Paloto Pty Limited v Herro

Catchwords

(2003) 58 NSWLR 21 Harold Alfred Templeton v The Leviathan Proprietary Limited (1921) 30 CLR 34 In re CragoCrago v Crago (1908) 8 SR (NSW) 269 In re CrawshayDennis v Crawshay (1888) 60 LT 357 In re MorrisonMorrison v Morrison [1901] 1 Ch 701 In Re NewIn Re Leavers(2003) 58 NSWLR 21 Harold Alfred Templeton v The Leviathan Proprietary Limited (1921) 30 CLR 34 In re CragoCrago v Crago (1908) 8 SR (NSW) 269 In re CrawshayDennis v Crawshay (1888) 60 LT 357 In re MorrisonMorrison v Morrison [1901] 1 Ch 701 In Re NewIn Re Leavers

Judgment (4 paragraphs)

[1]

Luke Herro (first defendant) Anthony John Khalil Herro (second defendant) Belinda Louise Herro (third defendant) Matthew James Herro by his tutor Luke Herro (fourth defendant) Julia Madeline Herro by her tutor Luke Herro (fifth defendant) Madeleine Kate Herro by her tutor Luke Herro (sixth defendant) Hanaan Mary Indari (seventh defendant) Representation: Counsel: D Ash (plaintiff)

Judgment - EX TEMPORE

The plaintiff is the trustee of a trust that was created by a Deed of Settlement made on 8 June 1965 between John Clifton Wilson (as Settlor) and Jeanette Mary Herro (as Trustee). It was recited in the Deed that the Settlor was desirous of making provision for his grandson, Anthony John Khalil Herro, who was referred to in the deed as the Beneficiary.
By clause 4 of the Deed, the Trustee was required to hold the settled property on trust for the Beneficiary absolutely upon his attaining the age of twenty-five. Clause 14 of the deed conferred a power on the Settlor to revoke or vary any of the trusts declared under the deed. Pursuant to that power, on 29 April 1974 John Wilson, as Settlor, and Jeanette Mary Herro, as Trustee, entered into a Variation of Deed of Settlement whereby a number of changes were made to the terms of the trust.
Significantly, clause 4 of the deed was deleted and replaced with the following: "The Trustee shall stand possessed of the trust fund on the vesting day in trust as to income and capital for such of the beneficiaries as are then living, or any one or more of them exclusive of the other or others in such shares or proportions as the Trustee in her absolute discretion may determine on or within a period of fourteen days before the vesting day and in default of any such determination as aforesaid shall stand possessed of the trust fund for such of the children of JEANETTE MARY HERRO and KHALIL HERRO as shall then be living, and if more than one as tenants in common in equal shares PROVIDED THAT should any child of JEANETTE MARY HERRO and KHALIL HERRO have died before the vesting day leaving a child or children him or her surviving such child or children shall take, if more than one as tenants in common in equal shares the share which their parent would have taken if living at the vesting day."
A new clause 1(A) was inserted into the Deed at the same time. That clause contained definitions, including a definition of "vesting day" and a definition of "the beneficiary". The "vesting day" was relevantly defined to mean: "the day on which shall expire the period of fifty years after the execution of this settlement or the period of twenty-one years after the death of the last survivor of the descendants now living of his late Majesty King George the Sixth whichever shall be the shorter …"
"The beneficiary" was defined to mean: "(i) any child, grandchild or great grandchild of Jeanette Mary Herro and Khalil Herro born before the vesting day; (ii) the lawful husband or widower wife or widow as the case may be from time to time of any such child or grandchild."
It can be seen that the vesting day is the day on which the period of fifty years after the execution of the Deed of Settlement expires. That is 8 June 2015. The plaintiff is concerned that if there is a vesting of the trust property on 8 June 2015 there will be consequences adverse to the beneficiaries, in particular the incurring of liabilities for capital gains tax and stamp duty. The Settlor died in 1991 so the power of variation contained in clause 14 of the Deed is no longer available. The Deed contains no other power of variation. Accordingly, by Summons filed on 23 December 2014, the plaintiff seeks relief such as will enable it as Trustee to vary the vesting date to any day not later than 7 June 2045.
