Plaintiff v First Defendant Second Defendant

1. F. It is not intended that Participants have any right or interest in the Trust Assets unless and until any of those assets are transferred to Participants in accordance with the terms of this Deed.

1.1 Definitions

In this deed, the following definitions apply:

"Assets" means all cash, investments, rights and other property of the Trust from time to time;

...

"Employee" means an employee or officer (including a director) of Babcock & Brown Group who is determined by the Remuneration Committee to be an Employee for the purposes of a Plan and who is an Australian Employee;

...

"Listco" means Babcock & Brown Limited ACN 108 614 955;

...

"Option Award" means an option offered or granted by Listco to an Employee to have a Share issued upon satisfaction of the Vesting Conditions and payments of the Exercise Price set out in the offer or terms of grant;

"Options" means options to have Shares issued or transferred in accordance with the terms of the option;

"Option Subscription Fund" means the amount referred to in Recital C paid or to be paid by the Settlor for the purpose of acquiring Options, and any future amount paid to the Trustee for that purpose;

"Participant Award" has the meaning given in clause 2.4;

"Participants" means the Employees nominated to be Participants by the Remuneration Committee from time to time;

"Plan" means Listco's Equity Incentive Plan or any equity incentive plan that is operated by Listco for the benefit of employees or officers (including directors) of Babcock & Brown Group;

"Plan Options" means Options which are hold by the Trustee;

"Power" means any right, authority, discretion or remedy conferred on the Trustee by this deed or any applicable Law;

...

"Remuneration Committee" means the sub-committee by that name of the board of Listco as constituted from time to time and if there is no such sub-committee, then the Board of Listco;

"Residual Beneficiaries" means Employees and/or charities nominated by the Remuneration Committee from time to time;

"Share" means a fully paid ordinary share in Listco;

"Share Award" means an option offered or granted by Listco to an Employee to have a Trust Share transferred from the Trust for nil cash cost to the Employee and in accordance with the terms of the offer or terms of grant;

...

2. Establishment of Trust

2.1 Establishment of Trust and Appointment of Trustee

(a) The Settlor has paid $10 to the Trustee to settle the Trust and to be held by the Trustee on trust for the purposes mentioned in this deed.

(b) The Settlor appoints the Trustee as trustee of the Trust to hold the Trust Fund upon the terms and conditions of this deed.

(c) The Trustee accepts appointment as trustee of the Trust and declares that it holds the Trust fund on trust on the terms and conditions of this deed.

2.2 Trustee not entitled to benefit from Trust Fund

The Trustee is not entitled to any interest or benefit from the Trust Fund, except as expressly contemplated by clauses 11.2, 13.2 and 13.3.

2.3 Purpose of Trust

(a) The purpose of the Trust is to administer employee share plan activities, including (without limitation):

(i) acquiring shares, options and other securities of Listco; and

(ii) providing those shares, options and securities to Employees.

(b) In furtherance of this purpose the Settlor has paid, or will pay, the Share Subscription Fund and the Option Subscription Fund to the Trustee to be held as part of the Trust Fund.

(c) The Trustee must apply the Share Subscription Fund to subscribe for or acquire Shares and must hold such Shares as Trust Shares pending their transfer or other application in accordance with clause 6.

(d) The Trustee must apply the Option Subscription Fund to subscribe for Options and must hold such Options pending their exercise or other application in accordance with clause 6.

(e) Plan Participants and their beneficiaries shall have no preferred claim on, or any beneficial ownership interest in any Trust Assets. Any rights created under the Plan and this deed shall be mere unsecured contractual rights of Plan Participants and their beneficiaries against Listco.

...

2.4 Offers of Awards to Employees

(a) Listco will offer the Participants an opportunity to acquire, or will grant, individual allocations of Share Awards and/or Option Awards ("Participant Awards"), on terms determined by the Remuneration Committee, within 10 Business Days (or longer period determined by the Remuneration Committee) of the date of issue of the relevant Trust Shares or Plan Options to the Trustee or within 10 Business Days (or longer period determined by the Remuneration Committee) of the re-allocation of the relevant Share Awards or Option Awards to a new Participant under clause 6(d) (as the case may be). Offers or grants of Participant Awards which are not accepted will be dealt with under clause 6(d).

...

2.5 Termination of Trust

(a) The Trust must wind-up and terminate on the first to occur of the following dates ("Termination Date"):

(i) if the Trustee holds no Assets and the Remuneration Committee directs that the Trust should terminate; or

(ii) 80 years from the date of this deed.

