Knudsen v Kara Kar

THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

1150/91 NIELS KNUDSEN & ANOR V KARA KAR HOLDINGS PTY LTD & 2 ORS

1 HIS HONOUR: These proceedings have a tangled history. They began by summons filed on 17 January 1991. Initially the only orders sought were that the first defendant ('Kara Kar', which carried on business as a manufacturer of trailers) be wound up and a liquidator appointed. By amendments to the summons other relief was sought, including damages for the wrongful dismissal of the first plaintiff and an order that an account be taken in respect of Kara Kar's administration as trustee of a pension fund trust. At all relevant times Kara Kar has been the trustee of the fund, as well as conducting the business and employing staff. The amendments to the summons were accompanied by changes to the composition of the parties to the proceedings. Eventually the winding up application was abandoned. 2 Young J delivered reasons for judgment in the proceedings on 13 April 1994. His Honour made an order for damages for wrongful dismissal, as to which there is no longer any contest. He also dealt with the application for orders for the taking of accounts. He found that Kara Kar had committed two breaches of trust: first, it had paid out $115,000 to one of its directors (Mr Yardy) without any authority under the trust instrument; and secondly, it had made a distribution to the plaintiffs on 28 February 1991 upon the incorrect basis that the plaintiffs' beneficial entitlement was proportionate to their interest in the issued shares in Kara Kar (the proportion being 1:9). He directed an inquiry before the Master. 3 Master Macready dealt with various aspects of the taking of accounts in his reasons for judgment delivered on 1 February 1996. After further submissions, he delivered supplementary reasons for judgment on 22 March 1996. He determined the amounts payable to each of the plaintiffs once the $115,000 was brought back into the trust and a 'foregone benefits account' was allocated. The matter then returned to Young J. There was a dispute before his Honour as to what the Master had decided, counsel for the defendants contending that the plaintiffs were not entitled to any distribution from the trust in the absence of evidence that Kara Kar had exercised its discretion as trustee to make a distribution. In his further reasons for judgment delivered on 4 September 1996, Young J found that it was too late for the defendants to raise the question whether the trustee had exercised its discretion. He found that the plaintiffs were entitled to the sums awarded by the Master, namely $66,112 for Mr Knudsen and $30,336 for Mrs Knudsen. 4 The defendants appealed, by leave, to the Court of Appeal. The Court's reasons for judgment were delivered on 27 March 1997. The Court found that the trial before Young J had miscarried, principally because the defendants had in fact taken the point during the initial hearing that the trustee had not exercised its discretion to make a distribution, contrary to the view expressed by Young J in his reasons for judgment of 4 September 1996. Beazley JA said: 'Once it is established that a matter, properly raised in the proceedings has not been determined, or that a party has been denied the opportunity of presenting its case to the Court, in whole or in part, and thus denied procedural fairness, then, in the usual course, appellate intervention is warranted. The appellate court may refuse to intervene if the question involved could not succeed or would make no difference to the final orders made by the trial judge. However, if appellate intervention is required, the procedure which the Court adopts will vary depending upon the circumstances. If the trial judge has made all necessary findings of fact relevant to the issue, or there is no dispute as to the relevant facts, or if the question involves a pure question of law, the appellate court may consider it appropriate to determine the matter itself. However, where, as here, the matter does not involve a pure question of law, the trial judge has not made relevant findings of fact, there are factual issues in dispute, and further, it cannot be said that 'the point' is hopeless, the Court has no option but to allow the appeal and to remit the matter for rehearing …'. 5 The Court of Appeal allowed the defendants' appeal and ordered that the matter be remitted for rehearing. Pursuant to directions made by the Registrar on 31 July 1997, the plaintiffs filed a statement of claim on 28 August 1997. The case, which eventually came before me for rehearing in the three days from 10 to 12 August 1999, was the case pleaded in the statement of claim. The parties are now Mr and Mrs Knudsen as plaintiffs, and Kara Kar and Mr and Mrs Yardy as defendants. A central issue for me to decide is whether Kara Kar exercised its discretion as trustee to make a distribution to the plaintiffs, and if it did not do so, whether the Court should direct it to do so or even exercise the discretion itself. 6 On 25 September 1997 Kara Kar as trustee filed its defence to the statement of claim. On 15 October 1997 a defence in virtually identical terms was filed on behalf of Kara Kar in its capacity other than as trustee, and on behalf of Mr and Mrs Yardy. Kara Kar as trustee was represented by a different firm of solicitors from the solicitors acting for Mr and Mrs Yardy and Kara Kar in its non-trustee capacity. 7 By these defences the defendants admitted that Mr Yardy removed $115,000 from the trust fund without the knowledge and agreement of Mr Knudsen. However, they denied that this was done dishonestly or wilfully in contravention of the trust deed. They admitted that payments were made to the plaintiffs on 28 February 1991 but they denied that they were made in the exercise of any power or discretion of the trustee under the trust instrument. Instead, they alleged that the payments to the plaintiffs were made at that time as part of the notional winding up of the trust fund and the distribution of that fund to the plaintiffs in the same ratio as their investment in shares in Kara Kar. They alleged that the plaintiffs have no entitlement to the moneys they claim, since any benefits they might have derived from the trust fund were subject to the exercise of the trustee's discretion, and that discretion was never exercised. 8 The defences contained some important admissions, and they referred to other matters which the defendants did not admit, while acknowledging the findings that have been made against them in previous judgments. At the beginning of the hearing before me, counsel for the defendants informed me that although the Court of Appeal had remitted the entire matter for re-hearing, the defendants were interested in contesting only the question of proper construction of the trust instrument. He said there was no issue as to the amounts of money calculated by the Master, and that the defendants would accept the findings of fact made by Young J. Counsel for the plaintiffs confirmed that the primary issue for me to determine related to the true meaning and effect of the provisions of the trust instrument with respect to withdrawal benefits, but there was also question of whether the defendants had acted in bad faith. 9 I granted several short adjournments to permit the parties to explore whether the real issues for decision could be clarified by the formulation of separate questions for determination and a statement of agreed facts. Eventually the parties handed up an agreed chronology and a statement of agreed matters, and invited the Court to treat these documents as mutual admissions. I shall return later to the issue of determining separate questions under Part 31 of the SCR. 10 The agreed chronology is as follows:

11 The statement of agreed matters is as follows: STATEMENT OF AGREED MATTERS

As at 1989 there were four members of the fund, Mr and Mrs Knudsen and Mr and Mrs Yardy (p 8).

$115,000 was removed from the Trust fund in about December 1989. This sum was paid out of the fund by a cheque drawn by Mr Yardy in favour of Queens land solicitors who were acting for him in the purchase of his current home at Mermaid Waters, Queensland. (p 8)

The books of the Trust were (at least up to 13 April 1994) kept under the control of Mr Nancarrow a chartered accountant. Mr Nancarrow found out about this payment about six months after it was made and did the very best he could, with the limits allowed him by the law, to make the books of the Trust appear regular. (p 8)

What happened was that Mr Yardy considered that the money in the fund was his money or the company's money and felt no compunction at all paying out to the Queensland solicitors, on the basis that in due course the books and the records could be put in order. (p 8)

The sum of $115,000 was not a surplus of forfeited benefits. At 30 June 1989, the special reserve of the pension fund did not contain $115,000 but nearer to $80,000. Whilst this sum of about $80,000 contained some forfeited contributions of short-term employees who had left the company, it also contained a large percentage of excess contributions that had been made in earlier years which under clause 37 of the deed should have been transferred to a separate fund, but by dispensation Mr Nancarrow obtained from the taxation authorities were allowed to be administered within the existing fund without taxation penalty. It was not a surplus benefit that could be repaid to the company as employer. (p 9)

There were notations in the 1987 and 1989 accounts concerning the 9: 1 ratio of retirement benefits. As the special reserve had not been exhausted, all that was indicated in these accounts was that Mr Knudsen and Mr Yardy had given intellectual assent to the proposition that if the special reserve had been used up there would be a restructuring to obtain the 9:1 ratio. That had not come to pass and never came to pass. Mrs Yardy, and Mrs Knudsen and Kara Kar Holdings Pty Ltd had not input into that understanding. The amounts in the fund were not beneficially held in a nine to one ratio. (p 10)

By not bringing the $115,000 to account and in indicating that it wished to proceed on the nine to one ratio, the trustee was in breach of trust. (p 10)

1. If the sums standing to the credit of the Employer's Contribution Accounts of Mr and Mrs Knudsen are re-calculated as at 28 February 1991 on the basis that the breaches of trust identified on 13 April 1994 are rectified, those amounts are $66,112 and 30,336 respectively.

11AUGUST 1999 12 In order to decide whether the trustee has or has not exercised its discretion to make a distribution to the plaintiffs, I must identify the trustee's relevant discretionary powers and, in detail, the facts relevant to any historical exercise of the trustee's discretion. Although I encouraged the parties to prepare them, I have formed the view that the agreed chronology and statement of agreed matters are of very limited use to me. I regard it as necessary to make further findings, on the basis of the meagre evidence tendered at the rehearing. 13 I shall begin by summarising the 1979 and 1990 trust instruments and some matters relevant to their proper construction, and making some findings about their meaning. I shall set out the legal grounds for review of the exercise of relevant discretions by the trustee, with a view to identifying precisely the factual issues that must be determined. I shall then make the requisite additional findings of fact.

