that she was to hold her interest in name only. However, if these statements are viewed in context, it becomes clear that the only immediate transaction is the contract to sell 25% of the goodwill to Stephen. The reason for following this course is expressly identified as the need to eliminate excessive stamp duty and avoid triggering capital gains tax issues.
The statement of the plan continues:
B agrees to pay out $600,000 gold coast property debt and transfer his 50% interest across to AB. AB will then own this property 100% in her own name and it will totally be unencumbered.
$4.0m is to be raised through the bank and to be allocated as follows:
$2.0m to Kim and Peter
$1.0m to AB
$0.6m to payout Gold Coast Unit
$0.4m to cover acquisition/legal/financing costs of the transfer of the sale of the hotel and the sale of the 50% of the Gold Coast property. Also SB will continue to support the ongoing 'lifestyle' costs of AB.
(NB Agreement would state AB agrees to the sale of 25% good will to SB for consideration of $3.6m. Further, AB provides $2.0m of her $3.0m to Kim and Peter. By preparing the agreement this way eliminates excessive stamp duty and does not trigger future capital gains tax issues for SB. It also ensures AB's $3.0m proceeds do not attract capital gains tax i.e. $3.0m funds will be tax-free).
Again SB agrees to pay all associated costs with the sale agreement.
SB agrees to indemnify AB for all Hotel Group debt.
SB is no longer liable for Kim and Peters' Rose Bay property loan repayments, nor is SB guarantor for the loan, and no longer supports 'lifestyle' expenses (i.e. $2,000 per week, school, motor vehicle, taxation et al from date of the settlement).
AB, Kim, Peter and family agree that they longer have an interest in Bowden Family Trust and agree not to challenge any of AB's remaining interest in the hotel property group nor contest AB's Will in respect of the hotel property interest (including group companies).
AB agrees to 'Will' her remaining 50% interest in the hotel property, including interest in Bowden Family Trust, and related group companies.
As AB is consenting to leaving her remaining interest to SB upon her death - SB needs to have legal certainty that he will have effective control all the Hotel group assets up until this event occurs. In order to cover as many different contingencies that may happen between now and this future event, AB would need to consent to the following: (Emphasis added)
The statement in this paragraph, about leaving Adelaide's remaining interest to Stephen upon her death, repeats the proposal that it is upon Adelaide's death, that Stephen is to become the owner of his share of Adelaide's estate. That result is the reason for the stated need of Stephen to have "effective control" until Adelaide's death. The use of the word "control" is significant, as control would not ordinarily extend to Stephen enjoying all of the benefits of ownership, including the right to dispose of the Hotel Assets for Stephen's own benefit.
[29]
The alleged November 2003 constructive trust
Louise submits that, even if it be accepted that the July Minutes did not create a binding agreement, by reason of certain events that occurred in November 2003, the signatories to the July Minutes became bound by its terms.
I accept this submission, for the reasons set out below. However, the validity of this submission will have no effect on the outcome of this dispute for two reasons. First, as I have explained above, I have not accepted that the July Minutes evince an intention that, after Adelaide assigned half of her interest in the Goodwill to Stephen, she would hold the balance of her interest in the Goodwill and her interest in the Freehold on trust for Stephen. Accordingly, the correctness of the submission does not advance Louise's case. Secondly, for the reasons given below, any agreement that was created by the conduct of the parties in November 2003 was replaced by the agreements contained in the formal documents that were executed in November and December 2003.
One of the purposes for the family having the meeting that took place on 1 July 2003 was for Adelaide to raise funds for the purpose of making a gift to Kim, to enable Kim and Peter to acquire a motel to operate as a business. Mr Morrison found a suitable motel in Gosford, and, in early October 2003, Kim and Peter inspected the motel, and decided that they would like to buy it, and complete the purchase before Christmas, so that they could enjoy the benefit of the Christmas trade.
A number of conversations then took place between Mr Morrison, Adelaide, Kim and Stephen. Mr Morrison gave unchallenged evidence that he spoke to Stephen about the need for Kim and Peter to pay a deposit of about $60,000 and stamp duty of $98,000. Stephen replied:
Go get it in a headlock, because after the meeting on 1 July 2003 the family agreement is a done deal and it has all dragged on too long. I will pay for the ingoing costs, and I will have them reimbursed on settlement.
Mr Morrison spoke to Adelaide and referred to Stephen's observation that the family arrangement made at the meeting of 1 July 2003 was a "done deal", and that he would get his money back on settlement.
Mr Morrison gave evidence that Adelaide said:
We have made a family agreement, so you should proceed to assist Kim and Peter to purchase the Gosford Palms Motor Inn. Stephen will get his money back on settlement and I will gift $2 million of my $3 million to Kim and Peter when they have to pay the purchase price.
Exchange of contracts for the purchase of the motel occurred on 14 October 2003, and Stephen arranged for the deposit of $60,000 and the stamp duty of $98,000 to be paid out of the funds of the Trust, on the basis that the payments would be treated as drawings by him.
Stephen was eventually repaid the amounts advanced out of the money borrowed at settlement of the transaction on 22 December 2003.
I am satisfied that following these events, Stephen, Adelaide and Kim became contractually bound on terms that probably included the terms contained in the July Minutes.
It is not necessary to investigate in any comprehensive way what the terms of that contract were, as the parties expressly proceeded upon the basis that Stephen would be repaid upon settlement of the agreement, which the parties expected would be documented in the formal documentation, and that is what occurred.
[30]
Validity of the Principal Deed and the Deed of Assignment
Louise submits that neither the Principal Deed nor the Deed of Assignment is valid and enforceable, because identical counterparts of those deeds were not delivered. Stephen and Louise executed versions that contained different terms to those executed by Adelaide, Kim and the other parties.
This submission forms part of an argument that depends upon the signatories to the July Minutes having agreed, by the terms of that document, that Adelaide would only retain the legal title to her interest in the Goodwill and the Freehold that she did not assign to Stephen, and would hold that interest on trust for Stephen. If that were so, then in the event that the July Minutes recorded a valid agreement, or the provisional agreement in the July Minutes became binding by reason of the events of November 2003, the result that Adelaide would hold her remaining interest on trust for Stephen would not be disturbed by the terms of the Principal Deed and the Deed of Assignment. It would not matter if, on the proper construction of those deeds, no trust was created in favour of Stephen, because those deeds were invalid.
As I have found that, on the proper construction of the July Minutes, it was not agreed, provisionally or otherwise, that Adelaide would hold her remaining interest on trust for Stephen; this argument must fail in any event.
However, for the reasons that follow, I find that the Principal Deed and the Deed of Assignment are valid, or if not valid as deeds, constitute binding contracts between the parties to them. Alternatively, Stephen and Louise were estopped from asserting that the documents were invalid. In the case of the Principal Deed, the version signed by Adelaide and Kim is the effective one, and in the case of the Deed of Assignment, the deed that takes effect is the one that has been stamped with ad valorem duty.
[31]
The correspondence
On 7 November 2003, Mr Wiseman sent drafts of the four Deeds and the Management Agreement in duplicate to Mr Kilmurray, Adelaide's solicitor, for execution. Those drafts were in the form of the documents that Adelaide alleges, and Stephen accepted at the trial, are valid and effective. Mr Wiseman advised that when the documents were returned to him, they would be held in escrow. Mr Wiseman had earlier advised Mr Kilmurray, in a letter dated 29 October 2003, that the escrow condition for all of the documents was that the NAB provided the finance and Adelaide received the money under the Deed of Assignment.
Mr Kilmurray returned a set of the documents executed by Adelaide, Kim, Peter and Mr Bullen to Mr Wiseman, under cover of a letter dated 20 November 2003. Mr Kilmurray advised that Adelaide had executed her will. Mr Kilmurray stated: "The above documents are to be held by you in escrow on the conditions outlined in your correspondence of 2 August 2003 and 29 October 2003".
Subsequently, Mr Morrison informed Mr Wiseman that Stephen required further amendments, notwithstanding that the documentation had already been signed. On 28 November 2003, Mr Wiseman, by letter, advised Stephen that he had gone through the amendments with Mr Morrison, and that Mr Morrison was going to contact Mr Kilmurray "to see whether the other side would agree to the changes and re-execute the documents".
Mr Morrison sent a facsimile to Mr Kilmurray on 2 December 2003, with which he attached a copy of the first page of the Deed of Assignment with marked up amendments to Recitals C, D and E, and the draft Principal Deed with the same marked up amendments to the same recitals, and amendments to cll 6.2 and 7.2. The amendments suggested to the recitals were relatively inconsequential changes to the history of the Partnership. The words "at the discretion of the trustee" were added to the end of cl 6.2, and the words "notwithstanding the bank's actions" were added to the end of cl 7.2.
Mr Morrison's facsimile stated:
I refer to our previous discussions and confirm the following amendments for you to consider on behalf of Adelaide, Kim and Peter…
Please advise if you have any objections, if not we would simply send the amended pages to Phillip Wiseman to replace the previously signed deeds. He would then send copies of the originals.
Mr Morrison's facsimile is cast more in the form of a request than of a demand. It does not convey the message that Stephen would not regard himself as being bound, if Adelaide and the others did not agree to the changes that he wanted. Mr Morrison did not mention the course that would be followed if there was no agreement to the changes. He said that, if there was agreement, amended pages would be inserted into the documents executed by Adelaide and the others, and the completed documents sent to Mr Kilmurray. That would naturally convey to Mr Kilmurray that, if the changes were not agreed to, and amended deeds were not sent to him, then the original executed documents would take effect.
In addition, Stephen wanted the amount in the definition of "Purchase Price" in the Deed of Assignment to be changed from $3 million to $2,826,000.
On 4 December 2003, Mr Kilmurray wrote to Kim and Peter seeking their instructions. He said: "you don't have to agree to the amendments as you have already signed the documents. It is suggested to me by John that the amendments don't really change anything other than to correctly recite the historical facts…"
Although it is true that deeds only become binding as deeds upon delivery, it appears that both Mr Morrison and Mr Kilmurray were proceeding upon the basis that, as a matter of contract, Adelaide, Kim and the others had accepted the offer made by Stephen in the form of the draft documents, when they executed and returned those documents.
On 10 December 2003, Mr Morrison sent an email to Mr Wiseman to which he attached, among other things, amended pages for the Principal Deed and the Deed of Assignment, with the instruction: "The amended pages should simply be inserted into the already signed document. Upon final signing you would provide copies to our offices".
There is no evidence that Mr Kilmurray informed Mr Morrison before he sent this email to Mr Wiseman, that Mr Kilmurray's clients had agreed to the amendments being made. In fact, they had not agreed to the amendments, and did not ever execute the amended deeds.
Mr Wiseman gave affidavit evidence, but did not say how he interpreted this email from Mr Morrison. Mr Morrison's email referred to a discussion between himself and Mr Wiseman, although the evidence does not disclose the terms of that discussion. It would be natural for Mr Wiseman to understand from the instruction, that he should "simply" insert amended pages into the draft deeds, which Adelaide and Kim had agreed to the amendments requested by Stephen.
On 12 December 2003, Mr Wiseman wrote to Mr Kilmurray, after Stephen and Louise had executed all of the documents, including the Principal Deed and the Deed of Assignment containing the amendments required by Stephen. Mr Wiseman said:
I confirm that the documentation was this morning executed by Stephen and Louise Bowden and Ritz Restaurants (Hurstville) Pty Ltd.
I am holding these documents in escrow pending settlement which is scheduled to take place on Monday, 22 December 2003…
This letter did not convey to Mr Kilmurray that the documentation had been amended. As Mr Kilmurray had not advised Mr Morrison or Mr Wiseman that his clients had agreed to the amendments, and as there was no indication in the letter that the documents executed by Stephen and Louise had been amended, it would be natural for Mr Kilmurray to understand that Stephen and Louise had executed unamended documents, and that Stephen had dropped his request for the amendments to be made.
The transactions contemplated by the Deeds were completed on 22 December 2003. Mr Morrison's statement of the source and application of funds shows that Adelaide had received $1 million, and that a total of $2 million was received by Kim and Peter (after repayment of various amounts disbursed for their benefit in November 2003). The $1 million was not actually paid to Adelaide, as the bank required both Adelaide's and Stephen's authority to make the payment, and Stephen was overseas at the time.
The transactions were therefore completed on the basis of the documents executed by the parties before 22 December 2003. While Stephen and Louise had in fact executed versions of the Principal Deed and the Deed of Assignment that were different to the versions executed by Adelaide and Kim, the communications that I have discussed above would naturally have caused Adelaide and Kim, through their solicitor, Mr Kilmurray, to understand that Stephen and Louise had executed identical documents to those that they had executed.
Mr Kilmurray advised Blake Dawson Waldron (as Mr Wiseman was away) on 23 December 2003, that the escrow condition would not be satisfied until the $1 million payable to Adelaide had actually been paid to her.
There was then correspondence between Mr Kilmurray and Mr Wiseman, as to whether or not the escrow condition had been satisfied at the time of settlement.
On 15 January 2004, Mr Wiseman, by way of letter, advised Mr Kilmurray that he was "proceeding to have the relevant documents stamped at the Office of State Revenue".
Mr Morrison advised Mr Kilmurray on 26 March 2004 that Adelaide had drawn down her $1 million from the bank.
Mr Kilmurray advised Mr Wiseman, on 29 March 2004, that the escrow condition had been satisfied.
Mr Wiseman wrote to the Chief Commissioner of Stamp Duties on 29 March 2004. He advised that Stephen had acquired a 25% interest in the goodwill of the Hotel, and that the sale "does not include either the freehold or the plant and equipment". He said that the valuation of goodwill, license, permits and entitlements as per the valuation was $11,300,000, 25% of which was $2,825,000. He calculated the duty to be $140,865.
The only deed that was attached for stamping was the Deed of Assignment. The Deed of Assignment that is in evidence is stamped on the basis that the dutiable amount is $2,825,000.
It seems clear that the document that was stamped is comprised of the whole of the Deed of Assignment executed by Adelaide, save for the final page, which is identical to the final page of the version of the Deed of Assignment executed by Stephen, which contains the jurat with Stephen's signature and the signature of Mr Wiseman as the witness. The conclusion seems inescapable, that someone within Mr Wiseman's office solved the problem of having two versions of the Deed of Assignment, each signed by a different party, by detaching the unsigned page from the version executed by Adelaide, and adding to it the signed page from the version executed by Stephen. Mr Wiseman, in his affidavit, acknowledged in very general terms that in some unexplained way this must have happened, but he does not appear to have taken personal responsibility for what is without doubt an extraordinary course of events. The consequence of this was the production of a version of the Deed of Assignment for stamping that in substance contained the terms agreed to by Adelaide.
On 1 April 2004, Mr Wiseman advised Mr Kilmurray that the Deed of Assignment had been lodged for stamping. It appears from the imprint on the Deed of Assignment that the stamp duty was paid on 30 March 2004. Mr Wiseman enclosed with the letter copies of the four Deeds and the Management Agreement "duly executed by our client". It is not clear from the letter whether the Deed of Assignment that was enclosed was the deed that was executed by Stephen, or the document that was stamped by the Stamp Duties Office.
At the hearing, Kim produced, in response to a notice to produce, originals of a number of deeds that had been executed by Stephen and Louise. Relevant deeds were tendered by senior counsel for Louise at T 35 to 39. Exhibit D1 is an original of the Principal Deed signed by Stephen, and Exhibit D2 is an original of the Deed of Assignment signed by Stephen. Both of these deeds had been produced by Kim. Louise also tendered versions of the Principal Deed (two copies; Exhibits D3 and D4) and the Deed of Assignment (Exhibit D5) executed by Adelaide, or Adelaide and Kim, which had been produced by Stephen. Exhibit D6 is the original composite deed that had been stamped. It was produced by Stephen.
All of this suggests that Mr Wiseman sent to Mr Kilmurray versions of the Principal Deed and the Deed of Assignment in the form that had been executed by Stephen. It does not appear that Mr Wiseman sent to Mr Kilmurray a copy of the Deed of Assignment that had been stamped.
There was no evidence that Mr Kilmurray, Adelaide or Kim noticed that the Principal Deed or the Deed of Assignment that had been received from Mr Wiseman contained the relatively brief amendments that Stephen had originally requested through Mr Morrison to Mr Kilmurray on 2 December 2003.
[32]
Effect of documents
I find that the parties completed the transactions on 22 December 2003, in the belief that the legal effect of the transactions was governed by the suite of documents that had first been sent in draft by Mr Wiseman to Mr Kilmurray on 7 November 2003. They did not do so in the belief that they were bound by a contract entered into on 1 July 2003, or on the basis that the terms contained in the July Minutes had become binding upon them by reason of the events that occurred in November 2003. The parties thought that they were bound by a version of the formal documents that had been prepared, although there was a misunderstanding as to what terms were contained in the Principal Deed and the Deed of Assignment.
Stephen offered to enter into contracts in terms of the draft documents that Mr Wiseman forwarded to Mr Kilmurray on 7 November 2003. Adelaide, Kim and the others accepted that offer by executing all of the documents and returning them to Mr Wiseman through Mr Kilmurray, on the basis that they would be held in escrow. Stephen then requested amendments, but even if he intended to insist on those amendments, his accountant, Mr Morrison, put his position in terms of a request, rather than a demand. Importantly, on 12 December 2003, Mr Wiseman advised Mr Kilmurray that he was holding the documentation executed by Stephen and Louise in escrow, without positively stating that the documents that were executed had been amended to include the variations required by Stephen. On the objective information available to Adelaide, through her solicitor, Adelaide completed the transactions on the basis that the documents that she, Kim and the others had executed were in effect.
Accordingly, the documents executed by Adelaide, Kim and the others took effect as simple contracts, or if that is wrong, as Stephen and Louise allowed completion to take place without positively advising Adelaide and Kim that they had only executed documents containing the amendments, Stephen and Louise are estopped from asserting either that there was no valid agreement, or that the agreement contained terms other than those contained in the documents executed by Adelaide, Kim and the others. As of 22 December 2003, the transaction ceased to be executory, and had become executed. It was then too late for Stephen (if he had done so), or Louise, to assert that there were no valid agreements.
I do not accept Louise's argument that the Deeds were invalid because the parties did not deliver to the other identical counterparts. When the effect of all of the Deeds and the Management Agreement are taken together, as they must be, it is clear that there was sufficient consideration to support the promises made by all of the parties.
In my view, it is immaterial that, on 1 April 2004, Mr Wiseman first provided Mr Kilmurray with the Deeds and the Management Agreement executed by Stephen and Louise. That was after both the completion of the transaction on 22 December 2003, and the confirmation by Mr Kilmurray, on 29 March 2004, that the escrow condition had been satisfied. The rights and obligations of the parties had crystallised before 1 April 2004.
In any event, as I have said, there is no evidence that Mr Kilmurray realised that the Principal Deed and the Deed of Assignment executed by Stephen contained different terms to the equivalent documents executed by his clients. On the balance of probabilities, if Mr Kilmurray acted competently, he would have satisfied himself that the documents he received appeared to have been properly executed by Mr Wiseman's clients. Given that he had not been told that the documents had been amended, it would not be expected of Mr Kilmurray that he would minutely compare the documents to ensure that the documents were in precisely the same terms as those executed by his clients. It would have been reasonable for Mr Kilmurray to rely upon Mr Wiseman's assurance that his clients had executed the documents, and also the later advice that the Deed of Assignment had been lodged for payment of stamp duty.
The better view may have been that the valid Deed of Assignment is the one executed by Adelaide alone, were it not for the circumstances in which the composite deed was created within Blake Dawson Waldron, and submitted to the Office of State Revenue for stamping. It seems clear that Stephen did not authorise the creation of the composite deed, but his solicitor had the responsibility for its creation. Mr Wiseman submitted the composite deed for stamping on behalf of Stephen and Adelaide, as the effect of s 304 of the Duties Act 1997 (NSW) would have been that, unless the Deed of Assignment was properly stamped, it would "not be available for use in law or equity for any purpose". Mr Wiseman applied $140,865 from the money borrowed in order to implement the transactions in payment of the stamp duty: see Mr Morrison's source and application of loan funds statement dated 22 December 2003. Thereafter, Adelaide and the other parties conducted all of their affairs on the basis that the Deed of Assignment was valid and effective.
In those circumstances, Stephen is estopped by reason of the conduct of his solicitor from asserting that the composite deed is not the effective Deed of Assignment, and he has not sought to do so in these proceedings.
I do not accept that Louise, who was not a party to the Principal Deed or the Deed of Assignment, has standing in any event to assert that those deeds are invalid, or that their terms are other than the terms accepted by the parties to them. She is not privy to either of the deeds.
[33]
Effect of Deeds and Management Agreement
It is now necessary to determine the legal effect of the documents that I have found bound the parties.
Unsurprisingly, the Deeds and the Management Agreement cover much the same ground as the July Minutes, as the drafters have relatively closely followed the structure contemplated by that document.
Initially, I will only make limited observations concerning the significance of particular aspects of the wording of the documents. I will then deal with the substantive issues that have been raised concerning the proper construction of the documents, and their effect.
It is appropriate to begin by considering the Principal Deed, which was to some extent intended to provide an overarching basis for the family transaction.
[34]
The Principal Deed
I will set out the terms of the Principal Deed, and for convenience, interpolate my initial observations on the significance of the terms of that document.
The parties to this deed were Adelaide, Stephen and Kim.
WHEREAS
A. Kim and Steve are the daughter and son respectively of AB.
B. In 1979 AB and her late husband Thomas together with Steve and Kim and Peter Jaeger acquired from Tooth & Co Limited the goodwill and hoteliers licence of the Hurstville Ritz Hotel at 350 Forest Road, Hurstville, (the 'Hotel'). Kim and Peter Jaeger acquired a one third interest, Steve acquired a one third interest and AB and Thomas jointly acquired the other one third interest.
C. The Hotel business was run by Kim and Peter Jaeger, Steve, AB and the late Thomas Bowden in partnership (the "Partnership").
D. In or about February 1982, Kim and Peter Jaeger withdrew from the Partnership and at that time Steve became entitled to a 50% interest in the Partnership and AB and Thomas jointly own the other 50% interest.
E. In 1990 the partners in the Partnership bought from Tooth & Co Limited the freehold interest in the land upon which the Hotel stood subject to the Lease.
F. In 1994 Thomas Bowden died and his interest in the goodwill and licence of the Hotel, the land upon which the Hotel was erected and the Partnership vested in AB as his sole beneficiary.