(b) The Trustee must on the Termination Date:

(i) as soon as practicable sell, call in and convert into money the Assets;

(ii) pay out all liabilities of the Trust; and

(iii) pay the remainder, less all proper costs, disbursements, fees and other outgoings and less all proper provisions for future liability, to the Residual Beneficiaries.

(c) In winding up the Trust the Trustee may make any provision it considers necessary to provide for any outgoings or liabilities (actual or contingent) of the Trust or any of the Assets before making any distribution to the Residual Beneficiaries, and subject to this, must hold the part of the Assets retained in trust for the Residual Beneficiaries.

...

6 Vesting, allocation and exercise

...

Allocation of awards

...

(e) Prior to the Vesting Date for a particular Participant Award, the relevant Participant has no beneficial or other proprietary interest in the Trust Shares, Plan Options, or any other Assets comprising the Trust Fund."

16 In addition to the provisions of the Trust Deed, reference was also made to the provisions of the "Equity Incentive Plan Rules".[10] It is not necessary to refer to the provisions of these Rules in great detail, save to note the definition of "Award" and the provisions of clause 14.2, which provides that: "All unexercised Awards will lapse on the liquidation of the Company" (which is defined as meaning Babcock & Brown Ltd).[11] The word "Award" is defined in sub-clause 1.1 as meaning:

"(a) an Option;

(b) a Performance Right;

(c) a Performance Share;

(d) a Bonus Deferral Right;

(e) a Cash Award; or

(f) any other incentive determined by the Board and granted under the terms of this Plan,

and includes any of those Awards made with the involvement of, or exercisable against, a Trustee appointed under Rule 9."

The capitalised terms in this definition are also defined in the Rules. Clause 20.5 of the Rules also reflects the provisions of clause 6(e) of the Trust Deed, which is set out above.[12]

17 As indicated previously, the position of the defendants was that there has been a failure to dispose of the entire beneficial interest behind the Trust so that now that the purpose of the Trust can no longer be performed, the plaintiff, as the trustee, holds the assets on a resulting trust in favour of the first defendant as settlor and contributor, by operation of law. The position of the defendants in this respect was based upon two propositions:

(1) that the Trust was established for the purposes set out in clause 2.3 of the Trust Deed concerning the Equity Incentive Plan but that, as a result of the liquidation of Babcock & Brown Ltd, that Plan is no longer in operation and the commercial purpose of the Trust has, consequently, disappeared; and

(2) that there are no nominated Residual Beneficiaries and there is no mechanism now available whereby Residual Beneficiaries can be nominated.

18 The plaintiff does not dispute that if a trust fails, the trust fund is normally held on a resulting trust for those who provided that fund.[13] This is, as it was said, an application of the more general principle that where a trust fails for any reason, the equitable interests purportedly allocated by the failed trust must pass to someone as equity abhors, and will not tolerate, a vacuum in the equitable ownership.[14] It follows that the critical question is whether there has been a failure of the Trust as indicated and, consequently, a resulting trust by operation of law as submitted by the defendants.

19 The plaintiff submitted that the proper construction of the Trust Deed, particularly clause 2, indicates that the Trust has not failed and, consequently, no resulting trust arises.

20 In support of this proposition, the plaintiff submitted that clause 2.5 of the Trust Deed is an express provision for the application of any surplus arising upon the winding up of the Trust where the claims of all primary beneficiaries have been met. Consequently, it was submitted that even if it were to be held that it is a condition subsequent to the continued subsistence or operation of the Trust that the purpose set out in clause 2.3 should subsist and that this purpose failed with the liquidation of Babcock & Brown Ltd, the direction to distribute the surplus to Residual Beneficiaries on termination of the Trust in accordance with the direction contained in clause 2.5 remains capable of fulfilment.[15] It was submitted by the plaintiff that even without any amendment to the Trust Deed, the Residual Beneficiaries will become entitled to the surplus on the termination of the Trust on the termination date, which is 8 September 2084. It was submitted that this point distinguishes the present case from Air Jamaica Ltd v Charlton,[16] where Lord Millett said that:[17]

"one of the benefits [the employees] bargained for was that the trustees should be obliged to pay them additional benefits in the event of the scheme's discontinuance. It was the invalidity of this trust that gave rise to the surplus."