The 1979 trust deed (as amended in 1980) 14 The trust deed for the Kara Kar Employees Pension Fund was executed on 22 June 1979, and was amended on 29 January 1980. I shall refer to the provisions of the amended deed. 15 The deed made provision for the employer to make contributions to the pension fund of such amounts as were determined by the employer from time to time. It required separate accounts to be opened in the name of each member, and for amounts paid in respect of a member (including, presumably, payments by the member as well as payments by the employer) to be credited to the account. Profits and losses arising from the investment of money standing to the credit of a member's account were required to be credited or debited to that account, with no discretion for the trustee not to do so (Clause 10). The provisions relating to member accounts were expressed in mandatory terms and there was no relevant discretion of the trustee, although the employer had a discretion as to whether to contribute and if so, whether to contribute 'in respect of' one member rather than another. 16 The deed required that benefits (up to the maximum approved for tax purposes) be paid to the member upon retirement at the normal retirement date, and gave the member upon retirement the right to receive the full benefit standing to his credit, although the trustee had a discretion to pay the benefit by way of lump sum or pension or annuity. The dependants of a deceased member were entitled to receive the benefits credited to the member. 17 Clause 15 dealt with the case of a member leaving the service of the employer before reaching the normal retirement date. It provided: '15. When a Member leaves the service of the Employer before reaching his normal retirement date for reasons other than those stated in Clause 16 [which dealt with forfeiture of benefits upon insolvency, defalcation or conviction of a criminal offence], he shall cease to be a Member and the Trustee may deal with the total amount at credit of the Member as they at their discretion may determine and may at their discretion pay the whole or part thereof to the Member. Any amount not paid to the Member shall be credited to the Special Reserve Account provided no direct contributions will be made by the Employer to the Special Reserve Account and further that out of the amounts so credited to the Special Reserve Account the Trustee shall pay to the Employer any such sum which may be owing by the Member to the Employer at the date of his resignation or dismissal upon receipt of a written request to do so from the Secretary of the Employer.' 18 Clause 17, headed 'forfeited benefits', required that where benefits were forfeited, they were to be placed in a special reserve account within the fund, to be disbursed for 'prescribed purposes' within two months after the close of the financial year, or applied subsequently in accordance with an undertaking by the trustee of the fund approved by the Commissioner of Taxation. The trustee was given a discretion to make payments from the special reserve account for various prescribed purposes, including 'to meet Employer's contributions in time of hardship or special circumstance' and 'any other purposes approved by the Commissioner of Taxation'. 19 Clause 31 empowered the trustee, with the consent of the principal employer, to alter or make substitution for the trusts and provisions of the deed. Any alterations so made were deemed to be of the same effect as if they had been originally contained in the deed. There was a proviso that no such alteration 'shall reduce or prejudice the benefits secured to a member in pursuance hereof' prior to the date of the alteration. 20 Clause 37 provided that if at any time, in the opinion of the trustee, a member's benefit were to exceed the limitation on the amount of superannuation benefits imposed by the Commissioner of Taxation, the trustee may refuse to accept future contributions in respect of the member, or may establish a separate and distinct fund for excessive benefits, transferring such amount of the member's benefit to the new fund as it considered necessary to prevent the member's benefit from becoming excessive.

The 1987 legislative amendments affecting superannuation funds 21 Mr Nancarrow, the accountant for Kara Kar, gave evidence that both Mr Yardy and Mr Knudsen intended and endeavoured to use the pension fund in the most tax effective way. I accept this evidence, which is supported by the documentation. 22 It is plain from even a superficial reading that the structure of the Pension Fund and the provisions of the 1979 trust deed were strongly influenced by taxation considerations. Thus, Clause 36 empowered the trustee to limit the benefits of a member so as to ensure that the fund qualified for concessional tax treatment. The 1980 amendments also appear to be driven, or at least influenced, by changes to the tax treatment of superannuation funds. 23 Far-reaching changes to the regulation of Australian superannuation funds were enacted by the Commonwealth Parliament in 1987. They included the Occupational Superannuation Standards Act 1987, which set out the conditions and supervisory requirements to be met by superannuation funds in order for them to be eligible for concessional tax treatment. One of the critical elements of government superannuation policy at that time was that benefits arising from employer and employee contributions to a superannuation fund must be genuine retirement benefits, which could be preserved and carried with the employee through any change of employment, but not paid out until the employee reached retirement age (see the discussion of the government's public pronouncements by Hill J in Re Bond; ex parte Ramsay (1992) 92 ATC 4807, at 4814-4816). 24 Section 7 of the Occupational Superannuation Standards Act authorised the making of regulations prescribing standards applicable to the operation of superannuation funds. The standards were contained in the Occupational Superannuation Standards Regulations, 1987. The Regulations set out various 'vesting standards', including a requirement that the rights of members to receive benefits must be set out in the governing rules of the superannuation fund and must be fully secured (see, as to earlier comparable provisions, Metropolitan Gas Company v Federal Commissioner of Taxation (1932) 47 CLR 621). Regulations 9-11 set out some standards which required preservation of employer-financed benefits. In Re Bond at 4815-4816, Hill J described the effect of the preservation standards as follows: 'The effect … is that, except or to the extent that benefits are payable on the retirement of the member before attaining the age of fifty-five years in the form of a non-commutable pension or annuity, no benefits may be paid to a member until the member retires from the workforce and attains an age of not less than fifty-five years, or the benefits become payable in a number of circumstances set out in [the Regulations]. In other circumstances, the preserved benefits, if otherwise an entitlement to them arises, may be rolled over into another superannuation fund, an approved deposit fund, or into a deferred annuity.' 25 His Honour regarded the Act and Regulations as important in construing the fund deed which he had to consider. Likewise it seems to me important in the present case to bear in mind the taxation context in which the 1990 amendments to the Pension Fund were made. 26 It appears to me that the Pension Fund, as constituted under the 1979 trust deed, did not comply with the standards introduced by the 1987 legislation. Benefits to any member who left the employer's service before reaching the normal retirement date depended upon the exercise of discretion by the trustee, and there was no provision giving the member any entitlement to benefits in those circumstances or requiring the trustee to preserve the amounts in the member's accounts for the member's benefit. I infer that the 1990 amendments to the trust deed, which conferred an 'entitlement' on a member who left the service of the employer and made extensive arrangements for preservation of the member's benefits, were adopted for the purpose of complying with the new requirements.

