JS v Protective Commissioner & Anor Re Protected Estate of JS

Supreme Court of NSW|2003-06-25|Before: Windeyer J

CITATION : JS v Protective Commissioner & Anor Re Protected Estate of JS [2003] NSWSC 621 revised - 15/07/2003 HEARING DATE(S) : 24 and 25 June 2003 JUDGMENT DATE : 14 July 2003

JURISDICTION: Equity Division Protective List JUDGMENT OF : Windeyer J at 1 DECISION : Amended notice of motion dismissed.

CATCHWORDS : MENTAL HEALTH - protected estates - managers - claim for transfer of management of estate from Protective Commissioner to trustee company - matters for consideration - loss of confidence in Protective Commissioner - no facts given as to reasons for loss of confidence - no breach of duty - competing claims of Protective Commissioner and trustee company - consideration of the level of fees charged against estate Compensation to Relatives Act 1897 Guardianship Act 1987 Hansard LC 6 April 2000, p4254 LEGISLATION CITED : Hansard LC 12 April 2000, p 4523 Protected Estates Act 1983 s4, s5, s8, s13, s27, s52, s53, s54, s55 Protected Estates Amendment (Investment) Act 2000 Protected Estates Regulation 1995, Clause 4 Trustee Companies Act 1964 CASES CITED : Mv Protective Commissioner [2002] NSWSC 421 MB v Protective Commissioner (2000) 50 NSWLR 24 at 32 JS (Applicant) PARTIES : Protective Commissioner (First Respondent) ES (Second Respondent) FILE NUMBER(S) : SC 70 of 1997 Miss Jane Needham (Applicant) COUNSEL : Mr S Balafoutis (First Respondent) Mr D Officer QC, with him Mr R Scruby (Second Respondent) Stacks the Law Firm (Applicant) SOLICITORS : Mr T Tunbridge (First Respondent) G H Healey & Co with Graeme R Jenson & Co (Second Respondent)