There are six defendants named in the Summons. The second defendant is Anthony Herro, the settlor's grandson who was named in the Deed as the Beneficiary. The first defendant is his younger brother, Luke Herro. They are the only children of Jeanette Mary Herro and Khalil Herro. Thus, as matters currently stand, and in the absence of a contrary determination made under clause 4 of the Deed by the Trustee, the trust property will vest equally in the first and second defendants on the vesting day in accordance with clause 4 of the Deed. The first and second defendants are two of the four directors of the plaintiff. The other directors are Khalil Herro, who is now aged 89, and Jeanette Herro. There is evidence that Jeanette Herro now suffers from advanced dementia. The third defendant is Belinda Herro, Luke Herro's wife. The fourth to six of the defendants are their three children, each of whom is a minor. Luke Herro has agreed to act as tutor for them in the proceedings and an order to that effect will be made. Each of the third to six of the defendants falls within the definition of "the beneficiary" and is thus a potential object of an exercise by the trustee of the power conferred by clause 4 of the Deed. So too is Anthony Herro's wife, Hanaan Indari. She is to be added as a further defendant to the proceedings. Leave to file an Amended Summons to deal with her joinder and Luke Herro's appointment as tutor will be granted. The defendants all support the plaintiff's application.
The only assets of the trust are 100 ordinary shares and 20 redeemable preference shares in a private company, Khalil Investments Pty Limited. There is evidence that Khalil Investments Pty Limited has assets with a net market value of in excess of $16 million. There is also evidence that if there is a vesting of the trust property in June 2015, there would be a net capital gain (allowing for the 50 per cent discount) of $1,365,302 and thus a total capital gains tax liability (assuming a marginal tax rate of 49 per cent) of $668,998. According to the second defendant there may also be a liability for stamp duty totalling an amount estimated to be greater than $38,000. It is asserted by the second defendant that if there is a vesting of the trust property in June 2015 and the shares in Khalil Investments Pty Ltd are transferred equally to the first and second defendants, it will be necessary for Khalil Investments Pty Ltd to sell assets in order to make a distribution so as to enable the first and second defendants to discharge the taxation liabilities that would arise.
The plaintiff accepts that the recent decision of the Court of Appeal in Re Dion Investments Pty Ltd [2014] NSWCA 367 is binding authority for the proposition that s 81(1) of the Trustee Act 1925 (NSW) does not permit the Court to confer upon the Trustee a discretionary power of amendment of the terms of the trust. In that case Barrett JA (with whom Beazley P and Gleeson JA agreed) upheld the decision of the primary judge (Young AJ) to the effect that the variation of the terms of the trust is not of itself a transaction within the meaning of s 81 and the section did not therefore empower the Court to confer upon a trustee a power to alter the terms of the trust as the trustee thinks fits (see at [98]-[100] and [108]). The plaintiff therefore seeks to invoke inherent jurisdiction of the Court to sanction deviations from the terms of the trust, which jurisdiction, it submits, has not been ousted by the enactment of s 81. I am content to proceed on the assumption that the inherent jurisdiction remains available.
This inherent jurisdiction or power is described in Jacobs' Law of Trusts in Australia, Seventh Edition at [1705] as follows: "The court has always had jurisdiction to sanction deviations from the terms of the trust where circumstances have arisen of an exceptional and urgent nature. In the leading case, Re New, Romer LJ stated: "In a case of this kind, which may reasonably be supposed to be one not foreseen or anticipated by the author of the trust, where the trustees are embarrassed by the emergency that has arisen and the duty cast upon them to do what is best for the estate […], then it may be right for the Court, and the Court in a proper case would have jurisdiction, to sanction on behalf of all concerned such acts on behalf of the trustees as we have above referred to."
