Plaintiff v Defendants

2 The inventory of assets and liabilities filed in support of the application for letters of administration disclosed a gross estate of $1,126,712.18. Of that amount, $770,000 was attributed to the property at 1974 Licola Road, Glenmaggie,[1] known as 'Lazy Acres' ('the property').

3 Although all other matters relating to the distribution of the estate have been agreed by the administrators, both the plaintiff and the second defendant are interested in purchasing the property. Each has made an offer to purchase the property from the estate, but they have been unable to agree on how the property should be dealt with. The land remains held on trust for sale pursuant to s 38 of the Administration and Probate Act 1958.

4 It is now more than three years since the death of the deceased and two years since the grant of letters of administration of the estate. In order to resolve the issue, the plaintiff filed an originating motion on 3 April 2014 seeking orders that the three parties as administrators:

(a) be directed to sell the property by public auction through the agency of an appropriate land agent; and

(b) each of them be at liberty to bid at the auction and, if successful, to purchase the property from the estate.

5 According to the affidavit sworn 25 March 2014 by the plaintiff in support of his originating motion, the property is now valued at approximately $1,300,000, although no valuation is exhibited to his affidavit.

6 By affidavit sworn 26 March 2014 in Colombo, Sri Lanka, the first defendant deposed that he supported the application by the plaintiff.

7 The second defendant appeared by counsel on return of the summons. Although she did not file an affidavit in respect of the application, her counsel stated that she consents to orders that the property be sold by public auction, but does not consent to the order that each of the parties have liberty to bid at the auction and, if successful, to purchase the property from the estate. It was contended by the second defendant that the 'self-dealing rule' prohibits the parties from bidding at that auction.

8 An executor or administrator cannot purchase from him or herself the property of an estate.[2] The rule is an application of the general principle that a trustee must not profit from his or her position as trustee, a principle that has been strictly applied.[3] The basic form of the rule is explained in Jacobs', where the learned authors provide:

Except with the consent of the court, or pursuant to an express power contained in the trust instrument or with the assent of all beneficiaries, a trustee must not purchase the trust property (as distinct from purchasing a beneficiary's interest) either directly or from the co-trustee or co-trustees. If this happens, the transactions may be set aside by the court without any evidence being adduced that the transaction was unfair or that the trustee took any improper advantage of his or her position as a trustee, even if the terms are fair and generous.[4] These are rules about 'self-dealing'; the purchase of a beneficiary's interest are dealt with by rules about 'fair-dealing'.[5] The court will not permit a trustee to have an interest adverse to and inconsistent with the duty to the beneficiaries, unless, of course, authorised by the trust instrument.[6]

9 In Union Trustee of Australia Ltd v Gorrie, Gibbs J explained the rationale for the principle:

The principle that lies at the root of this matter is that a trustee for sale owed a duty to his beneficiaries to do everything in his power for their benefit, and is therefore absolutely precluded from buying the trust property, irrespective of the questions of undervalue or otherwise, because he may be thus induced to neglect his duty.[7]

10 Mr Boaden, on behalf of the plaintiff, made further specific reference to Gibbs J's decision in this case, where his Honour said:

On behalf of the defendant it was contended that the court has no power in any circumstances to sanction the sale of trust property to a trustee against the wishes of a beneficiary who is sui juris. It was said that the power to authorise a trustee to purchase exists only where the beneficiaries are unascertained, or under disability and cannot consent for themselves. It appears to me that the powers of the court are not quite so limited.

...

Other cases ... illustrate the reluctance of the court to approve a sale to a trustee in the face of objections from beneficiaries. I understand the true rule to be that if a beneficiary who is sui juris opposes a sale to a trustee, the court has power to permit the trustee to purchase, but will only approve of such a sale in exceptional circumstances where the interests of the trust estate demand it - that is only as a last resort.[8]

11 In Re Tabone, Winneke CJ rejected the submission that the Court has no power to grant such permission.[9] The Chief Justice accepted however that the power should be exercised only in exceptional circumstances, and that courts apply a very stringent test in determining whether or not the discretion should be exercised.[10] After noting that counsel were unable to refer to any reported decision in which such permission had been granted in the face of opposition by a beneficiary of full age and capacity, his Honour said:

If a beneficiary who is of full age and capacity refuses to give his consent to the trustee's participation in the sale, I am of opinion that he is entitled to have full weight given to his undoubted right to do so.[11]

12 In that case, his Honour held that the circumstances were not so exceptional as to justify a departure from the general principle that trustees should not be permitted to bid for and purchase trust property in the face of an objection by a beneficiary.[12] On behalf of the trustees seeking to bid, it was argued that they had special interests in the property, meaning that they would be especially eager bidders, and that this could only be in the trust's interest. His Honour specifically rejected these arguments. In his view, those facts related only to the desirability of purchasing the land from the trustees' point of view of purchaser, not to the desirability from the point of view of the estate that such an opportunity should be given.[13]

13 In Patros v Patros, Cavanough J allowed an application allowing trustees to bid made under ss 63 and 63A of the Trustee Act 1958.[14] Section 63 provides:

Power of Court to authorize dealings with trust property

(1) Where in the management or administration of any property vested in trustees, any sale, lease, mortgage, surrender, release or other disposition, or any purchase, investment, acquisition, expenditure or other transaction, is in the opinion of the Court expedient, but the same cannot be effected by reason of the absence of any power for that purpose vested in the trustees by the trust instrument (if any) or by law, the Court may by order confer upon the trustees, either generally or in any particular instance, the necessary power for the purpose on such terms and subject to such provisions and conditions (if any) as the Court thinks fit and may direct in what manner any money authorized to be expended, and the costs of any transaction are to be paid or borne as between capital and income.

(2) The Court may from time to time rescind or vary any order made under this section, or may make any new or further order.

(3) An application to the Court under this section may be made by the trustees, or by any of them, or by any person beneficially interested under the trust.[15]

14 His Honour expressly distinguished Re Tabone on the basis that Winneke CJ was not referred to s 63 of the Trustee Act 1958.[16] His Honour further distinguished Re Tabone on the basis that in Patros v Patros the issue was not a lack of consent by the beneficiaries but the fact that the beneficiaries were infants.[17] His Honour went one step further, noting that:

There was no reliance in Re Tabone on social, emotional or familial concerns as such, whereas Clay v Clay ... suggests that the principles of equity have moved on in that regard since Re Tabone was decided.[18]

15 Counsel for the second defendant submitted that, as the deceased died intestate, the administrators can only purchase the property if all the beneficiaries agree or the Court gives consent. He submitted there were no exceptional circumstances shown to override the objection of a beneficiary because:

(a) there is no admissible evidence on the value of the property;

(b) there is no evidence that the property has been put up for sale to test the market, and did not sell;

(c) there is no evidence that the property would not sell if put to market;

(d) there is no evidence that, if the property were put up for sale, and the sale were handled properly and conducted appropriately, it would not produce the full market value;

(e) there is no evidence as to why the plaintiff and the first defendant want leave to bid at the auction of the property;

(f) there is no evidence that the plaintiff and the first defendant are willing to pay at least the best price available for the property; and

(g) there is, in short, no evidence that it is in the best interests of the deceased's estate that the plaintiff and the first defendant have the opportunity to become the purchasers of the property.

16 Counsel for the plaintiff accepted that the rule that an executor, administrator or trustee must not purchase trust property is elementary. The plaintiff accepted the authority of Re Tabone,[19] and that the jurisdiction to allow a fiduciary to purchase should be exercised with care and only in exceptional circumstances, but submitted that it did not follow that approval should be refused in all cases, or indeed in this case. He submitted that Patros v Patros was an example of a case where other factors outweighed the potential risk of financial detriment, although he accepted that the facts were quite different.[20]

17 The plaintiff submitted that exceptional circumstances were made out in this case because:

(a) the three administrator-beneficiaries have been unable to reach agreement on the sale of the property;

(b) it is now three and a half years since the death of the deceased, and two years since the grant of probate;

(c) it is 'undeniable' that it will be for the benefit of the estate if the power is granted;

(d) since all three must be involved in the sale process, including selecting the estate agent and auctioneer, agreeing on the marketing plan, agreeing upon contractual terms upon which the property is to be sold, and agreeing on the reserve, there is no possible detriment in permitting them to bid;

(e) the participation by the plaintiff in the bidding process will drive up the price;

(f) the second defendant is allowing her personal views to obstruct the duty she has as a trustee for sale; and

(g) the second defendant is ignoring her obligations under the Civil Procedure Act 2010 to take steps to resolve the dispute.