15 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION PROTECTIVE LIST

P70 OF 1997 JUDGMENT 1 This is an application by "JS", the maternal grandmother of a young boy whose estate is under management of the Protective Commissioner. I will call that young boy "J". JS seeks an order that the Protective Commissioner be removed as manager of the estate of J and that Perpetual Trustee Company Limited (Perpetual) be appointed in his place. 2 J was born on 17 August 1993. He suffered calamitous injuries in a motor vehicle accident on 27 November 1993. His mother and father were both killed in that accident. J suffered severe brain damage. His brothers escaped more or less uninjured. J has been in the care of JS since he was released from hospital. He requires constant care. His brothers are cared for by their paternal grandparents, who also take some part in the care of J. His paternal grandfather whom I will call "ES" brought the original proceedings for an order under s13 of the Protected Estates Act 1983 (the Act) that the estate of J be subject to management and that management be committed to the Protective Commissioner. An order to that effect was made on 12 September 1997. There have been unfortunate disputes between the grandparents but it is not necessary to go into these here. The maternal and paternal grandparents of J appear to have considerable animosity towards each other. 3 The present proceedings are irregularly constituted because ES was the original plaintiff at the time the management order was made in 1997. There was an application some years back by JS to remove the Protective Commissioner and for herself to be appointed as manager. That application failed. The present application is made in the original proceedings yet names JS as plaintiff and the Protective Commissioner and ES as defendants. While I ordered that ES be joined as a defendant I did not consider it necessary to require new proceedings to be commenced. I have come to the conclusion however that in future such a procedure should not be allowed. The application is for substantive relief. It is not appropriate that such an application be made on notice of motion. Separate proceedings are required. 4 At the commencement of the hearing, Mr Officer QC, senior counsel for ES, sought a short adjournment for discussion. When the hearing recommenced he announced that ES, who had originally opposed the order sought for transfer of management to Perpetual, had changed his stance and no longer sought to be separately heard, as the concerns which he had expressed in his affidavit evidence had been allayed through discussions with Perpetual and it seems the Protective Commissioner's representatives. On that basis counsel for ES then withdrew, although ES did give some short evidence when called by counsel for the Protective Commissioner. 5 The following statement was then made by Miss Needham, counsel for JS: My friends and I, in the light of the evidence and in the interests of conserving the time available and with the hope that we would be able to finish the evidence in this matter today, have agreed on two issues which relate to the conduct of the proceedings. The first is that the Protective Commissioner acknowledges that JS has lost total trust and faith in the Commissioner. The parties are happy to agree to that. And on JS side it is not intended to make or to pursue any of the criticisms set out in her affidavit against the Protective Commissioner in support of this notice of motion. 6 In further discussion it was made clear that the grounds put forward on behalf of JS for a change of management were that she had lost total trust and faith in the Protective Commissioner and that the Protective Commissioner accepted that to be so; that Perpetual would be a better or at least equivalent manager so far as investment returns on the estate of J were concerned; and that the fees which would be charged by Perpetual were less than those which would be charged by the Protective Commissioner. Counsel for the Protective Commissioner also stated that he would raise as a question relevant to the application a contention that the Protective Commissioner was better able to deal with disputes which were likely to continue to arise between the two sets of grandparents. As a result of the admitted fact as to loss of confidence, a great deal of evidence which went to this question was not read. The court is not required nor able to come to any decision as to whether or not the lack of confidence and trust is justified. 7 When the original management order was made, J was just over three years of age. He is now close to ten years of age. His estate was not large in 1997. Some funds were paid from time to time by the third party insurer and some funds were received as a result of an action brought on his behalf and on behalf of others under the Compensation to Relatives Act 1897. That action was brought by ES as executor of the will of his deceased son. The position changed dramatically recently when a claim by J for damages for his injuries and losses as a result of the accident was settled by the insurer for a sum of $15 million plus costs of $1 million. After payment of out of pocket expenses and some other claims a sum of just over $12.6 million has been paid to the Protective Commissioner. This has not been invested other than in the Australian Cash Fund pending the determination of these proceedings. The Protective Commissioner has agreed that if a change of manager is ordered then he will not charge corpus commission on the verdict moneys received. 8 Under s27 of the Act money received by the Protective Commissioner is to be paid into the Special Deposits Account in the Treasury to the credit of a trust fund and the Commissioner is required to keep a separate current account in respect of each estate of payments in and out of the trust fund. 9 As is usual in these matters financial plans have been prepared for J by Perpetual and by the Protective Commissioner. The investment powers of the Commissioner were widened as a result of the coming into operation on 9 November 2001 of the Protected Estates Amendment (Investment) Act 2000. The Commissioner has established eight funds for various classes of investment. Four of these namely Access Investment, Australian Cash, Australian Cash Plus and Australian Fixed Interest are managed in house by the Protective Commissioner. The remaining four, namely International Bond Fund, Australian Listed Property Securities, Australian Shares and International Shares are managed by State Street Global Advisers under a memorandum of understanding between the Protective Commissioner and New South Wales Treasury Corporation. The Protective Commissioner is planning to "outsource" management of the four funds presently under his direct control. 10 Section 52 provides that balances to the credit of all current accounts in the trust fund are, for the purposes of investment, one common fund. Section 53, 54 and 55 of the Act are as follows: 53. Investment of trust fund Money in the trust fund may be invested: (a) in accordance with the Trustee Act 1925 , in any investment, or (b) to the extent of not more than $1,000,000 at any one time, on deposit with the Treasurer for a period or periods not exceeding 12 months. 54. Establishment of investment funds and reserve fund (1) For the purpose of investing money in accordance with section 53 (a), the Protective Commissioner is to establish: (a) one or more investment funds, and (b) a reserve fund. (2) The Protective Commissioner may from time to time transfer money from the trust fund to an investment fund or from an investment fund to the trust fund. (3) The Protective Commissioner may determine the classes of investments in which money in an investment fund may be invested and may vary the classes from time to time. (4) The Protective Commissioner is to keep an account for each investment fund showing the amounts that are from time to time to the credit of each current account from which the fund is derived.