G. Since that date the Hotel Business has been operated by the Partnership consisting of AB and Steve in equal shares.
H. AB has requested that Steve acquire from her one half of her interest in the Partnership, goodwill of the Hotel business and licence (but not the freehold) at a certain price which Steve has agreed to do subject to AB entering into the provisions of this Deed (the "Steve Transaction").
I. AB intends to pay a substantial part of the proceeds she receives from Steve to Kim to enable Kim to acquire a business.
J. As part of the Steve Transactions, AB has agreed to leave to Steve in her Will her remaining interest in the goodwill and licence and the Partnership, all her interest in the freehold property on which the Hotel stands and all her shares in the Hotel companies, and Steve has agreed that AB is free to leave the rest of her estate to whomever she thinks fit. As part of the Steve Transaction, Steve has requested that AB and Kim execute this Deed.
The recitals largely speak for themselves. Recital H is quite specific in relation to the proposition that Stephen would acquire one half of Adelaide's interest in the Goodwill of the Partnership, but not the Freehold. This is obviously consonant with the objective of the parties to avoid capital gains tax, as only half of Adelaide's interest in the Goodwill, being her original half, and not the half that she inherited from Thomas, could be assigned at that time without a capital gains tax liability being incurred.
Furthermore, Recital J clearly provides for Adelaide to leave the balance of her interest in the Hotel to Stephen in her will.
The Principal Deed commences with the following terms:
NOW IT IS HEREBY AGREED AND DECLARED BETWEEN THE PARTIES AS FOLLOWS
1. MANAGEMENT OF HOTEL
1.1 AB agrees that Steve is to be appointed Managing Partner of the Hotel Partnership.
1.2 Without limiting the generality of the foregoing, Management shall include not only the Hotel Partnership but the freehold land and buildings, hotel assets and goodwill and lease and all other assets utilised in the business of the Hotel in which AB has an interest.
1.3 Without limiting the generality of any of the foregoing, Steve's management shall extend not only to the Hotel Partnership but to the Hotel freehold and the Hotel companies.
1.4 Upon or prior to the execution of this Agreement, AB and Steve will executive a Hotel Management Agreement in relation to the provisions of this clause.
As cl 1.1 appoints Stephen to be the managing partner, it is implied that the Partnership will continue. The clause contemplates that Stephen will continue to have the duties of a managing partner to Adelaide.
Clause 1 gives to Stephen the exclusive right, as between Stephen and Adelaide, to manage both parties' interests in all of the relevant assets.
Clause 1.4 contemplates that the Management Agreement will have been executed before the execution of the Principal Deed.
The following clause deals with Stephen's authority to sell the Hotel and all associated assets, and is perhaps the most significant term in the Deeds for the purposes of resolving the dispute between the parties.
2. SALE OF THE HOTEL
2.1 In the event that the Hotel is sold and the proceeds of sale invested in a new Hotel, new investment property or other investment (the replacement investment), then the provisions of clause 1 of this Deed shall apply to the replacement investment mutatis mutandis.
2.2 AB covenants with Steve that she will forthwith after the sale of the Hotel execute a codicil to her Will or execute a new Will whereby she will leave to Steve her interest in the replacement asset.
2.3 AB hereby consents to Steve selling on behalf of himself and AB anyone or more of the Hotel business, the Hotel freehold and all of the Leasehold.
2.4 AB shall only be entitled to withhold her consent to the sale referred to in clause 2.3 if the sale proceeds are insufficient to pay out all of the liabilities then secured on the Hotel freehold.
Clause 2 gives Stephen an unqualified right to sell the Hotel, subject to the caveat in cl 2.4. Clause 2.4 was not triggered in the present case, because the sale proceeds for the Hotel were sufficient to pay out all liabilities secured on the Freehold. Clause 2.4 was evidently intended to give Adelaide some protection. As it only refers to liabilities secured on the Freehold, that protection would be limited. It would not have the effect that Stephen could not sell the Hotel Assets unless the sale proceeds were sufficient to pay out all liabilities of the Partnership, both secured and unsecured. Still, the provision placed some limitation on Stephen's entitlement to sell the Hotel Assets, which appears to reflect the need to ensure that Stephen had some continuing ability to meet his obligations to Adelaide under the Principal Deed.
Clause 2.1 operates on the assumption that the Hotel has been sold. Implicitly, cl 2.1 gives Stephen the authority to decide the assets that should be acquired by the Partnership with the proceeds of sale. The clause places no express limitation on the replacement investment, as it includes a new Hotel, a new investment property "or other investment". However, it will be necessary to consider below whether the requirement that the proceeds of sale be used to acquire an "investment" places a limitation on the exercise of Stephen's discretion.
The question will be whether cl 2.1 authorised Stephen to cause the Partnership to make an unsecured, interest-free loan of $28,394,241 to the Trust, and if it did so in principle, whether it did so in the context where Stephen caused the Partnership and the Trust to disburse the funds received from the Partnership in the manner that I have outlined above.
Clause 2.1 may be the crucial provision insofar as it states that "the provisions of clause 1 of this Deed shall apply to the replacement investment mutatis mutandis". An important question will be: what should the court find the Principal Deed authorised Stephen to do by requiring that certain of its provisions be applied mutatis mutandis?
Clause 3 then deals with Adelaide's obligation to make a will in accordance with Recital J:
3. WILL OF AB
3.1 AB upon the date hereof has executed a new Will whereby she has left to Steve her interest in the goodwill and licence of the Hurstville Ritz Hotel her interest in the Partnership, her interest in the freehold upon which the Hotel stands and all her shares in the Hotel companies (the "Steve Clauses").
3.2 AB has left the rest of her estate in her said Will to parties other than Steve.
3.3 AB covenants that she will not revoke, vary, delete, alter or change the provisions of her Will in relation to the Steve Clauses.
3.4 Nothing in clause 3.3 prevents AB changing by Codicil the rest of her Will from time to time as she thinks fit and leaving the rest of her estate to whomever she thinks fit, or executing a new Will providing new provisions in relation to her estate, provided that such new Will contains the Steve clauses in identical terms.
3.5 In the event that AB marries, AB covenants with Steve to execute a new Will immediately upon her marriage containing inter alia the Steve clauses in identical terms.
Clause 2.2 complements these provisions by requiring Adelaide to execute a codicil or a new will to leave her interest in any replacement investment, following the sale of the Hotel Assets, to Stephen. It is implicit in the clause that if a replacement investment was acquired, Adelaide would automatically own a share of that investment proportionate to her remaining interest in the Hotel.
It seems clearly to be implied by the terms of cll 2.2, 3.1 and 3.3 that Adelaide would not be entitled, in the period leading up to her death, to require transfer or payment to her of any of the capital of the Partnership or the Hotel Assets, on any basis that would enable her to dissipate that property. Also, she would not be entitled to dispose of any of her interest in that property by any transaction inter vivos. I will have more to say about this issue below.
There is a question whether, as a result of what I will call Adelaide's "will covenants", Stephen acquired any beneficial interest in any of the relevant property, as a result of an entitlement to an order that Adelaide specifically perform her covenants. Most relevantly, the issue would be whether Stephen could have required Adelaide to specifically perform the covenant in cl 2.1, which required her to leave her interest in the replacement investment to Stephen by a new will, or a codicil to the 2003 will.
Following on, the Principal Deed then deals with certain covenants by Kim and Stephen, and the consideration provided by the parties, which do not require comment.
4. COVENANTS BY KIM and STEVE
4.1 Kim covenants for the benefit of herself her executors, her administrators, and permitted assigns that she will not challenge the Steve Clauses in the Will of her mother under the Family Provision Act or any other Statute or making any other claim in respect of the Steve Clauses in her mother's Will.
4.2 Steve on his part covenants with Kim not to challenge any other clauses in his mother's Will apart from the Steve Clauses under the Family Provisions Act or any other Statute or make any other claim in respect of the rest of his mother's Will.
5. CONSIDERATION
5.1 The parties acknowledge that valuable consideration has been for the parties entering into this Deed as set out in recitals hereto.
5.2 AB and Kim acknowledge that Steve has agreed to enter into the Steve Transaction upon the basis of his mother executing a new Will as stated in Clause 1.1 and his mother and Kim entering into this Deed. AB and Kim further acknowledge that Steve would not have proceeded with the Steve Transaction without their agreement to enter into this Deed.
Clause 6 is also crucial, as it contains provisions that were intended to regulate the rights of the members of the Bowden family to the fruits of the Hotel business, as well as those of any replacement investment.
6. FAMILY ARRANGEMENTS
6.1 SB agrees with AB to pay out the mortgage secured on her Unit being Unit 107, Carmel by the Sea, 177 Old Burleigh Road, Broadbeach and Steve agrees to transfer to AB all his right, title and interest in and to that Unit within 3 months from the date of this deed.
Clause 6.1 is plainly intended to have the effect that Adelaide would own her Gold Coast unit solely in her own name, and free from any encumbrance. As the evidence clearly establishes that Stephen held his interest in the unit on trust for Adelaide, his agreement to transfer that interest to Adelaide did not provide any real consideration for the benefits he received under the Principal Deed. Clause 6.1 imposes an obligation on Stephen to pay out the mortgage, but is indefinite as to the source of the funds to make that payment.
Although the Principal Deed is not explicit in this regard, it seems to be clear from the surrounding circumstances, including, in particular the Partnership's modus operandi, that the payment would be made out of the capital of the Partnership. Plainly, the payment should not be debited to Adelaide's Partners' Funds (as occurred), and instead it should have been debited to Stephen's Partners' Funds.
Clause 6.2 then provides:
6.2 Notwithstanding anything to contrary contained in this Agreement, Steve undertakes with AB to ensure that AB will during her lifetime continue to receive the support of Steve in relation to the costs of her ongoing life style including distribution of profits from the Hotel business or distributions from any Trust associated with the Hotel business.
There is an issue between the parties as to whether, as the defendants' contend, cl 6.2 creates the only entitlement for which Adelaide was to receive any income from the operation of the Hotel business, or whether, as is Adelaide's case, neither the provision, nor any other term in the Deeds and the Management Agreement, displace Adelaide's underlying entitlement, as a partner, to receive a share of income.
Stephen submitted, in his written opening, that the effect of the provision on its proper construction is that all of Adelaide's entitlements in the Partnership, and other aspects of the Hotel business, or any replacement investment, during her lifetime, merged into the provisions of cl 6.2.
The provision takes the form that Stephen "undertakes…to ensure" that Adelaide will "continue to receive the support" of Stephen "in relation to the costs of her ongoing life style". That is not, in terms, a covenant to pay any identified sum of money.
None of the parties submitted that cl 6.2 was in any way unenforceable for want of certainty.
The provision hinges on the meaning of the concept of lifestyle costs. "Lifestyle costs" is not an inherently clear or certain term. Lifestyle costs will be different things to different people, and even for the one person, lifestyle costs may change with age, and wealth. "Lifestyle costs" may not equate to "living expenses" (which is probably another uncertain term), as the use of the word "lifestyle" probably connotes expenses beyond ordinary living expenses of a personal, discretionary and non-essential nature.
Stephen submitted, in his final written submissions, that the meaning of "lifestyle costs" could be objectively determined by looking at the amounts received by Adelaide from the Partnership and the Trust in the period leading up to the execution of the Deeds and the Management Agreement. However, the evidence was not precise as to the amounts expended by Adelaide on what might be called "lifestyle costs", in the years leading up to December 2003.
The Partnership's annual accounts show that, for the years 1999 to 2003, Adelaide became entitled to profits of $3,945.51, $14,407.52, $92, $708.39 and $2,330.24. However, over that period, the accounts show unexplained drawings by Adelaide from her Partners' Funds of $822,450.12 in 1999, $837,952.71 in 2001 and $785,000 in 2003.
The Trust's annual accounts for the same period show that a distribution was made to Adelaide of $294,007.04 in 1999, and thereafter nil, $50,000, $50,000 and $50,000 (the 2003 figure was found in the 2004 accounts). The 2003 balance sheet shows that the Trust had no liability to Adelaide, although it owed her $386,865.83 at the end of the 2002 year. This suggests that all distributions made in favour of Adelaide had been paid to her by 30 June 2003.
Although there is some consistency in the $50,000 Trust distributions made to Adelaide over the three years leading up to December 2003, taken as a whole, the annual accounts provide an uncertain foundation for any objective determination of Adelaide's lifestyle costs as at December 2003.
There is also an inherent difficulty in determining who it was that was entitled to determine what the amount of Adelaide's lifestyle costs was. Although Stephen undertook to ensure that Adelaide would receive his support in relation to those costs, the provision did not state that Stephen had the sole right to determine the amount payable.
Clauses 6.3 and 6.4 are relatively self-explanatory (although it is to be noted that Stephen did not comply with clause 6.3 in relation to causing the costs of acquiring half of Adelaide's interest in the Goodwill, paying out her mortgage, and transaction costs to be debited to his own Partners' Funds).
Clauses 6.3 to 6.5 of the Principal Deed then provide:
6.3 Steve agrees with AB and AB will not be responsible for any of the acquisition, legal or financing costs or any stamp duty, valuation fees or other expenses in connection with the financing costs of any of the matters contemplated by his Agreement and that any such costs and expenses will be the sole responsibility of Steve.
6.4 Kim agrees that upon completion of this Agreement, Steve will no longer be liable to make any loan repayments or procure the payment of any loan repayments in relation to the mortgage secured on her property at Unit 1, 843 New South Head Road, Rose Bay, nor is Steve still liable to make any contribution for the life style expenses of Kim and her husband and children including without limiting the generality of the foregoing, weekly payments to cover school, motor vehicle taxation and other expenses currently borne by Steve on the payment of which has been procured by Steve.
6.5 AB and Kim agree and acknowledge that as from the date of completion of this Agreement, Steve will be free to distribute any income form the Bowden Family Trust to members of his immediate family. AB and Kim each covenant with Steve for the benefit of herself, her executors, her administrators and permitted assigns that she will not challenge any distributions of income from the Bowden Family Trust made solely for the benefits of Steve's immediate family, and not maintain any entitlement to a right to distribution of income or capital or both from the said Trust.
Relevantly, for present purposes, cl 6.5 had the effect that Adelaide relinquished any entitlement that she had to a distribution of income or capital from the Trust. That had the practical effect, as noted above, that if the documents permitted the continuation of the status quo, the income from the operation of the Hotel would substantially be earned by the Trust, so that, as a practical matter, it was unlikely that Adelaide would receive any future income through the Partnership, even though, as a legal matter, she retained her proportionate right to share in that income.
Adelaide also agreed that Stephen would be free to distribute any income from the Trust to members of his immediate family. That agreement related only to income and not to capital.
I do not accept the defendants' argument that, on the proper construction of the Principal Deed, Adelaide positively agreed that her entitlements were limited to the receipts provided for in cll 6.1 and 6.2 of the Principal Deed. The Principal Deed does not contain any express term whereby Adelaide relinquished her entitlement to receive any income earned by the Partnership. Instead, it contained a term whereby Adelaide relinquished her right to receive any distributions from the Trust, which had the practical effect that there would be no income for Adelaide to receive, so long as the status quo was maintained whereby only the Trust earned any significant income. In my view, that commercial arrangement is to be explained by the drafter's objective to structure the transaction in a manner that created the least risk possible, that the revenue authorities would be entitled to characterise the transaction as involving an immediate transfer of Adelaide's remaining beneficial interest in the Partnership and the Hotel Assets to Stephen.
This construction of the relevant terms of the Principal Deed is supported by the fact that cl 6.2 is expressed in terms of Stephen undertaking to ensure that Adelaide will continue during her lifetime to receive Stephen's support, and contemplates that the source of Adelaide's receipts will include profits from the Hotel business or distributions from the Trust. This arrangement does not exclude Adelaide's entitlement to share in the income of the Partnership, even though (as will be seen) the combined effect of cl 6.5 of the Principal Deed and cl 1.4 of the Management Agreement was that Stephen could indefinitely perpetuate the arrangement whereby the profits from the Hotel Business were almost entirely earned in the Trust, and Adelaide had relinquished her right to share in distributions of the Trust.
I do not think that the fact that Stephen covenanted to confer on Adelaide the benefits provided by cl 6.1 of the Principal Deed requires a conclusion that Adelaide relinquished all entitlements other than those provided by that clause and cl 6.2. The value to Adelaide of the covenants in cl 6.1 was much less than the value of her remaining beneficial interest in the Partnership and the Hotel Assets, and Stephen's covenant in cl 6.1 may be seen as consideration for Stephen being able to secure ultimate ownership of Adelaide's remaining interest, without having to pay the price immediately, or at all, and being able to control the management of the Hotel Assets in the interim.
Clause 6.5 may also be significant, insofar as it authorised Stephen to distribute the income of the Trust to members of his family. Insofar as, following the sale of the Hotel Assets, Stephen may have disbursed the capital of the Trust, in a manner that was funded by the loan from the Partnership; cl 6.5 may have a bearing on his entitlement to do that, without being in breach of his duty as a partner.
Clause 7 then deals with the responsibility of the parties for the liabilities of the Hotel business.
7. LIABILITIES OF THE HOTEL BUSINESS
7.1 As from the date of this Deed, Steve agrees to indemnify AB and hold her harmless in relation to all debts of the Hotel business and all debts secured on the Hotel freehold or the Hotel companies.
7.2 Steve agrees that in the event of any exercise or security by any secured creditor holding security over the Hotel business, the Hotel freehold or the Hotel companies, as between Steve and AB, Steve agrees that recourse will first be had against the Hotel assets including goodwill and freehold and secondly against Steve's personal assets without any recourse against the personal assets of AB.
These provisions have been relied upon by the defendants, in various ways, to support their arguments that the real effect of the Deeds and the Management Agreement was that Stephen became beneficially entitled immediately to the whole of Adelaide's share in the Hotel. The argument was to the effect that Stephen would not have agreed to take all of the risk of the debts of the Hotel business, if he was not to gain immediately the reciprocal benefit of full ownership.
While this argument has some weight, in the sense that the acceptance by Stephen of all of the risk of the debts of the Hotel might support an argument that it was intended that he would also become entitled to the beneficial ownership of the Hotel, the argument is by no means conclusive, and must bend to the proper construction of the documents as a whole. In my view, the argument is ultimately inconclusive. Adelaide had agreed to leave Stephen the whole of the balance of her interest in the Hotel in her will, and elsewhere in the documents she gave him effective control over the operation of the business. Accordingly, even if Stephen did not immediately acquire the whole beneficial interest, he did acquire the means to manage the Hotel during the balance of Adelaide's lifetime in the manner of his own choosing. This would make the indemnities equally commercially justifiable; to protect Adelaide from risk, as would the situation where Stephen received immediately the balance of Adelaide's beneficial interest in the Hotel.
The Principal Deed contains the following definitions, which help to explain the relevance to the proceedings of a number of the corporate defendants.
8. DEFINITIONS AND INTERPRETATIONS
…
8.7 The word "agreement" includes an undertaking or other binding arrangement or understanding, whether or not in writing.
8.8 The "Hotel companies" mean Butlers Bridge Pty Limited ACN 003 678 528 Kettleswell Pty Limited ACN 003 802 426, Ritz Restaurants (Hurstville) Pty Limited ACN 056 554 842 and Bowden Hotel Investments Pty Limited ACN 100 896 606.
8.9 The "Hotel freehold" means the property upon which the Hurstville Ritz Hotel at 350 Forest Road, Hurstville is erected and includes the realty owned by AB and Steve, Butlers Bridge Pty Limited and Kettleswell Pty Limited.
…
[35]
The Deed of Assignment
The Deed of Assignment commences with recitals that are comparable to those set out above in relation to the Principal Deed.
RECITALS
A. SB is the son of AB.
B. In 1979 AB and her late husband Thomas together with Stephen and Kim and Peter Jaeger acquired from Tooth & Co Limited the goodwill and hoteliers licence of the Hurstville Ritz Hotel at 350 Forest Road, Hurstville, (the "Hotel"). Kim and Peter Jaeger acquired a one third interest, Steve acquired a one third interest and AB and Thomas Jointly acquired the other one third interest.
C. The Hotel business was run by Kim and Peter Jaeger, Steve, AB and the late Thomas Bowden in partnership (the "Partnership).
D. In or about February 1982, Kim and Peter Jaeger withdrew from the Partnership and at that time Steve became entitled to a 50% interest in the Partnership and AB and Thomas jointly own the other 50% interest.
E. In 1990 the partners in the Partnership bought from Tooth & Co Limited the freehold interest in the land upon which the Hotel stood subject to the lease.
F. In 1994 Thomas Bowden dies and his interest in the goodwill and licence of the Hotel, the land upon which the Hotel was erected in the Partnership vested in AB as his sole beneficiary.
G. Since that date the Hotel Business has been operated by the Partnership consisting of AB and SB in equal shares.
H. AB has requested that SB acquire from her one half of her interest in the Partnership, goodwill of the Hotel business and licence (but not the freehold) (and being the same interest originally acquired by AB in 1978 and 1982 and not the interest acquired by AB in 1994 consequent upon the death of Thomas), in consideration of the payment of the Purchase Price by SB to AB.
It is only necessary to set out the operative part of the Deed of Assignment.
OPERATIVE PROVISIONS
1. INTERPRETATION
1.1 Definitions
The Following definitions apply to this document
"AB Interest" means the interest in the goodwill, the Partnership and the licence as more particularly described in recital H and being transferred by AB to SB pursuant to the terms of this Deed.
…
"Interest in the Goodwill" means the original 25% interest in the goodwill, excluding the interest in the goodwill inherited by AB in 1994 upon the death of her late husband Thomas Bowden, and acquired by AB in 1978.
"Purchase Price" means the sum of $3 million ($3,000,000).
…
3. ASSIGNMENT
3.1 Assignment
(a) AB assigns to SB all of her right, title and interest in the AB Interest, free of any Encumbrance on the terms set out in this document. SB accepts the assignment.
(b) AB acknowledges that she has received the Purchase Price in consideration of the assignment in paragraph (a).
…
6. GENERAL
…
6.5 Operation of this document.
(a) This document contains the entire agreement between the parties about its subject matter. Any previous understanding, agreement, representation or warranty relating to that subject matter is replaced by this document and has no further effect.
…
(d) The provisions of this clause 6.5 do not apply to any Agreement between, inter-alia, either of the parties to this Deed and any other party, and executed on the same day as this Deed.