The Deed of Amendment of 1990 27 On 22 August 1990 Kara Kar as trustee and principal employer executed a deed by which the 1979 trust deed was amended by the adoption of a set of rules, having effect as if set out in the Deed of Amendment. The significance of the taxation context was underlined by the definition of 'Relevant Requirements' in Clause 1.1, which referred to the Occupational Superannuation Standards Act and Regulations, and any other law which must be satisfied by a superannuation fund in order to qualify for the maximum available income tax concessions. 28 The Deed of Amendment provided that the assets of the pension fund would continue to be vested in the trustee upon trust to apply them in the manner set out in the Rules, and the fund would be managed and administered in all respects according to the Rules. 29 In my opinion, the effect of these provisions was to substitute new provisions (but the Rules) for the provisions of the 1979 trust deed governing the trust. While the Rules referred to the 'Plan', defined to mean the entire superannuation plan constituted by the deed which established it and the Rules from time to time, the Rules left no room for the 1979 trust deed to have any continuing operative effect. On their face, the Rules were intended to be a comprehensive set of provisions dealing with the entire subject matter of the previous trust deed. This conclusion is supported by the taxation context to which I have referred - the purpose of the 'amendment' was to adopt a new set of rules which would comply with comprehensive new legislative requirements, including rules which would substitute vested rights for trustee discretions. Thus, the 'amendment' was in truth a replacement of the old with the new provisions, with the consequence that the assets of the trust were thereafter held solely under the Rules. 30 In the absence of any transitional or other relevant provisions, I infer that the new provisions replaced the old on the date of their adoption, namely 22 August 1990. Consequently, steps purporting to have been taken with respect to the trust before that date are governed by the 1979 trust deed (as amended in 1980). Steps taken on or after that date are governed by the 1990 Rules. 31 According to the Rules, the assets of the Plan (including contributions and other money received by the Trustee for the purposes of the Plan) were held upon trust to be applied in accordance with the provisions of the Rules (Clause 4.2). According to Clause 2.11, the trustee's discretions were absolute and uncontrolled and the trustee could exercise its powers at any time and from time to time, and could refrain from exercising them at all. Although Clause 2.11 confirmed the breadth of the trustee's discretionary powers under the Rules, the exercise of its powers was nonetheless reviewable by the Court on the limited grounds which I shall describe below. 32 No member had any right or interest in respect of the Plan except in accordance with the Rules (Clause 6.2). The Rules (Clause 7.4) required the trustee to maintain for each member an employer contribution account, a member contribution account and a productivity account. There were no productivity accounts in the present case because there were no contributions in that category. As previously mentioned, Mr and Mrs Yardy made member contributions and so there were member/employee contribution accounts for them. In effect, their previous employee contribution accounts became their member contribution accounts under the new arrangements. But there were no contributions by Mr or Mrs Knudsen and therefore no member contribution accounts for them. 33 The Rules (Clause 7.4 (a) (i)) required the trustee to record in a member's employer contribution account all contributions to the Plan made by an employer 'in respect of' the member. As with the 1979 trust deed, the Rules left the amount and designation of those contributions to the employer, but once the employer made a contribution to the Plan and designated it as a contribution 'in respect of' a named member, the trustee had no power to record that contribution otherwise than in the employer contribution account of the designated member. 34 Clause 7.4 (a) (vii) required the trustee to record in a member's employer contribution account 'amounts credited or debited to this Account in respect of the earnings of the Plan'. Clause 7.4 contained several obligations with respect to the member contribution account and the productivity account, it but did not stipulate the basis for allocating pooled earnings amongst the accounts. While, therefore, the trustee may have had some discretion as to the allocation, I infer that (as was the case under the 1979 trust deed) the trustee did not have any discretion to avoid allocating an appropriate amount of the annual investment earnings of the Plan to each of the members' accounts. 35 The Rules also required the trustee to maintain a 'Foregone Benefits Account' (Clause 7.5), to which must be credited any balance remaining in a member's accounts after payment of the member's withdrawal benefit. Clause 7.5 authorised the trustee in its discretion to apply the amount standing to the credit of the Foregone Benefits Account, with the consent of the principal employer, for a number of purposes including the payment of contributions otherwise payable by the employer or a member. These provisions were similar to, though not identical with, the provisions of the 1979 trust deed with respect to the special reserve account. Although the Rules did not contain any relevant transitional provision, in my opinion it was consistent with the Rules for the former special reserve account to become the Foregone Benefits Account, and this is in fact what happened when the Rules commenced. Therefore when the interim financial statements of 28 February 1991 applied the special reserve account to the members' accounts so as to eliminate and close it, that step was purportedly taken under Clause 7.5 of the Rules, presumably under the authority of sub-paragraph (a) of Clause 7.5 as a payment of contributions otherwise payable by an employer. 36 Eligible employees were admitted to participate in the Plan in a category of membership specified in Schedule 2 to the Rules (Clause 8.1 and the definition of 'Category' in Clause 1.1). Clause 8.1 stated that if the invitation for admission to membership did not specify a category of membership, it was deemed to have specified Category A. Mr and Mrs Knudsen were not invited to become members under the Rules, since they were already members under the 1979 trust deed and their membership continued under the Rules, upon the adoption of the Rules. 37 Notwithstanding the provisions of Clause 8.1, my view is that they were Category B members. Schedule 2, which specified the type of benefit payable for the purposes of Clause 10.1, referred to only one category, namely Category B, for which the 'type of benefit' is listed as 'Lump Sum'. The evidence indicates that all members of the Pension Fund were admitted for lump sum benefits rather than a pension or annuity (notwithstanding the title of the fund). This, and the simple fact that only Category B is mentioned in Schedule 2, suggests that Mr and Mrs Knudsen (and Mr and Mrs Yardy) were Category B members. 38 Clause 10.1 stated that a member who left after his normal retirement date was entitled to receive a retirement benefit of a capital value equal to his 'Accumulated Credit', defined as the total of the amounts standing to the credit of the member in his member contribution account, his employer contribution account and his productivity account. For Mr and Mrs Knudsen, who had only employer contribution accounts, the entitlement upon retirement would be to receive the capital value standing to their credit in those accounts. The beneficial entitlement under Clause 10.1 did not depend upon the exercise of any discretion by the trustee, though the benefit was payable only if the member reached the normal retirement date. Clauses 10.2 and 10.3 dealt with total and permanent disablement and death in service, and Clause 10.4 (which I shall described in detail) related to the withdrawal benefits of a member who left the employer's service before reaching of the normal retirement date. 39 Clause 10.5 dealt with preservation of benefits. It empowered the trustee to retain a member's benefit in the Plan for as long as necessary to ensure that payment was not made to the member prior to his attaining a particular age or satisfying other conditions laid down by the Relevant Requirements. The clause envisaged that the benefit could be transferred to another fund, provided that the other fund was subject to similar restrictions. Subclause 11.12 enabled the trustee to reduce the benefits payable to a member in order to ensure that the member did not receive an excessive amount, having regard to the Relevant Requirements. The trustee could establish a separate, non-complying fund which would not receive the maximum income tax concessions, as a vehicle for excess benefits (Subclause 11.14). 40 Clause 10.4 stated: '10.4 A Member who leaves the Service and who is not entitled to a Retirement Benefit or a Total and Permanent Disablement Benefit and in respect of whom a Death Benefit is not payable shall be entitled to receive a Withdrawal Benefit, payable as indicated in Schedule 2 for the Category to which he then belongs, and which shall be of a capital value equal to the total of his Member Contribution Account and his Productivity Account and such proportion of his Employer Contribution Account as is indicated by Schedule 4 having regard to his Category of membership, provided that the Trustee may in its absolute discretion in any particular case decide to increase a Member's Withdrawal Benefit to an amount not exceeding his Accumulated Credit'. 41 As applied to Mr and Mrs Knudsen, Clause 10.4 had the effect that when they left their employment they were 'entitled' to receive a withdrawal benefit (defined in Clause 1.1, unhelpfully, as the benefit payable pursuant to Rule 10.4) of a capital value equal to such proportion of their respective employer contribution accounts as was indicated in Schedule 4 for their category of membership, although the trustee had a discretion to increase the withdrawal benefit to an amount not exceeding the amounts in their respective employer contribution accounts. 42 Schedule 4 was headed 'WITHDRAWAL BENEFITS - PROPORTION OF EMPLOYER CONTRIBUTION ACCOUNT PAYABLE'. Under and to the left of the heading were the words 'Category B:' but nothing else appeared in Schedule 4. I have held that Mr and Mrs Knudsen were members in Category B. The position, therefore, was that their entitlement to Withdrawal Benefits was not completely set out in the Rules because of the omission of any proportion in Schedule 4. If it had been, they would have been absolutely entitled to the payment of the stated proportion of the amounts in their Employer Contribution Accounts: Re Bond; ex parte Ramsay (1992) 92 ATC 4807. 43 There is no admissible extrinsic evidence which would assist me to identify the proportion which was intended to be inserted in Schedule 4 when the 1990 Deed of Amendment was executed. The evidence going to whether the parties always intended that the pension fund would be split between them in the ratio 9:1 is irrelevant to the present question. If the parties had that intention, it would be reflected in the allocation of employer contributions to the accounts of the Yardys and the Knudsens rather than in the proportionate entitlement of the Knudsens to the amounts in their own employer contribution accounts; and in any case, the present question relates as much to the proportionate entitlement of the Yardys as to the entitlement of the Knudsens.

The effect of failure to complete Schedule 4 44 The omission of any statement of proportion in Schedule 4 could be interpreted in various ways. First, it might be said that the omission of any statement of proportion is equivalent to the statement of a zero proportion, so that the clause would confer no benefit on the member in the absence of a favourable exercise of discretion by the trustee. But in the taxation context that I have described, the drafter of Clause 10.4 obviously intended to set out a vested benefit for the departing member, subject to a discretionary power of the trustee to increase the benefit up to a stated limit. It would be inconsistent with the taxation context for me to construe the clause in this way. Moreover, the words 'capital value equal to … such proportion … as is indicated by Schedule 4' imply, in my opinion, a proportion other than zero. 45 Secondly, it might be said that in the absence of any other specification, the proportion which should be implied is 100 percent. I disagree. If the proportion were 100 percent, then the proviso which permits the trustee to increase the benefit up to the Accumulated Credit would be meaningless, at any rate where (as with the Knudsens) there is no account other than the employer contribution account. 46 Thirdly, it could be contended, as a matter of construction, that Clause 10.4 did not replace its predecessor (Clause 15 of the 1979 trust deed) because it did not completely set out a substitute provision for withdrawal benefits. On this view, withdrawal benefits were still governed by Clause 15 after 22 August 1990 because the 1990 Rules did not express any completed intention to replace the earlier provision. But in my view this approach is not available, because of the way the 1990 Rules were introduced. As I have said, the Rules on their proper construction of the intended to be a comprehensive set of provisions governing the fund and its assets, replacing and excluding the provisions of the 1979 trust deed, including Clause 15. 47 I favour a fourth approach, which produces the same outcome as the third approach, though from a conceptually different viewpoint. The failure to complete Schedule 4 meant that there was a gap in the disposition of the beneficial ownership of the pension fund under the 1990 Rules. There was no provision dealing with the beneficial entitlement of a member leaving the service before retirement age to any part of the amount in his or her employer contribution account. 48 In my view the discretion conferred upon the trustee by the latter part of Clause 10.4, empowering it to increase the distribution out of the employer contribution account, could not be treated as a provision filling the gap in beneficial ownership. As a matter of construction, the latter part of Clause 10.4 was purely adjectival upon the former part of the clause, which purportedly conferred an entitlement to a specified proportion of the account. The conferral of an entitlement having failed because of the incompleteness of Schedule 4, the adjectival discretion could not be elevated into a self-sufficient discretionary trust. 49 Where there is a gap in the beneficial ownership of a fund settled upon trust, there is an 'automatic' resulting trust to the settlor. As Megarry V-C said in Re Vandervell's Trusts (No 2) [1974] Ch 269, 689 'what a man fails effectually to dispose of remains automatically vested in him', not as a matter of presumed or automatic intention but by operation of law. If a new trust had been created by virtue of the settlement of a fund under the 1990 Rules, then any gap in the beneficial ownership would lead to a resulting trust for the benefit of the provider of the fund (most likely, the employer). However, in the present case the 1990 Rules were adopted by way of amendments to the provisions governing an existing trust. As I have said, the intention seems to have been that the 1990 Rules should entirely replace the provisions of the 1979 trust deed. But that intention failed, to the extent that Schedule 4 was not completed. Equity fills up the gap in dispositive intention by imposing an automatic resulting trust. Since, however, the gap in beneficial ownership arises out of an amendment to an existing trust rather than at the point of creation of a new trust, Megarry V-C's principle implies that the beneficial ownership results back to its previous situs in the amended trust, rather than to the original provider of the fund. 50 The outcome, in my opinion, is that because of the failure of Clause 10.4 and Schedule 4 of the 1990 Rules to specify the proportion of the employer contribution account to which the departing member was entitled, the departing member's entitlement is governed under a resulting trust by the 1979 trust deed, as amended in 1980. The relevant provision of the 1979 trust deed is Clause 15, which authorises the trustee to pay to the member the whole or any part of the amount standing to his or her credit in the member's account, but any amount not paid to the member must be credited to the special reserve account (which became the Foregone Benefits Account under the 1990 Rules).