21 It was submitted further by the plaintiff that although the power to nominate Residual Beneficiaries for the purposes of clause 2.5 was vested in the Remuneration Committee,[18] this power has not failed because even though the Remuneration Committee ceased to exist with the liquidation of Babcock & Brown Ltd (and, it was submitted, its power cannot be exercised by the liquidator of Babcock & Brown Ltd), the power is capable of being exercised in the events which have happened by the Court itself. I accept that this follows because the power to nominate Residual Beneficiaries is a fiduciary power which is properly described as a "power in the nature of a trust", or a "discretionary trust".[19] Powers such as this impose upon the donee of the power a duty to select from among a class of beneficiaries who are to receive and, where appropriate, the proportions in which they are to receive the income or capital of the trust property.[20] Where the donee of the power does not exercise that power, or the donee is "absent", the Court will ensure, by one means or another, that the trust is carried into effect, including by exercising the discretion of the donee itself.[21]

22 In addition, the plaintiff made three other points in relation to the power of nomination:

(1) The Remuneration Committee of the Board of Babcock & Brown Ltd did not nominate Residual Beneficiaries;

(2) With the resignation of all of the directors of Babcock & Brown Ltd, it is no longer possible for such nominations to be made by that Committee[22] (even assuming that the Board of Babcock & Brown Ltd and its committees retained their status after the liquidation of Babcock & Brown Ltd).[23] Further, it seems doubtful in any event that the Committee could be reconstituted given the absence of the Board of Babcock & Brown Ltd; and

(3) The plaintiff, as trustee, contends that the liquidator of Babcock & Brown Ltd is not able to exercise the power of nomination.[24] There is no general principle that all powers formerly exercisable by particular officers of a company are, on the commencement of its liquidation, transferred to the liquidator.[25] It is necessary to look to the terms of the Trust Deed and the Corporations Act 2001 to determine whether the liquidator is able to exercise a particular power. Nothing in the Trust Deed either expressly or impliedly supports the proposition that in the event of the winding up of Babcock & Brown Ltd the power of nomination is exercisable by the liquidator.[26] Furthermore, the power is not an asset of Babcock & Brown Ltd and nothing about it makes it necessary for the liquidator to exercise it in winding up the affairs of Babcock & Brown Ltd and distributing its property.[27]

23 In these circumstances, the plaintiff, as trustee, sought a declaration set out in paragraph 2 of the orders sought in the amended originating motion that "the power vested in the Remuneration Committee ... to nominate Residual Beneficiaries cannot be exercised either by the liquidator of Babcock & Brown Ltd or by the directors or former directors of Babcock & Brown Ltd."[28] Moreover, it contends that it would be appropriate for the Court to exercise the power of nomination of Residual Beneficiaries and to determine the proportions in which they should receive distributions.

24 The defendants submitted not that there has been a total failure of the Trust but, rather, that a resulting trust arises where, inter alia, there has been an incomplete disposal of the beneficial interest under express trust.[29] Resulting trusts of this kind, which arise by operation of law, are, like other resulting trusts, based upon intention presumed from the circumstances.[30] In this vein, the defendants also made reference to the following statement by Jacobs:[31]

"A resulting trust may be presumed upon a disposition of the legal estate without any disposition of the beneficial interest, arising by reason of a mistake or an oversight in the drafting of a document evidencing an express trust or a failure to make provision for the particular contingency which has later occurred. ... [T]he law presumes that, in so far as the settlor or testator has not disposed of the beneficial interest, he or she intended to retain it."

25 The defendants submitted that the situations in which the presumption of favour of a resulting trust may arise include, for example:

(a) where the purposes for which the trust was constituted have failed;[32]

(b) where there is a complete failure of beneficiaries;[33]

(c) where property conveyed on trust for certain purposes exceeds that which is required for their fulfilment.[34]

In relation to the third category, or the "surplus" cases, it was submitted that these include situations where there has been a surplus of funds raised through donations or member contributions for a specific purpose[35] and, more particularly, where there is an undistributed surplus in employee or superannuation funds.[36] Nevertheless, it was submitted that a resulting trust will not arise where the settlor has made a clear alternative provision for the "destination" of the whole of the beneficial interest in an express trust, which will be given effect by the Court.[37] It was noted, however, that an intention to "abandon" the beneficial interest is not lightly to be inferred.[38]

26 Applying these principles, the defendants submitted that, contrary to the plaintiff's contention, the critical issue is not whether there has been a total failure of the Trust. The defendants submitted that there has not been a total failure, but that the critical issue is, rather, whether there has been an incomplete disposal of the beneficial interest behind the Trust. Resolution of this issue, it was said, requires consideration whether the Trust Deed, on its proper construction, makes specific provision for the "destination" of any surplus and whether the evidence justifies the inference that the settlor intended to abandon any right to that beneficial interest.