7. FINANCE
7.1 Completion
Completion of the Agreement on the part of SB is conditional upon finance being granted by the National Bank of Australia.
7.2 National Australia Bank
SB has applied to the National Bank of Australia for such finance and SB will diligently pursue such application for finance and will satisfy all and any reasonable requirements of the National Bank of Australia in relation to such finance.
7.3 Non-approval by National Australia Bank
In the event that finance is not approved by the National Australia Bank within 3 months from the date of this Deed, SB shall be entitled to rescind this Agreement by notice in writing to AB.
In the event of such rescission, the Management Agreement and the Deed of even date between AB, SB and Kim Jaeger shall also be deemed to have been rescinded and terminated ab initio.
The combined effect of Recital H, the definitions of "AB Interest" and "Interest in the Goodwill", and cl 3.1, makes clear that all that Adelaide immediately assigned to Stephen, by the Deed of Assignment, was that half of her interest in the Partnership that she acquired before the date relevant to the imposition of capital gains tax. It would have necessarily been implied, but Recital H makes it clear that Adelaide retained her interest in the Freehold and her other half interest in the Partnership.
I have set out parts of cl 6.5, as they are relevant to the argument whether the terms of the July Minutes form any part of the agreement between Adelaide and Stephen.
I have included cl 7, as it was necessary for bank finance to be raised in order for the debt on Adelaide's Gold Coast unit, and the purchase price of $3 million and associated costs to be paid. It may appear from the terms of cl 7 that Stephen was to borrow the necessary funds on his own account. However, the funds were borrowed as a partnership expense, which has some relevance to the accounting issues.
[36]
The Family Deed
Adelaide, her companion at the time Graeme Bullen, Kim, Peter and Stephen entered into a deed, the purpose of which was to prevent the parties challenging the transaction implemented by the other deeds, particularly by challenging Adelaide's will.
The provisions of the deed are self-explanatory, and I include the recitals and the operative part of the deed for completeness.
WHEREAS
A. Kim and Steve are the daughter and son respectively of AB.
B. Kim and Peter are married.
C. AB and Graeme may in the future live in a domestic relationship.
D. AB and Steve own the goodwill and hoteliers licence of the Hurstville Ritz Hotel at 350 Forest Road, Hurstville (the "Hotel).
E. The Hotel business is run by Steve and AB in partnership (the "Partnership").
F. Part of the freehold upon which the Hotel stands is owned by AB and Steve. The rest of the freehold upon which the Hotel stands is owned by the Hotel companies. AB and Steve own the Hotel, the Partnership and their interest in the freehold in equal shares.
G. AB has requested that Steve acquire from her one half of her interest in the Partnership, goodwill of the Hotel business and licence (but not the freehold) at a certain price which Steve has agreed to do subject to AB entering into the provisions of a Deed of even date (the "Steve Transaction") a copy of which is annexed, and that that the spouse and or partners of AB and Kim enter into the provisions of this Deed.
NOW IT IS HEREBY AGREED AND DECLARED BETWEEN THE PARTIES AS FOLLOWS
1. WILL OF AB
1.1 AB upon the date hereof has executed a new Will whereby she has left to Steve her interest in the goodwill and licence of the Hurstville Ritz Hotel, her interest in the freehold upon which the Hotel stands and all her shares in the Hotel companies (the "Steve Clauses").
1.2 AB has left the rest of her estate in her said Will to parties other than Steve.
1.3 AB covenants that she will not revoke, vary, delete, alter or change
the provisions of her Will in relation to the Steve Clause.
1.4 Nothing in clause 1.3 prevents AB changing by Codicil the rest of her Will from time to time as she thinks fit and leaving the rest of her estate to whomever she thinks fit, or executing a new Will providing new provisions in relation to her estate, provided that such new Will contains the Steve Clauses in identical terms.
1.5 Graeme and Peter confirm and acknowledge that they have received a copy of the first Deed which they have read and acknowledge the terms and provisions of clause 3 thereof, and in particular, the reference to the Steve Clauses contained therein.
2. COVENANTS by GRAHAM
2.1 Graeme covenants for the benefit of himself his executors his administrators and permitted assigns that he will not challenge the Steve Clauses in AB's Will under the Family Provision Act or any other statute or make any other claim in respect of the Steve Clauses in AB's will.
3. COVENANTS BY PETER
3.1 Peter covenants for the benefit of himself his executors, his administrators, and permitted assigns that he will not challenge the Steve Clauses in the Will of AB under the Family Provision Act or any other Statute or make any other claim in respect of the Steve Clauses in AB's Will.
4. COVENTS by KIM
4.1 In the event that Kim remarries, or enters into a domestic relationship with a person other than Peter, Kim covenants to execute a Deed in similar terms to this Deed and to procure her new husband or partner to enter into a Deed in similar terms to this Deed. Such new Deed shall be executed by Kim and her new husband or new partners for the benefit of Steve.
5. CONSIDERATION
5.1 The parties acknowledge that valuable consideration has been provided for the parties entering into this Deed as set out in recitals hereto.
5.2 Graeme and Peter confirm and acknowledge that Steve would not have proceeded with the Steve Transaction without their agreement to enter into this Deed.
[37]
The Divorce Deed
Louise, Stephen and Adelaide entered into a further deed, the objective of which was to attempt to prevent Louise being able to make a claim for an interest in the Hotel, if she and Stephen divorced.
The relevant parts of the deed are as follows.
WHEREAS
A. Steve is the son of AB
B. Louise and Steve are married
C. AB and Steve own the goodwill and hoteliers licence of the Hurstville Ritz Hotel at 350 Forest Road, Hurstville, (the "Hotel").
D. The Hotel business is run by Steve and AB in partnership ("the Partnership").
E. Part of the freehold upon which the Hotel stands is owned by AB and Steve. The rest of the freehold upon which the Hotel stands is owned by the Hotel companies. AB and Steve own the Hotel, the Partnership and their interest in the freehold in equal shares.
F. AB has requested that Steve acquire from her one half of her interest in the Partnership, goodwill of the Hotel business and licence (but not the freehold) at a certain price which Steve has agreed to do subject to AB entering into the provisions of a Deed of even date (the "Steve Transaction") a copy of which is annexed, and that the spouses and or partners of AB and Kim enter into the provisions of a Divorce Deed which they have agreed to do. AB has requested that Louise enter into this Deed.
NOW IT IS HEREBY AGREED AND DECLARED BETWEEN THE PARTIES AS FOLLOWS
1. COVENANTS by LOUISE
1. Louise covenants that in the event of a divorce or separation that Louise will not make any claim under the Family Law Act in relation to the Hotel assets.
1.2 Nothing in this clause 1 prevents Louise making a claim under the Family Law Act in respect of any of the other assets of Steve apart from the Hotel assets.
2. COVENANTS by STEVE
2.1 Steve covenants with Louise that in the event of a divorce or separation, Steve will not oppose any application by Louise for a transfer into her sole name of the matrimonial home at 3 Princess Avenue, Vaucluse.
3. CONSIDERATION
3.1 The parties acknowledge that valuable consideration has been provided for the parties entering into this Deed as set out in recitals hereto.
3.2 Louise confirms and acknowledges that AB would not have proceeded with the Steve Transaction without her agreement to enter into this Deed.
[38]
The Management Agreement
Adelaide, Stephen and the Trustee entered into a management agreement in the following material terms.
WHEREAS
A. AB and Steve own, the goodwill and hoteliers licence of the Hurstville Ritz Hotel at 350 Forest Road, Hurstville, (the "Hotel").
B. The Hotel business is run by AB and Steve in partnership (the "Partnership").
C. Steve holds the hoteliers licence for the Hotel on behalf of AB and himself.
D. AB and Steve own the goodwill and hoteliers licence of the Hotel in Partnership, and have agreed that Steve is to be appointed Managing Partner of the Hotel Partnership.
E. Ritz is the Lessee of the Hotel premises and has leased the hoteliers licence. Ritz has agreed to Steve's appointment.
NOW IT IS HEREBY AGREED AND DECLARED BETWEEN THE PARTIES AS FOLLOWS
1. MANAGEMENT OF THE HOTEL
1.1 AB agrees that Steve is to be appointed Managing Partner of the Hotel Partnership.
1.2 Without limiting the generality of the foregoing, Management shall include not only the Hotel Partnership but the freehold land and buildings, hotel assets and goodwill and lease and all other assets utilised in the business of the Hotel in which AB has an interest.
1.3 Without limiting the generality of any of the foregoing, Steve's management shall extend not only to the Hotel Partnership but to the Hotel freehold and the Hotel companies.
1.4 Steve is empowered as Managing Partner to grant or extend the existing Partnership lease to Ritz Restaurants (Hurstville) Pty Limited or such other the Trustee for the time being of the Bowden Family Trust.
1.5 Steve as Managing Partner is to have full and unfettered control over the assets of the Hotel business including all stock, liquor, food, tables, chairs, and all other contents in the Hotel.
1.6 Steve as Managing Partner is authorised to control and administer the freehold owned by AB and Steve upon which the Hotel is erected.
1.7 Steve manages the Hotel on behalf of Ritz as Lessee. Ritz confirms that. Nothing in this Agreement detracts from that.
2. SALE OF LIQUOR
2.1 Steve as Licensee shall have full and unfettered discretion as regards the sale of liquor from the Hotel and the administration of all liquor sales for the purposes of the relevant Liquor Act and all other relevant licensing legislation.
2.2 Steve shall not be entitled to any commission on the sale of any liquor in the Hotel.
…
The provisions of Recitals B and D, and cl 1, make it clear that Adelaide and Stephen intended that the Partnership would continue.
Clause 1 has the effect of appointing Stephen as the managing partner, with powers of management over the Freehold and the Goodwill, as well as the Hotel companies (the latter being defined in the same way as has been set out above in the context of the Principal Deed).
Importantly, cl 1.4 empowers Stephen, as managing partner, to grant or extend the existing Partnership lease to the Trustee. So long as Stephen exercised that power in favour of the Trustee, he could achieve the practical result that the profit from the operation of the Hotel business was earned in the Trust.
As I have noted above, the Principal Deed provides, in cl 2.1, that in the event that the Hotel was sold and the proceeds of sale invested in a replacement investment, "then the provisions of clause 1 of this Deed shall apply to the replacement investment mutatis mutandis".
Clauses 1.1 to 1.3 give Stephen substantial management powers over the Hotel in the capacity of managing partner. The provisions do not, however, absolve Stephen from his fiduciary obligation to manage the various assets in the interests of the Partnership as a whole, rather than himself alone.
Clause 1.4 required Adelaide and Stephen to execute a Hotel Management Agreement upon or prior to the execution of the Principal Deed. They in fact did so and executed the Management Agreement at the same time as the other Deeds.
The crucial issues in these proceedings arise out of the fact that, after the Hotel was sold by Stephen in late 2007, and after payment of the other debts of the Partnership, he loaned the net proceeds of sale to the Trust on a non-interest-bearing basis, such that, after the Partnership's debt to the Trust was repaid, the Trust owed a debt of $28,586,446.66 to the Partnership (as at 30 June 2008). Thereafter, Stephen caused the Trust and the Partnership to use and disburse this money in the way that I have outlined above.
The question is whether the combined effect of the Principal Deed and the Management Agreement authorised Stephen to apply the Partnership's assets in that way, without Stephen being in breach of his fiduciary duties as a partner.
[39]
Was the application of the proceeds of sale of the Hotel authorised?
The primary issue in these proceedings is whether Stephen was authorised, by the Deeds and the Management Agreement, to cause the net proceeds of sale of the Hotel to be disbursed in the manner in which they were disbursed. That includes the making of a loan by the Partnership to the Trustee, on an interest-free basis, and the application by the Trustee of those loan monies for a number of purposes that were not for the benefit of the Partnership. It also includes the repayment of part of the loan by the Trustee to the Partnership, in order to fund substantial drawdowns by Stephen on his, and apparently also on Adelaide's, Partners Funds.
The Principal Deed expressly contemplated that Stephen might sell all of the Hotel assets, by availing himself of the consent to that course by Adelaide, and that he would invest the proceeds of sale in a replacement investment. The question is whether the Deeds and the Management Agreement authorised Stephen to take the particular course he took.
I preface my response to this question by observing that, although Adelaide and Stephen both pleaded the terms of the Principal Deed that govern the determination of this question (mainly cl 2.1, which provides in substance that the provisions of cl 1 shall apply to the replacement investment mutatis mutandis), the parties did not, in my view, make detailed or comprehensive submissions as to the proper construction of these terms, in the context of the facts disclosed by the evidence as to what was done with the net proceeds of the sale of the Hotel. These terms, which I will collectively call the "mutatis mutandis provisions", appear to have authorised Stephen to make a replacement investment of the proceeds of sale, provided that he acted mutatis mutandis with the manner in which cl 1 of the Principal Deed authorised him to act before the sale of the Hotel. The crucial question is: was the manner in which Stephen acted in relation to the disbursement of the net proceeds of sale within the scope of the mutatis mutandis provisions?
In essence, Kim took the stance that, once it was determined that the terms of the Principal Deed did not positively exclude Adelaide's right to receive Partnership income, if any such income was generated, the disbursement of the net proceeds of sale was unauthorised simply because of the continuing existence of the Partnership: for instance, see pars 2 and 7 of the Statement of the Plaintiff's Case handed up at the beginning of oral submissions.
Stephen, on the other hand, made some submissions on the issue of the application of the mutatis mutandis provisions, but they were limited to an assertion that the making of the interest-free loan was, in substance, the same as the pre-existing circumstances, where Stephen was authorised by the Management Agreement to continue the lease by the Partnership of the Hotel Assets to the Trustee on uncommercial terms, so that the profits of the Hotel business were earned by the Trust, and Adelaide relinquished her right to distributions of the income or capital of the Trust. As will be seen, I accept that this submission is material, but I do not think that it deals with all of the issues that arise on the construction and application of the mutatis mutandis provisions.
Apart from my concern that the parties have not addressed all of the issues that I see arising in relation to the proper construction of the Deeds and the Management Agreement - in particular, the effect of the mutatis mutandis provisions - there is the concern, which I have raised above, that the parties did not lead their expert evidence on the accounting issues, and have not contested or made submissions in relation to those issues. The court was invited by the parties to make a determination that it was proper to order Stephen, as an accounting party in the partnership, to provide a final partnership accounting to Adelaide. The parties proceeded on the basis that all that was required of the court was to determine that there was a sufficient likelihood that Stephen would on balance be ordered to pay money to Adelaide to warrant that an accounting be ordered. It was not necessary at this stage of the proceedings, for the court to attempt to determine the amount that Stephen may be obliged to pay to Adelaide.
I have complied with the parties' request, at least to the extent that I have analysed the effect of the Partnership's financial statements (pars 233 to 285 above); the effect of the Trust's financial statements (pars 286 to 299 above); and made a preliminary, but incomplete, determination of how the balance of the proceeds of sale of the Hotel were applied by Stephen (pars 300 and 301 above).
Those analyses were made without the benefit of expert evidence or the submissions of the parties. I have come to the view that the result of those analyses is not only relevant to the question of whether there is sufficient likelihood that a partnership accounting will lead to Stephen being ordered to pay money to Adelaide to justify an order for the taking of accounts; but it is also my view that the nature of the steps taken by Stephen in the disbursement of the net proceeds of sale of the Hotel is relevant to the question of whether Stephen was authorised by the Principal Deed and the Management Agreement to take those steps.
As a result of what I have described above, with no disrespect intended, as the relatively general submissions that have thus far been put on behalf of the parties, the court does not at present have the benefit of the parties' submissions on all questions that may arise in relation to the proper construction and application of the Principal Deed and the Management Agreement.
That has given rise to my concern that, if I simply proceed to determine all of the questions that may strictly arise under the orders for the determination of separate questions, I may deprive the parties of the opportunity to which they are entitled to contest the issues and make their own submissions. As I have also mentioned above, this concern is related to the appearance that the hearing may have ended in circumstances where the accounting evidence and submissions may not be congruent with the requirements of the separate questions.
It will be appropriate for me to make good these concerns by undertaking the following provisional analysis of the relevant terms of the Principal Deed and the Management Agreement.
It is appropriate to start with cl 2.3 of the Principal Deed, under which Adelaide consented to the sale of the Hotel assets. Insofar as cl 2.1 states: "In the event that the Hotel is sold and the proceeds of sale invested in a new Hotel, new investment property or other investment", the clause impliedly, in the context, authorises Stephen to employ the proceeds of sale in acquiring a replacement investment. Crucially, cl 2.1 then provides in that event: "then the provisions of clause 1 of this deed shall apply to the replacement investment mutatis mutandis".
Initially, in fact, albeit for less than a day, the replacement investment was a deposit by the Partnership with the NAB. On the same day, the amount of that deposit was paid to the Trustee. The initial question is whether the making on that day of an interest-free loan to the Trustee was authorised.
If cl 2.1 is initially construed in accordance with its express wording, the answer must depend upon whether an interest-free loan falls within the expression "other investment".
"Investment" is relevantly defined in the Macquarie Dictionary as:
1. the investing of money or capital in order to secure profitable returns, especially interest or income.
To similar effect, Butterworth's Australian Legal Dictionary defines the term in the following way:
The conversion of money or circulating capital into some species of property from which an income or profit is expected…
In Perpetual Trustee Co Ltd v Cheyne [2011] WASC 225, Edelman J, when sitting in the Supreme Court of Western Australia, said at [52]:
There is one significant difference between the usual meaning of "investment" and the transaction which is proposed by Perpetual Trustee. The usual meaning of investment in this context is to "[e]xpend (money, effort) in something from which a return or profit is expected": New Shorter Oxford English Dictionary, p 1410, definition 6. However, the transaction which Perpetual Trustee wishes to make is one where Perpetual Trustee will not receive anything in return…
His Honour, in the following paragraphs, explained why he did not consider a transaction under which a trustee would not receive a return or profit to be an investment within the terms of s 17 of the Trustees Act 1962 (WA).
In the context of powers to invest given to trustees, Jacobs' Law of Trusts in Australia (7 ed) states at [1804]:
However, it is necessary to consider in each case what an 'investment' is. 'Invest' as used in an investment clause has been defined to include as one of its meanings, and semble as its normal meeting, 'to apply money in the purchase of some property from which profit or interest is expected and which property is purchased in order to be held for the sake of the income which it will yield'.
The learned editors relied for this proposition on Re Wragg [1919] 2 Ch 58, at 65. They also, at the same paragraph, discussed the general proposition that a loan made by a trustee without security is not regarded as an investment.
If this approach to the meaning of the word "investment" were to be applied to the terms "other investment" and "replacement investment" in cl 2.1 of the Principal Deed, then the making by the Partnership of the interest-free loan to the Trustee would not have been authorised by the Principal Deed.
There is then the need to determine the effect of the wording in cl 2.1 of the Principal Deed that, following the acquisition of a replacement investment after the sale of the Hotel, "the provisions of clause 1 of this Deed shall apply to the replacement investment mutatis mutandis".
The meaning of the expression "mutatis mutandis" in a legal context was considered by Cohen J in Delnorth Pty Ltd v State Bank of New South Wales (1995) 17 ACSR 379, where his Honour said at 382, 383:
... There is very little law as to the extent of the meaning of the phrase "mutatis mutandis". Jowitt's Dictionary of English Law defines the phrase as meaning with the necessary changes in place of detail. Stroud does not deal with the expression, nor is it included in the words and phrases explained in Halsbury's Laws of England.
There has been one case in Australia dealing with the use of the phrase in statutory interpretation, Gill v State Planning Authority (1979) 20 SASR 580. There, under a statute relating to the vesting of land for the purpose of a particular undertaking, it was provided that sections of another statute "shall mutatis mutandis be applied to and in relation to the vesting of the land". It was held that the sections specified in the Act were not to be applied without qualification but were to undergo such variations of substance as were implied by the expression mutatis mutandis, which in the circumstances meant with all modification and adaptations necessary to ensure that they, jointly and severally, have effect for the purposes of the Red Cliff Land Vesting Act 1973 (SA) (at 585). This case dealt with the interpretation of a statute and what was contemplated by the legislature. There seems to be no case in Australia which deals with the phrase when it is used in contracts.
I have not been able to find any English case but there are two American cases which are of some assistance. The first is Copeland v Eaton (1911) 95 NE 291, a decision of the Supreme Court of Massachusetts. The case concerned an agreement for the licensing of a patent. It was provided that in certain circumstances the provisions of an existing contract in relation to the defining of profits were, under the new situation, to apply mutatis mutandis. It was said that those words meant necessary changes in detail to conform to a single vital alteration. The court considered that it should look at the main purpose of the contract in order to consider the extent to which it was to be changed.
This decision was followed in Houseman v Waterhouse (1920) 182 NYS 249 where a partnership agreement provided that where one partner retired the remaining partners would continue and the original agreement would apply to the new partnership mutatis mutandis. The decision in Copeland v Eaton was applied and it was said that the phrase meant that there should be necessary changes in detail to conform to a single vital change. The new firm was to continue under the terms of the articles of the former partnership agreement, with such changes as were necessary because of the change in membership.
In cl 4(b) it was specifically provided that when the clauses of the annexed agreement were to be applied mutatis mutandis then certain references in the latter agreement would be translated so as to be applicable to the licence agreement. In my opinion this meant that appropriate changes would be made to the designated clauses to the extent necessary to fit in with the terms of the licence agreement…
This approach is consistent with the definition of the expression "mutatis mutandis" in Butterworths Australian Legal Dictionary:
When the appropriate changes have been made. Used when applying a principle or rule which needs modification to fit a new set of facts…
By cl 2.1, the Principal Deed provides expressly for the manner in which its provisions are to operate in the event the Hotel is sold by Stephen, and the proceeds applied to the acquisition of a replacement investment. However, it does so in an omnibus way by using the mutatis mutandis device to deal with the whole range of possibilities that may fall within the definition of replacement investment. That introduces a degree of obscurity into the application of cl 2.1. It requires judgments to be made about the changes that are appropriate, and those that are not.
There may be a number of ways in which cl 2.1 could reasonably be applied to the provisions of cl 1 of the Principal Deed. The more literal and narrow approach would be to pick up the provisions of cl 1.1 to 1.3, with the effect that Stephen would be authorised to manage the replacement investment in whatever form it took. Clause 2.1 would not have the effect that cl 1.4 would extend the mutatis mutandis operation of cl 1 to the whole of the terms of the Management Agreement, because literally cl 1.4 simply notes that, upon or prior to the execution of the Principal Deed, Adelaide and Stephen will execute a Hotel Management Agreement in relation to the provisions of cl 1.4.