The nature of the trustee's power under Clause 15, and the Court's power to intervene 51 According to McLelland J, in the case of some kinds of discretionary powers of trustees, the Court may in a proper case execute the trust by substituting its own discretion for that of the trustees: Rapa v Patience (Supreme Court of New South Wales, 4 April 1985, unreported). English case law holds that such intervention is permissible only where the power is a trust power (that is, a power coupled with a duty) rather than a mere or bare power: see, especially, Re Baden's Deed Trusts [1971] AC 424, 449 per Lord Wilberforce. In my opinion McLelland J had trust powers in mind as the kinds of powers which may warrant judicial execution of the discretion. In his Honour's view, it is right for the Court to take such a course only where the existing trustees are unlikely to fulfil their duty in a proper manner. The Court has no authority to usurp the functions conferred on the trustees, except where such a course is shown to be necessary in order to give effect to the intention evidenced by the terms of the trust instrument. 52 As a matter of construction, the trustee's power under clause 15 to pay the whole or part of the member's account to the member was a mere or bare power of appointment rather than a trust power, as there was no duty to exercise it in favour of the member. Lord Wilberforce's speech in Re Baden's Deed Trusts is now the leading exposition of the distinction between trust powers (which his Lordship called 'trusts') and bare powers, although in that case the problem related to certainty of definition of the class of objects, a problem which does not arise in the present case. In the present case the trustee's power was closer to the power to transfer property to a named object, considered by the High Court of Australia in Lutheran Church of Australia v Farmers' Co-operative Executors & Trustees Limited (1970) 121 CLR 628. Clause 15 expressly dealt with the destination of the member's fund in the event that there was no distribution to the member, implying that the trustee had no duty to make any distribution to the member: cf Re Leek Dec'd [1968] 1 All ER 793. 53 However, being vested in a trustee, the power conferred by Clause 15 was a fiduciary power vested in Kara Kar as trustee. According to Lord Wilberforce in Re Baden's Deed Trusts, a trustee who has such a power, although it is a bare power, has a duty to consider responsibly, in individual cases, whether to exercise it (at 449; see also Re Manisty's Settlement [1974] Ch 17). In Re Hay's Settlement Trust [1981] 3 All ER 786 Megarry V-C held that a trustee holding a bare power has three duties: to consider periodically whether or not to exercise it; to consider the range of objects of the power (not relevant here, as there is only one object, namely the member); and to consider the appropriateness of individual appointments. To like effect, Windeyer J observed in the Lutheran Church case that 'a discretionary power given to a trustee to act or not to act in a specified manner imposes a duty on the trustee at least to consider the matter and to decide deliberately whether or not to exercise the power' (at 652). 54 Given, then, that a trustee who has a bare power has a duty to consider whether to exercise it, how does the Court ensure that the duty is performed? In Re Baden's Deed Trusts (at 449) Lord Wilberforce accepted that there is no obligation to exercise a bare power and no court will intervene to compel it, whereas a trust power is mandatory and its execution may be compelled. But that does not mean that the Court is powerless to see to the performance of the trustee's 'duty to consider'. In the Lutheran Church case Windeyer J said (at 652): 'If it is a mere power, the court cannot dictate to trustees whether it should be exercised, or not exercised. That discretion is committed to them. But, even in that case, the court is not entirely unconcerned; for if trustees having a pure discretionary power refuse to consider whether and how they will exercise their discretion, then the court will remove them and substitute new trustees - who will have the same discretion but who, it is hoped, will not be recalcitrant.' 55 Apart from enforcement of trustee's 'duty to consider', there are several other grounds for curial intervention. The starting point is that the Court cannot examine the exercise of a discretion conferred in absolute terms, so long as the discretion is exercised in good faith and without an ulterior purpose: Gisborne v Gisborne (1877) 2 App Cas 300. But the exercise of fiduciary powers, including a trustee's administrative powers as well as powers of disposition (be they trust powers or bare powers) is open to review on four grounds, however broad may be the terms of the trustee's discretion (see Karger v Paul [1984] VR 161; Rapa v Patience, cited above). The first ground is where the discretion was not exercised in good faith; the second is where it was not exercised upon a real and genuine consideration (which includes consideration of the wrong question: see Dundee General Hospitals Board of Management v Walker [1952] 1 All ER 896, 905); the third is where the discretion was exercised for an ulterior purpose or was not exercised in accordance with the purposes for which was conferred; and the fourth is where the trustees have disclosed (otherwise than in the course of proceedings in which the discretion is challenged) the reasons for the exercise of their discretion, and those reasons are not sound. 56 For the most part, the duty to act in good faith speaks for itself. It should be noted, however, that in equity the concept of good faith has an element of elasticity, in the sense that an exercise of power may be treated as lacking in good faith if it is arbitrary, or capricious (Re Pauling's Settlement Trusts [1964] Ch 303, 333), or irresponsible (Lutheran Church case, at 639; see generally, Attorney-General of the Commonwealth v Breckler (1999) 197 CLR 83). 57 Cowan v Scargill [1985] 1 Ch 270 may be seen as an example of the second ground of judicial intervention, where the trustees have failed to act on a real and genuine consideration (or, as Lord Truro LC said in Re Beloved Wilkes' Charity (1851) 3 Mac & G 440; 42 ER 330, at ER 333, 'with a fair consideration'). In that case union representatives on the board of trustees of the mineworkers' pension scheme wished to limit the range of investments of the fund by excluding overseas investments and investments in oil companies. Megarry V-C held that to do so would be contrary to the duty of the trustees to act in the best interests of their beneficiaries by obtaining the most prudent available investment return. By taking into account their personal views and moral reservations, the union trustees had misunderstood their duty and had failed to give proper consideration to the exercise of the investment power. 58 The second ground was expressly applied by Bryson J in a superannuation context in Vidovic v Email Superannuation Pty Ltd (Supreme Court of New South Wales, 3 March 1995, unreported). His Honour found that on the facts, the trustee failed to assess the plaintiff's application for benefits on the ground of total and permanent disablement by reference to the elements of the definition of that phrase in the trust instrument. 59 An aspect of the trustees' duty to give real and genuine consideration is the requirement that they must inform themselves, before making a decision, of the matters that are relevant to it. This extends beyond simple matters of fact to include taking advice from appropriate experts, although they must take care not to delegate the exercise of their discretion to the expert advisers. As Robert Walker J remarked in Scott v National Trust [1988] 2 All ER 705, 718, the development of this principle is still continuing, especially in the context of pension schemes, and there is still some uncertainty as to the standard to be applied. But the issue does not arise for determination in the present case. 60 Cowan v Scargill could also be seen as an illustration of the third ground for intervention, which requires that the trustees must exercise their powers for proper purposes. In that case the union trustees were exercising a power of investment, conferred to produce the best financial return for the fund, for the improper purpose of advancing their political or moral views. Careful attention must be given to the nature of the power in question, in order to determine the proper purposes for its exercise. In Lock v Westpac Banking Corporation (1991) 25 NSWLR 593 Waddell CJ in Eq held that in exercising their powers under a superannuation trust deed with respect to an accumulated surplus in the fund, the trustees were entitled to take into consideration the interests of the employer as well as the interests of the members (at 610). 61 I turn to the fourth ground. Until recently it was a safe formulation of orthodox principle to say that trustees are not obliged to give reasons for their decisions, but if they do, their reasons may be examined and reviewed by the Court: Re Londonderry's Settlement [1965] Ch 918; see also Karger v Paul and Rapa v Patience, cited above, and Parkes Management Ltd v Perpetual Trustee Co Ltd (1977) ACLR 303. But in recent times, that formulation has been revised. In Scott v National Trust (718) Robert Walker J cited the Scottish appeal to the House of Lords in Dundee General Hospitals Board of Management v Walker. Their Lordships held in that case that the Court will respect the intention of the author of the trust instrument that the trustees are to be the sole judges of matters placed within their discretion, but the Court may take into account any reasons given by the trustees in assessing whether their decision is open to challenge. However, this does not necessarily mean that well-advised trustees should decline to give reasons for their decisions. As Robert Walker J said, the true position was put succinctly by Lord Normand in the Dundee Hospitals case (at 900), when he said: 'It was said for the appellants that the courts have greater liberty to examine and correct a decision committed by a testator to trustees, if they choose to give reasons, than if they do not. In my opinion, that is erroneous. The principles on which the courts must proceed are the same whether the reasons for the trustees' decision are disclosed or not, but, of course, it becomes easier to examine a decision if the reasons for it have been disclosed.': [1952] 1 All ER at 905. These views were taken up and applied by Young J in Maciejewski v Telstra Super Pty Ltd (1998) 44 NSWLR 601, his Honour remarking (at 604) that 'whilst trustees do not have to give reasons in a case where a plaintiff puts forward a prima facie case that the trustee's discretion has miscarried, the absence of reasons and the absence of any evidence before the Court as to what happened, will tend to make that prima facie case a virtual certainty.' 62 If any of these grounds is made out, the principal and perhaps the only forms of relief are an order to remove the trustees and appoint others, or an order returning the matter to the trustees for a fresh decision, to be made in light of the Court's judgment. In Vidovic v Email Superannuation Bryson J said he found it difficult to see how in principle the Court could do anything else.