18 The plaintiff also contended that, as the defendant is now a party to civil litigation, her response to the plaintiff's application is contrary to s 18 of the Civil Procedure Act 2010 in that it could be described as being frivolous, vexatious and without any proper basis. It was further contended that, by opposing the application, the second defendant has ignored her overarching obligation to take steps to resolve and determine the dispute.

19 The passage in Jacobs' to which counsel for the second defendant took the Court, referred to above, continues:

Trustees for sale are bound to get the best possible price for the property and, if they purchase for themselves, their interest as a buyer is to get the property at the lowest possible price, that is, their interest as a purchaser is inconsistent with their duties as trustees, and it is this conflict of interest and duty which gives the court grounds for exercising its equitable jurisdiction to protect the beneficiaries.[21]

20 In my view, that is the problem that arises in this case. If the plaintiff is able to bid at the auction, his involvement in the sale process is inextricably compromised. He is involved in choosing the estate agent. As administrator, he is obliged to choose the best estate agent for the lowest price. As purchaser, a poorer agent, who will attract fewer bidders, is preferable. As administrator, he is obliged to choose the best auctioneer at the lowest price. As the purchaser, a poorer auctioneer, who will sell for a lower price, is preferable. And as administrator, he will ultimately be responsible for choosing the reserve price, on the advice of an independent valuer. As purchaser, a valuer who will give the property a lower value is preferable, and a reserve price lower than he might otherwise set as administrator.

21 The plaintiff's case is that he is but one of three administrators who all play a role. That is not an answer that can resolve the issue of the conflict of interest and duty. That conflict can only be resolved if the party wishing to bid and purchase the property was no longer an administrator of the estate and an independent administrator was appointed to the estate.

22 Counsel for the plaintiff correctly pointed out that, although the jurisdiction to allow a fiduciary to purchase should be exercised with care, and only in exceptional circumstances, that does not mean refusal should be automatically refused in all cases. In Re Tabone, Winneke CJ was taken by counsel to the case of Savage v Carruthers as authority for the proposition that any conflict of interest and duty may be resolved by placing conditions upon the sale.[22] His Honour, upon reading the judgment, noted that Philp J had in fact held that the Court will not grant leave unless it is shown that the trustee is offering at least the best price obtainable, ordinarily by testing the market at an auction conducted with a reserve calculated by an independent valuation without the trustee bidding.[23] The Chief Justice indicated what he thought the proper course of action:

I think it is eminently desirable that the property should be put up for sale, and the market tested, without either of the applicants bidding.[24]

23 As stated, there is no evidence before the Court as to the value of the property, aside from the value in the inventory and the later assertion of the plaintiff. There is no evidence that the property cannot and would not sell at public auction, or that the plaintiff is able and willing to pay a greater price than would be obtained at public auction. Although the plaintiff submitted that it would be 'undeniable' that it would be for the benefit of the estate if he were allowed to bid, there is in fact no evidence before this Court that that is the case. The only justification put forward by the plaintiff is that he wishes to purchase the property, and allowing the trustees to participate in the bid will inevitably inflate the sale price by virtue of there being more bidders. That justification ignores the conflict inherent in the trustees, as potential purchasers, being responsible for arranging the sale, even with independent advice.

24 In respect of the plaintiff's submission that the response of the second defendant to the plaintiff's application could be described as being frivolous, vexatious and without any proper basis, in my view, there being an inherent conflict between interest and duty for those parties who are administrators of the estate and who also wish to purchase the property, there are valid grounds for opposing the plaintiff's application. Insofar as it is contended that the second defendant has ignored her overarching obligation to take steps to resolve and determine the dispute, it appears that the dispute would only have been resolved if the second defendant had agreed with the plaintiff. Although it seems to have taken an inordinate period of time before this application was issued, it is an issue that is best resolved by the Court where there is no consent by all of the parties.

