Macedonian Orthodox Community Church St Petka v His Eminence Petar

Judgment 1The plaintiffs Lorand Loblay and Karen Loblay commenced these proceedings by summons filed on 9 August 2013. 2The plaintiffs are the executors of the will of the late Emery George Nemes by probate granted by this court on 18 July 2012. I will call the plaintiffs the "executors". 3By order 1 of the claim for relief in the summons the executors seek the opinion, advice and directions of the court in respect of the question set out in the Statement of Facts filed in the proceedings. Paragraph 18 of the Statement of Facts poses the following question: "The opinion, advice and direction of the court is sought under Section 63 of the Trustee Act 1925 based on this Statement of Facts that the executors are entitled to act on the joint advice of Christopher Birch SC and Benjamin DeBuse dated 7 August 2013 to defend and bring a cross claim in the proceedings presently before the court, suit no 2013/177990". 4Suit no 2013/177990 was commenced by statement of claim filed in the court on 11 June 2013 by Robert William Fischer and three other plaintiffs against Nemeske Pty Ltd (the "trustee") as first defendant, the executors as second defendants, nine named persons as third defendants, and Marianne Fischer as fourth defendant. For convenience I will call this suit the "principal proceedings". 5The trust records of the trust of which Nemeske Pty Ltd is trustee contain evidence that suggests the trustee was at the date of the death of Mr Nemes indebted to him for an amount of $3,904,300, and that the debt was secured by a charge granted by the trustee on 30 August 1995. 6In essence the claim made by the plaintiffs in the principal proceedings is that the trustee is not indebted to the executors for $3,904,300, or any other sum. 7In substance the issue in the principal proceedings is between the first defendant as trustee and the second defendants as executors. 8In clause 4 (a) to (p) of the deceased's will he made bequests to various named beneficiaries. Thereafter in clause 4 (q) of the will the deceased gave all of his shares in the trustee to six named beneficiaries. Those beneficiaries include the four plaintiffs in the principal proceedings. By clause 4 (r) of the will the deceased gave the residue of his estate to 29 individuals or couples in percentages ranging from 1.1% to 18.2%. 9When the executors complete the execution of the deceased's will the beneficiaries listed in clause 4 (q), including the plaintiffs, will become owners of the shares in the trustee. Consequently, they will be able collectively to appoint the board of directors of the trustee, and so cause the trustee to exercise its powers under the deed which created the trust in such manner as they wish, subject to the overriding obligation of the trustee to properly perform its obligations as trustee. 10The trust was created by a deed of trust made on 24 June 1974. Clause 2 provides that the trustee is to hold the trust fund "subject to the trust's directions and discretions which are fully set out in the first schedule hereto". The first schedule, in substance, empowers the trustee to pay the income of the trust towards the maintenance, education, advancement or benefit of any one or more of the specified beneficiaries in the discretion of the trustee. The first schedule also permits the trustee in its discretion to determine for which of the specified beneficiaries it should hold the capital of the trust as at the vesting day, determined in accordance with that schedule. Whilst this statement of the trustee's discretionary power is an oversimplification of the terms of the first schedule, it is sufficient to show how control of the trustee will bring with it significant discretionary power in relation to the disposal of the fund held on trust by the trustee. Clause 4 (a) and (b) of the trust deed contains additional powers by which the trustee may apply the trust fund for the maintenance, education, advancement in life or benefit of the specified beneficiaries. 11The specified beneficiaries are defined in par (g) of the first schedule as being various named persons and their progeny. It appears from par 1 (a) of their statement of claim that the plaintiffs in the principal proceedings claim to be specified beneficiaries, and they plead in pars 5 and 6 that the third and fourth defendants are or may be specified beneficiaries. The fourth defendant is said to be the mother of the plaintiffs. 12If the trustee is indebted to the estate of the deceased for the sum of $3,904,300 then the value of the trust fund held by the trustee will be diminished by that amount when the debt is paid to the executors on behalf of the estate. That event will benefit the residuary beneficiaries to the detriment of the specified beneficiaries of the trust. 13Neither the principal proceedings nor the summons for judicial advice raises any issue about the meaning and effect of any term of the will of the deceased. Once the executors have gotten in the assets of the estate the will of the deceased will be administered according to its terms. The shares in the trustee presently held in the name of the executors will be transferred to the beneficiaries named in clause 4 (q). Those beneficiaries, as shareholders, will then be entitled to exercise their shareholders' rights according to law. If the trustee has repaid the debt to the executors the value of those rights may effectively be reduced by the amount of the debt. When the will is administered the executors will distribute the residuary estate to the residuary beneficiaries. If the debt has been paid the residuary estate will be greater by the amount of the debt than it otherwise would be. 14It follows that although different classes of beneficiary under the will have inconsistent interests in practical terms, the difference does not arise from any uncertainty as to the meaning and effect of the will. It is simply a question of whether the estate includes the debt as an asset, and that is an issue to be determined between the trustee and the executors. In this respect it is the executors who are legally entitled to the debt, if it exists, and it is the executors who have the right to enforce the debt as part of their duty to get in the estate. 