Alternatively, the relationship between cl 2.1 and cl 1.4 might be read more expansively, so that cl 2.1 picked up the whole of the terms of the Management Agreement, so that those terms were also to be applied mutatis mutandis to the replacement investment. If that were the appropriate approach, then cl 1.4 of the Management Agreement may authorise Stephen to deal with the replacement investment in a manner that had the same effect as the pre-existing arrangement, whereby the Hotel was leased to the Trust in a manner that resulted in substantially all of the profit of the Hotel business being earned by the Trust, rather than the Partnership. In that event, the effect of the continuing operation of cl 6.5 of the Principal Deed would be that Adelaide would not receive any share of the income from the replacement investment (other than what she was entitled to receive under cl 6.2). That would not be because she had in some way relinquished her entitlement to share in the profits of the Partnership, but because the Principal Deed and the Management Agreement operated in a way that there would be no significant profits in the Partnership.
The drafters of the Principal Deed, when faced with the problem of how to deal with the operation of the Principal Deed and the Management Agreement, in the wide range of possibilities contemplated by the description of the replacement investment in cl 2.1, decided to deal with the problem elliptically with the mutatis mutandis device rather than to spell out extensively how the term was to operate in relation to the various investments that could fall within the term "replacement investment". That approach has introduced difficulties in determining what Stephen was authorised to do.
One of the possibilities contemplated by cl 2.1 is that Stephen may have invested the proceeds of sale of the Hotel in a new hotel. In that case, there would naturally be a strong argument for the proposition that cl 2.1 was, by means of cl 1.4, intended to pick up the whole of the terms of the Management Agreement, so that Stephen would be authorised to cause the Partnership to lease the new hotel to the Trust on an equivalent basis to the lease of the old Hotel. The problem is, however, that the greater the variance between the replacement investment chosen by Stephen and a new hotel, the more difficult it becomes to determine what characteristics of the replacement investment, compared to the Hotel, are entitled to be changed, and what characteristics are not. Where the replacement is a new hotel, the physical and commercial attributes of the replacement investment naturally tend to relate mutatis mutandis with the pre-existing investment in the Hotel. That natural relationship tends to dissolve the greater the physical and commercial differences between the replacement investment and the Hotel.
This is an inherently contentious issue, which the parties have not yet addressed. What were the essential attributes of the Hotel that must continue to exist in the replacement investment, and could not be changed within the licence permitted by the expression "mutatis mutandis"?
I will not finally address that question now, but I will make a number of observations concerning the issues that may be raised by the question. As has been noted already in a number of places, the essential manner in which the Partnership chose to conduct its operations, in order to minimise the income tax of the partners, was to lease the Hotel to the Trust at an uncommercial rent, which caused the profit of the Hotel business to be earned by the Trust rather than the Partnership. However, as I have also discussed above, when considering the terms upon which the Partnership operated (see pars 323 to 333 above), the Partnership retained a high degree of security in its control of the Hotel Assets, because the Partnership could terminate the Lease at any time on one month's notice, and the Partnership (or the partners) at all times retained ownership of the Hotel Assets. In that way, the Partnership had the benefit of the arrangement whereby the profits of the Hotel business were earned by the Trust, but the Partnership retained ownership of, and the near-term ability to exercise control over, the Hotel Assets.
A question must arise on the proper construction of the Principal Deed as to whether or not this was a feature of the Partnership's investment in the Hotel Assets that was required to be carried over into any replacement investment.
One reason why that question might require an affirmative answer is that, even if Adelaide's entitlement was limited to the receipt of the lifestyle expenses contemplated by cl 6.2 of the Principal Deed, Adelaide's security of receipt of those payments was dependent upon the maintenance within the Partnership of a replacement investment that would continue to generate sufficient income to fund Stephen's obligations under cl 6.2.
This question leads to a consideration of the significance of the particular form of the replacement investment selected by Stephen, and also the extent of the enquiry that must be undertaken concerning the ramifications of the investment.
In summary, on the basis of the provisional investigation of the financial statements of the Partnership and the Trust that I have undertaken (see pars 237 to 299 above), it appears that Stephen caused the Partnership to make an interest-free unsecured loan to the Trust, which was technically on demand, but where Stephen controlled both the lender and the borrower. The amount of the loan changed from time to time, apparently primarily to fund drawings from the Partners Funds. Part of the net proceeds of sale of the Hotel was used to repay a debt owed by the Partnership to the Trust, which apparently had arisen in order to fund drawings from the Partners' Funds against unrealised revaluations of the Goodwill of the Hotel. Part of the loan made by the Partnership to the Trust was used to repay debts owed by the Trust to beneficiaries in relation to distributions made out of the Trust in prior years, but not actually paid to the beneficiaries. It appears possible that substantial parts of these payments were used by the beneficiaries to assist in the repurchase of the Hotel, although this issue has not yet been explored in the evidence. Part of the loan was used by the Trust to lend $7.2 million on an unsecured basis to the trustee for a superannuation fund for the benefit of Stephen and Louise, which was used to partially fund the acquisition of the Cabramatta Inn Hotel. The basis of this loan has not yet been established. There is some evidence that the interest rate was the same as the rate charged by the commercial lender who was granted a mortgage over the Cabramatta Inn Hotel. If so, there may be a question as to why the Trust should receive the same level of interest for an unsecured loan as the commercial lender receives for a secured loan. It has not yet been established whether the loan made by the Trust was on demand, and if it was, whether it was practically realistic to expect the borrower to repay on demand.
As the parties have not yet tendered their expert accounting evidence, or contested the issue of how the net proceeds of the sale of the Hotel were applied by Stephen, it is premature for the court to try to determine finally how the mutatis mutandis provisions apply to what Stephen actually did in relation to the replacement investment.
It may be a factor of some significance that the analysis that I have carried out was based upon financial statements based upon annual balance dates, and it is possible that the significance of Stephen's actions in dealing with the net proceeds of sale of the Hotel should be dealt with on the basis of a more fine-grained analysis of the timing of events than I have been able to undertake.
All of these considerations arise in the context that, if the replacement investment made by Stephen was not authorised by the Principal Deed, Stephen may be required, on the ordinary principles of fiduciary law, to account to Adelaide for the consequences of the unauthorised investment. That may have the consequence that Adelaide becomes entitled to income that was not positively contemplated by the Deeds or the Management Agreement.
Another issue arises out of the fact that a substantial part of the proceeds of sale of the Hotel was paid out to Stephen and related parties as drawings from the Partners' Funds of the Partnership, and not indirectly through the making by the Partnership of the interest-free loan to the Trustee. The parties have not yet addressed the question of whether Stephen was entitled to draw down the whole of his Partners' Funds in the accounts of the Partnership, leaving only Adelaide's Partners' Funds, or whether there was anything in the Deeds and the Management Agreement whereby it was contemplated that the Partnership would continue until Adelaide's death, which restricted in some way Stephen's entitlement to withdraw all of his funds from the Partnership.
Even if it be accepted that Stephen was entitled to withdraw the whole of his Partners' Funds, there appears to be no basis for Stephen's entitlement to withdraw any part of Adelaide's Partners' Funds for his own benefit. It is premature for the court to attempt to do the arithmetic in detail, but it would appear from the mistakes that were made on a number of occasions, in debiting Adelaide's Partners' Funds with expenses that were not hers, and in failing to credit her with credits to which she was entitled, that Adelaide's Partners' Funds were substantially understated over a number of years. There is at least a strong appearance that the drawdowns made by Stephen exceeded his own corrected Partners' Funds, and to the extent that he drew down from Adelaide's Funds, that was an unauthorised withdrawal by Stephen. That should give rise to an obligation on Stephen's part to account to Adelaide for the unauthorised use of her Partners' Funds.
I have not, thus far, made any reference to the possibility that events antecedent to the making of the Deeds and the Management Agreement may be relevant to the proper construction of those documents, particularly in regard to identifying the commercial purpose or objects of the agreements, or establishing the background circumstances. It is possible that, in particular, the discussions that occurred during the July Meeting, as recorded in the July Minutes, may be relevant for this purpose.
It will be sufficient to note the following statement of the principles of contractual construction given by French CJ, Nettle and Gordon JJ in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37; (2015) 325 ALR 188 (footnotes omitted):
[46] The rights and liabilities of parties under a provision of a contract are determined objectively, by reference to its text, context (the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract) and purpose.
[47] In determining the meaning of the terms of a commercial contract, it is necessary to ask what a reasonable businessperson would have understood those terms to mean. That enquiry will require consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract.
[48] Ordinarily, this process of construction is possible by reference to the contract alone. Indeed, if an expression in a contract is unambiguous or susceptible of only one meaning, evidence of surrounding circumstances (events, circumstances and things external to the contract) cannot be adduced to contradict its plain meaning.
[49] However, sometimes, recourse to events, circumstances and things external to the contract is necessary. It may be necessary in identifying the commercial purpose or objects of the contract where that task is facilitated by an understanding "of the genesis of the transaction, the background, the context [and] the market in which the parties are operating". It may be necessary in determining the proper construction where there is a constructional choice. The question whether events, circumstances and things external to the contract may be resorted to, in order to identify the existence of a constructional choice, does not arise in these appeals.
[50] Each of the events, circumstances and things external to the contract to which recourse may be had is objective. What may be referred to are events, circumstances and things external to the contract which are known to the parties or which assist in identifying the purpose or object of the transaction, which may include its history, background and context and the market in which the parties were operating. What is inadmissible is evidence of the parties' statements and actions reflecting their actual intentions and expectations.
[51] Other principles are relevant in the construction of commercial contracts. Unless a contrary intention is indicated in the contract, a court is entitled to approach the task of giving a commercial contract an interpretation on the assumption "that the parties… intended to produce a commercial result". Put another way, a commercial contract should be construed so as to avoid it "making commercial nonsense or working commercial inconvenience'.
The observations of their Honours at [48] to [50] are germane to the issue under consideration.
Earlier, in Newey v Westpac Banking Corporation [2014] NSWCA 319, Gleeson JA, with whom Basten and Meagher JJA agreed, said in relation to this issue:
[90] Nonetheless it is also important to bear in mind the extent to which context and legitimate surrounding circumstances can be used as an aid in the construction of a written agreement. In McGrath v Sturesteps; Sturesteps v HIH Overseas Holdings Ltd (in liq) [2011] NSWCA 315; 81 NSWLR 690 at [17]-[18] Bathurst CJ (Macfarlan JA and Sackville AJA agreeing) said:
[17] … Whilst it is correct in my opinion that context and the surrounding circumstances known to both parties can be taken into account (see Codelfa Construction Pty Ltd v State Rail Authority (NSW) at 350, 352) even in cases where there is an absence of apparent ambiguity (Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd at [40]; International Air Transport Association v Ansett Australia Holdings Ltd [2008] HCA 3; (2008) 234 CLR 151 at [8]; Park v Brothers [2005] HCA 73 ; (2005) 80 ALJR 317 at [39]; Franklins Pty Ltd v Metcash Trading Ltd at [14], [63], [305]) that does not permit the Court to depart from the ordinary meaning of the words used by the parties merely because it regards the result as inconvenient or unjust: Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 109.
[18] This does not mean that there are not exceptional cases where, to use the words of Lord Hoffmann, something has clearly gone wrong with the language so as to interpret it in accordance with the ordinary rules of syntax makes no commercial sense: see Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38 ; [2009] 1 AC 1101 at [15]-[16]; Jireh International Pty Ltd v Western Exports Services Inc [2011] NSWCA 137 at [55], [60]. In such a case, in my opinion, a court is entitled to depart from the ordinary meaning to give effect to what objectively speaking the parties intended.
[91] The reference in McGrath v Sturesteps at [17] to the well-known observation of Gibbs J in Australian Broadcasting Commission v Australasian Performing Right Association Ltd at 109, is a strong reminder that there is no licence for "judicial rewriting"of an agreement: Kooee Communications Pty Ltd v Primus Telecommunications Pty Ltd [2008] NSWCA 5 at [27] (Basten JA; Giles and Tobias JJA agreeing); Franklins at [23] (Allsop P). The ability of courts to give commercial agreements a commercial and business-like interpretation is constrained by the language used by the parties. If, after considering the contract as a whole and the background circumstances known to both parties, a court concludes that the language of a contract is unambiguous, the Court must give effect to that language unless to do so would give the contract an absurd operation: Jireh International Pty Ltd v Western Exports Services Inc at [55] (Macfarlan JA; Young JA and Tobias AJA agreeing).
The parties have not properly made submissions concerning the extent to which the court should have regard to circumstances external to the Deeds and the Management Agreement, in determining how those agreements should be construed, directed in detail to the meaning of the term "replacement investment", or the application of the mutatis mutandis provisions.
[40]
Implied term
Stephen pleaded the defence that the Deeds and the Management Agreement each contained an implied term to the effect that Adelaide agreed, on completion, to relinquish, or alternatively, to abandon or waive her interest in and rights attaching to her remaining interests in the Partnership and the Hotel Assets, in return for Stephen undertaking the obligations in cll 6.1, 6.2, 7.1 and 7.2 of the Principal Deed.
I do not accept that a term to this effect should be implied into the Deeds and the Management Agreement.
As I have already explained above, practical arrangements were contained in those agreements that gave Stephen the power, at least as long as the Partnership retained the Hotel, to ensure that the income of the Hotel Business was almost entirely earned in the Trust, and Adelaide relinquished her entitlement to receive distributions of income or capital from the Trust. That is all that Adelaide expressly relinquished under the terms of the Deeds and the Management Agreement.
Similarly, I have also discussed above that, in my view, the parties have not yet dealt effectively with the issue of the meaning and effect of the mutatis mutandis provision in cl 2.1 of the Principal Deed, in relation to whether, in all of the circumstances of this case, Stephen was authorised to deal with the proceeds of sale of the Hotel in the manner in which he did.
If the proper resolution of that issue is that Stephen was not authorised to deal with the proceeds of sale in the way that he did, then the result will be that he dealt with the assets of the Partnership in an unauthorised way. If so, Stephen may become liable to account to Adelaide, or to pay her equitable compensation, as a defaulting fiduciary. Adelaide's entitlement will not arise by reason of her being entitled to share in the profits of the Partnership, but will arise because the assets of the Partnership have been applied in an unauthorised way.
To be effective, therefore, the implied term would have to have the effect that Adelaide relinquished, abandoned or waived not only her right to share in the profits of the Partnership, but also her right to share in the assets of the Partnership. That is what appears to be alleged in par 3(1)(b)(v) of Stephen's third further amended defence. (I do not know whether the change in position indicated in Kim's submissions, whereby in respect of her construction and conventional estoppel cases she said that Adelaide agreed to relinquish her right to share in any profits of the Hotel business, rather than that she would hold her remaining interest on trust for Stephen, was intended to apply to the case based upon the existence of an implied term: see T 356.39).
In my view, if the implied term were to go that far, it would be fundamentally inconsistent with the express terms of the Deeds and the Management Agreement. If those agreements in fact contained an implied term whereby Adelaide relinquished, abandoned or waived "her interest in and any rights attaching to the remaining" the Partnership and the Hotel Assets, that would jeopardise the achievement of the secondary objective of the documents, which was to ensure that the transactions did not incur any capital gains tax or excessive stamp duty liabilities. The express, bespoke arrangements that empowered Stephen to ensure that the Partnership did not earn any profits in which Adelaide would be entitled to share, are inconsistent with the implication of the term submitted by Stephen.
In Secured Income Real Estate (Aust) Pty Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596, Mason J (as his Honour then was) stated the conventional test for the existence of a term implied into a contract in fact, in the following terms at 605, 606:
I need only refer, as did Kelly J in the Full Court, to the majority judgment of the Judicial Committee in BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 16 ALR 363 at 376; 52 ALJR 20 at 26, where their Lordships said: "Their Lordships do not think it necessary to review exhaustively the authorities on the implication of a term in a contract which the parties have not thought fit to express. In their view, for a term to be implied, the following conditions (which may overlap) must be satisfied: (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that 'it goes without saying'; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract."
In my view, the term for which Stephen contends should not be implied into the Deeds and the Management Agreement, because it is not necessary to give business efficacy to the agreements; it is not so obvious that it goes without saying; and it is likely to be inconsistent with the express terms of the agreements. I have used the word "likely", because the meaning and effect of the mutatis mutandis provision have not yet been determined. If the result of that determination is that Stephen was authorised to deal with the proceeds of sale of the Hotel in the manner that he did, then the implied term will not be necessary. If he was not so authorised, then the implied term will be inconsistent with the terms of the agreements.
[41]
Conventional estoppel
For the reasons that I have given above, I have not yet resolved the dispute between the parties as to the proper construction and effect of the Deeds and the Management Agreement, in a way that has enabled me to make a finding on the primary question of whether Stephen was authorised to deal with the proceeds of the sale of the Hotel Assets in the manner in which he dealt with those proceeds.
Both Stephen and Louise pleaded a defence based upon the principle of conventional estoppel, as a fall back defence against the possibility that they failed in their defences based upon the proper construction of the agreements.
It is necessary for me to deal with the conventional estoppel defences, and I will do so on two assumptions; first, that the agreements did not have the effect that Adelaide agreed to hold her remaining interest on trust for Stephen, or that she relinquished her right to receive the benefits of her continuing beneficial ownership of part of the Hotel Assets during her lifetime; and secondly, that the agreements did not have the effect that Stephen was authorised to sell the Hotel Assets, and then deal with the proceeds of sale as if they were his own property.
Stephen pleaded a defence based upon a conventional estoppel in par 4(d)(ii),(iii) and (v) (sub-par (iv) appears to be missing).
Louise pleaded her conventional estoppel defence in pars 13(g) and (h). As I understand it, unlike Stephen, Louise maintains her claim that an element of the Common Understanding and Assumption was that Adelaide would hold her remaining interest in the Hotel Assets on trust for Stephen.
As I understand Louise's defence, it is derivative on Stephen's equivalent defence, in the sense that Louise did not take part in any of the conversations with Adelaide, and did not participate in the July Meeting, or sign the July Minutes. Louise gives evidence of having discussions with Stephen, in which Stephen advised her of his understanding of the effect of the discussions that he had had with his mother. The terms of the statements made by Stephen to Louise would have gone a substantial way towards justifying Louise in understanding that the alleged Common Understanding and Assumption existed. However, Louise's entitlement to maintain her conventional estoppel defence can rise no higher than the entitlement of Stephen to maintain that defence. Nothing Stephen may have said to Louise could have bound Adelaide to a conventional estoppel that Stephen himself could not assert.
Accordingly, in what follows, I will concentrate on the conventional estoppel defence maintained by Stephen.
I will start by considering the manner in which Stephen has pleaded his conventional estoppel defence.
Stephen alleges that Adelaide made what he called "the Adelaide Representations", which are pleaded in par 4(ii)(A) to (F). These representations were alleged to have been made by Adelaide to Stephen in April, May, June and July 2003, by various unidentified conversations in the first three months, and by conversations at the 1 July 2003 meeting, and in the July Minutes.
The operative part of the Adelaide Representations appears to be in the following (the statements attributed to Adelaide in the earlier sub-paragraphs being in the nature of general indications of what Adelaide was prepared to do):
(E) although she was only agreeing to sell half of her share in the goodwill in the Hotel to the first defendant in 2003, she was effectively selling her entire interest in the Hotel Business, including the Freehold and the goodwill, to the first defendant;
Particulars
Minutes of meeting held on 1 July 2003 signed by Adelaide Bowden, the plaintiff and the first defendant and others
(F) on receipt of the agreed purchase price of $3 million for her entire interest in the Hotel business, and the assumption of the Stephen Obligations by the first defendant, she would have no further entitlement to any share of any profits derived from the Hotel business or any distribution from any Trust associated with the Hotel business".
The defence then alleges, in sub-pars (G) to (I), that the parties to the Deeds and the Management Agreement had "a common understanding and, or in the alternative, an agreed assumption", which I will summarise as: Adelaide had relinquished her beneficial interest in favour of Stephen; Stephen would be free to distribute income from the Trust or the Hotel business without any duty to account to Adelaide; and Stephen had no duty to account to Adelaide in relation to any profits made by the Partnership or the Hotel business, including following any future sale. This is called "the Common Understanding and Assumption".
Stephen then pleads in sub-pars (aa) to (bb) (I cannot fathom why this method of identifying sub-paragraphs has been used) that the Deeds do not reflect the Common Understanding and Assumption, so that they should be rectified. I need not be troubled about this intrusion of a rectification claim into the pleading of the conventional estoppel defence, as Stephen has abandoned the rectification claim.
The defence then alleges in par 4(iii) that, in reliance on the Common Understanding and Assumption, Stephen gave instructions for the preparation of, and entered into the Deeds and the Management Agreements, and he assumed the liabilities and obligations imposed upon him by those documents.
Finally, Stephen alleges in par 4(v) - there being no par 4(iv) - (and I paraphrase) that Adelaide is estopped from denying that Adelaide held the equitable interest in the Hotel Business on trust for Stephen; from asserting that the agreement that was reached is inconsistent with the Common Understanding and Assumption; that Adelaide had any entitlement to any profits or distributions, including with respect to any sale of the Hotel, or that Stephen had any duty to account; and that Adelaide had not relinquished any beneficial interest in favour of Stephen.
In final oral submissions, Mr Willmott said (T 356-357) that what Adelaide "was effectively doing was that she would not relinquish her interest in the Hotel business but her rights to any benefits by way of income or profits". As I understand Stephen's case as put in oral submissions, it was necessary for Adelaide to retain the beneficial ownership in her share of the Hotel assets that she did not assign to Stephen, in order to avoid incurring any GST or excessive stamp duty liability, but she could bind herself to relinquish any entitlement to receive income, which is what she represented that she would do, and that formed the conventional basis upon which the parties proceeded.
It is important to identify the form and effect of the Common Understanding and Assumption asserted by Stephen and Louise in this case as the basis of their conventional estoppel defence.