25 Accordingly, I shall order that the parties be directed forthwith to sell the property by public auction through the agency of an appropriate land agent. I refuse the application that each of the parties be at liberty to bid at the auction and, if successful, to purchase the property from the estate of the deceased.

26 The second defendant sought orders that the plaintiff personally pay the second defendant's costs of and incidental to this proceeding, and orders that the plaintiff not be indemnified for his costs and expenses of this proceeding out of the deceased's estate. In support of this, it was submitted that this application was in truth motivated by the plaintiff's desire to purchase the property: there was no argument that the property needed to be sold, but only as to who may bid.

27 There is longstanding authority that, where a trustee approaches the Court for leave to purchase the trust property in such circumstances, it is the trustee who seeks an indulgence and must pay the costs of the application, whether successful or otherwise.[25] In my view, those authorities should be followed in this case.

28 Accordingly, I order the plaintiff personally pay the second defendant's costs of the proceeding to be taxed on the standard basis in default of agreement and the plaintiff not be indemnified for his costs and expenses of the proceeding out of the estate of the deceased.

[1] Described in Certificates of Title Volume 8294 Folio 971, Volume 8490 Folio 956, and Volume 9399 Folio 562.

[2] Hall v Hallett (1784) 1 Cox 134; 29 ER 1096; Watson v Toone [1820] EngR 270; (1820) 6 Madd 153; 56 ER 1050; Cook v Collingridge [1823] EngR 419; (1823) 37 ER 979; Williams on Executors, (9th ed) (1893) 806-7.

[3] See Boardman v Phipps [1966] UKHL 2; [1967] 2 AC 46.

[4] Williams v Scott [1900] AC 499; (1900) 17 WN (NSW) 104; Aberdeen Town Council v Aberdeen University (1877) 2 App Cas 544; Randall v Errington [1805] EngR 82; (1805) 10 Ves 423; 32 ER 909; Attorney-General v Lord Dudley [1815] EngR 570; (1815) Coop G 146; 35 ER 510; Souter v Souter [1923] NZLR 1078; Farness v Cox [1898] NSWLawRp 44; (1898) 19 LR (NSW) Eq 103.

[5] Tito v Waddell [No 2] [1977] Ch 106, 240-1; [1977] 3 All ER 129, 241; Clay v Clay [2001] HCA 9; (2001) 202 CLR 410, [50]-[53]. See McPherson, 'Self-Dealing Trustees' in (ed) Oakley, Trends in Contemporary Trust Law, 134. The self-dealing rule applies to personal representatives: Kane v Radley-Kane [1999] Ch 274; [1998] 3 All ER 753.

[6] J D Heydon and M J Leeming (eds), Jacobs' Law of Trusts in Australia (Butterworths, 7th ed, 2006) [1743].

[7] [1962] Qd R 605, 614.

[9] [1968] VicRp 16; [1968] VR 168, 171.

[14] [2007] VSC 83; (2007) 16 VR 182.

[15] Section 63A relates to the approval by the Court of orders under s 63 where persons are unable to consent by reason of minority or incapacity, and is irrelevant to the current proceeding.

[16] Patros v Patros [2007] VSC 83; (2007) 16 VR 182, 185.

[19] [1968] VicRp 16; [1968] VR 168.

[20] [2007] VSC 83; (2007) 16 VR 182.

[21] J D Heydon and M J Leeming (eds), Jacobs' Law of Trusts in Australia (Butterworths, 7th ed, 2006) [1743]. See Re Bloye's Trust [1849] EngR 980; (1849) 1 Mac & G 488 [1843-60] All ER Rep 1092; 41 ER 1354.

[22] [1958] QWN 32.

[23] [1968] VicRp 16; [1968] VR 168, 171.

[25] Hordern v Bull [1905] NSWStRp 84; (1905) 5 SR (NSW) 518; Re Ryrie's Settled Estates [No 2] [1907] NSWStRp 47; (1907) 24 WN (NSW) 87; J D Heydon and M J Leeming (eds), Jacobs' Law of Trusts in Australia (Butterworths, 7th ed, 2006) [1744] n 364. See also Waine v King (Unreported, Supreme Court of New South Wales, Hodgson J, 5 October 1995).