15As the executors are presently entitled to the shares in the trustee, and as the executors are the directors of the trustee, the executors are in a position of conflict of interest in relation to the issue of the trustee resisting their own claim as executors that the trustee is indebted to the estate. The plaintiffs in the principal proceedings plead in pars 12 to 15 of the statement of claim the standing that they claim to bring the proceedings. In brief they allege that the executors have refused to appoint the nominees of the plaintiffs as directors, and to retire as directors and transmit the shares in the trustee to the plaintiffs, and furthermore that the trustee has refused to bring the principal proceedings. In these circumstances the parties to the principal proceedings for sensible practical reasons have agreed to allow the plaintiffs effectively to prosecute the proceedings for the benefit of the first defendant trustee against the second defendant executors. The other defendants have been joined so that they are bound by the result of the principal proceedings. 16The residuary beneficiaries under the will of the deceased have not been joined as parties to the principal proceedings because they have no standing to enforce the debt that is claimed to be owing by the trustee to the estate. The executors are the proper parties to enforce the debt. 17Paragraph 6 of the Statement of Facts describes the identity and the circumstances of the residuary beneficiaries. There are 33 named residuary beneficiaries (including joint beneficiaries) of which eight have died. Of the surviving residuary beneficiaries,15 live outside of Australia and 10 live in Australia. All of the residuary beneficiaries are over the age of 18 years, and some are aged 60 years and over. 18Paragraph 14 of the Statement of Facts records that Mr Loblay is not a beneficiary and derives no benefit nor does the other executor derive any benefit from the estate or the resolution of the proceedings in so far as the administration of the estate is concerned. 19In these circumstances the practical effect of the question upon which judicial advice is sought is to see whether the executors are justified in defending the principal proceedings in order to establish the existence of the debt owed by the trustee to the estate, and also justified in bringing a cross claim to recover the debt and enforce the charge which secures its repayment by the trustee. If the executors do not take that course then it will follow that the residuary estate will necessarily be deprived of the value of the debt. As noted, the executors are the proper parties to resist the plaintiffs' claim in the principal proceedings and to recover the debt if they succeed. It is impracticable that the residuary beneficiaries could defend the principal proceedings, even if they had a right to do so, and were made parties. 20The executors have filed the summons seeking judicial advice to comply with the injunction of the plurality of the High Court in Macedonian Orthodox Community Church St Petka v His Eminence Petar (2008) 237 CLR 66 at 94 [74], that "a trustee who is sued should take no step in defence of the suit without first obtaining judicial advice about whether it is proper to defend the proceedings". That decision establishes at page 89 [56] that: "There is nothing in s 63 [of the Trustee Act 1925 (NSW)] which limits its application to "non-adversarial" proceedings, or proceedings other than those in which the trustee is being sued for breach of trust, or proceedings other than those in which one remedy sought is the removal of a trustee from office". Further, as the plurality noted in relation to the submission of the Attorney-General: "He further submitted, however, that the discretion of the court to consider applications brought under s 63 should not be open to a general first principle that, where there is a contest or where there are adversaries, it is not appropriate to give advice. Those submissions are correct, and early authorities must be read in their light": page 90 [60]. 21The function of the court in the present case is to give private advice to the executors: Macedonian Orthodox Community Church at page 91 [64]. Further, "provision is made for a trustee to obtain judicial advice about the prosecution or defence of litigation in recognition of both the fact that the office of trustee is ordinarily a gratuitous office and the fact that a trustee is entitled to an indemnity for all costs and expenses properly incurred in performance of the trustee's duties" (emphasis in original) page 93 [71]. 22Finally, the plurality laid down at page 94 [74] in relation to the proper function of the court on the present application: "But deciding whether it would be proper for a trustee to defend proceedings instituted about the trust is radically different from deciding the issues that are to be agitated in the principal proceedings. The two steps are not to be elided. In particular, the judicial advice proceedings are not to be treated as a trial of the issues that are to be agitated in the principal proceedings". 