Additional findings of fact 63 A central difficulty in this case is that the documentary records of the administration of the pension fund are scant and incomplete. It appears that many of the records were destroyed when the first defendant's business moved from New South Wales to Queensland. Nevertheless, there are some financial statements in evidence, and affidavit and oral evidence was given based upon recollection. Some significant evidence emerged from these sources on several matters going beyond the agreed matters but bearing on the issues for determination in this case. It is necessary for me to deal with: (a) the purposes for which the fund was established; (b) whether the parties intended or decided to distribute superannuation benefits in proportion of 9:1; (c) how the plaintiffs' employer contribution accounts were treated by the trustee prior to the payment of $115,000 from the fund; (d) whether the payment of $115,000 was authorised by the trustee at any time, and how it was and should have been treated in the financial records of the fund; and (e) the nature and content of the decision which led to the payments made to the plaintiffs on 1 March 1991. 64 I should deal briefly with two preliminary matters, relating to the credibility of witnesses and the constitutional requirements for decisions by the directors of the trustee.

The credibility of the witnesses 65 The evidence of Mr Knudsen was inconsistent with the evidence of Mr Yardy and Mr Nancarrow. My opinion is that on the whole, the evidence of Mr Nancarrow is more reliable than the evidence of either Mr Yardy or Mr Knudsen. One of the unfortunate aspects of the case was that at the rehearing, the parties relied on affidavit evidence prepared for the original hearing, some of which was in answer to affidavits which were not read. In those circumstances, I have been less concerned about discrepancies between the affidavit and oral evidence of witnesses, that I would have been if the affidavits had been more closely contemporaneous with the rehearing. Specifically, Mr Nancarrow's oral evidence departed from his affidavits on some points. For example, in his affidavit of 22 July 1991 he deposed to a meeting of the directors of the trustee in November or December 1989, convened at short notice, to authorise the payment of the $115,000. But his oral evidence is that the payment was simply made by Mr Yardy signing a cheque while Mr Knudsen was absent on holidays, and the payment was not discovered by Mr Nancarrow until 7 or 8 months later, when he came to prepare the financial statements for the fund for the year ended 30 June 1990. In my view his oral evidence is more plausible and I accept it on this point, and generally. 66 Mr Knudsen's evidence was generally acceptable but in my view, with the passage of time he has persuaded himself to believe some things which are unlikely to be true. Specifically, I reject his evidence that he never acquiesced in the idea that eventually the proceeds of the pension fund would be distributed in the proportion 9:1. Mr Nancarrow, whose evidence I accept, deposed to conversations between Mr Knudsen and Mr Yardy and himself at which that intention was expressed and acknowledged, and the intention was stated (as I shall explain) in financial statements for the pension fund which (in my view) Mr Knudsen probably read and approved. 67 My overall assessment of Mr Yardy's evidence was that it was unreliable except where it operated against his interests. His demeanour and approach to his oral evidence was uncooperative and at time evasive (for example, in his handling of the question 'what is a trust?'and his persistent failure to give direct answers to the questions put to him). He did not seem to be doing his best to recollect the events. I also detected a lack of frankness - for example, when he answered 'not really' to the question whether he was 'pretty cranky' with Mr Knudsen for trying to wind up the company.

The constitutional requirements for decisions by the directors of Kara Kar 68 The Rules permitted the Trustee to appoint a Management Committee comprising representatives of the employer and members, but there is no evidence that any such committee was established. I interpret references in the evidence of Mr Yardy and Mr Nancarrow to 'nominee trustees' as references to the directors of the trustee company, Kara Kar, acting in their capacity as its board. 69 The articles of association of Kara Kar vested the power to manage the business of the company in its board of directors, by a provision in standard form. The evidence is that the directors at relevant times were Mr and Mrs Yardy and Mr Knudsen. Mr Knudsen did not cease to be a director until 22 October 1991, well after he was dismissed from the company. 70 The articles contemplated the appointment of permanent directors, with special powers, but in the absence of any evidence indicating that any of the directors was appointed as a permanent director, I infer that there were no permanent directors in this case. On the view that I take of the facts, nothing turns on this point. 71 The quorum for board meetings was two directors, and the articles stated that it was not necessary to give notice of a meeting of the board to a director who was not for the time being within the State of New South Wales. Thus, a constitutionally valid meeting of the directors could have taken place between Mr and Mr Yardy without notice to Mr Knudsen, if at the time he was outside New South Wales.

The purposes for which the fund was established 72 In my view there is ample evidence to indicate that Mr Yardy and Mr Knudsen agreed to establish the pension fund in order to minimise the taxation payable on distributions of profits from the company's business. To fulfil this purpose, they contemplated that with the assistance of Mr Nancarrow, they would structure the fund in such a way as to deliver maximum taxation benefits. They sought the Commissioner's approval of the 1979 trust deed, and amended it in 1980 in order to comply with the Commissioner's requirements. 73 It appears that the employer contributions to the fund were made proportionately to the salaries of the members, rather than their equity interests in the company, in order to ensure that the fund was a complying superannuation fund for tax purposes. The fund accumulated a surplus during the 1980s. Part of the surplus was returned to Kara Kar as employer, by distributions in 1983, 1984 and 1989. The remainder was transferred to a special reserve account, within the fund, with the Commissioner's approval. 74 The 1989 financial statements indicate that the special reserve arose from two sources. First, money lent back by the fund to Kara Kar in previous years (presumably after Kara Kar had contributed those amounts as employer contributions) was required to bear interest and consequently the fund derived interest income. Secondly, several employees were 'lost' in the 1982 business recession without receiving distributions. Money from both sources was transferred to the special reserve, which was used to provide employer contributions for the members of the fund (Mr and Messrs Yardy and Mr and Mrs Knudsen) to the maximum extent permitted by tax law. It appears to have been anticipated that the special reserve would gradually be decreased in this way until it was fully used up. As I shall explain, the intention to gradually apply the special reserve in this way was superseded by Mr Yardy's payment of $115,000 out of the fund in December 1999. 75 Although the pension fund was established and administered for the purpose of maximising the tax advantages for its members, it was undoubtedly a real fund and not a sham, and the provisions of the trust instrument applicable to it for the time being were real provisions creating real beneficial rights and interests. When, therefore, Kara Kar as employer made contributions in respect of each member proportionately to their salaries rather than proportionately to their equity in the business of the company, those contributions were to be dealt with by the trustee in accordance with the trust instrument which defined the beneficial rights of the members. The defendant submitted, in effect, that while the trust instrument in this case was not a sham, its provisions and administration were subject to the overriding qualification that benefits would be allocated in the proportion of 9: 1. I see no basis for taking that approach unless there was a contract to adhere to the 9: 1 proportion or there was an arrangement to that effect which equity will recognise through the principles of estoppel.

Was there a legally binding agreement or arrangement that benefits under the fund would be shared in the proportion 9: 1? 76 As I have said, Mr Nancarrow gave plausible evidence of discussions which had occurred from time to time, since the inception of the fund, between Mr Yardy and Mr Knudsen in his presence, in which Mr Knudsen made an acknowledgment along the lines that the fund would benefit the Yardys and the Knudsens in the proportion 9: 1. I reject Mr Knudsen's evidence to the extent that it is contrary to Mr Nancarrow's evidence on this point. However, given that there is a documentary account of this understanding in the 1989 financial statements, I would not rely on Mr Nancarrow's evidence for the precise terms of the arrangement. 77 The 'Information for Members' attached to the 1989 financial statements included the following notes: '(a) Amounts equal to the maximum permissible contributions are being transferred each year from the Special Reserve to individual member's accounts. (b) It is envisaged that the ultimate retirement benefits payable to the Yardy and Knudsen families will be in proportion to their shareholding ratio. (c) Before the object in (b) can be achieved, the Special Reserve has to be used up. After that happens Company contributions can be structured to achieve the desired result.' 78 Mr Knudsen gave evidence that he was unaware of these notes until they were drawn to his attention by his legal representatives in the context of these proceedings. I find it implausible that a director of the trustee would be unaware of notes to a document attached to the trust's financial statements. It is true that Mr Knudsen was on holidays in late 1989, and there is insufficient evidence to prove that he actually saw the 1989 financial statements including the notes, or that he participated in any process of approval. Nevertheless, it seems to me unlikely on the balance of probabilities that he would not have asked for such an important financial document, and also likely that he would have been provided with it whether he asked for it or not, (given the trustee's obligation under Clause 11 of the 1979 trust deed). 79 The notes make it clear, in my view, that there was an understanding about the 9: 1 proportion, and also that as a matter of construction, the understanding was not legally binding. What is recorded in the notes is a proposal which is 'envisaged'. The proposal is acknowledged to be an option which cannot be achieved until the happening of a future event, namely the using up of the special reserve. Once that event occurs, it will be necessary for contributions to be 'structured' to achieve the desired result. The method of implementation is not addressed. 80 The defendant's primary contention was that the understanding amounted to a contract, but counsel for the defendant submitted that if I rejected the primary contention (as I do) there was evidence to establish an equitable estoppel against the plaintiffs which would prevent them from denying the arrangement. In my opinion the facts do not support the alternative submission. The arrangement was at its highest, an arrangement anticipating a restructuring of the beneficial interests in the fund once the special reserve had been used up. In fact, by the time the special reserve was used up by virtue of the interim financial statements of 28 February 1991, the defendants had caused the circumstances to change by bringing about the termination of Mr Knudsen's employment and by taking steps to pay out the plaintiffs' existing entitlements in the fund. Since the defendants had fundamentally departed from the arrangements, it could not be inequitable for the plaintiffs to resile.