Paragraph (aa) is in the form of an allegation that the Deeds and the Management Agreement do not reflect the Common Understanding and Assumption in three ways (the first of which, that during Adelaide's lifetime, she would hold her remaining interest on trust for Stephen, has been abandoned by Stephen). The alleged Common Understanding and Assumption is to the effect that the parties would act as if Adelaide had relinquished her right to receive any profits earned by her beneficial share in the Hotel Assets, and Stephen could do what he wanted with those assets, or any replacement assets, as if they were his own, irrespective of what the Deeds and the Management Agreement might provide, with the effect that the Common Understanding and Assumption would prevail over the effect the formal agreements.
The alleged Common Understanding and Assumption did not take the form that the parties knew what the effect of the formal agreements was, but they would not be bound by some aspect of those agreements, and their rights would be inconsistent with those agreements.
As a matter of first principle, it is easier to see how a conventional estoppel could legitimately exist where the Common Understanding and Assumption takes the latter form, than when it is of the former form. In the latter case, the parties are aware of the true effect of the formal agreement, but they have some reason to agree that they will act as if the formal agreement did not bind them, and their rights and obligations were in some agreed way inconsistent with the formal agreement. Where the parties act upon such a Common Understanding and Assumption, it is not hard to see how it may be unconscionable for one of the parties later to insist upon the rights and obligations created by the formal agreement.
The conventional estoppel contemplated, where the Common Understanding and Assumption takes the former form, involves the parties agreeing as to what their rights and obligations will be, and then formally entering into agreements that may be inconsistent with the earlier agreement. The basis of this conventional estoppel will be a Common Understanding and Assumption that the parties' rights and obligations will be governed by the informal agreement, whether or not there is any inconsistency in the formal agreement.
It is likely to be difficult for a party to prove in fact that all parties to the informal agreement adopted a Common Understanding and Assumption that the informal agreement would prevail over any inconsistent formal agreement.
The difficulty is made more acute in the present case where Stephen and Louise have abandoned the claim that the formal agreements should be rectified, because relevant mistakes were made in rendering the informal agreement into the formal agreements. If there was no mistake that would justify rectification, how can it be said that the parties adopted a Common Understanding and Assumption that they would be bound by the terms of their informal agreement, rather than by the formal agreements? There are real grounds for suspicion that Stephen and Louise cannot logically maintain the conventional estoppel claim that they make, if they cannot maintain a claim that, by reason of some operative mistakes, the Deeds and the Management Agreement should be rectified.
Be that as it may, a question of legal principle arises as to whether Stephen and Louise are entitled to maintain a conventional estoppel claim based upon conversations and documents brought into existence before the parties entered into the Deeds and the Management Agreement.
The law on this issue is unsettled. It was considered, but not resolved, by Tobias JA, with whom Mason P and Campbell JA agreed, in Ryledar Pty Ltd v Euphoric Pty Ltd [2007] NSWCA 65; (2007) 69 NSWLR 603 at [204] to [214]. His Honour discussed competing lines of authority, including by reference to the decision of McClelland J (as his Honour then was) in Johnson Matthey Ltd v A C Rochester Overseas Corporation (1990) 23 NSWLR 190, who held that "reasons of principle and policy combined to exclude evidence of alleged estoppels by convention… arising in the course of pre-contract negotiations which culminate in a written contract, except in proceedings for the rectification of the written contract…" The other line of authority is represented by the decision of Rolfe J in Whittet v State Bank of New South Wales (1991) 24 NSWLR 146, where it was held that matters arising out of pre-contractual negotiations, which could be proved to the extent necessary to justify rectification, namely, by clear and convincing proof, may be relied upon to found an estoppel by convention.
As the conflict of authority was not resolved in Rydelar, and as it is not necessary for me to attempt to decide the correct principle, it is not necessary to analyse the relevant paragraphs of Tobias JA's judgment more deeply.
Even though Rolfe J in Whittet preferred the view that the basis for a conventional estoppel could arise out of events occurring during pre-contractual negotiations, his Honour said at 153: "it would be strange, so it seems to me, if matters arising out of pre-contractual negotiations, which could be proved to the extent necessary to justify rectification, namely, by clear and convincing proof, could not be relied upon to found an estoppel by convention because of the source from which they arose".
I respectfully agree with his Honour's observation that, if it be assumed that a conventional estoppel may be based upon events that occur during the course of negotiations leading to the making of a contract, the same level of proof should be required as that necessary to justify an order for rectification; that is, clear and convincing proof.
It may also be noted that the conventional estoppel alleged in Whittet was of the second form that I have discussed above. Rolfe J accepted an argument by a mortgagor that she only executed a mortgage in favour of a bank, known by her solicitor to contain a term securing all monies advanced by the bank to the mortgagor's co-mortgagor husband, after representatives of the bank had assured the solicitor that the bank would not enforce the mortgage for any principal amount greater than $100,000. Thus, the parties knew that the mortgage contained an 'all monies' security term, but they expressly formed an objective assumption that the guarantee would only be enforced up to $100,000 of principal.
As appears from the extract from the judgment of McHugh JA (as his Honour then was) in State Rail Authority of New South Wales v Heath Outdoor Pty Ltd (1986) 7 NSWLR 170 at 193, set out by Rolfe J in his discussion of that case at 152, McHugh JA allowed the possibility of an equitable estoppel arising of the type commonly called a promissory estoppel, in the following circumstances:
… The rationale of this branch of equitable estoppel is that it is unconscionable for a person to resile from a promise that he will not exercise a right if to do so will place the promisee, who has acted on the promise, at a material disadvantage. It must be just as unconscionable to exercise a right acquired after a promise that any such right would not be exercised if or when acquired. Indeed the case for applying the doctrine of promissory estoppel seems to be particularly strong when the promisee is induced to confer the right on the promisor by the promise that the right will only be acted on in special circumstances or at a particular time or place or in a particular way…
Rolfe J reasoned that this approach should equally apply to a claim for conventional estoppel, based upon events occurring before the making of the contract. Whether or not this conclusion is correct, it is to be noted that McHugh JA was considering a case where a party, knowing of the legal effect of the proposed contract, represents that he or she will not exercise a particular right granted by the proposed contract, or will only do so in particular circumstances.
In Ryledar, Tobias JA made the following observations concerning the general principles applicable to a claim of conventional estoppel:
[199] Recently the principles were restated by Brereton J in Moratic Pty Ltd v Gordon [2007] NSWSC 5, where his Honour observed (at [30]) that the doctrine of conventional estoppel precluded either party to a contract from denying an assumption which has formed the conventional basis of the relationship between them. Accordingly, it is necessary to determine whether the parties have in fact adopted such an assumption as the conventional basis of their relationship.
[200] His Honour then stated the matters necessary to establish conventional estoppel (at [32]) as being that:
(a) the plaintiff has adopted an assumption as to the terms of its legal relationship with the defendant;
(b) the defendant has adopted the same assumption;
(c) both parties have conducted their relationship on the basis of that mutual assumption;
(d) each party knew or intended that the other act on that basis; and
(e) departure from the assumption will occasion detriment to the plaintiff.
[201] In noting the differences between promissory estoppel and conventional estoppel his Honour then observed with respect to the latter (at [33]) that it:
is focussed on the consensual basis of the parties' relationship: it operates when both parties have adopted the same assumption as the basis of their relationship, often without appreciating that any departure from the strict legal position is involved so as to hold both parties to their common understanding.
Stephen based his conventional estoppel defence on the following circumstances.
He relied, in his final submissions, on conversations between Adelaide and Mr Morrison regarding the purpose of the meeting and identified paragraphs of his 28 August 2014 affidavit (see written submissions par 2.2 footnote 19). Stephen did not explain in his submissions how the representations were made in the conversations. A review of Stephen's evidence of the conversations with Adelaide shows that Adelaide initially said that she wanted Stephen to buy her out, so that she could buy Kim a business, but that she did not want any tax liability. Stephen said that he would talk to Mr Morrison to see whether there was a way that would save them from paying taxes. Later, Stephen told Adelaide that Mr Wiseman was putting together a family agreement to reflect the discussions that had occurred with Mr Davidson that may solve the tax problem. Adelaide said:
John has told me that I can save paying any tax if I sell you half of my interest in the Hotel and leave the rest to you in my Will. You have total control over the Hotel. Nothing will change. You pay me $3 million and I will give $2 million to help Kim and Peter.
Adelaide said that she just wanted to get her money and get out of the Hotel, and to help Kim and Peter. Just before the July 2003 meeting, in a further telephone conversation, Stephen said to Adelaide that he had been told by Mr Morrison that he had explained to Adelaide that Stephen would pay her $3 million to buy out her share of the Hotel and the Properties, but Adelaide would not have any tax liability.
I do not consider this evidence to constitute a representation by Adelaide to Stephen that, if Stephen paid her $3 million for half of her interest in the Hotel and Adelaide left the balance to Stephen in her will, that Adelaide would have no further entitlement to any share of any profits derived from the Hotel Business or any distribution from the Trust.
Stephen's final written submissions also rely on conversations that happened at the 1 July 2003 meeting (par 2.2 foot note 19). The evidence is found primarily in par 101 of the affidavit of Mr Morrison, dated 28 August 2014, in the form of the following conversation:
Adelaide: "I wish Stephen to buy out all of my share of the Hotel."
Morrison: "Adelaide, that is your interest in the Hotel business (including the Freehold and the goodwill), the partnership, Freehold land and the shares in the Hotel companies".
Adelaide: "I just want my share of the Hotel now. Stephen has been broke before and I don't want the risk any more. I want my money out now. I just don't want the risk anymore."
"I am happy with what John has outlined to overcome the tax and stamp duty issues."
"I wish to receive payment for my share without any exposure to any ongoing liabilities to the banks from the Hotel business."
"I just want to assist Kim and Peter, and to put an end to family squabbles and to retire in peace without any worry."
"I am prepared to part with my entire interest in the Hotel for receiving payment of $3 million, plus the transfer to me of the Gold Coast unit without a loan."
"I don't want to know about any Capital Gains Tax or stamp duty. Those things are Stephen's worry. I don't want any exposure to the future debts of the Hotel, and I want Stephen to continue to pay my ongoing lifestyle expenses".
These statements that have been attributed to Adelaide should not be considered out of context, particularly in circumstances where Adelaide is not able to respond, and the events occurred about 11 years before Mr Morrison prepared his affidavit. Mr Morrison said that he explained everything in the July Minutes to the persons present at the meeting (affidavit par 106). Isolated statements attributed to Adelaide should be considered in the context that everything said in the July Minutes was also said during the meeting.
Stephen's evidence on this subject merely confirmed Mr Morrison's evidence, by reference to a draft of the July Minutes.
I do not accept that Adelaide is estopped by reason of the conventional estoppel alleged by Stephen and Louise.
I do not accept that the evidence relied upon by Stephen and Louise makes good the proposition that the parties had the Common Understanding and Assumption alleged. In any event, I do not accept that the existence of that Common Understanding and Assumption has been proved "to the extent necessary to justify rectification, namely, by clear and convincing proof", as Rolfe J required in Whittet. That is the reason why I do not find it necessary in the present case to decide the point of principle as to whether a claim for conventional estoppel can ever be based on pre-contractual events.
The defence also fails because I do not accept on the evidence that Stephen entered into the Deeds and the Management Agreement in reliance upon the alleged Common Understanding and Assumption.
From my analysis of the financial records of the Partnership produced by Mr Morrison on the instructions of Stephen (and signed by Stephen for the 2004, 2006 and 2007 years), the accounts recognised Adelaide's entitlement to share in the annual income, to share in any capital revaluation, and to share in the capital profit generated by the sale of the Hotel. The income, in the years when it was earned, may have been small, but Adelaide was credited with that income in years when it was earned (albeit arguably she was not given the correct share in accordance with the effect of the Deeds). The accounts were prepared consistently with Stephen and Mr Morrison having the belief that Adelaide was not entitled to drawings on her capital account, unless Stephen chose that approach as the means of providing Adelaide with her 'lifestyle' expenses. Her share of income was otherwise capitalised. Adelaide's capital gains tax obligation on the sale of the Hotel was debited to her capital account. The accounts are consistent with Stephen husbanding Adelaide's capital until the time when he would become entitled to it under Adelaide's will.
Further, for the reasons that I have set out above, in the course of analysing the wording of the July Minutes, when the whole of that document is given due weight, it is clear that Adelaide was to remain the owner of the interest in the Hotel that she did not assign to Stephen, and that he was to become the owner at a later time through the implementation of Adelaide's will.
Adelaide is not alive to give her version of the events relevant to the establishment of the alleged Common Understanding and Assumption. Although Adelaide may have had a misguided view as to her rights and entitlements, after the sale of the Hotel, as manifested by her repeated demands to receive her share of the sale proceeds, her conduct was inconsistent with an assumption on her part that she had entirely relinquished her rights to receive any benefits from her beneficial interest in the Hotel Assets, or any replacement assets. The court should be wary about accepting the claims of living parties to an alleged Common Understanding and Assumption, when a deceased party is not alive to give their version of events, and their conduct while alive is inconsistent with the deceased party operating on the basis of the alleged Common Understanding and Assumption.
The essential flaw in the conventional estoppel defence is that it ignores the fact that, while the primary objective of the Bowden family was to achieve the result that Adelaide could put into effect a distribution of her estate during her lifetime, in a way that enabled her to make an immediate gift to Kim, and to realise for her own immediate use some of her interest in the value of the Hotel Assets, there was a secondary objective that was essential to the primary objective being implemented. That was that the proposal could not be implemented at all, if it incurred the amount of CGT and liability to stamp duty that would have been incurred if Adelaide had immediately sold the whole of her share in the Partnership Assets to Stephen. Stephen was not in a position to borrow the funds necessary to meet those liabilities.
The ultimate structure of the transaction that was implemented by means of the Deeds and the Management Agreement, was driven by the availability of a means to avoid incurring those liabilities, save for a relatively small amount of stamp duty. That depended upon Adelaide genuinely retaining the beneficial ownership of the whole of her post-CGT regime interest in the Hotel Assets until her death, when she could devise that interest to Stephen in her will.
I do not accept that any of the parties had any intention that the transaction implemented by the Deeds and Management Agreement would not be implemented in a genuine way that recognised the constraints imposed by the terms of the documents designed to avoid the transaction incurring a CGT liability, and an unnecessarily high stamp duty liability.
While Stephen gave evidence as to what he understood the effect of the agreement that he reached with his mother was, he did not give any positive evidence of any discussions capable of sustaining a Common Understanding and Assumption that the parties would ignore the constraints imposed by the terms of the Deeds and the Management Agreement. In particular, there was no evidence that the parties agreed that they would act as if the true agreement between them ignored those constraints, even if that might put in jeopardy the CGT and stamp duty benefits that the terms of the Deeds and the Management Agreement generated.
It is true that a number of terms of the Principal Deed and the Management Agreement had the combined effect that the Partnership was expected to earn very little profits that could be distributed to Adelaide. That result was created by the practical measures included in the agreements, and not by some implicit agreement that Adelaide would relinquish her right to receive the profits earned by her share of the Hotel Assets.
The very existence of these practical measures in the agreements is in my view inconsistent with the continuing existence of the Common Understanding and Assumption alleged by Stephen and Louise.
In my view, the terms of the Principal Deed and the Management Agreement, which had the effect that, at least while the ownership of the Hotel was retained, Stephen could ensure that the profits of the Hotel business were exclusively earned in the Trust, and that Adelaide had relinquished her right to any distributions from the Trust, were reasonably clear and straightforward: see principally cl 6.5 of the Principal Deed, and cl 1 of the Management Deed. It is probable that Stephen understood that the purpose of this arrangement was that Adelaide would not receive more than the lifestyle expenses the subject of cl 6.2 of the Principal Deed, while maintaining her beneficial interest in her remaining share in the Hotel Assets, so that the tax effectiveness of the transactions as effected by the formal documentation would not be put in jeopardy. It is possible, and perhaps likely, that Stephen did not understand the effect of the mutatis mutandis provision in cl 2.1 of the Principal Deed. However, I do not accept that the evidence shows that anything said or done by Adelaide before the Deeds and the Management Agreement were entered into, or any of the terms of those documents, justified Stephen (or Louise) in believing that Stephen could treat the Hotel Assets, or any replacement investment, as his own, in a manner that was inconsistent with the remaining legal and equitable rights of Adelaide, as retained by the documents.
[42]
Alleged collateral agreement
Although Louise pleaded that there was a collateral agreement to the agreement created by the formal documentation, that Adelaide would hold her remaining interest in the Goodwill and the Freehold on trust for Stephen, I do not understand her to have maintained that claim in her final submissions.
The argument must fail in any event, because any such collateral agreement would be inconsistent with the terms of the formal agreement, and a principal and an alleged collateral agreement cannot coexist if the latter is inconsistent with the former: see Hoyt's Pty Ltd v Spencer (1919) 27 CLR 133.
[43]
Inconsistency between July Agreement and Deeds
The defendants' argument that an agreement was made, either on 1 July 2003, or as a result of the events of November 2003, and that the agreement provided that Adelaide would hold her remaining interest in the Goodwill and the Freehold on trust for Stephen (which evolved in Stephen's case into an argument that Adelaide relinquished her right to receive any share of the income from those assets), and that that agreement prevailed over any inconsistent terms in the formal documentation executed in November and December 2003, fails for the primary reason that, even if one or both of those agreements were made, they did not have the effect of creating the trust alleged, or of a relinquishment by Adelaide of any entitlement to income. I have given my reasons for that conclusion above.
However, I reject the argument that the earlier agreements, if made, would have prevailed over any inconsistent terms in the formal documentation.
The parties are bound by the recitals and the terms of the Deeds and the Management Agreement that I have considered above, which have the clear effect that Adelaide only transferred to Stephen half of her interest in the Goodwill, and remained beneficially entitled to the balance of her interest in the Goodwill and her half interest in the Freehold, albeit that her capacity to enjoy the fruits of that beneficial interest were circumscribed by the terms of the documents.
The court should also give effect to the provisions of cl 6.5(a) of the Deed of Assignment, in that the Deed of Assignment was agreed to contain the entire agreement between the parties, and that any previous agreement was to have no further effect. There is no basis for the court to treat that term as being mere surplusage. Clause 6.5(d) preserves the effect of the other Deeds and the Management Agreement. The very inclusion of cl 6.5(d) shows that cl 6.5 was not included in the document as something in the nature of habitual 'boilerplate'. It shows a positive intention by the drafter to ensure that the precise effects intended to be achieved by the terms of the Deeds and the Management Agreement were not put in jeopardy by arguments based upon any earlier agreements between the parties.
[44]
Alleged authorisation by Adelaide of Stephen's conduct
Louise makes a submission that there was no failure by Stephen to account to Adelaide: see opening submissions par 5, and closing submissions pars 5 to 7. Louise submits that Adelaide "authorised and consented to any breach of fiduciary duty or failure to account by Stephen": closing submissions par 6.2. As I understand it, this submission is made in response to all of the bases upon which Adelaide may claim that she is entitled to payment, following an accounting by Stephen. The submission is literally made in relation to specific claims by Adelaide, but this may be a result of changing perceptions on Louise's part of the precise nature of the accounting sought by Adelaide.
Louise's argument is based upon the historical way that the Partnership conducted its business, and in particular the arrangement whereby Adelaide agreed that profits would be made in the Trust, and not by the Partnership itself. Louise relies upon the fact that Adelaide placed Stephen in sole control of the Partnership's business. By doing so, Louise asserts that Adelaide consented, in the Principal Deed, to Stephen having the sole discretion concerning the sale of the Hotel, and the making of any replacement investment using the proceeds of sale. More specifically, Adelaide authorized her nephew, Mr Morrison, to make decisions as to how the accounts of the Partnership and the Trust should be prepared, and how distributions should be made to the beneficiaries of the Trust, to minimise the overall tax burden on the members of the Bowden family. Mr Morrison was not only the accountant for the family, but he was their financial adviser. Mr Morrison regarded himself as being under a special duty to look after his "Auntie". Mr Morrison sat down with Adelaide in the presence of Stephen, Kim and Peter, after the Partnership accounts and Adelaide's tax returns were prepared, in the years following the sale of the Hotel. He explained the accounts and arranged for Adelaide to sign them personally. This was particularly significant, in the case of the accounts for the year ended 30 June 2008, which showed that the primary asset of the Partnership was a non-current loan to the Trust of $28,394,241. Adelaide signed the pages in the 2008 accounts that recorded this investment, on 11 May 2009. The accounts showed that the Partnership earned negligible interest during that year. The accounts for subsequent years recorded changes in the Partnership's funds, and reaffirmed that the Partnership was receiving negligible interest. The 2009 accounts in particular showed substantial drawings made by Stephen.
Louise notes the fact that Kim and Peter were present at the family meetings in which the Partnership's accounts were explained to Adelaide, but they did not give evidence to refute Mr Morrison's account of providing explanations to Adelaide.
As I have noted above, when analysing the pleadings, Louise alleges in her third further amended defence that, to the extent that Stephen was required to account to Adelaide as alleged by Kim, he did so account: see par 30(b).
I do not consider that this allegation properly pleads a defence by Louise that Adelaide authorised and consented to any breaches of fiduciary duty or failure to account by Stephen. It is probably sufficient to raise a defence of settled accounts against Adelaide, and it appears that, in substance, the argument put by Louise does include a claim that Adelaide settled her accounts with Stephen, when she signed the partnership accounts, after the sale of the Hotel, after those accounts had been explained to her by Mr Morrison.
The evidence makes it clear that Adelaide was not told of the sale of the Hotel until after it had occurred, and she also did not know in advance that Stephen would authorise Mr Morrison to cause the net proceeds of the sale of the Hotel to be immediately paid out of the Partnership's bank account into the bank account of the Trust, on the basis that it would be a non-interest-bearing loan. Save to the extent that the terms of the Principal Deed and the Management Agreement may have authorised Stephen to take these steps, it cannot be said that Adelaide knew about or authorised those steps in advance.
All that can be said against Adelaide is that, after Mr Morrison explained to her that the Partnership's funds had been advanced to the Trust on a non-interest-bearing basis, she signed the Partnership's accounts, and did so in some subsequent years.
In Jane v Bob Jane Corporation Pty Ltd [2013] VSC 406, Sifris J set out the following useful definition of a settled account, at [82] (citations omitted):
[82] A settled account is a statement of the accounts between two parties which is agreed to and accepted by both as correct. It is applicable where there are mutual debits and credits and the parties strike a balance and agree that balance as truly representing the financial result of their transactions. Signing the account is not strictly necessary. Where the account is kept for any length of time and no objection is made the person to whom it is sent is bound by it and prevented from opening the account afterwards…
His Honour considered the issue, on the case before him, of whether the plaintiff should be allowed to reopen the settled accounts, or allowed to make surcharges and falsifications, in the following passages (citations also omitted):
[119] The Plaintiff has submitted that even if it is found that there are settled accounts, in light of the disputed debits made by BJC, the accounts should be re-opened and liberty given to the Plaintiff to surcharge and falsify.