I interpolate here that in relation to the expression used by Romer LJ "in a case of this kind", it is necessary to consider what his Honour said in the passage immediately preceding the passage which has just been quoted. His Lordship there made it clear that what he meant by "in a case of this kind" was a case where there were circumstances in the management of a trust estate, and especially where that estate consists of a business or shares in a mercantile company, and some peculiar state of circumstances arises for which provision is not expressly made by the trust instrument and which renders it most desirable and possibly even essential for the benefit of the estate and in the interests of the beneficiaries that certain acts should be done by the trustees which in ordinary circumstances they would not have power to do.
Returning to Jacobs' Law of Trusts in Australia, the learned authors then go on to identify three other types of case where the court exercised an inherent power to authorise deviations from the terms of a trust. None of those are said to be relevant to the present case. The authors then state that prior to the enactment of the statutory provisions (notably s 57 of the Trustee Act 1925 (UK) and s 81 of the Trustee Act 1925 (NSW)) which conferred wider powers on the courts to authorise departures from the terms of a trust, this inherent jurisdiction of the court: "was of an exceptional nature, the primary rule being that the court, as much as the trustee, was bound to act within the terms of the trust as constituted by the settlor or testator; that the business of the court was to execute trusts, not to alter them."
The expression of that primary rule can be seen, for example, in what was said by Farwell LJ in Re Hazeldine's Trust [1908] 1 Ch 34 at 41, which was referred to with approval in Harold Alfred Templeton v The Leviathan Proprietary Limited (1921) 30 CLR 34 at 56 and 65, and more recently by Mason P in Gonzales v Claridades [2003] NSWCA 227; (2003) 58 NSWLR 211 at [33]-[34].
In Re Dion Investments Pty Ltd itself, Barrett JA, after referring to the principle in Saunders v Vautier (the operation of which may bring about a variation of trusts even in the absence of a variation provision in the trust instrument) said at [47]: "Beyond that, there may be a very limited power of the court (of uncertain provenance) to sanction departure from the terms of the trust where some circumstance of emergency in the course of administration needs to be resolved in the interests of preserving the trust property: Re Jackson (1882) 21 Ch D 786; Re New [1901] 2 Ch 534; Re Tollemache [1903] 1 Ch 457."
In Re Tollemache (supra), was decided by Kekewich J. His Honour gave a number of examples of the types of cases in which the court is asked to sanction departures from the terms of a trust and then stated (at 462): "The above are illustrations of the exercise of the Court, justified by the practical necessity of the case, of jurisdiction going beyond the mere administration of trusts according to the terms of the instruments creating them. Others might be given, the applications or rather the circumstances inducing them exhibiting large varieties, but those mentioned suffice to explain the scope of the practice of the Court. There might be added illustrations of the refusal of the Court to exercise this extraordinary jurisdiction, but there is no occasion. All the cases of refusal may be grouped under one of two classes. Either, notwithstanding the advantage actual and prospective of what is proposed to be done, there is no urgency for it, and the existing state of things may without great mischief be allowed to remain, or the terms on which the advantage can be gained are such that the Court would by accepting them create a new trust in lieu of that which it is administering."
Kekewich J then turned to a discussion of the authorities including In re Crawshay; Dennis v Crawshay (1888) 60 LT 357, In re Morrison; Morrison v Morrison [1901] 1 Ch 701, and In Re New; In Re Leavers; In Re Morley [1901] 2 Ch 534, the Court of Appeal case quoted by the authors of Jacobs'. Kekewich J, after referring to the same passage from the judgment of Romer LJ, went on to say (at 464) that the passage must be taken to be controlled by the caution later expressed by Romer LJ in that case that: "It need scarcely be said that the Court will not be justified in sanctioning every act desired by trustees and beneficiaries merely because it may appear beneficial to the estate."