The employer contribution accounts prior to the payment of $115,000 81 As I shall explain, after the unauthorised payment of $115,000 was made from the fund in December 1989, the member accounts in the fund were altered. In order to understand the effect of the alterations and to assess their validity, I must first deal with the state of the accounts prior to December 1989. Fortunately there is some clear evidence on this point, in the financial statements for the fund for the year ended 30 June 1989. It is not clear from the evidence just how those financial statements were adopted, or indeed, that they were adopted at all. However, subsequent financial statements which are in evidence are clearly based upon the 1989 financial statements, and in the circumstances it is appropriate for me to infer, and I do infer, that the 1989 financial statements were validly adopted by or on behalf of the trustee. 82 According to the 1989 financial statements, members' funds totalling $325,930 comprised employee contributions of $56,564, employer contributions of $189,371 and a special reserve of $79,995. I wish to make some remarks about the first two of those items. 83 As to the employee contributions, I infer that the $56,564 shown in the 1989 financial statements is the contribution of $18,814 made by Mr and Mrs Yardy in 1979 plus accumulated investment income apportioned to their employee account. 84 As to the employer contributions, the 1989 financial statements attached the 'Information for Members' to which I have already referred. That statements set out the accumulated allocations to the accounts of each of the four members of the fund and the amount in the special reserve. The allocated amounts were: Mr Yardy $109,930; Mrs Yardy $61,422; Mr Knudsen $50,830; Mrs Knudsen $23,753; and special reserve $79,995. The amounts for Mr and Mrs Yardy included part of the accumulated employer contributions and the whole of the accumulated employee contributions. In the case of Mr and Mrs Knudsen, the amounts allocated were all from the employer contributions account. 85 It is plain that in 1989 the allocation of investment income to the accounts of the Yardys and the Knudsens was not in the ratio 9: 1. It appears, as I have already said, that past employer contributions had been paid into the fund in a ratio proportionate to salaries, in order to maximise taxation benefits. I infer that the investment income of the fund was allocated in 1989, and probably in previous years, to the accounts of the four members, and to the special reserve, in proportion to the respective sizes of the accounts. That approach was required by the 1979 trust deed, which was the applicable instrument at the time of adoption of the 1989 financial statements, and (as I have said) the trustee had no discretion to depart from it.

The payment of $115,000 86 The evidence on this subject is very sketchy. Putting together the evidence of Mr Nancarrow and Mr Yardy, I conclude that there were funds in a bank account of the trust sufficient to meet a cheque for $115,000. Mr Yardy needed that amount to complete the purchase of his home in Mermaid Waters. Being an authorised signatory for the trust's bank account, he simply prepared and signed a cheque for that amount drawn on the trust's bank account. Mr Knudsen was not aware of the payment at the time it was made, and did not become aware of it until much later. It is likely that he was still on holidays. He may have been aware that Mr Yardy proposed to take some such action, and he may have informed Mr Nancarrow that he would oppose any such step (his evidence is that he did, but Mr Nancarrow cannot remember any such conversation). But Mr Knudsen's position and state of knowledge hardly matter, because in my view there was no contemporaneous attempt to legitimise the payment when it was made by having it approved by the directors of the trustee. 87 Although Mr Nancarrow gave affidavit evidence that a meeting of the directors of the trustee was held at very short notice to respond to Mr Yardy's request for an immediate reduction in the sum of $115,000 from his at call loan to the company, his oral evidence was rather different. The account given in his oral evidence, which I accept, is that he first found out about the payment some seven or eight months after it was made, when he was preparing the financial statements to 30 June 1990. He prepared a minute of a meeting of directors which was intended to legitimise and account for the payment, and he prepared the 1990 financial statements on the same basis. If there was a meeting of the directors of the trustee, adopting Mr Nancarrow's draft resolutions, it would not have occurred until about the same time as the finalisation of the 1990 financial statements. 88 There is no direct evidence that the 1990 financial statements were adopted by the trustee. It appears from Mr Nancarrow's evidence that the financial statements were completed in the latter half of 1990, at a time when Mr Knudsen was on long service leave. Mr Nancarrow signed the auditor's report, and Mr Yardy signed the draft minute to which I have referred, as chairman. Given the paucity of evidence, conclusions must be based on flimsy foundations. Proceeding in that manner, I find it is more likely than not that the 1990 financial statements and the draft minute were approved by both Mr and Mrs Yardy, but that Mr Knudsen was not notified of any meeting to approve the financial statements. I shall assume, for the purposes of further discussion, that this adoption constituted approval by the board of directors of Kara Kar, either because Mr Knudsen (being absent) was not entitled to notice under the articles of the company, or because the lack of notice was a procedural irregularity cured by s 1322 of the Corporations Law. It is unnecessary for me to resolve this point because, even on the assumption which I make, the 1990 financial statements and the directors' resolution did not comply with the trust instrument and were ineffective to alter the plaintiffs' employer contribution accounts. 89 The 1990 financial statements were markedly different from the financial statements for 1989. Several changes were made. First, the accumulated and current entitlements of Mr and Mrs Knudsen were recalculated as one ninth of the allocation to Mr and Mrs Yardy's employer contribution accounts. In conjunction with this, the accounts of Mr and Mrs Yardy were segregated into an employee contribution account and an employer contribution account for each of them. The accounts of Mr and Mrs Knudsen were reduced by $61,829, and that amount was transferred back to the special reserve. 90 Secondly, the assets of the fund were revalued to reflect a decline in current market value as a result of the 1989 stock market collapse. The reduction in value of the assets, totalling $73,400, was allocated to members' funds on the same basis as investment income, that is (as from 1990) in the ratio of 9:1. The combined effect of the first and second changes was to reduce the account of Mr Knudsen from $50,830 in 1989 to $ 7,661 in the 1990 financial statements, and to reduce the account of Mrs Knudsen from $23,753 in 1989 to $3,056 in 1990. 91 The third change followed from Mr Yardy's withdrawal of the $115,000. That amount was debited to the special reserve account. The net effect on the special reserve (after crediting the $61,829 transferred from the accounts of Mr and Mrs Knudsen, and other adjustments) was to reduce the balance from $79,995 to $13,010. In a sense, therefore, distribution of the $115,000 to Mr Yardy was funded by reduction of both the employer contribution accounts of Mr and Mrs Knudsen and the special reserve. 92 In my opinion the first and third steps were not authorised by the relevant trust instrument. I use the expression 'relevant trust instrument' because, for reasons which I have given, the 1979 trust deed would have governed the accounting steps which I have described if they were taken (by adoption by the trustee) before 22 August 1990, but the 1990 Rules would be the applicable provisions if the accounting steps were taken on or after that date. Fortunately, the relevant provisions of the two instruments were to the same effect, so it is not necessary for me to decide which was the governing instrument. 93 The first step involved recalculating and altering the amounts standing to the credit of the plaintiffs' employer contribution accounts. The findings which I have already made imply that before the alterations, the accounts reflected the employer contributions made in respect of each of the plaintiffs over the period from 1979 to 1989, and the investment income attributable to those contributions. Under both trust instruments, the trustee was obliged to credit the full amount of each contribution by the employer, in respect of a member designated by the employer, to that member's account. There was simply no discretion in the trustee to do otherwise, nor any discretion to alter or reverse accurate entries once they were made. No doubt the trustee could alter the accounts to correct clerical mistakes, or even to correct a mistake made by the employer in wrongly attributing an amount to a designated member at the time of payment. But if one assumes (as I have held) that the figures in the 1989 accounts accurately reflected the allocation of employer contributions and investment income to each of the members' accounts, then the purported reduction of the plaintiffs' accounts was unwarranted and ineffective. The fact that Mr Yardy or Mr Nancarrow or even the board of directors of the trustee had by 1990 formed the view that the plaintiffs' employer contribution accounts had been built up on the wrong principle did not provide any justification for the reductions, given the terms of the relevant trust instrument. 94 Under both trust instruments the trustee had a discretion to apply amounts standing to the credit of the special reserve/Foregone Benefits Account by way of refund to the employer of contributions made by it. But according to the 1989 financial statements, the amount standing to the creditor the special reserve was only $79,995. Therefore the payment out of the fund of $115,000 cannot be regarded as a refund to the employer out of the special reserve/Foregone Benefits Account for the purposes of the relevant trust instrument. I would reject any contention that the payment should be treated, inter alia, as a return to the employer of $79,995, valid to that extent, since that would be inconsistent with the way the payment was in fact treated in the 1990 financial statements and the resolution. 95 Having reached that conclusion, I find it unnecessary to decide whether the payment could be treated for purposes of the trust instrument as a refund to the employer, passed on by the employer to Mr Yardy or his investment company by way of loan or repayment of loan. 96 I note that my conclusion as to the payment is in accordance with the Young J's 1994 finding, which was substantially accepted in the Statement of Agreed Matters.