[120] In my opinion, there is no basis to either surcharge or falsify the settled accounts or re-open them.
[121] It has long been established that, if the accounts are treated as settled, then it is incumbent upon the Plaintiff to point out in his pleading some distinct error, and establish that error by proof before liberty is given to surcharge and falsify.
[122] As Bob Jane did not plead or could not point to any specific error, it was entirely appropriate for his Counsel to effectively abandon this form of relief and contend that the accounts should be re-opened.
[123] The general rule is that the Court will open the account and not merely surcharge and falsify where:
(a) the account has been shown to be erroneous to a considerable extent, both in amount and in the number of items; or
(b) fiduciary relations exist and a less considerable number of errors are shown; or
(c) fiduciary relations exist and one or more fraudulent omissions or insertions are shown.
[124] In Wheatley v Bower [2001] WASCA 293, [123] Malcolm CJ put it this way:
115 In my opinion, the accounts in this case were not shown to be erroneous to a considerable or any extent and, although the parties were in fiduciary relations, it was not shown that there were any fraudulent omissions or insertions in the accounts, so as to justify the re-opening of any of the accounts, or to depart from the maxim that so far as limitation periods are concerned, equity follows the law.
116 As between partners, a settled account, namely one that is agreed between the parties, as in this case, is a good defence to an action for an account, although in special circumstances the court may re-open the accounts or give liberty to surcharge and falsify. A single important error is sufficient, if fraudulent, to justify an order to open the whole account. If it is not fraudulent the proper order is to give liberty to surcharge and falsify: Gething v Keighley (1878) 9 Ch 547 at 550. Accounts will be re-opened on the ground of fraud in spite of the existence of a stringent agreement against re-opening: Oldaker v Lavender [1833] E R 706; (1833) 6 Sim 239; Sim v Sim (1861) 11 I Ch R 310 at 321. The mere fact that the claimant has already had an account rendered to him will not preclude him, in the absence of acquiescence, from having an account taken by the court once fraud has been established.
The learned authors of Meagher, Gummow and Lehane's Equity Doctrines & Remedies (5 ed) say, at [26-120], on the subject of when settled accounts can be reopened for error, not involving fraud in the preparation of the accounts (citations omitted):
… In cases where the plaintiff can prove that the settled accounts are vitiated by error, 'it is easier to open the account' where the defendant stands in a fiduciary relation towards the plaintiff and is an accounting party than where the defendant does not stand in that position towards the plaintiff. Indeed, absent fraud, the plaintiff in such a case is entitled prima facie to an order reopening the accounts, unless in all the circumstances the court is of the view that it would be unjust to permit more than surcharging and falsification. In cases of error unaccompanied by fraud, where there is no fiduciary relationship between the parties, the proper order is to give liberty to surcharge and falsify, no matter how grave or elementary the errors involved. Except in the cases of fraud and mistake, the effect of a plea of settled accounts is to prevent any reconsideration of the accounts.
A similar statement of principle is made in Lindley & Banks on Partnership (19 ed) at [23-112], concerning the significance of errors in settled accounts (citations omitted):
Fraud and misrepresentation
If any part of a settled account is affected by fraud or misrepresentation, a new account will be directed, even after a considerable lapse of time.
Errors
Where errors affect the whole of a settled account, a new account will be directed, unless the account has stood unimpeachable for many years…
In any other case, permission to serve notice of objection to specific items in the account will be the only available remedy. An item omitted by mutual mistake will normally be put right. However, the mere fact that items are treated in an improper way, or are improperly omitted, is not itself sufficient to induce the court to reopen a settled account; if the partners knew about those items and no fraud or undue influence can be proved, it will be inferred that they were dealt with in an agreed manner…
In the present case, there are a number of factors which justify the result that Adelaide should not be refused her application for an accounting by Stephen. There is a separate question as to whether Adelaide should be allowed to reopen the accounts entirely, or should only be entitled to an accounting with respect to specific surcharges and falsifications.
Both Stephen and Mr Morrison owed fiduciary obligations to Adelaide.
Stephen authorised and was responsible for the manner in which Mr Morrison put into effect transactions on behalf of the Partnership and the Trust; the manner in which he prepared their accounts; and the explanation that he gave to Adelaide of the contents of the accounts, which occurred in Stephen's presence.
Mr Morrison said (T 129) in relation to the effect of the Deeds: "Because everybody knew it and we had the minutes that explained that, and nobody did not know that (sic). Everybody agreed that was the plan, and that's what we stuck to…". Any advice or explanation that Mr Morrison gave to Adelaide was infected by the fact - as Mr Morrison made clear in his cross-examination (T 115 ff) - that Mr Morrison had an absolute belief that the effect of the July Minutes, and any subsequent agreement between the parties, was that Adelaide only held the legal title to her remaining interest; that she held the beneficial interest on trust for Stephen; and that Stephen was entitled to deal with the property of the Partnership, including the Freehold, as if it was his own. I am not satisfied that Mr Morrison was capable of giving proper and accurate advice to Adelaide concerning her rights.
Mr Morrison said in cross-examination that Adelaide "was not financially a sophisticated woman" (T 122).
Although Adelaide signed a number of the Partnership's annual accounts after the sale of the Hotel, Mr Morrison conceded in cross-examination (T 204) that on at least two occasions Adelaide said to him "Where's my money?"; meaning that Adelaide claimed to be entitled to receive more than she was getting following the sale of the Hotel.
In my view, it is most unlikely that Mr Morrison gave any, or any adequate, explanation to Adelaide that the Partnership's annual accounts may have contained serious errors, made by Mr Morrison, in relation to how expenses and revaluations were accounted for as between Adelaide and Stephen. I am not satisfied that, when Adelaide signed the annual Partnership Accounts, she understood and accepted the errors that had been made in Stephen's favour.
A number of the possible errors in the Partnership's annual accounts, concerning the way expenses and revaluations had been apportioned as between Adelaide and Stephen, continued to have historical effect in and from the 2008 accounts, but they had first been made in earlier accounts of which Adelaide was not aware, and which Stephen had signed on her behalf exercising his power of attorney.
Furthermore, if it was a breach of fiduciary duty by Stephen to cause the Partnership to make the non-interest-bearing loan to the Trust for the purpose of paying that money out of the Trust in a way that benefited his interests and not the interests of the Partnership, the fact of the breach of fiduciary duty would itself be a sufficient reason to permit Adelaide to reopen the settled accounts; and in any event, there is no reason to believe that Adelaide was informed of what the Trust did with the money, so that Adelaide's claim concerning the application of the money could not be regarded as being settled by her signing the Partnership's accounts.
I am therefore not satisfied that Adelaide is precluded from seeking any of the relief she seeks in these proceedings because of any explanations given to her about the Partnership's accounts, after the sale of the Hotel, or the fact that she signed any of those Partnership accounts.
[45]
Utility of partnership accounting
As I understand Stephen's submissions, he puts an argument that there is no utility in the court ordering him to undertake an accounting to Adelaide, because the effect of cl 3.1 of the Principal Deed is that Adelaide covenanted to leave the entirety of her interest in the Partnership to Stephen by her will: see Stephen's outline closing submissions pars 5.3(b), 5.4 and 6.1.
Stephen starts, in par 5.3(b), by noting that Kim has conceded that any moneys held for Adelaide in the Partnership capital loan account will pass to Stephen. While Kim did make a concession generally in that form, as I understand its effect, it was that Kim accepted that any interest of Adelaide in the capital of the Partnership that she held at her death is held by Kim, as her executor, on trust for Stephen. That concession was subject to the condition that Stephen first pays to Kim, on behalf of the estate, all amounts that he owed to Adelaide personally at the date of her death. Kim did not concede that any amounts payable by Stephen to Adelaide following an accounting, or as equitable compensation, for breach of duty owed to Adelaide, formed part of her interest in the Partnership that she was obliged by her will covenant to leave to Stephen.
The question is whether, on the proper construction of cl 3.1 of the Principal Deed, the term had the effect contended for by Stephen. It is to be noted that cl 3.1 remains the relevant provision, because that is the provision by which Adelaide promised to leave her "interest in the Partnership" to Stephen. Even though the Hotel was sold, which triggered the operation of cl 2.2 of the Principal Deed, that term only applies to Adelaide's interest in the replacement investment.
To address this question properly, it is necessary to distinguish Adelaide's interest in the assets of the Partnership from her entitlement to share in any profits earned by the Partnership.
In submissions, Kim relied upon the decision of the High Court in Birmingham v Renfrew (1936) 57 CLR 666. I do not think that the principles that govern the operation of mutual wills have direct application in the resolution of the present question: see in particular the explanation by Dixon J (as his Honour then was) at 689, as to how "a floating obligation, suspended, so to speak, during the lifetime of the survivor can descend upon the assets at his death and crystallise into a trust". The doctrine of mutual wills does not require the survivor to ensure that all of his or her assets in existence at the time of inheritance under the will of the first to die will be included in the survivor's estate at his or her death. Rather, the survivor has the right to use and dispose both of his or her own assets, and the inherited assets, but must leave a will that disposes of the assets that remain in the estate at death in accordance with the agreement for mutual wills.
In my view, in the present case, it follows from the terms of cll 2.2 and 3.1 of the Principal Deed, in particular, that Adelaide was required to leave to Stephen by her will all of her interest in the assets identified, including her interest in the Partnership Assets that were not otherwise identified, or her interest in any replacement investment. Support for this conclusion can it also be found in the provisions of the Principal Deed that gave Stephen the right to manage the whole of the Partnership's assets (cl 1); and that gave him the right to sell the whole of those assets (cl 2). Adelaide's obligation was a floating obligation in that it could only attach to the assets of the Partnership that she continued to own at the date of her death, and could not attach to assets that were replaced or lost during her lifetime. In that sense her obligation could only crystallise on her death, in relation to the assets of the Partnership that were in existence at that time. However, her power to sell any of the Partnership's assets, or to dispose of them in the ordinary course of the Partnership's business, was lost; and in my opinion there is a clear implication that she could not require Stephen to transfer any of the Partnership's assets to her, so that she would be in a position to dispose of or dissipate them outside the Partnership. This situation would not extend to any profits of the Partnership to which Adelaide became entitled, assuming there was a way in which the Partnership could earn profits, or to any compensation to which Adelaide became entitled in her personal capacity.
The position is not necessarily the same in relation to any profits earned by the Partnership between the date of the sale of the Hotel and Adelaide's death.
The question concerning the application of cl 3.1 of the Principal Deed to the profits that the Partnership earned, or should have earned, only arises if I am right in the conclusion that I have expressed above, which is that the Principal Deed and the Management Agreement did not have the effect that Adelaide ceased to be entitled to share in the profits of the Partnership. Rather, they had the effect that the Partnership might not earn any profits available to be shared between the partners. The question is: what is the position if at her death Adelaide was entitled to a share of profits that the Partnership should have earned, but for a breach by Stephen of his fiduciary duties as Adelaide's partner?
It follows from my conclusion that, if the Partnership had in fact earned profits, Adelaide would have been entitled to receive her proportionate share of those profits, that Adelaide would have been entitled to choose to spend her share of the profits, or leave them in her Partners Funds.
In my view, Stephen's contention is defeated by a simple response based upon the proper construction of cl 3.1 of the Principal Deed. That is that, when all of the Deeds and the Management Agreement are considered together, and in context, Adelaide only covenanted to leave to Stephen her interest in the Partnership assets, which would include her share in the Partners' Funds that have represented profits earned, that she chose not to expend prior to her death.
The reference to Adelaide's "interest in the Partnership" is apt, as a matter of the ordinary meaning of the words used, to refer to her interest in the capital and assets of the Partnership, but would also extend to any entitlement to a share in profits that had accrued, but not been paid to Adelaide in the ordinary course, at the date of her death. It is proper to distinguish between an interest in the Partnership, and an interest in the profits of the Partnership. Clause 3.1 did not have the effect that Adelaide was obliged to capitalise her share of profits.
If cl 3.1 had had that effect, it would not have been necessary for the drafter of the Principal Deed and the Management Agreement to include the terms in those documents that have the effect of empowering Stephen to ensure that the profits from the Hotel business be earned by the Trust, rather than the Partnership, by reason of the maintenance of the lease that the Partnership had granted to the Trustee, and Adelaide's relinquishment of her entitlement to distributions from the income and capital of the Trust. The fact that, by cl 6.5 of the Principal Deed, Adelaide relinquished her entitlements in relation to the Trust, but there was no equivalent relinquishment in relation to her entitlement to share in any profits earned by the Partnership, tells against the court construing the documents in a manner that has that effect.
Consequently, if at her death Adelaide was entitled to receive a share in profits that the Partnership should have earned, but for breach of fiduciary duty by Stephen, Adelaide was not under any obligation to leave the fruits of that entitlement to Stephen in her will. Adelaide was free to deal with that entitlement in any manner that she saw fit.
This analysis of the effect of cl 3.1 of the Principal Deed has proceeded upon the assumption that any entitlement on Adelaide's part should properly be characterised as an entitlement to profits that should have been earned by the Partnership. The making of that assumption would be encouraged by the way Kim has formulated order 1 of her claim for relief, and her allegation in par 22 of her statement of claim; the latter of which is expressed in terms of "profits earned on her capital account".
It is by no means clear, however, that any amounts that Stephen may have been obliged to pay to Adelaide at the date of her death, either following an accounting, or as equitable compensation, should properly be characterised as receipts of Partnership profits. The better view probably is that the alternative remedies to which Adelaide would be entitled, if Kim succeeds in her case, would simply be her personal assets, because, at least in a two-person partnership, any compensation payable by one partner to another for breach of fiduciary duty should not in principle be treated as an asset of the partnership.
There is one respect in which Stephen's argument may have a valid application. My provisional understanding of the issues considered by the parties' accounting experts is that many of the adjustments to the Partnership accounts that have been the subject of their investigations are revisions to the aspect of the Partners' Funds that probably should be treated as strictly being on capital account, in accordance with proper accounting principles. To the extent that that is so, it may well be that there is no utility in the exercise, if the only effect of the revision is to change the value of Adelaide's interest in the Partnership, which she was obliged to leave to Stephen in her will.
I would hesitate to attempt to answer that question solely as a matter of principle, before the issues ventilated in the expert accountants' reports are dealt with in court. I can see at least one area where the revision of the Partners' Funds in the Partnership accounts may be material, even if the only changes that are made are to increase Adelaide's share in the capital of the Partnership. If it happened that the effect of the revision was to increase the amount of Adelaide's capital, and the consequence was that Stephen's drawings were from Adelaide's capital as well as his own, the withdrawal by Stephen of Adelaide's capital might be an unauthorised use of Adelaide's entitlement to her Partners' Funds, which might entitle her to some compensation.
That is not an issue that the parties have yet addressed in detail, and it should be considered in conjunction with the expert accounting evidence.
[46]
Notice by Louise of breach of fiduciary duty
Paragraph 1 of the statement of claim seeks an order against all of the defendants, including Louise, that they account to Adelaide for the profits of Adelaide's share of the partnership assets. Paragraph 5 seeks an order that all of the defendants, including Louise, must pay to Adelaide equitable compensation for breach of fiduciary duty by Stephen. These paragraphs appear to seek relief against Louise in monetary terms for her involvement in breaches of fiduciary duty by Stephen, irrespective of whether or not Louise has received assets as a result of Stephen's breaches of fiduciary duty.
There is no allegation in the statement of claim that Stephen was engaged in a dishonest and fraudulent design in relation to his disbursement of Adelaide's interest in the proceeds of sale of the Hotel Assets, so the case against Louise cannot be one of liability for involvement in breach of fiduciary duty by Stephen within the second limb of the rule in Barnes v Addy (1873) 28 LT (NS) 398: see Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2007) 230 CLR 89 at [179] to [184]; Hasler v Singtel Optus Pty Ltd; Singtel Optus Pty Ltd v Almad Pty Ltd [2014] NSWCA 266; (2014) 87 NSWLR 609 at [121] to [125]; and Simmons v New South Wales Trustee and Guardian [2014] NSWCA 405 at [111] to [115].
Thus, the case against Louise is not one of involvement in breaches of fiduciary duty by Stephen.
Nonetheless, par 29 of the statement of claim contains an allegation that all of the defendants, including Louise, are liable to account to Adelaide in respect of the profits of the Partnership. The period for which the account is to take place is now limited to the period from 29 October 2007 to 8 February 2012.
Other paragraphs of the statement of claim, such as pars 3, 4 and part of par 5, appear to seek proprietary relief in relation to assets acquired by Louise as a result of a breach of fiduciary duty by Stephen.
While the statement of claim contains allegations that Louise was involved in conduct engaged in by Stephen, as a director of the Trustee and the defendant companies, notice by Louise of breaches of fiduciary by Stephen in that context would only be relevant to the liability of the various companies to Adelaide in relation to assets received by those companies as a result of the breach of fiduciary duty by Stephen. For example, it is alleged in par 24 that Stephen and Louise caused the eighth defendant to repurchase the Hotel out of the Partnership's funds distributed to the Trustee; and there is an allegation in par 26 that, on 5 February 2010, Stephen and Louise caused the ninth defendant to purchase the Cabramatta Inn Hotel, using $7,720,000 ultimately borrowed from the Partnership.
The statement of claim alleges, in par 25(c), that Louise was the knowing recipient of the proceeds of sale of the Hotel, which are traceable to a breach of fiduciary duty by Stephen. It is claimed in par 25(d), that Louise holds on constructive trust for Adelaide any assets acquired as a result of receiving part of the proceeds of sale, and is liable to account to Adelaide for any profits derived from those assets.
The statement of claim does not identify any assets alleged to have been received by Louise personally, or any profits made by the use of those assets.
Thus, the statement of claim does not properly plead a claim against Louise, based upon her assistance in breach of fiduciary duty by Stephen. It does plead that Louise, in her capacity as a director of the corporate defendants, had notice of Stephen's breach of fiduciary duty, when those defendants received assets acquired by misuse of the proceeds of sale of the Hotel, but that claim, if established, will give Adelaide a remedy against the corporate defendants, and not Louise. The statement of claim alleges that Louise received assets acquired from the misuse of the proceeds of sale of the Hotel, but does not identify any such assets.
Louise was not cross-examined about the circumstances in which she acquired any assets personally, as a result of the misuse of the proceeds of sale of the Hotel. While Kim made submissions to the effect that Louise had notice that Stephen breached his fiduciary duty to Adelaide, those submissions did not descend to any detail about the circumstances in which Louise acquired any assets personally.
The Trust's accounts for the 2008 year show that Louise received drawings from the profits of the Trust of $75,000, but for almost half of that year the Trust was still operating the Hotel, in the manner that it did before the sale of the Hotel. The accounts for the 2009 year appear to show drawings by Louise out of profits of the Trust of $238,115. There appears to be no drawings by Louise in later years.
The 2008 accounts of the Trust show that, when the proceeds of sale of the Hotel were paid to the Trust, a pre-existing debt of $8,060,889.01 owed by the Partnership to the Trust was repaid. This repayment did not involve a receipt of money by Louise.
The Trust's 2009 accounts show that $7,787,339.48 was paid to beneficiaries of the Trust, to whom the Trustee owed debts, as a result of earlier distributions of profits of the Trust, which had not been paid to the beneficiaries in cash. As I understand the evidence, none of this money was paid to Louise. A small amount was paid to Stephen, and large amounts were paid to four of the corporate defendants.
I have not attempted to trace through the accounts of any of the corporate defendants, to see whether Louise personally received any money that could be traceable to the proceeds of sale of the Hotel.
The only money received personally by Louise that, upon my present understanding of the evidence, might be traced to the proceeds of sale of the Hotel was the drawings that she received in the 2008 and 2009 financial years.
Louise gave evidence that she did not have any detailed knowledge of the Trust's structure, and that she relied upon Mr Morrison in the conduct of the affairs of the Trust, and the corporate defendants. She said that she did not read the accounts for the Trust and the corporate defendants prepared by Mr Morrison. She was told to sign the accounts, and she did so.
Louise said in her affidavit that she had numerous discussions with Stephen concerning the proposal that Stephen acquire part of Adelaide's interest in the Hotel, and that Stephen had given her a description of the scheme devised by Mr Morrison that included:
… This scheme effectively gives Kim her distribution under mum's will now, and ensures I received my share of mum's part of the business when she dies. In the meantime, while mum is alive, legally I will have full and unfettered control over everything. The income and assets of the business will be in my hands from now on. I am effectively acquiring all of mum's interest now but it won't be all in my name until she dies.
Louise was not present at the 1 July meeting, and there is no evidence that she was engaged in the discussions concerning the proposal that led to the execution of the Deeds and the Management Agreement.
She said that she was shown the July Minutes, and that Stephen told her of the effect of the Deeds; she also "very superficially" read the Deeds.
Louise said that she understood Adelaide held her remaining interest in the Hotel "on behalf of Stephen", and that Adelaide had no right to challenge any distributions of income or capital from the Trust. She said that she believed that Stephen was able to use the net proceeds of sale of the Hotel as he saw fit because of the family arrangement that had been made in 2003. Further, that she received advice from Mr Morrison that she and Stephen were free to distribute the net proceeds of the sale of the Hotel as they saw fit.
Louise said in cross-examination that she assumed that she would have read the letter written by Mr Wiseman to Stephen and Louise on 30 April 2004, which stated that Stephen's acquisition of the 25% interest in the Goodwill of the Hotel from Adelaide had been completed.
Louise said in her affidavit that she believed at the time the Cabramatta Inn Motel was purchased, that Stephen could use the proceeds of sale of the Hotel as he saw fit.
Having heard Louise in the witness box, I am prepared to accept that she is not commercially sophisticated, and that it is highly likely that she believed what she was told by Stephen and Mr Morrison to be correct.