Kekewich J declined to sanction a proposed change in investment, not authorised by the terms of the trust, that was to the advantage of the beneficiaries. His Honour followed the decision of Buckley J in In re Morrison, being of the opinion that the decision of the Court of Appeal in In Re New afforded no reason to depart from what was said by Buckley J. The decision of Kekewich J was affirmed in the Court of Appeal (see In re Tollemache [1903] 1 Ch 955). On that occasion, the Court of Appeal included Romer LJ himself who said that In Re New showed how far the Court will go "and beyond what point it will not go". Cozens-Hardy LJ, in the same case, agreed and stated that In Re New "constitutes the high-water mark of the exercise by the Court of its extraordinary jurisdiction in relation to trusts."
I should also refer to In re Strang (1941) 41 SR (NSW) 114 where Jordan CJ said, based on In Re New and In re Tollemache, that: "The furthest that the Court felt itself at liberty to go in departing from the provisions of the trust instrument was to sanction a departure in case of emergency where this was necessary to prevent loss; it would not do so merely in order to secure an additional profit."
Further reference should be made to the discussion of In Re New and In re Tollemache in Chapman v Chapman [1954] AC 429 at 452-455 per Lord Morton of Henryton. I note in passing that In Re New has been followed a number of times in New South Wales (see, for example, In Re Toohey; Freehill v Toohey (1906) 6 SR (NSW) 538 and In re Crago; Crago v Crago (1908) 8 SR (NSW) 269).
Mr D Ash of Counsel, who appears for the plaintiff, submitted that the present case is one where an emergency has arisen in the course of administration which needs to be resolved in the interests of preserving the trust property. It is thus a case, so it was submitted, where the very limited power described by Barrett JA may be exercised. In summary, it is put that an emergency has arisen in the sense that since the settlement of the trust a tax on capital gains has been imposed and the tax would become payable upon the vesting of the property of the trust. It is submitted that this is something that has unexpectedly arisen, it being not something that was foreseen or anticipated by the Settlor. It is then put that the relief sought, namely granting power and/or authority to the Trustee to vary the vesting day, concerns the administration of the trust. Finally, it is put that the situation needs to be resolved to preserve and prevent loss to the trust property.
For the following reasons, I do not think that this is a case where the Court would be justified in sanctioning a variation of the terms of the trust to provide for a later vesting day. I do not think that it is correct to characterise the circumstances of the present case as involving an emergency that has arisen in the course of administration of the estate which needs to be resolved in the interests of preserving the trust property.
It is true that when the trust was settled in 1965, and when the Settlor amended the terms of the trust in 1974 to provide a vesting day, there was no capital gains tax in existence in Australia. It did not come into existence until 1985. I note, however, that the Settlor was alive at that time, and retained a power of variation until his death in 1991, yet there was no further exercise by the Settlor of the power of variation. Even if the imposition of the capital gains tax legislation can be considered to be something of an unexpected or unforeseen occurrence when viewed from 1965 or 1974, it was a well-known fact at a time when the Settlor could have taken steps to deal with it, including by causing the vesting date to be deferred. In these circumstances I have some doubt that the existence of the capital gains tax legislation should be regarded as an emergency in relation to the trust.
However, assuming in the plaintiff's favour that the introduction of the capital gains tax brought about an emergency in relation to the trust, I nonetheless have difficulty seeing it as one that faces the Trustee in the course of management or administration of the trust. It does not impinge upon the trustee's duties in relation to the management or administration of the trust property which consists of the shares in Khalil Investments Pty Limited. If the vesting date arrives in June 2015, it will be the duty of the trustee to do whatever is required in order for that property to vest in accordance with the terms of the trust. It is not suggested that the capital gains tax legislation would impede that process in any way. The Trustee may well understand that upon such vesting of property there will be taxation consequences for the beneficiaries, and may consider that, in the interests of the beneficiaries, it would be desirable if the terms of the trust were altered so that it could effect a deferral of the vesting date. However, these matters are not themselves concerned with the management or administration of trust property. As Barrett JA said in Re Dion Investments Pty Limited (supra) at [94], in the context of s 81 of the Trustee Act: "Variation of the terms of a trust (including by way of conferral of some new power on the trustee) is not something within the ordinary and natural province of a trustee. It is not something that it is 'expedient' that a trustee should do; nor, fundamentally, is it something that is done 'in the management or administration of' trust property. A trustee's function is to take the trusts as it finds them and to administer them as they stand. The trustee is not concerned to question the terms of the trust or seek to improve them. I venture to say that, even where the trust instrument itself gives the trustee a power of variation, exercise of that power is not something that occurs 'in the management or administration of' trust property. It occurs in order that the scheme of fiduciary administration of the property may somehow be reshaped."