23It follows that the issue for determination by the court is not whether the executors are entitled to succeed on their defence of the principal proceedings, or whether the advice given by counsel is correct, but is whether in all of the circumstances established by the Statement of Facts, including the advice of counsel, the executors will be justified and will be properly performing their duties as executors if they defend the principal proceedings and prosecute a cross claim to recover the debt and enforce the charge. 24Section 63 (1) of the Trustee Act 1925 (NSW) provides: "A trustee may apply to the Court for an opinion advice or direction on any question respecting the management or administration of the trust property, or respecting the interpretation of the trust instrument". 25"Trustee" is defined in s 5 to include a legal representative. 26It is clear that the executors are entitled to invoke s 63 (1) and that the question set out in the Statement of Facts is in respect of the management or administration of the trust property, in that it concerns the getting in of an asset worth $3,904,300 that is under challenge by the plaintiffs in the principal proceedings. 27The court is of the opinion that the executors are entitled to act on the joint advice of counsel referred to in the question at par 18 of the Statement of Facts to defend and bring a cross claim in the principal proceedings, and will make an order to that effect. 28The court has carefully considered counsel's advice and is of the view, without affirming the necessary correctness of that advice, that the reasoning displayed by counsel in concluding that the executors have a good defence to the principal proceedings is sufficiently sound to warrant the executors prosecuting the defence, and additionally instituting a cross claim to recover the debt. 29Although these reasons for judgment are in the nature of a private advice to the executors from the court, it is neither necessary nor appropriate for the court to recount or consider the reasoning in counsel's opinion in detail, as that opinion remains subject to legal professional privilege in the executors. 30It will be sufficient for the court, having general regard to the terms of counsel's opinion, to justify the basis of the court's advice by examining the thrust of the plaintiffs' case in the principal proceedings and identifying the arguments available to the executors which make the executors' defence reasonably arguable, and justify their prosecution of the defence and cross claim in order to get in the assets of the estate for distribution in accordance with the terms of the will of the deceased. 31It appears that the debt of $3,904,300 arose as a result of a distribution which the trustee made under the trust deed at a meeting of the directors of the trustee held on 23 September 1994. The minutes that exist have not been signed by the chairman of the meeting. The relevant resolution is described as "SETTLEMENT DISTRIBUTION OF PROFIT". The resolution is in the following terms: "RESOLVED that pursuant to the powers conferred on the Company as Trustee in the Deed of Settlement of the Nemes Family Trust: - That a final distribution be and is hereby made out of the asset revaluation reserve for the period ending 30 September, 1995 and that it be paid or credited to: - the beneficiaries in the following manner and order: The entire reserve if any, to be distributed to: - Emery George Nemes & Madeleine Nemes as joint tenants". 32That resolution was apparently based upon a revaluation of the underlying assets of the trust. The resolution purported to make a distribution "out of the asset revaluation reserve". The amount distributed was recorded in the accounts of the trust as an amount equal to the amount in the asset revaluation reserve. The amount of the distribution has been treated in the accounts of the trust as a debt owed by the trustee to the beneficiaries to whom the distribution was made. There is no direct evidence as to the circumstances that caused the trustee and the named beneficiaries to treat the amount of the distribution as a loan by the beneficiaries to the trustee. Comprehensive proof of the circumstances relating to the transaction may not now be available because of the death of the deceased and the accountant who advised the trustee and the deceased at the time. 33The plaintiffs allege in par 22 of the statement of claim that the "Asset Revaluation Account" was an accounting entry and not property capable of being distributed, that no money was in fact lent by the deceased and his wife to the trust, and that the transactions were effected by a series of accounting entries that were beyond the power of the trustee. 34It is to be noted that the resolution did not purport to distribute the asset revaluation reserve, but purported to make a distribution "out of the asset revaluation reserve". The effect of the resolution depends upon its proper construction which, in the court's view, is a justiciable issue. It is capable of being construed as evidence of an intention by the trustee to distribute a proportion of the entirety of the trust fund equal to the amount in the asset revaluation reserve as numerator over the entire value of the trust fund as denominator. 