Apart from it being put to Louise in cross-examination that she had read Mr Wiseman's letter, it did not appear to me that she was challenged concerning the state of her knowledge and belief in the period up to the time when, on 5 August 2010, Stephen's solicitors wrote a letter to her solicitors in the Family Court proceedings, in which the solicitors claimed that Stephen owed a substantial debt to Adelaide. I am satisfied from the cross-examination that, from that time, or the time when she read Stephen's affidavit, Louise must have been aware of the possibility that Stephen was liable for a substantial amount to Adelaide, because Adelaide had been entitled to a share of the proceeds of the sale of the Hotel. Louise's only response was that she did not believe the claim. That may not have been an unreasonable response by Louise, given the self-interest that Stephen had in attempting to minimise the pool of assets available for distribution in the Family Court proceedings. However, whether or not Louise believed Stephen, she was put on notice of Adelaide's claim.
However, the only significant event concerning the use of the proceeds of sale of the Hotel that occurred after Louise was clearly put on notice of Adelaide's claim was the re-purchase of the Hotel. Louise responded with the answer: "Obviously", to the assertion in cross-examination that she knew at the time of repurchase that it was partly funded from the sale of the Hotel. Louise had acknowledged in her affidavit that the repurchase of the Hotel was made from borrowings and the remaining funds from the initial sale of the Hotel.
In considering whether, at the time Louise personally received money that may be traceable to the proceeds of sale of the Hotel, which appears to be only in 2008 and 2009, Louise had knowledge that she received the money as a result of breach of fiduciary duty by Steven; the court must have regard to a number of matters. The first is her state of knowledge at the time of receipt. I accept Louise's evidence that she did not personally have any appreciation of the legal effect of the Deeds and the Management Agreement. The only Deed that she executed was the Divorce Deed, which only contained a recital that Adelaide "has requested that [Stephen] acquire from her one half of her interest in the Partnership, goodwill of the Hotel business and licence (but not the freehold) at a certain price which [Stephen] has agreed to do…" That recital was not sufficient by itself, in my view, to dispel Louise's entitlement to believe what she was told by Stephen and Mr Morrison concerning the effect of the whole suite of the Deeds and the Management Agreement.
The court should also bear in mind that Kim appears to accept that Stephen was entitled to use his share of the proceeds of sale as he wished. Even if that share is assumed to be half of the $28,394,241 debt owed by the Trustee to the Partnership as at 30 June 2008, $14,197,120.50 was available to Stephen. That amount is greater than the sum of the loan made by the Trust for the purchase of the Cabramatta Inn Hotel, and the amounts contributed by the corporate defendants to the re-purchase of the Hotel. It is probably also sufficient to cover the distributions of profit from the Trust made to Louise.
The details of these possible calculations are not significant. The point is that for Kim to establish that Louise personally received money that might be traced to the proceeds of sale of the Hotel with knowledge that she had received the money as a result of breach of fiduciary duty by Stephen, it would be necessary to establish in a precise way her state of knowledge at the time of receipt. Kim did not begin to undertake that exercise, having regard to Louise's apparent role in the affairs of the Trust, and the underlying complexity of the financial transactions.
[47]
Issues arising out of Adelaide's will covenant and will
Clause 3.1 of the Principal Deed recorded that Adelaide had, upon the date of the deed, executed a new will which, in effect, left all of her interest in the Partnership and the Hotel Assets to Stephen. Adelaide covenanted, in cl 3.3, that she would not revoke or change the provisions in her will that had that effect. Under cl 2.2, Adelaide covenanted to execute a codicil, or a new will, forthwith after any sale of the Hotel, leaving her interest in any replacement investment to Stephen.
By the date of her death, the only significant asset remaining in the Partnership was the remainder of the debt owed to it by the Trustee, from the loan that Stephen made of the net proceeds of the sale of the Hotel assets. As cl 2.2 of the Principal Deed only related to Adelaide's interest in the replacement asset, that provision had effect in relation to Adelaide's interest in the debt owed by the Trustee, and cll 3.1 and 3.3 would continue to have effect in relation to Adelaide's interest in the Partnership and the Hotel Companies.
While Adelaide's 2003 Will satisfied all of her will covenants in the Principal Deed, after Stephen did not respond to Adelaide's demand for 'her share', or the taking of accounts, after the sale of the Hotel, Adelaide revoked her 2003 Will and made two new wills, dated 17 March and 11 December 2008, which contained a new cl 3(a), as set out above, but it will be convenient to repeat as follows:
All sums of money owing to me from the sale of the commercial property known as "The Hurstville Ritz Hotel"… and all interest due and to become due in respect thereof and my interest in all securities, if any, for the same to my daughter KIM FRANCES JAEGER and my son STEPHEN JAMES ABOUT as shall survive me for 30 days, and if more than one then equally as tenants in common.
The will for which probate was granted did not contain the terms required by the Principal Deed, in that it did not leave the whole of Adelaide's remaining interest in any replacement investment following the sale of the Hotel to Stephen.
Further, the new wills did not contain the provision in the 2003 Will whereby Adelaide left her interest in the shares in the Hotel Companies to Stephen, so that under the later wills those assets fell into residue
Initially, Stephen sought a declaration that Kim, as Adelaide's executor, held Adelaide's interest in the shares in the Hotel Companies on trust for Stephen, and an order that those shares be transmitted to Stephen.
The declaration sought was in respect of the companies listed in the schedule, which included the four Hotel Companies listed in the definition of that term in cl 8.8 of the Principal Deed (set out above at par 473), and also an additional company called Bowden Property Investments Pty Ltd.
In Stephen's third further amended defence, he pleaded in par 20AA, in effect, that by reason of Adelaide's breach of her will covenants, Kim held Adelaide's shares in the Hotel Companies, Adelaide's interest in the Partnership, "including but not limited to all choses in action derived from her interest in the Partnership, and all receivables, including loans to the Bowden Family Trust and the Bowden Superannuation Investment Trust", and Adelaide's interest in any replacement investment, on trust for Stephen.
Stephen informed the court during final oral submissions that it had been an inadvertent error for a declaration to the effect of par 20AA of the defence to have been omitted from his amended first cross claim, and the case proceeded upon the basis that he had sought that relief in his cross claim.
Initially, as I understand it, four primary issues arose between Kim and Stephen concerning the breach by Adelaide of her will covenants. Two of those issues have fallen away.
[48]
Breach of covenant to leave interest in replacement investment to Stephen
First, Kim has accepted that it will be appropriate for the court to make a declaration that she holds Adelaide's interests in the Hotel Companies, as well as her interest in the Partners' Funds of the Partnership (after all necessary and proper adjustments have been made to Adelaide's Partners' Funds) on trust for Stephen. Kim's position is that she will not contest the proper implementation of Adelaide's will covenants. Her acceptance of that course is conditional, however, on Stephen first complying with his obligations to provide a proper partnership accounting to Adelaide, including the making of all necessary and proper adjustments to Adelaide's Partners' Funds, and also that he account to Adelaide's estate for all profits made in breach of his fiduciary duty to Adelaide, or alternatively that he pay to the estate all equitable compensation for which he may be held liable to Adelaide up until her death, in either case with all appropriate interest to the date of payment.
Consequently, the primary issue relating to the breach by Adelaide of her will covenants is no longer contested.
In my view, Kim's acceptance that she holds these assets on trust for Stephen (which I understand was not in issue during the trial) undermines Louise's argument that Kim has come to court with unclean hands, because of Adelaide's breach of her will covenant.
It is not necessary for me to consider the principles that are applicable to the equitable defence of unclean hands. It is an obvious proposition that Adelaide was obliged, by cl 2.2 of the Principal Deed, to leave her interest in any replacement asset to Stephen, and that the making of her 2008 wills was a breach of that covenant. It seems clear that Adelaide's decision to revoke her 2003 Will, and make the 2008 wills, was a response to Stephen's failure to respond to her demands after the sale of the Hotel. It appears that Adelaide's understanding of her entitlements was misguided. If the defendants' claims in these proceedings succeed, then Kim's case will fail. However, if Kim's case succeeds on any basis, so that Adelaide was entitled to receive money as a result of Stephen's conduct following the sale of the Hotel, then it will follow that Stephen was also in breach of his obligations to Adelaide. In that situation, Stephen (and thus Louise) could not say that Adelaide's breach of the will covenant had the result that she had unclean hands, so that she could not enforce Stephen's obligations to her arising out of the Partnership, and the Deeds and the Management Agreement.
[49]
Shares in Bowden Property Investments Pty Ltd
Secondly, as I understand it, Stephen now accepts (as was indicated in final oral submissions) that Bowden Property Investments Pty Ltd is not a Hotel Company, as it was not included in the relevant definition in the Principal Deed, and as it was in any event incorporated after the date of the Deeds. Stephen has made no claim that the shares in the company were assets of the Partnership. That part of Stephen's claim for relief, in which he seeks a declaration that Kim holds Adelaide's shares in Bowden Property Investments Pty Ltd on trust for Stephen, must therefore be dismissed.
[50]
Entitlement to proceeds of present proceedings
Two issues remain in contention. The first arises out of that part of the wording in par 20AA of Stephen's third further amended defence which, in effect, alleges that, if at Adelaide's death, Adelaide was entitled to a chose in action, being a claim for breach by Stephen of his fiduciary duties as a partner to Adelaide, then the fruits of that claim were an interest that Adelaide had in the Partnership, so that Kim would also hold the benefit of that chose in action on trust for Stephen.
I have dealt with the nature of Adelaide's rights, at the time of her death, to an account of profits, or alternatively equitable compensation, from Stephen as a result of any breach by him of any fiduciary duties that he owed to Adelaide, in the context of my consideration of Stephen's defence that Adelaide's estate cannot be entitled to an account from Stephen, because Kim would hold all fruits of that accounting on trust for Stephen, whatever the fruits might be. See pars 630 - 647 above. (This was a different aspect of the defence pleaded in par 20AA of the defence).
I held that the defence failed, because any sums that Stephen was obliged to pay to Adelaide, whether by way of an account or equitable compensation, were amounts owed to Adelaide in her personal capacity, and could not be, without her authority, part of Adelaide's "interest in the Partnership" within the meaning of that expression in cl 3.1 of the Principal Deed.
Stephen's claim that he is entitled to a declaration that Kim holds those monies on trust for him must also fail, for the same reasons.
[51]
Construction of cl 3(a) of will admitted to probate
The last issue that remains involves the proper construction of cl 3(a) of the will in respect of which probate was granted to Kim. Stephen pleads, in par 20A of his third further amended defence, in effect, that, if he is liable to pay monies to the estate of Adelaide on an account, or as equitable compensation, the effect of cl 3(a) is that Kim will hold those monies as to half for herself, in her personal capacity, and as to the other half for Stephen.
Kim responded to this claim in par 11 of her reply. First, Kim says that this claim does not properly arise on the matters pleaded in the statement of claim, and would arise, if at all, only in a properly constituted will construction suit. I do not propose to enter in detail into this aspect of the dispute. It was raised in fact in these proceedings, and has been the subject of argument. It is in the interest of the parties, and will ultimately avoid multiplicity of proceedings, if I deal with the substance of the issue. That is what I propose to do. Kim then says that the determination of the issue should be deferred until the time any accounts are taken. I cannot see any benefit in that approach.
In substance, Kim's response is that any and all fruits of these proceedings will fall wholly within the residuary estate, because the bequest in cl 3(a) extends only to:
the interest of [Adelaide] at the date of her death in the proceeds of sale of the [Hotel] and all interest due and to become due in respect thereof, and does not extend in any respect to any of the fruits of these present proceedings, being a claim for an account or other relief against the various defendants of, or in respect of, profits properly payable to [Adelaide] during her lifetime.
I take the relevant principle for the proper construction of wills to be as stated by Lord Romer in Perrin v Morgan [1943] AC 399 at 420 as follows:
My Lords, I take it to be a cardinal rule of construction that a will should be so construed as to give effect to the intention of the testator, such intention being gathered from the language of the will read in the light of the circumstances in which the will was made. To understand the language employed the court is entitled, to use a familiar expression, to sit in the testator's armchair. When seated there, however, the court is not entitled to make a fresh will for the testator merely because it strongly suspects that the testator did not mean what he has plainly said…
The so-called armchair principle was expressed by Blackburn J in Allgood v Blake (1873) L R 8 Ex 160 at 162 as follows:
The general rule is that, in construing a will, the court is entitled to put itself in the position of the testator, and to consider all material facts and circumstances known to the testator with reference to which he is to be taken to have used the words in the will, and then to declare what is the intention evidenced by the words used with reference to those facts and circumstances which were, or ought to have been, in the mind of the testator when he used those words… the meaning of words varies according to the circumstances of and concerning which they are used.
The words used by Adelaide in cl 3(a) of her 11 December 2008 will literally refer to her interest in all sums of money owing to her from the proceeds of sale of the Hotel, and all interest due in respect of that entitlement, and any securities for the same.
The effect of the Principal Deed and the Management Agreement was that Adelaide was not entitled to demand payment of any part of the proceeds of sale of the Hotel Assets. That result must be implied from her covenant to leave her remaining share in the Hotel Assets to Stephen in her will. It also follows expressly from the provisions that gave Stephen absolute control of the assets during Adelaide's lifetime.
Read in literal terms, Adelaide would not be entitled to receive any sums of money from the sale of the Hotel.
However, the question becomes: what effect should be given to these words, so that they have some meaning and effect? Do the words have an operative secondary meaning? As is stated in Principles of Australian Succession Law (2 ed), LexisNexis Butterworths, at [8.8]:
This principle is really part of the so-called 'armchair principle'… It will be seen, in discussion of the armchair principle, that a court of construction is entitled to take into account all the circumstances surrounding the making of the will and the circumstances actually known to the testator when the will was made. In the light of those circumstances, it may be clear to a court that a testator used the word in a sense other than the usual sense. If so, the secondary meaning will be given to that word…
The question becomes whether the words "all sums of money owing to me from the sale of the [Hotel]" can only refer to a share in the sale proceeds, or whether their meaning can extend to all monies owing to Adelaide from the use of her share in the sale proceeds. In my opinion, that question should be answered affirmatively.
It is plain that Adelaide believed she was entitled to be paid sums of money from the sale of the Hotel, even though she was not. After Adelaide became aware of the sale of the Hotel, she made a number of requests to Stephen that he pay her share of the proceeds of sale to her, although what she meant by the reference to her share was never made clear.
It is clear that Adelaide believed she was owed "sums of money" and that she wished to leave that interest to Stephen and Kim equally.
Adelaide was an elderly woman, who was unfamiliar with commercial practice, and was probably unaware at the time she executed her will of what Stephen had done with the net proceeds of sale of the Hotel. Even if she became aware that Stephen had caused the Partnership to lend the whole of the net proceeds of sale to the Trustee, which did not occur until 11 May 2009, when Adelaide signed the partnership accounts for the year ended 30 June 2008. Adelaide's two 2008 wills were prepared by her solicitor, but the solicitor could not have known any more than Adelaide did about the disbursement of the proceeds of sale, as Adelaide was only shown the 2008 accounts for the Partnership on 11 May 2009.
Thus, all Adelaide had to go on, so to speak, was that she knew that the Hotel had been sold; she believed that she was entitled to share in the proceeds of sale; but she was misguided as to the true nature of the rights.
In this context the words "All sums of money owing to me" should be construed as being intended to encompass all sums of money to which she was entitled, as a result of the proceeds becoming available from the sale of the Hotel, whatever the basis of that entitlement might be. This construction has the effect that the words "owing to me from the sale" are not restricted to a share of the proceeds of sale. To give the words that narrow meaning would be to give them no effect at all, because Adelaide did not have a right to a share in the proceeds of sale. Giving the words "owing to me from the sale" the wider meaning of all of the money owing to me from the way the proceeds of sale were used, gives those words effect, and in my view accords with the intention that I believe Adelaide had when she made her will.
[52]
Simple or compound interest
As Kim makes clear in par 12 of the Overview in her final written submissions, she seeks an account of the profits actually made by the defendants, or equitable compensation for profits that ought to have been made by the Partnership. Kim has not yet made an election between these two remedies. She says that, if the court accedes to her application that accounts be taken, three steps will be involved. The first is the reconstruction of the accounts of the Partnership relating to Partners' Funds, so that they accurately reflect the position of each of the partners. The second step is to identify either the profits in fact generated by the recipients of the Partnership assets, or the profits that ought to have been realised by the Partnership. The third and final step is for interest to be calculated.
Kim asks the court - I understand with the acquiescence of the defendants - to determine now whether interest should be assessed on a simple basis, or on the basis of court rates, compounded with yearly rests, notwithstanding that the court will not have carried out steps one and two.
Kim submits that interest should be calculated on a compound basis, and the defendants submit that only simple interest should be awarded.
I do not feel able at this stage of the proceedings to make a definitive ruling as to the basis upon which interest should be applied, in respect of any breaches that are established against the defendants.
Kim has cited a number of authorities to the court, including the relatively recent judgments of Pembroke J in Thomas v SMP (International) Pty Ltd (No 6) [2010] NSWSC 1311, and of Slattery J in Linjing Fang v Xiaodan Sun (No 2) [2014] NSWSC 1194. Both of their Honours cite the following statement of principle by Boehm AM in Southern Cross Commodities Pty Ltd (I liq) v Ewing (1987) 11 ACLR 818 at [843]:
… A trustee may, and normally will, be charged with compound interest with yearly rests not only where he has used the money for his own commercial purposes but also where he has been guilty of fraud or serious misconduct.
Kim submitted that the court has a discretion as to whether or not to order that interest be calculated on a compound basis. In Thomas, Pembroke J expressed a preference for the view that, in modern times, the court should always order that interest be calculated on a compound basis, but it was not necessary for him to decide that question. Kim did not submit that compound interest should necessarily be awarded, and this is not an appropriate occasion for me to consider that issue.
Southern Cross Commodities suggests that it will be appropriate for the court to award interest on a compound basis in two circumstances, only one of which involves fraud or serious misconduct by the defendant. That is where there is such fraud or serious misconduct, that the court should order that compound interest be paid. However, even where there is no fraud or misconduct, if the defendant has used the money for his or her own commercial purposes, then it may be appropriate to order compound interest.
In his final written submissions, Stephen submits, in reliance on the judgment of Heydon JA (as he is Honour then was) in Harris v Digital Pulse Pty Ltd [2003] NSWCA 10; (2003) 56 NSWLR 298 at [299], that Stephen should not be ordered to pay interest on a compound basis, because he had not acted fraudulently, and Equity will not impose a penalty on a defaulting fiduciary, who has not acted fraudulently. In my view, this submission misstates the effect of his Honour's judgment. It is true that Heydon JA, with the concurrence of Spigelman CJ on this issue, held that Equity would not act to punish a defaulting fiduciary, but that was in the context of a ruling that Equity would not order that a defaulting fiduciary pay compensation on a basis equivalent to the imposition of exemplary damages at common law. His Honour specifically distinguished the situation where Equity might order a defaulting fiduciary to pay interest on the amount of equitable compensation payable, calculated on a compound basis. Heydon JA made the following observations on the subject of when Equity will order a defaulting fiduciary to pay a high rate of interest:
[303] The award of the higher rate of interest in cases of gross misapplication of trust funds thus rests not on ideas of punishment or penalty, but on two other bases. The first was articulated by the Full Federal Court (Burchett, Gummow and O'Loughlin JJ) in Bailey v Namol Pty Ltd (1994) 53 FCR 102 at 112: the award of the higher rate of interest in cases of gross misapplication of trust funds rests "on the footing not that a penalty is imposed but that the defendant is estopped from denying that he received interest at such a rate which he ought to have received". The second is that the award ensures that the fiduciary retains no profit. Thus in Southern Cross Commodities Pty Ltd (in liq) v Ewing (1987) 11 ACLR 818 at 848, Acting Master Boehm, sitting in the Supreme Court of South Australia, in awarding compound interest at the higher rate, said: "It is not a punishment. It is not compensation. It is equity's way of ensuring, as far as possible, that no profit should remain in the hands of the trustee from so gross a breach of trust." An appeal was dismissed by the South Australian Full Court: Southern Cross Commodities Pty Ltd (in liq) v Ewing (1988) 91 FLR 271. That approach was approved by Kearney J in Hagen v Waterhouse (1991) 34 NSWLR 308 at 393, a case which was itself approved by this Court (Gleeson CJ, Handley and Sheller JJA) in Alemite Lubrequip Pty Ltd v Adams (1996) 41 NSWLR 45 at 47. In Wallersteiner v Moir (No 2) [1975] QB 373 at 388 Lord Denning MR combined the two bases when he said, after citing Jones v Foxall, Attorney-General v Alford, Burdick v Garrick and Vyse v Foster:
Those judgments show that in equity, interest is never awarded by way of punishment. Equity awards it whenever money is misused by an executor or a trustee or anyone else in a fiduciary position - who has misapplied the money and made use of it himself for his own benefit. The Court:
presumes that the party against whom relief is sought has made that amount of profit which persons ordinarily do make in trade, and in these cases the court directs rests to be made,' ie, compound interest: see Burdick v Garrick, 5 Ch App 233, 242, per Lord Hatherley LC.
The reason is because a person in a fiduciary position is not allowed to make a profit out of his trust: and, if he does, he is liable to account for that profit or interest in lieu thereof.
In addition, in equity interest is awarded whenever a wrongdoer deprives a company of money which it needs for use in its business. It is plain that the company should be compensated for the loss thereby occasioned to it. Mere replacement of the money - years later - is by no means adequate compensation, especially in days of inflation. The company should be compensated by the award of interest. That was done by Sir William Page Wood V-C (afterwards Lord Hatherley) in one of the leading cases on the subject, Atwool v Merryweather (1867) LR 5 Eq 464n, 468-469. But the question arises: should it be simple interest or compound interest? On general principles I think it should be presumed that the company (had it not been deprived of the money) would have made the most beneficial use open to it: cf Armory v Delamirie (1723) 1 Stra 505. It may be that the company would have used it in its own trading operations; or that it would have used it to help its subsidiaries. Alternatively, it should be presumed that the wrongdoer made the most beneficial use of it. But, whichever it is, in order to give adequate compensation, the money should be replaced at interest with yearly rests, ie compound interest.
At 397 Buckley LJ followed the line of cases under discussion and said:
The justification for charging compound interest normally lies in the fact that profits earned in trade would be likely to be used as working capital for earning further profits. Precisely similar equitable principles apply to an agent who has retained moneys of his principal in his hands and used them for his own purposes...
At 398 Buckley LJ said:
In cases of this kind interest is not... given to compensate for loss of profit but in order to ensure as far as possible that the defendant retains no profit for which he ought to account.