Moreover, in circumstances where, on vesting, the capital gains tax legislation would give rise to liabilities on the part of the recipients of the property but not directly affect the property itself, it is difficult to regard the suggested resolution of the problem as something that is necessary in the interests of preserving the trust property. This case is quite unlike a case where trustees charged with the on-going management of trust assets are confronted with a problem that places the assets of the trust in jeopardy.
It is well established that the inherent power sought to be relied upon in this case is an extraordinary one that should be exercised with great caution. It is also clear that the Court should be astute to not exercise the power so as to create a new trust in lieu of that which it is administering (see In re Tollemache [1903] 1 Ch 457 at 462). In this case the Settlor, in conjunction with the making of a variation concerning the beneficiaries of the trust, deliberately chose a definition of "vesting day" and made no alteration to it following the introduction of the capital gains tax legislation. In my view the giving of the relief sought would be tantamount to the creation of a new trust. In all the circumstances, the Court declines to exercise its inherent power to make the orders sought by the plaintiff.
The plaintiff advanced two further grounds upon which the relief sought could be granted. The first ground was the so-called fifth exception to the general rule that the Court has no power to vary a trust. This exception was identified by Young J (as his Honour then was) in Tickle v Tickle (1987) 10 NSWLR 581 at 586 in the following terms: "That is, that accepting that there is no power to alter a trust merely because the current trustee and beneficiaries perceive that the altered trust would suit them better, the court has power to alter a trust involving infants where circumstances have occurred which have tended to thwart the testator's or settlor's intention and the parties or their guardians have consented to a course which will effect such intentions cy-pres."
His Honour said that the case before him came within that fifth exception "fairly and squarely".
Tickle v Tickle (supra) concerned gifts made by a will including an immediate gift of residue to two grandsons of the testator, who were minors. In this case there are minors involved, but they are merely potential objects of a discretionary power. They have no proprietary interest in any of the assets of the trust. Even allowing that such objects may have certain interests that would be protected by a Court of Equity, as submitted by Mr Ash based on what was said by Lord Wilberforce in Gartside v Inland Revenue Commissioners [1968] AC 553 at 617, I do not think that the trust before me can be described as "a trust involving infants" for the purposes of the fifth exception identified by Young J. In any event, I do not regard this as a case where circumstances have occurred which have tended to thwart the settlor's intention.
The second further ground was based on s 50 of the Minors (Property and Contracts) Act 1970 (NSW). That section operates where a minor is beneficially entitled at law or in equity to property. It permits the Court to make orders authorising a person to, inter alia, make any disposition of the property. The definition of "disposition of property" includes the grant of a power in respect of property.
It was submitted that a grant by the Court of power to the Trustee to extend the vesting date was a disposition of property as defined. However, even assuming that the minors in this case are beneficially entitled to property (as defined in the Act), s 50 only empowers the Court to make orders authorising a person (in this case the plaintiff) to make a disposition of property. After this difficulty was pointed out, reliance upon s 50 was, as I understood it, abandoned.
The Court orders: 1. That Luke Herro be appointed as tutor for his children, Matthew Herro, Julia Herro and Madeline Herro, in the proceedings. 2. That Hanaan Mary Indari be added as a defendant to the proceedings. 3. That leave is granted to the plaintiff to file an Amended Summons consequential upon orders 1 and 2. 4. That such Amended Summons may be filed by sending it to my Associate within seven days. 5. That the proceedings are otherwise dismissed.

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