35Furthermore, it would be possible for the court hearing the principal proceedings to find that the distribution intended to be effected by the resolution was part of a composite transaction whereby the distribution was made and immediately replaced by an advance of the value of the property distributed to the trustee as a debt payable to the relevant beneficiaries. The fact that the property purportedly distributed may not have been represented by specifically identifiable assets, as opposed to a proportion of the trust fund as a whole, would not necessarily deprive the loan that is recorded in the trust's financial statements of validity. 36These are issues which in the court's opinion are reasonably open to argument at the hearing of the principal proceedings. 37The plaintiffs then plead in par 23 of their statement of claim in the alternative to par 22 that the distribution and the creation of the debt were void and of no effect in that the distribution was beyond the power conferred by clause 4 (b) of the trust deed, or if within power was exercised for an improper purpose. By that provision the trustee was empowered to apply any part of the capital or income of the trust as the trustee shall think fit for the maintenance, education, advancement in life or benefit of any of the specified beneficiaries. The deceased and his wife were specified beneficiaries. As the distribution, if valid, must have included a distribution of capital, it is the power in clause 4 (b) that must support the distribution, rather than the power in clause 2 and the first schedule, which has been mentioned above. 38In outline, the plaintiffs give particulars in par 23 which assert that no property was in fact distributed to the deceased and his wife, that they never called on the debt, that the debt reduced the trust's net assets, provided them no income and was not enforced during their lives, and was of no benefit to them. 39The plaintiffs' claim is one that must be determined by the court hearing the principal proceedings on the available evidence, but it is at least strongly arguable that the propriety of the distribution and the creation of the debt cannot be determined retrospectively by the manner in which the deceased and his wife dealt with the asset during their lifetimes. 40The final particular to par 23 of the statement of claim is an allegation that no notice of the distribution was given to the plaintiffs as required by clause 4 (b) of the trust deed. 41The power in clause 4 (b) is made subject to a proviso that where it is intended to advance an amount of capital greater than $10,000 "the Trustee shall give written notice of such intention to all of those contingent presumptive discretionary or expectant beneficiaries who may exercise the powers conferred by clause 15.2 of this instrument at least thirty (30) days prior to such advancing or raising and payment or application of such capital". 42Clause 15.1 of the trust deed sets out a mechanism whereby the trustee from time to time may be appointed or removed. Clause 15.2 provides that: "In addition to the above named modes [the deceased] or in the event of his death or mental incapacity [the deceased's wife, and then after her to two named persons in succession and then the four plaintiffs] surviving for the time being jointly shall have the power to remove replace or appoint in addition a trustee or trustees at any time". It is notable that clause 15.2 then provides: "Such power shall be exercised in writing signed by the said [deceased] or [the deceased's wife] or [the other named persons] or the survivors for the time being of [the plaintiffs] jointly, respectively". 43The plaintiffs' argument apparently is that where clause 4 (b) requires the trustee to "give written notice of such intention to all of those contingent presumptive discretionary or expectant beneficiaries who may exercise the powers conferred by clause 15.2", that notice must be given to all of the beneficiaries who are consecutively named, before the exercise of the power will be valid. 44That argument is not necessarily correct, and there is an argument reasonably available to the executors that the words "who may exercise the powers" refer only to the particular beneficiary who at that time is actually nominated as the person empowered by clause 15.2 to replace the trustee. It is at least an available construction of clause 15.2 that at the relevant time the deceased was the only such beneficiary. Clause 15.2 identifies a sequence of beneficiaries each of whom can only exercise the power if the earlier identified beneficiaries have died or lack mental capacity. It is not clear why clause 15.2 would require that notice be given to any beneficiaries who do not have any power to act upon the notice. Furthermore, the use of the word "or" on numerous occasions in that part of clause 15.2 which sets out the mechanism for replacing the trustee supports the argument that notice is only required to be given to the beneficiary or beneficiaries presently entitled to replace the trustee. 45In any event the court is of the view that this issue is sufficiently open to justify the executors contesting the plaintiffs' argument. 46The plaintiffs plead in pars 24 to 26 of the statement of claim that the charge secures no money, or is voidable, or is held on trust by the executors, principally on the ground that the deceased and his wife received the benefit of the charge knowing that it was given in breach of trust. 