Application of money in investment fund (1) Money in an investment fund may be applied for the following purposes: (a) the making of investments authorised by this Part, (b) payment to the reserve fund of such amount as the Protective Commissioner may from time to time determine, (c) payment of such amount as the Protective Commissioner may from time to time determine in relation to the costs incurred by the Protective Commissioner: (i) in the exercise of the Protective Commissioner's functions under this Act, and (ii) in the exercise of the Protective Commissioner's functions as Public Guardian under the Guardianship Act 1987 , (d) the making of periodic payments to the current accounts from which the fund is derived. (2) The amount referred to in subsection (1) (c) must not exceed such amount as is approved by the Director-General having regard to the Protective Commissioner's current budget. (3) For the purpose of making payments referred to in subsection (1) (d): (a) any income arising from an investment fund must be periodically divided between each current account in the trust fund in proportion to the amounts invested from those accounts and the period of each investment, and (b) any profit or loss of a capital nature arising from that fund must be periodically divided between the current accounts in proportion to the amounts invested. 11 The Protective Office financial plan is based upon investment of the whole of J's funds into the Protective Office managed funds in various proportions. The financial plan produced by Perpetual has provision for a considerable part of the estate to be invested direct in shares rather than through a managed fund. It was accepted by counsel for the Protective Commissioner and for JS that both plans were satisfactory and that there was little purpose in comparing them as the outcome over a period of sixty eight years would not be certain and in any event depended upon proper controlled management during those years, which it was not suggested would not be given. In other words it was not suggested that I should compare the plans. Nor is it suggested that the fund would not be sufficient to cover all likely expenses of J during the rest of his life. 12 Mr Cumpston, an actuary called by JS, made various calculations comparing the Protective Office and the Perpetual plans to determine what drawings would be available on the basis that the original fund which was calculated on $12 million would be reduced to zero in year 68. This did not mean that the fund would be so reduced. To a large extent the exercise was done to show the effect of the fees intended to be charged by Perpetual and by the Protective Commissioner respectively would have on the income available for J if that were needed. 13 It is necessary now to set out the fees proposed to be charged against the estate by each of the Protective Commissioner and Perpetual. For comparison the ongoing fees are based on a capital fund of $12 million which will of course reduce over the period. Perpetual fees 14 The maximum fees which can be charged by a trustee company are fixed by the Trustee Companies Act 1964. The fees proposed to be charged by Perpetual are substantially less than those maximum fees. The proposed fees are:

Establishment fee of 0.6% on settled funds to a maximum of $35,000 $ 35,000

Ongoing management fees of 0.55% based on assets under management charged quarterly $ 66,000 (based on $12 million) Work outside establishment costs and ordinary ongoing management of assets - hourly rate not more than $300 per hour at present

Legal fees for establishment of the trust or fund Maximum - $7,000 expected $ 2,000 15 Mr Rickert, who gave evidence for Perpetual said that he considered most of the management work would not be separately charged for at the hourly rate and that the legal fees would not be more than $2,000 to $3,000. In fact it is difficult to see why any legal fees would be incurred. To these fixed fees of $35,000 and the $66,000 based on 0.55% on $12 million there would be added a fee of 4% on income charged by the Protective Commissioner in respect of private management if that were charged, and the management expenses, commonly called the MER, involved in the management of those parts of the funds invested in managed funds. There is also the brokerage which would be charged on the purchase of that part of the fund it was intended to invest direct in equities. In the long run Mr Rickert and Mr Cumpston came to the conclusion which I accept that the initial charge of Perpetual including any brokerage and legal fees would be in the order of $60,000 and that the ongoing annual management fee would be in the order of $130,000. That ongoing management fee would include the charge levied by the OPC on annual income in respect of private managers and the MER on managed funds. 16 The annual management charge of 0.55% may increase if the published rate of Perpetual for its charges in respect of long term trusts, which is currently set at 1.375% was increased, in which case the .55% would increase by the same proportion. Protective Office fees 17 The fees which can be charged by the Protective Commissioner are fixed by the Protected Estates Regulation 1995 together with an entitlement to charge estate funds as set out in s55 of the Protected Estates Act 1983. Under the Regulation on an estate of $12 million the Protective Commissioner would be entitled to a corpus fee of $126,000. In addition he would be entitled to a fee of 5.25% on income collected other than rental income when the fee would be 2.5%. There are additional fees for taxation work and special work, which I take it would be no different from those to which Perpetual is entitled. In addition to this the Protective Commissioner is entitled, pursuant to s55(1)(c) of the Act which I have set out, to apply money in an investment fund - which comprises all funds under management under the Act unless in a reserve fund or remaining in the trust fund - in payment of such amount as he shall determine in relation to his costs incurred in the exercise of his functions under the Act and in the exercise of the Protective Commissioner's functions as Public Guardian under the Guardianship Act 1987. I referred to this latter matter in M v Protective Commissioner [2002] NSWSC 421 and say no more about it except that I understand there is no charge made against estates managed by the Protective Office in connection with functions exercised as Public Guardian at least at the present time. These fees provided for by the Regulation and s55 were better suited to the previous procedure where the investment powers of the Protective Commissioner were limited and most assets were held in the common fund. 18 Mr Gabb, who holds the office of Protective Commissioner, was called to give evidence. He stated that he preferred not to disclose the arrangements under the Memorandum of Understanding between the Protective Office and New South Wales Treasury Corporation and State Street Global Advisers, which he regarded as confidential. He was not pressed to answer and this information is still not known. However, the evidence is that both the Treasury Corporation and State Street charge a fee against the funds under management. What this means is that the charges which are being incurred by protected estates managed by the Protective Commissioner are not known to the protected persons nor to their families. That seems to me to be an entirely unsatisfactory position. Further s5A(2) of the Act gives power to the Protective Commissioner to: "delegate to any suitably qualified person the Protective Commissioner's functions in relation to investment funds". Section 4(2) provides a reference to a function includes a reference to a power, authority or duty. It is no doubt pursuant to this power of delegation that the arrangements with New South Wales Treasury Corporation are in place, although I have difficulty in understanding on what basis or authority that delegate sub-delegates those powers to State Street Investments, which is what appears to be done. The Protective Commissioner said in evidence that he could influence the State Street investments. All this would be far clearer if the Memorandum of Understanding which exists between the Commissioner and New South Wales Treasury Corporation were in the public domain or at least in evidence in these proceedings. 19 The fees made payable by the Protected Estates Regulation 1995 are prescribed pursuant to s8 of the Act. Section 8(4) of the Act provides as follows: 8. Fees