At 406 Scarman LJ said, after referring to Burdick v Garrick:
Dr Wallersteiner was at all material times engaged in the business of finance. Through a complex structure of companies he conducted financial operations with a view to profit. The quarter million pounds assistance which he obtained from the two companies in order to finance the acquisition of the shares meant that he was in a position to employ the money or its capital equivalent in those operations. Though the truth is unlikely ever to be fully known, shrouded as it is by the elaborate corporate structure within which Dr Wallersteiner chose to operate, one may safely presume that the use of the money (or the capital it enabled him to acquire) was worth to him the equivalent of compound interest at commercial rates with yearly rests, if not more. I, therefore, agree that he should be ordered to pay compound interest at the rates, and with the rests, proposed by Lord Denning MR and Buckley LJ.
The citation by Lord Denning MR of Jones v Foxall followed by his statement that it was among the judgments which show that in equity "interest is never awarded by way of punishment" negates the reliance by the plaintiff on that case.
[304] All these cases were approved and applied by this Court (Meagher, Sheller and Beazley JJA) in Cureton v Blackshaw Services Pty Ltd [2002] NSWCA 187. In particular, the Court said that compound interest awarded against fiduciaries "is not awarded as a punishment": at [104].
[305] Accordingly the contentions of the plaintiff to the effect that the award of compound interest against fiduciaries reflects a punitive approach which is consistent with the availability of exemplary damages must be rejected. Those contentions rest on a highly selective citation of authority, and cannot survive a reading of all the leading cases.
Thus, Equity may order a defaulting fiduciary to pay interest on compensation calculated on a compound basis, but that is not done in order to punish the fiduciary. It is done because of the way the fiduciary has used the money or other assets obtained in breach of duty to earn, or attempt to earn, a profit for himself or herself. The fiduciary may be estopped from denying that he or she has made a profit, or may have made a profit in a compounding manner.
The problem in the present case is that the basis upon which particular defendants may be liable to account to Adelaide, or the nature and amount of any equitable compensation that should be paid to her, have not yet been decided.
Kim's case is put on the basis that Stephen, and the other defendants, may be liable to account to Adelaide following a reconstruction of the Partnership's accounts. She also says that part of the proceeds of sale of the Hotel may have been applied, through the loan made by the Partnership to the Trustee, in making payments to, or for the benefit of the defendants, and for the repurchase of the Hotel and the acquisition of the Cabramatta Inn Hotel.
The court is in a position to take a view about the culpability of the conduct of the defendants in relation to errors in the Partnership's accounts, but even if that leads to the conclusion that, in respect of any breaches in that regard, only simple interest was warranted, that still leaves open the possibility that compound interest should be charged on any misuse of the assets of the Partnership, that involved the defendants using those assets for their own commercial purposes.
I have explained above that, on the basis of the present evidence, and the submissions made on behalf of the parties, I have not adequately been able to track the disbursement of the monies loaned by the Partnership to the Trustee. Accordingly, at this stage, I am not in a position to make sufficiently precise findings concerning the application of that part of the Partnership's assets, which defendants benefited from the receipt or use of those funds, or the culpability of the relevant defendants. Nonetheless, if it be found that some of the defendants have wrongfully used or participated in the use of the Partnership's funds for their own benefits, the imposition of compound interest may be appropriate.
I am in a position, however, to make a number of findings that go some way to determining whether it may only be appropriate to award simple interest on some aspects of Kim's claim.
I am satisfied that all of the defendants have acted honestly. They have not acted fraudulently, and I would not characterise their conduct as involving serious misconduct.
The defendants genuinely relied upon the advice given by Mr Morrison. I have explained above that Mr Morrison formed an absolute view that the effect of the 1 July 2003 meeting, the July Minutes, and any subsequent agreements, was that from the date of completion Adelaide only held her remaining interest as to the legal title, and that Stephen was entitled to full beneficial ownership of the Partnership's assets, and the assets deployed by the Partnership. Mr Morrison acted on that basis; he so advised Stephen and Louise; and he prepared the annual accounts, and the tax returns of all interested parties, on that basis. I am satisfied that Mr Morrison honestly held the view that he formed.
I am satisfied that Stephen and Louise, and through them the corporate defendants, genuinely believed that the effect of whatever agreements took effect was that Stephen became beneficially entitled to the whole of Adelaide's interest in the Partnership and the related assets.
Although I have found that that belief was unsound, I am satisfied that the argument to the contrary was genuinely put, and at least reasonably arguable. It required a close analysis of the relevant documents to be satisfied that Adelaide did retain beneficial ownership of the portion of the Partnership and the related assets that she retained.
I appreciate that this finding gives little effect to the evidence given by Stephen, at the behest of Mr Morrison, in the Family Court proceedings between himself and Louise. The evidence given by Stephen in those proceedings was to his great discredit, and I regret to have to say that he was so obviously lying when he gave that evidence that I have been able with some confidence - albeit that the result is hardly satisfactory - to satisfy myself that, in the period before the Family Court proceedings, when Stephen and Mr Morrison were dealing with the proceeds of sale of the Hotel, they genuinely believed that they were entitled to do so as if Stephen was the sole beneficial owner.
Furthermore, insofar as Adelaide's case may be based on mistakes made in the preparation of the accounts of the Partnership; including the misallocation of revaluations and capital gains as between Adelaide and Stephen; and the mischarging of expenses against Adelaide's Partners' Funds, when those expenses ought to have been charged against Stephen; I am not satisfied that Stephen or any other defendant consciously appreciated the fact of the mistakes, or that it was necessary to revise the annual accounts.
I am also able to say that I am satisfied that it would be appropriate in this case to select as the applicable interest rate the rate established by s 100 of the Civil Procedure Act 2005 (NSW), as the appropriate rate to apply. The only open issue is whether that interest rate should be calculated on a simple or compound basis.
[53]
Conclusion
It will be necessary for the parties to review these reasons for judgment and decide how they wish the court to proceed. For that purpose the parties should confer, and it will be necessary for the court to fix a time for a hearing in which the question of the most appropriate way to proceed to complete this case may be determined.
The parties should consider the significance of the observations that I have made above concerning the separate questions and the parties' decision not to go into evidence on the issues raised by the expert accountants' reports on the one hand, and the need for submissions concerning the proper construction of the Deeds and the Management Agreement - particularly with regard to the effect of the mutatis mutandis provision in cl 2.1 of the Principal Deed - on the other.
Insofar as Kim seeks an order for an account by Stephen as an accounting party in the Partnership, Kim has established a right to that order, but at this stage only in a limited way. Mr Morrison made errors in the preparation of the annual financial statements of the Partnership that require correction. Even though the principal changes that are required to the Partners' Funds accounts will change Adelaide's entitlement to capital, and even though the effect of the Deeds and the Management Agreement was to prevent Adelaide from withdrawing her capital from the Partnership, the evidence strongly suggests that Stephen made some unauthorised withdrawals from Adelaide's Partners' Funds, in the mistaken belief that he was drawing down from his own Partners' Funds. However, the failure of the parties to conduct the proceedings in a way that would permit findings on the issue of whether Stephen breached his fiduciary duties to Adelaide, and if he did, the nature and consequences of those breaches, has a significant bearing on the utility of the accounting exercise that could be carried out at this stage. There remains a question as to whether the accounting should be on the basis of a common account or wilful default. It is an open question whether the implementation of a formal accounting process is the most efficient way to resolve the dispute, rather than for the court to determine in the conventional way the outstanding issues concerning the claim that Stephen breached his fiduciary duties to Adelaide, the nature and consequences of those breaches if they occurred, and the corrections that should be made to the annual financial statements based upon the evidence of the accounting experts.
I will be open to the suggestion that there may be issues that the parties consider have been raised for decision at this stage of the proceedings, which have not been dealt with in these reasons for judgment, and which remain outstanding.
The parties should also consider the short minutes of order that is appropriate for the court to make in relation to the issues that have been resolved by this judgment, and to bring in those short minutes of order.
[54]
DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.
Decision last updated: 22 July 2016
INTEREST - where equitable relief in the form of equitable compensation may be given for breach of fiduciary duty - rate of interest and whether simple or compound interest - principles for awarding simple or compound interest considered - final determination of proper basis for payment of interest not made - insufficient evidence of consequences of breach of fiduciary duty
Legislation Cited: Civil Procedure Act 2005 (NSW)
Conveyancing Act 1919 (NSW)
Duties Act 1997 (NSW)
Family Law Act 1975 (Cth)
Limitation Act 1969 (NSW)
Partnership Act 1892 (NSW)
Trustees Act 1962 (WA)
Uniform Civil Procedure Rules 2005 (NSW)
Cases Cited: Allgood v Blake (1873) L R 8 Ex 160
Barnes v Addy (1873) 28 LT (NS) 398
Baulkham Hills Private Hospital Pty Limited v GR Securities Pty Limited (1986) 40 NSWLR 622
Birmingham v Renfrew (1936) 57 CLR 666
Delnorth Pty Ltd v State Bank of New South Wales (1995) 17 ACSR 379
Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2007) 230 CLR 89
Hancock v Rinehart [2015] NSWSC 246
Harris v Digital Pulse Pty Ltd [2003] NSWCA 10; (2003) 56 NSWLR 298
Hasler v Singtel Optus Pty Ltd; Singtel Optus Pty Ltd v Almad Pty Ltd [2014] NSWCA 266; (2014) 87 NSWLR 609
Hospital Pty Ltd (1986) 40 NSWLR 631
Hoyt's Pty Ltd v Spencer (1919) 27 CLR 133
Jane v Bob Jane Corporation Pty Ltd [2013] VSC 406
Johnson Matthey Ltd v A C Rochester Overseas Corporation (1990) 23 NSWLR 190
Linjing Fang v Xiaodan Sun (No 2) [2014] NSWSC 1194
Masters v Cameron (1954) 91 CLR 353
Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37; (2015) 325 ALR 188
Newey v Westpac Banking Corporation [2014] NSWCA 319
Perpetual Trustee Co Ltd v Cheyne [2011] WASC 225
Perrin v Morgan [1943] AC 399
Re Wragg [1919] 2 Ch 58
Ryledar Pty Ltd v Euphoric Pty Ltd [2007] NSWCA 65; (2007) 69 NSWLR 603
Secured Income Real Estate (Aust) Pty Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596
Simmons v New South Wales Trustee and Guardian [2014] NSWCA 405
Southern Cross Commodities Pty Ltd (I liq) v Ewing (1987) 11 ACLR 818
State Rail Authority of New South Wales v Heath Outdoor Pty Ltd (1986) 7 NSWLR 170
Thomas v SMP (International) Pty Ltd (No 6) [2010] NSWSC 1311
Whittet v State Bank of New South Wales (1991) 24 NSWLR 146
Texts Cited: Butterworth's Australian Legal Dictionary
Jacobs' Law of Trusts in Australia (7 ed)
Lindley & Banks on Partnership (19 ed)
Macquarie Dictionary
Meagher, Gummow and Lehane's Equity Doctrines & Remedies (5 ed)
Category: Principal judgment
Parties: Kim Jaeger in her capacity as executor of the estate of the late Adelaide Emily Bowden (plaintiff)
Stephen Bowden (first defendant)
Jane Bowden (second defendant)
Butlers Bridge Pty Ltd (third defendant)
Kettleswell Pty Ltd (fourth defendant)
Bowden Hotel Investments Pty Ltd (fifth defendant)
Bowden Property Investments Pty Ltd (sixth defendant)
Ritz Restaurants (Hurstville) Pty Ltd (seventh defendant)
Hurstville Property Investments Pty Ltd (eighth defendant)
Bowden Company Pty Ltd (ninth defendant)
Samook Pty Ltd (tenth defendant)
Representation: Counsel: Mr R Newlinds SC (plaintiff)
Mr N J Beaumont SC (plaintiff)
Mr C E Bannan (plaintiff)
Mr M Willmott SC (first and third to tenth defendant)
Mr S Philips (first and third to tenth defendant)
Mr S Wheelhouse SC (second defendant)
Mr M Auld (second defendant)
This part of the July Minutes records an additional consideration to be paid by Stephen to Adelaide, comprising the payment of the balance of the mortgage on her Gold Coast apartment, and the transfer of Stephen's half interest to Adelaide (which he held on trust for her), plus the obligation on Stephen to continue to support the ongoing lifestyle costs of Adelaide. These are the only positive references in the July Minutes to Adelaide being entitled to receive any additional payment or income above the $3 million sale price payable by Stephen. There is a complete absence of any other reference to Adelaide being entitled to a continuing share of the income from the operation of the Hotel business.
As the status quo involved the Partnership not earning income, but the income of the Hotel business being earned in the Trust, Adelaide's agreement that she would no longer have any interest in the Trust would have the practical effect that she would not receive any continuing income from the operation of the Hotel business, except as otherwise provided by the July Minutes.
Finally, in relation to this part of the July Minutes, Adelaide's agreement that she would 'will' her remaining interest in the Hotel Assets to Stephen, involves the necessary implication that Adelaide would not be entitled to receive, or dispose of, that interest during her lifetime.
The plan provided further for control by Stephen pending Adelaide's death in the following terms:
AB agrees to appoint SB as managing partner of Hotel partnership (i.e. authorised to control freehold land & buildings, hotel assets, goodwill including any variations to the existing partnership lease to the Bowden Family Trust). Notwithstanding this, AB agrees to allow SB or his nominee an option to buy from AB (prior to the execution of her will) the remaining 50% interest in the Hotel property and the remaining 25% hotel goodwill at $20.0m plus CPI @ 50% less net asset and liability values at this time. (Emphasis added)
The effect of the agreement that Stephen would have control of any variations to the existing partnership lease would be that Stephen could continue to ensure that the profits of the Hotel business were earned in the Trust and not the Partnership. That power would augment the practical effect of Adelaide having agreed that she would have no continuing interest in distributions from the Trust.
The meaning of the last sentence of this paragraph is unclear. As it was expected that the will would be executed quickly as part of the implementation of the transaction, the option referred to could probably only be exercised before the more general transaction contemplated by the July Minutes was implemented. In the event the option was not exercised, so that the provision appears to be immaterial.
Then:
If in the event that Hotel freehold interest or leasehold interest (OR both) is sold, AB agrees to consent for SB to sell (i.e. AB consent cannot be withheld). Also AB consents to SB discretion in managing the sale funds, investment strategies, and or future replacement assets. If in the event there was a future sale, and prior to AB event, it would be acknowledged that SB would own 75% of the sale proceeds and AB 25% (Emphasis added).
This paragraph contemplates that in the event of the sale of the Hotel, Stephen would have the sole discretion in managing the sale funds, investment strategies, and future replacement assets. Management gives control, but is not tantamount to ownership. There is a specific acknowledgement that Adelaide would own 25% of the replacement assets until her death. (It should be noted that the split of 75% to 25% may be arithmetically incorrect. As the July Minutes contemplated that Adelaide would only sell 25% of the Goodwill, and Adelaide would retain 25% of the Goodwill and 50% of the Freehold, the percentage split may have depended upon the price for which the Freehold and the Goodwill were respectively sold).
Given that the present dispute has arisen following the sale by Stephen of the Hotel Assets, this aspect of the July Minutes is of special significance. Stephen was given discretion in the management of future replacement assets. However, there is express provision for Adelaide to continue to own the same proportion of the replacement assets that represented the proportion of the interest that she had retained in the Hotel Assets.
Importantly, the July Minutes do not contain an elaboration of Stephen's powers in relation to the replacement assets, save to say that he was to have the discretion in the management of those assets.
The July Minutes then deal with the terms of Adelaide's will, and certain family matters:
The above clauses would need to be included in a partnership agreement between AB and SB, as well as SB agreement to indemnity AB of all debts of the Hotel group.
WILLS AND AGREEMENTS
AB agrees in her 'Hotel property Will' to leave SB her entire 50% freehold land and building interest (including all hotel assets) and her remaining 25% goodwill interest to SB in the event of her death. AB agrees in a separate document not to change the 'Hotel Will'.
AB is free to leave the rest of her estate (namely 100% of the Gold Coast property, $1.0m cash asset, superannuation entitlement, and all future assets) to whomever she thinks fit and is free to change its contents at anytime.
AB, SB, Peter and Kim agree to not to challenge respective AB or SB 'Hotel interest Will' as set out above.
AB, SB and Kim agree to arrange their partners to agree not to challenge their respective 'Hotel interest Will' of AB and SB in the event of death.
The above represents minutes discussed concerning the Bowden Estate Plan at a group meeting at the Hurstville Ritz Hotel on 1 July 2003, at 3pm, attended by Stephen Bowden, Adelaide Bowden, Peter Jaeger, Kim Jaeger and chaired by John Morrison. We understand this does not represent a legally binding document but represents a confirmation of matters discussed and agreed. Legal documents will [be] prepared on the basis of the above to be formally reviewed by legal representatives of all related parties.
The reference to the need to terms being included in a partnership agreement implies the continuation of the Partnership, which would not have been necessary if Stephen immediately became the beneficial owner of all of the assets of the Partnership.
The July Minutes were signed by all of the five persons who were present at the meeting.
On a close analysis of the July Minutes, the wording of the document does not support the conclusion that there was an intention that Stephen would become the beneficial owner of Adelaide's interest in the Hotel that was to be bequeathed to him in her will, immediately upon the implementation of the proposed transaction.
Also, the July Minutes do not record an agreement by Adelaide that she would positively relinquish her entitlement to the fruits of her continuing beneficial ownership of her remaining share in the Hotel Assets, or any replacement assets. The effect of the July Minutes is more subtle, in that they contain agreements that will, at least during the continuation of the status quo, have the practical effect that Adelaide would not receive any ongoing income other than that which was expressly provided for in the July Minutes, primarily Stephen's obligation to ensure that her lifestyle costs were paid.
Given the significance that the defendants have attributed to the July Minutes, it will be appropriate for me to set out in summary my conclusions concerning their effect:
1. The family wanted to make an agreement that would achieve finality in relation to the ownership of the Hotel Assets. That required that a result be achieved whereby Stephen would be assured of ownership of the Hotel Assets, without having to share ownership with Kim. That in turn would require finding a way for Kim to receive her half share in Adelaide's estate without becoming entitled to part ownership of the Hotel Assets.
2. Adelaide's share in the Hotel Assets was worth $6 million, as the net value of the Hotel Assets was $12 million.
3. As it happened, 50% of Adelaide's half of the Goodwill of the Hotel could be sold without incurring capital gains tax.
4. Stephen was not in the financial position to raise the funds to acquire all of Adelaide's half interest in the Hotel Assets.
5. Adelaide was not prepared to sell the part of her interest whose sale would make her liable to pay capital gains tax, and Stephen neither wished to, nor could afford to, raise the additional funds to pay the capital gains tax immediately, together with any additional stamp duty.
6. The family accepted advice that their objectives could be achieved in a staged way, which would minimise capital gains tax and stamp duty.
7. Adelaide would immediately sell 50% of her half interest in the Goodwill for $3 million to Stephen, who would pay the stamp duty on the purchase, without Adelaide becoming liable to pay any capital gains tax.
8. Adelaide would immediately give Kim $2 million, and would give Kim the balance of her share in Adelaide's estate in Adelaide's will.
9. Adelaide would covenant to give Stephen the balance of Adelaide's interest in the Hotel Assets (valued at $3 million, consisting of 25% of the Goodwill and 50% of the Freehold) by her will.
10. Consequently, Stephen would not ever have to raise the $3 million to buy half of Adelaide's share in the Hotel Assets. No obligation to pay capital gains tax would be incurred immediately, and, as Stephen would receive the balance of Adelaide's interest in the Hotel Assets by devise, an obligation to pay capital gains tax would not arise on Adelaide's death. Nor would an obligation to pay stamp duty arise.
11. The family intended that the transactions to achieve their objectives would be genuine, in the sense that their actual legal effect would be such as was necessary lawfully to avoid incurring the unnecessary capital gains tax and stamp duty.
12. Adelaide did not, in any express or binding way, renounce her entitlement to receive any income as a continuing partner with Stephen, or as a beneficial owner of her remaining interest in the Hotel Assets, as that may have been self-defeating, in that the revenue authorities may have been entitled to treat the transactions as having the effect of an immediate assignment of the whole of Adelaide's interest in the Hospital Assets to Stephen.
13. The family agreed to take advantage of the subsisting practical arrangements, whereby the Hotel Assets were leased by the Partnership to the Trust, at a non-commercial rent, under a short-term lease, so that the profits from the Hotel business were earned in the Trust.
14. Stephen was given unilateral control over the Hotel Assets, including an entitlement to continue the existing lease. Adelaide did expressly relinquish her entitlement to distributions of income and capital from the Trust. That could be done without jeopardising the objective of avoiding capital gains tax and unnecessary stamp duty, which would have been risked if Adelaide had expressly relinquished her right to receive income from the exploitation of the Hotel Assets. The arrangement would have the practical effect that Adelaide would not receive income, save as may have otherwise expressly been agreed.
15. Stephen agreed to pay out Adelaide's mortgage on her apartment, and to pay her lifestyle costs for the rest of her life. The inherent uncertainty in the concept of lifestyle costs was a risk Adelaide was apparently prepared to take, because of her faith in her son, Stephen.
16. The Partnership, and Adelaide's beneficial interest in her remaining share of the Hotel Assets, or any replacement assets, would continue until her death.
17. The effect of Adelaide's covenants concerning leaving her remaining interest to Stephen by her will was that Adelaide ceased to be entitled to be paid any part of the Hotel Assets, or any replacement assets, or to dispose of those assets.
18. In realistic terms, Stephen's continuing ability to pay to Adelaide, her lifestyle costs was secured by the continued ownership of the Hotel Assets, or any replacement assets, as Stephen's ability to make those payments may have been lost if the assets were dissipated.
19. Stephen was to have effective control over the Hotel Assets until Adelaide's death, including an entitlement to sell those assets, and to acquire replacement assets. There was an express agreement that Adelaide would remain the owner of her share in the replacement assets.
20. There was no agreement that Stephen could at any time unilaterally dispose of any of the assets, or to use them for his own benefit, other than that which arose out of Stephen's entitlement to continue the lease from the Partnership to the Trust, and Adelaide's relinquishment of any entitlement to share in distributions from the Trust.
21. The July Minutes do not address in any detail how Stephen may have been entitled to establish an equivalent arrangement, whereby income would only be earned by the Trust, in relation to the exploitation of any replacement assets.