The decision to pay out the plaintiffs on 28 February 1991, and the interim accounts 97 As the agreed chronology notes, Mr Nancarrow prepared interim trust accounts as of 28 February 1991, as a basis for the payments which were received by Mr and Mrs Knudsen on 1 March 1991. Those financial statements show a 'distributable amount' of $13,424 comprising investment income, tax refundable and the value of tax losses, after deducting losses on the sale of shares and expenses. That amount, and also the balance of $13,010 standing in the special reserve, were distributed to the employee and employer contribution accounts, evidently in proportion to their respective sizes. The employer contribution account was allocated to the Yardys and the Knudsens in the ratio of 9:1. In the result, the accounts of Mr and Mrs Knudsen rose to $ 9,013 and $ 3,595 respectively and these amounts were then paid out to them. The total amount in the employee and employer accounts for Mr and Mrs Yardy rose from $139,080 in 1990 to $163,623. The special reserve was closed. 98 The 1991 financial statements confirmed the interim accounts to 28 February 1991. The 'distributable amount' was described as 'benefits accrued as a result of operations' and was in the slightly higher figure of $16,308, as a result of further investment earnings for the balance of the financial year. The additional amount was distributed proportionately to the employee and employer contribution accounts of Mr and Mrs Yardy, and the accounts of Mr and Mrs Knudsen were shown as closed and paid out. There is a note that the Knudsens had initiated legal action 'to have their benefits calculated on a salary basis', and that if they were successful, the additional benefits would be $29,560, which would reduce the benefits accrued for Mr and Mrs Yardy by the same amount. 99 A crucially important matter for me to determine is whether any decision was taken by or on behalf of the trustee to authorise the payments which were made of plaintiffs, and if so, what were the exact terms of the decision. The context is that Mr Nancarrow had calculated credit balances for the plaintiffs' accounts, in amounts substantially lower than the true credit balances, given that the purported reduction in the accounts was ineffective. 100 Mr Knudsen's employment came to an end in October 1990, and his company commenced the present proceedings, seeking at that time to wind up at Kara Kar on the ground of oppression, on 17 January 1991. In his affidavit evidence Mr Yardy said that shortly afterwards, he told Mr Nancarrow that the partnership with Mr Knudsen was finished, and instructed him to 'work out the value of his shares in the company and the pension fund so I can pay him out his 10 percent'. Mr Nancarrow produced the interim accounts in response to that instruction. Mr Yardy said in his affidavit that there was no meeting of the 'nominee trustees' (by which I take him to mean the directors) in relation to the payments which were in fact made. He said the payments were simply made 'on the basis of Mr and Mrs Knudsen's one-tenth shareholding in Kara Kar'. In oral evidence he agreed that he left it to Mr Nancarrow to calculate the amount of the payments and when he was asked whether he decided to pay the plaintiffs whatever was in their employer contribution accounts as calculated by Mr Nancarrow, he replied 'whatever he was entitled to, he got paid for'. 101 For the reasons which I have given, the correct credit balance in each of the plaintiff's employer contribution accounts was substantially higher than the amounts calculated by Mr Nancarrow in the interim accounts of February 1991. It follows from my construction of Clause 10.4 of the 1990 Rules that, since Schedule 4 had not been completed, the plaintiffs' entitlement to any payment depended upon whether the trustee exercised its discretion in their favour under Clause 15 of the 1979 trust deed. 102 Assuming that Mr Yardy's decision was the decision of the trustee, exactly what decision did he make? Did he decide to pay the plaintiffs (a) only the amounts that the trustee was obliged to pay them, because they were entitled to those amounts; or (b) the specific amounts calculated by Mr Nancarrow, no more and no less; or (c) amounts calculated to represent 10 percent of the net value of the fund; or (d) the amounts standing to the credit of their employer contribution accounts, whatever those amounts may be? 103 On the evidence, it seems to me that interpretations (b) and (c) should be rejected. Interpretation (b) is incorrect because, according to Mr Yardy's evidence, which is corroborated on this point by Mr Nancarrow, the instruction was given before the calculations were made, and therefore Mr Yardy cannot have had in mind payment of specific amounts at that time when he gave the instruction. Moreover, he persistently answered questions in cross-examination by reference to paying Mr Knudsen whatever he was entitled to, rather than a specific amount to be calculated. Interpretation (c) is incorrect because it is inconsistent with that same evidence, given that the trust instrument did not define existing entitlements by reference to the 9: 1 proportion and the notes to the 1989 financial statements spoke in terms of a future intention rather than present rights. In my opinion, therefore, the real choice is between interpretations (a) and (d). 104 Difficult though it is to make sense of the unsatisfactory evidence, I have decided that the correct interpretation is interpretation (d). I reach this conclusion in reliance on Mr Nancarrow's conduct after he received Mr Yardy's instruction. If he had taken Mr Yardy to mean interpretation (a), sooner or later he would have found it necessary to revert to Mr Yardy for clarification. This is because the entitlement of the plaintiffs (which, on this view, was the basis for paying them) was not set out in the trust instrument in view of the failure to complete Schedule 4; and moreover, on its face Clause 10.4 gave the trustee a discretion to increase the amount beyond the member's entitlement. A reasonable person in Mr Nancarrow's shoes would have drawn these issues to the attention of Mr Yardy and asked him for a decision to clarify his view as to the plaintiffs' entitlement. This did not happen. Instead, Mr Nancarrow proceeded to make calculations of the amounts standing to the credit of the plaintiffs' employer contribution accounts on the manifest assumption that those full amounts would be paid out. I infer that Mr Nancarrow understood Mr Yardy's instruction in terms of interpretation (d). That being so, I infer that interpretation (d) is the correct interpretation of the instruction that Mr Yardy gave. 105 It follows, in my view, that Mr Yardy authorised Mr Nancarrow to calculate the correct credit balances in the plaintiffs' employer contribution accounts, and to make arrangements for payment of the full amounts of those credit balances. For reasons that I have given, the full amounts of the credit balances were substantially greater than the amounts calculated by Mr Nancarrow. Nevertheless Mr Yardy's instruction, in its terms, authorised the payment of those full amounts. If Mr Yardy's instruction constituted a decision by the trustee, it can only have been a decision taken in exercise of the available discretionary power, namely the power conferred by Clause 15 of the 1979 trust deed. Clause 15 in terms authorised the trustee to decide to pay the full credit balance of the employer contribution account to the member, and therefore authorised the trustee to give the instruction which Mr Yardy in fact gave. 106 This leads to the question whether Mr Yardy's instruction should be regarded as a decision by the trustee. In January/February 1991, when the instruction was given, the directors of the trustee were Mr and Mrs Yardy and Mr Knudsen. A quorum for a meeting of the directors was two. Mr Yardy's evidence was that he and his wife actually held directors' meetings, and that he believed that he had the personal authority to issue the instruction which he gave to Mr Nancarrow. That seems to me to imply that in his view, he and his wife as directors of the trustee had authorised him to issue the instruction. Mrs Yardy did not give evidence to deny that such a meeting occurred. Given her lack of contrary evidence, and the fact that Mr Yardy's evidence on this point is against his interest, I accept his evidence and conclude that some kind of meeting between him and his wife occurred, at which it was decided that Mr Yardy would instruct Mr Nancarrow to give the instruction which he in fact gave. 107 No doubt Mr Knudsen was not notified of the meeting. Failure to notify him was a procedural irregularity for the purposes of s 1322 (2) of the Corporations Law (see the definition of 'procedural irregularity' in s 1322 (1) (b) (ii), which specifically refers to a deficiency of notice). According to that provision, the meeting is not invalidated unless the Court is of the opinion that the irregularity has caused or may cause substantial injustice that cannot be remedied by any order of the Court and by order declares the proceeding to be invalid. There is no application before me to make any such order. If an application were made, my present view is that I would reject it. This is because the decision of the directors, as I have construed it, would not cause any injustice to anyone, since the only persons to suffer from it are those who made the decision.