(4) Where it appears to the Protective Commissioner to be just and reasonable to do so, the Protective Commissioner may, at the discretion of the Protective Commissioner, waive, remit or reduce any of the fees chargeable under this section. 20 Pursuant to this provision Mr Gabb, by affidavit sworn 19 June 2003, which was about five days before the hearing commenced, stated that it appeared to him that if he remained as manager it would be just and reasonable to waive the corpus fee allowed under Clause 4(1)(a) of the Regulation, namely the fee of $126,000 to which I have referred and that it would be just and reasonable to reduce the management fees. Accordingly he said that he would waive all management and investment fees above 1.5% of the value of the estate so long as the value of that estate exceeded $4 million. From the projected figures it seems that the estate would be over that value for at least the substantial part of the 68 years, the expected life of J. The result of this would be that there would be no corpus commission charged and the ongoing management fee, based on an estate of $12 million would be $180,000. In oral evidence Mr Gabb said that the 1.5% would cover all extraneous expenses and would cover any fees charged by New South Wales Treasury Corporation in respect of the management of J's fund and any MER or other charge payable to or deducted by State Street in respect of the managed funds. He also said that the 1.5% figure would cover any charge made pursuant to s55(1)(c) of the Act. If the future s55 charge is anything like the previous annual charges made under that section or its predecessor, the old s57, then it could be expected that the charge made against the managed estates would be something in the order of 1.1% to 1.2% on the value of the investment fund each year. As it seems quite unlikely that the State Street management expenses would be less than 0.3% the Commissioner might, in theory have to refund from that proportion of the s55 charge allocated to J's estate, the difference between the total fees and the 1.5%. So far as I can see there would be no authority to repay any part of the s55 charges as the Act requires it to be spread over the investment fund and thus it is difficult to see how it can be certain that the charges could be kept within the 1.5% which it is agreed will be the maximum charge. That is a matter for the Commissioner to work out. This judgment is based on his stated charges. 21 On the basis of the now quoted figure, the annual management fee will be 1.5% of the fund value so long as the fund remains in excess of $4 million. On $12 million it will be $180,000 per annum. I can again draw attention to the fact that if expected capital growth is left aside, the annual fee would absorb about 47% of the actual income received, after tax. This is not a criticism of the Protective Office as similar charges are made by other authorized trustee companies, or at least can be made under their Act. Nevertheless it is a substantial charge. 22 On comparing the expected fees to be charged by Perpetual against those expected to be charged by the Protective Commissioner, Mr Cumpston came to the conclusion, which was not challenged and which I thus accept, that for a period of 68 years there would be an additional amount of money available to J under Perpetual management of $18,000 per annum. That over a period of 68 years comes to the very considerable sum of $1,224,000. The reason why this figure is not just the difference between the annual Protective Commissioner's fees and the annual Perpetual fees is I understand because of the taxation effect on those different figures.