47That argument may be available to the plaintiffs at the hearing of the principal proceedings, but there is a contrary argument available to the executors based upon the fact that the charge was created by a deed made on 30 August 1995 between the trustee, the deceased and his wife. The deed recited in Recital D that the trustee was indebted to the deceased and his wife in the sum of $3,904,300. The continuing argument is that the recital gives rise to an estoppel binding the trustee, as well as evidence of the intention of the parties in relation to the creation of the debt. 48The final claim made by the plaintiffs in the statement of claim, which they call their second claim, and plead in pars 27 to 30, is that the deceased on about 3 May 1994 resolved to vary the trust deed by substituting the word "18" for the word "60" in clause (f) of the first schedule to the trustee. The plaintiffs say that the effect of the resolution was to vest the trust on 24 September 1992 or on or about 3 May 1994. If this occurred, in either event, the capital of the trust would have vested in the beneficiaries before the purported distribution by the trustee to the deceased and his wife on 23 September 1994 which gives rise to the debt. 49Clause 17 of the trust deed empowered the deceased during his life to vary the trust deed provided that the variation did not confer any benefit on the deceased. 50On the application for judicial advice the executors tendered minutes of a meeting of the directors of the trustee apparently held on 3 May 1994 at which, in addition to the directors, the deceased is recorded as being present by invitation. The minutes purport to record an oral resolution made by the deceased on the day of the meeting in accordance with clause 17 of the trust deed to vary the provisions of the deed in the manner pleaded by the plaintiffs in their statement of claim. 51As the trust deed is dated 24 June 1974 the resolution upon which the plaintiffs rely was made, if genuine, some 20 years after the date of the deed. The effect of the alleged variation to the trust deed would be that the trust fund vested some two years before the date of the resolution. 52Clause 17 of the trust deed empowered the deceased to vary the trust deed "at any time and from time to time prior to the vesting date". There must be a question whether the trust deed on its proper construction empowered the deceased to act to vary the trust deed before the then current vesting date in a manner that made the trust vest on a date before the purported variation. 53Furthermore, the effect of par (d) of the first schedule of the trust deed is that on the vesting day the trustee shall hold the capital of the trust fund for the specified beneficiaries as are then living in such shares as the trustee in its absolute discretion may determine within a stipulated period before the vesting date, and in default of any such determination upon trust in equal shares for any issue of Patricia Gay Nemes who are then living, and in default of any such issue on trust in equal shares for any issue of all the specified beneficiaries who are then living. 54It appears that a number of factual issues may arise in relation to the genuineness of the resolution relied upon by the plaintiffs. These reasons for judgment do not deal with all of them. It is apparent that the trustee administered the trust after the date of the resolution as if it had not been made. The trustee did not distribute the capital of the trust in accordance with par (d) on the basis that the trust vested in accordance with the trust deed as varied by the resolution. 55The executors would be justified in resisting the alleged effect of the resolution as claimed in the statement of claim in the principal proceedings. 56The executors seek an order that they not be required to give notice of their application to the residuary beneficiaries. Neither the advice sought by the executors on this application nor the proceedings commenced by the statement of claim affect the rights of the residuary beneficiaries under the will. Rather, the application and the proceedings concern the assets that will be available to the residuary beneficiaries if the executors succeed in defending the plaintiffs' claim. The amount of $3,904,300 is substantial, and it will clearly be to the advantage of the residuary beneficiaries if the executors defend the claims successfully. It is clearly the duty of the executors to get in the deceased's estate provided it is reasonable for them, as is decided affirmatively by the judicial advice now given, to defend the proceedings. It is clear that the executors are prepared to perform their duties, and that they have acted properly in that regard in relation to the legal advice that they have obtained. The costs which the executors will incur in making the present application will be relatively small when compared to the benefit to the residuary beneficiaries if the plaintiffs' claim is successfully defended. The same is likely to be true in relation to the costs of defending the plaintiffs' claim. As the advice sought by the executors is private advice for their benefit the court will grant the order sought. 57The court will make the following orders: (1)The court orders that Lorand Loblay and Karen Loblay as executors of the estate of Emery George Nemes would be justified in defending and bringing a cross claim in proceedings No 2013/177990 brought in this court by Robert William Fischer and Others and are entitled to act in accordance with the advice of Christopher Birch SC and Benjamin DeBuse dated 7 August 2013. (2)The court directs that the executors are not required to give notice of this application to the residuary beneficiaries of the will of the late Emery George Nemes dated 3 July 2005. (3)The court orders that the cost of this application be paid out of the estate of the late Emery George Nemes on the trustee basis.