Review of the trustee's decision 108 The plaintiffs invited me to review the trustee's decision, if I found that there was a decision unfavourable to them. I have found in favour of the plaintiffs' primary submission, that the trustee made a decision to distribute the amount to which Young J held they were entitled. No doubt the plaintiffs would assert that this decision by the trustee is beyond challenge. Nevertheless I should express my view as to whether there are grounds for challenging the decision, lest my failure to do so encourages further litigation. In doing so, I do not wish to diminish the difficulty that Mr and Mrs Yardy would encounter if they sought to challenge as beneficiaries a decision which they had taken as directors of the trustee. 109 Construing Mr Yardy's instruction the way I do, I preclude any basis for contending that the trustee failed to discharge its duty (enunciated by Lord Wilberforce in Re Baden's Deed Trusts) to consider whether to exercise its discretion. Since, in my view, the trustee's decision was taken on its behalf by the only other members of the fund, and was to pay the plaintiffs the maximum amount which they could receive, I see no basis for contending that there was any lack of good faith on the part of the trustee. Since the decision was within the range permitted by Clause 15, and reflected the amounts actually standing to the credit of the plaintiffs' accounts, it cannot be said to have been capricious. 110 It is much more difficult to say whether the decision would be open to challenge on the ground that no real and genuine consideration was given to the matter for decision. The difficulty arises out of the almost complete absence of relevant evidence. In my view there is nothing in the evidence presented at the rehearing which would lead me to conclude or even suspect that Mr and Mrs Yardy did not give real and genuine consideration to the matter for decision. Therefore in the present evidentiary circumstances, any such challenge to the decision would fail. 111 Similarly, nothing in the evidence before me suggests that the decision was taken for other than proper purposes. I should say that I would be very concerned, if the trustee had decided to make a distribution reflecting the 9:1 proportion, that the decision would have been motivated by improper purpose. The fact that the members of the fund are also shareholders in the business entity, entitled to the distribution of profits in the proportion 9: 1, is in no way indicative of the proportionate distributions they should receive under the trust instrument. Nor is the fact that there was an arrangement in place which would or may lead to a restructuring of beneficial entitlements upon the happening of some future events, particularly as I have found that the arrangement was not binding at law or in equity. 112 It is true that the absence of reasons for the exercise of a discretionary power by a trustee may in some cases assist the Court to conclude that no valid reasons existed. However, in a case such as the present, where a small fund has been administered with minimal formality, the absence of reasons is likely to be less significant than in the case of a large, professionally administered fund. Moreover, it is relevant that the decision was in favour of the plaintiffs and contrary to the interests of those who made it. In my view the absence of reasons does not provide any basis for vitiating the decision in this case.

Separate questions for determination 113 At the rehearing counsel for both sides sought to direct my attention to the issues of construction and fact which they regarded as central to the case. I invited them to eliminate peripheral issues by agreeing on some separate questions for determination under Part 31 of the Supreme Court Rules. Eventually they produced an agreed statement of the separate questions, which they supported by a series of undertakings by their respective clients. I did not make any order for the determination of separate questions at the hearing, since by the time the separate questions and undertakings had been formulated the hearing was well on its way, and I needed time to consider whether the determination of separate questions would be the most efficacious way of determining the proceedings. I turn to that question now. 114 The statement of separate questions for determination, and the undertakings as settled by counsel, are as follows: STATEMENT OF SEPARATE QUESTIONS FOR DETERMINATION PURSUANT TO PART 31

On the true construction of the trust instrument, and in the events which have occurred:

Was each plaintiff entitled to receive, as a lump sum Withdrawal Benefit, a sum equal to the whole of the amount (calculated in accordance with the findings of Justice Young dated 13 April 1994 and 4 September 1996) standing to the credit of his or her Employer Contribution Account on 1 March 1991? In each case "the sum")

If "yes" to question 1, is the trustee now obliged to pay the balance of the sum to each plaintiff"

If "no" to question 1, was each plaintiff entitled to a withdrawal Benefit in some lesser amount or proportion of the sum, and if so, what amount or proportion of the sum?

If the answer to the first part of question 3 is "yes" is the trustee now obliged to pay to the balance of that amount or proportion to each plaintiff"

If the answer to question 1 or question 3 is that either or both plaintiffs were not entitled to any part or proportion of the sum, did the trustee exercise its discretion to pay either of them the whole of the sum pursuant to the proviso to Rule 10.4?

If the answer to question 5 is "yes", is the trustee obliged to pay the balance of the sum to each plaintiff"

If the answer to question 5 is "no" should the Court:

7.1 direct the trustee to exercise the discretion referred to in the proviso in accordance with law, or

7.2 exercise that discretion in place of the trustee, and if so, in what manner"

Is the meaning of rule 10.4 so uncertain (by reason, inter alia, of the incompleteness of Schedule 4) so as to make it ineffective, void or inoperative as a binding provision of the trust instrument?

If the answer to question 8 is "yes", is clause 15 operative as the applicable provision of the trust instrument concerning the proper payments, if any, to be considered or made by the trustee in respect of the termination of the plaintiffs' employment and membership of the trust?

If the answer to question 9 is "yes", 10.1 is the trustee obliged to pay the balance of the sum to each plaintiff, or

10.2 Should the Court: 10.2.1 direct the trustee to exercise the discretion referred to in Clause 15 in accordance with law, or

10.2.2 exercise that discretion in place of the trustee, and if so, in what manner?

10 AUGUST 1999 UNDERTAKINGS We, Niels Knudsen, Suchindra Knudsen, William Yardy, Jennifer Yardy and Kara Kar Holdings Pty Ltd, by our duly appointed solicitors hereby severally undertake to the Court, subject to the Court's power to relieve any of us from any part of these undertakings, and without prejudice to our rights of appeal, as follows:

If the question numbered 2 in Annexure A is answered "Yes" the defendants will consent to judgment for the first plaintiff in the sum of $57,099 (being the sum of $66,112 less the sum of $9,013 already received by way of withdrawal benefit) and for the second plaintiff in the sum of $26,741 (being the sum of $30,336 less the sum $3,595 already received by way of withdrawal benefit) together with interest on each judgment at the rates and during such periods as are agreed between the parties, or in default of agreement, as are determined by the Court.

If the question numbered 4 in Annexure A is answered "Yes" the first defendant will consent to judgment for the plaintiffs in such sums as are decided by the Court in answer to question 3 (the first and second plaintiffs giving credit for the sums of $9,013 and $3,595 received by them respectively as withdrawal benefits) together with interest on each judgment at the rates and during such periods as are agreed between the parties, or in default of agreement, as are determined by the Court.

If the question numbered 6 in Annexure A is answered "Yes" the first defendant will consent to judgment for the first plaintiff in the sum of $57,099 (being the sum of $66,112 less the sum of $9,013 already received by way of withdrawal benefit) and for the second plaintiff in the sum of $26,741 (being the sum of $30,336 less the sum $3,595 already received by way of withdrawal benefit) together with interest on each judgment at the rates and during such periods as are agreed between the parties, or in default of agreement, as is determined by the Court.

If the question numbered 7.1 in Annexure A is answered "Yes" the first defendant will thereupon take all necessary and appropriate steps to exercise the discretion referred to in question 7.1 in accordance with law and notify the plaintiffs in writing of its decision within 28 days (or such longer periods as is agreed between the parties or permitted by the Court).

If the question numbered 7.2 in Annexure A is answered "Yes" the defendants will within 28 days (or such longer period as is agreed between the parties or permitted by the Court) do all things necessary to comply with and carry into effect the Court's exercise of the trustee's discretion.

If the question numbered 10.1 in Annexure A is answered "Yes" the defendants will consent to judgment for the first plaintiff in the sum of $57,099 (being the sum of $66,112 less the sum of $9,013 already received by way of withdrawal benefit) and for the second plaintiff in the sum of $26,741 (being the sum of $30,336 less the sum $3,595 already received by way of withdrawal benefit together with interest on each judgment at the rates and during such periods as are agreed between the parties, or in default of agreement, as is determined by the Court.

If the question numbered 10.2 in Annexure A is answered "Yes' the first defendant will thereupon take all necessary and appropriate steps to exercise the discretion referred to in question 10.2.1 in accordance with law and notify the plaintiffs in writing of its decision within 28 days (or such longer period as is agreed between the parties or permitted by the Court).

If the question numbered 10.2.1 in Annexure A is answered "Yes" the defendants will within 28 days (or such longer period as is agreed between the parties or permitted by the Court) do all things necessary to comply with and carry into effect the Court's exercise of the trustee's discretion.

If the answers to the questions in Annexure A have the consequence that 9.1 the first defendant is not required to pay any sum or consent to judgment in any sum; and

9.2 the first defendant is not required to exercise any discretion according to law; and

9.3 the Court, declines to exercise any discretion of the trustee or alternatively exercises such a discretion against making a payment of any amount or proportion of any sum to either plaintiff;

the plaintiffs will consent to judgment in favour of the defendants in the suit.

11 AUGUST 1999 115 I have decided that it would be useful to make an order for the determination of these separate questions, having regard to the undertakings. The advantage of doing so is that it should avoid any further procedure for the quantification of recovery. I shall be make an order under Part 31 Rule 1 (a) that the above questions be decided separately from any other question in the proceedings. I shall answer the questions forthwith, since all relevant submissions on them were made at the rehearing, when they were fully explored. 116 My answers to those separate questions will be as follows: Question 1 Yes. Question 2 Yes. Questions 3,4, 5, 6 and 7 These questions do not arise. Question 8 Yes. Question 9 Yes. Question 10 Yes to 10.1. 10.2 does not arise. 117 I take it that the defendants will now consent to judgment in accordance with Undertaking No 6. I shall direct the plaintiffs to prepare short minutes of order to reflect these reasons for judgment, and I shall stand the matter over for the making of orders and to hear argument with respect to costs. * * * * * * * * *

Last Modified: 09/26/2000 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.