Management care in cases of family difficulties 23 According to the evidence of Mr Rickert for Perpetual the ordinary management of the estate as opposed to the financial management will be left to a client relationship manager. He said that Perpetual was used to dealing with situations of conflict, that the necessary meetings and interviews would be held, and that external assistance would be sought if that were necessary. There was some suggestion that because the Protective Commissioner was looking after the estates of many protected persons and because Perpetual was looking after far fewer that more individual attention would be obtained from Perpetual. I do not consider that contention to be made out. While there are complaints from time to time about changes in estate managers in the Protective Office there can be no doubt that the Office is well equipped with staff to deal with conflicts which arise from time to time within families. In fact Mr Commins, who is the present estate manager for J, and who manages sixteen estates himself and supervises others, says that more than half of the sixteen estates concern families in conflict. The Commissioner has a publicised method of dealing with complaints which I should say is known to ES and JS. It is perfectly clear that Perpetual is trying to expand its activities in funds management in protected estates. If it does succeed in expanding so will its staff. One cannot tell what the position will be over a long period of years. Judging on past experience it can be considered almost certain that conflicts and disputes will arise between the grandparent groups. Change of management 24 For a change of management to be ordered there must be a reason made out. The court must make its decision in the best interests of the protected person whose estate is subject to management. MB v Protective Commissioner (2000) 50 NSWLR 24 at 32. The reasons advanced on behalf of JS were, first that she had lost trust and faith in the Protective Commissioner and that he accepted that she had done so; second, that having regard to the charges expected to be made the estate would be better placed in the hands of Perpetual. 25 Miss Needham naturally called in aid the decision in MB. In that case there was evidence of particular complaints and allegations of mismanagement. Some relatively minor ones were made out but involved no breach of trust or duty and some were not decided, although if made out were held not sufficient to show unfitness to manage. 26 The fact that JS has lost trust and faith in the Protective Commissioner is not in itself I consider sufficient reason to revoke the existing order. The reasons for this may not have foundation. There may be no reason for complaint. In difficult cases such as this one it is almost certain that there will be tensions between the fund manager and the primary carer particularly during times when funds are short. At least that position has changed. It is not suggested JS cannot communicate with the Protective Commissioner, which was the position in MB, nor that there are not avenues open to her for review of decisions of the Protective Commissioner, nor that she is not aware of those avenues. And there is the fact that ES makes no complaint - although he does not oppose the change. If unspecified lack of confidence were sufficient or unspecified complaint sufficient - then a change would have to be ordered whenever there were personality differences or conflict. I do not consider this correct. I accept of course that the question is not the same as would arise on application to remove a trustee or liquidator where some breach of duty or incapacity would need to be established. All I am saying is that ungrounded lack of trust is not sufficient. 27 Insofar as a capacity to deal with conflicts which may arise from time to time between maternal and paternal grandparents and other members of the family properly interest in the welfare of J, I do not consider that it has been established that Perpetual procedures are superior to those of the Protective Commissioner, nor that they will be more successful and more acceptable. It is just not possible to tell. A reduction in conflict areas is more likely to result from sufficient funds than from anything else. 28 It then becomes necessary to consider the impact of fees on the estate. Even taking into account the fact that brokerage fees will be incurred on implementation of the Perpetual plan and its continuing operation over the years which would not be incurred on the Protective Office plan, it is likely that the Perpetual fees charged will be less than would be charged by the Protective Commissioner. On the other hand the question whether this will ultimately be of great significance could depend upon whether the Protective Commissioner produces a superior result to the Perpetual investment plan. It may or it may not. Neither plan is set in concrete and clearly there would be changes over a period of 68 years. One cannot tell whether over that period that there will be any significant difference at all. 29 I am also concerned with the question of how far a matter such as this should be dealt with or decided by the level of fees. Having said that it is perfectly clear that it is competition which has brought about the last minute reduction in fees proposed by the Protective Commissioner. And although I realize it is not the fault of the Protective Commissioner himself it is extraordinary, when it must have been realized, when the amending Act was passed in the year 2000, that a new fee structure would be required, there is not one nearly three years later. While I am only required to deal with this matter on the facts relevant to it, clients - as they call them - of the Office of the Protective Commissioner are entitled to certainty about these matters and having regard to the clear statements made to Parliament that investment of funds would not be outsourced in ordinary cases, (Hansard LC 6 April 2000 p4254, 12 April 2000 p4523) are at least entitled to know the costs involved with such outsourcing. 30 I have come to the conclusion that, in the absence of reasons for lack of trust, the finding that the Protective Commissioner has at least as good a system for the resolution of disputes and conflict as Perpetual has or may implement, and the fact that both financial management plans appear sound, the benefit which may be obtained, if investment results for each plan remain much the same, from lower fees with Perpetual as manager, is not sufficient to justify a change of management. I am not satisfied it is in the interests of J to revoke the existing orders. In those circumstances the amended notice of motion should be dismissed. 31 So far as costs are concerned while JS has been unsuccessful it has not been put that she did not have interests of J foremost in mind in making the application. In the circumstances the costs of all parties should come out of the estate. It is I think however important to say that this is not an order which would always be made in the case of unsuccessful applications of this sort. Orders 32 Amended notice of motion be dismissed. 33 Costs of all parties be paid out of the estate of J.

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