27 It is clear that resolution of the submissions of the plaintiff and the defendants in relation to the critical issue can only occur on the basis of a proper construction of the relevant provisions of the Trust Deed. For the reasons set out below, I am of the opinion that the Trust has not failed. As indicated, this follows from my views as to the proper construction of the Trust Deed, a matter to which I now turn.

28 It is quite clear that following the liquidation of Babcock & Brown Ltd there is no ongoing purpose that the Trust can now serve. The Babcock & Brown group enterprise ended with the insolvency and liquidation of Babcock & Brown Ltd and, consequently, there is no purpose in the Equity Incentive Plan for employees or the Trust Deed which supports that Plan. The Recitals to the Trust Deed, particularly Recital A, support this view, as do the provisions of clause 2.3, which contain detailed provisions as to the purpose of the Trust. Consistently with the Recitals, paragraph (a) of clause 2.3 states that the purpose of the Trust is "to administer employee share plan activities", a statement which is followed by some inclusive and more particular provisions in the same vein.

29 It is also made clear in the Recitals, namely in Recital F, and in clause 6(e), that none of the "Participants" have any beneficial or other proprietary interests in the "Trust Shares, Plan Options, or any other Assets comprising the Trust Fund" prior to the vesting date for a particular Participant Award. Further, clause 2.3(e) of the Trust Deed also provides that: "Plan Participants and their beneficiaries shall have no preferred claim on, or any beneficial ownership in, any Trust Assets. ...".[39] Additionally, clause 14.2 of the Equity Incentive Plan Rules provides that: "All unexercised Awards will lapse on the liquidation of the Company". Clause 1.1 of these Rules defines "Company" as Babcock & Brown Ltd.

30 In construing a trust deed, its provisions must, like any other deed or written instrument, be construed as a whole and an interpretation which does not render provisions or parts of provisions in a written instrument redundant is to be preferred to one which has this result.[40]

31 Directing attention to the proper construction of the trust instrument, as a whole, brings into focus difficulties with the submissions of both the plaintiff and the defendants. In my view, a critical difficulty arises as a result of the reference to charities within the definition of "Residual Beneficiaries". The plaintiff has submitted that the inclusion of charities within the class of possible Residual Beneficiaries is to be regarded as something in the nature of a gift over to charity. As I understand the plaintiff's submissions, a gift over of this kind is explicable on the basis that it is a provision found commonly in trust arrangements for the purpose of preventing the possibility of a resulting trust in favour of the settlor in the event that the trust otherwise fails for some reason. For example, the plaintiff submitted that the trust property would go to charity if, on the termination date, there were no Employees. The defendants argued, in effect, that this provision for charity is to be disregarded because of the failure of the purpose of the trust which is limited to the administration of an employee share plan or incentive scheme in terms of the provisions of clause 2.3 of the Trust Deed, and that the surplus should result back to the first defendant.

32 In my opinion, the purpose of the Trust as stated in clause 2.3 is certainly to be regarded as its principal or dominant purpose. Nevertheless, having regard to the provisions of the Trust Deed as a whole, I am not satisfied that this can be regarded as the whole purpose of the Trust; because this would be to disregard the provision for charity made through the definition of Residual Beneficiaries. It also follows, in my view, that on the basis of this construction of the purpose and operation of the Trust Deed, it cannot be said that there has been an incomplete disposal of the beneficial interest behind the Trust in the sense that there is no longer any class of potential beneficiary within the scope of the definition of Residual Beneficiaries which could now benefit consistently with the presumed intention of the settlor. In other words, there was, on this basis, an intention to benefit Employees through the incentive scheme established by the Equity Incentive Plan and the Trust Deed, but also an intention to benefit charity in the event that there was a surplus with respect to the purpose and entitlements under that Plan for the benefit or Participants, as defined.

33 Consequently, it follows that the only basis upon which it might be said that the implementation of the Trust and the presumed intention of the settlor would be frustrated or fails is in the event that neither the donee of the power to appoint Residual Beneficiaries nor the Court acts to appoint so that the assets of the Trust can be distributed. In my view, such an obstacle is to be regarded as something flowing from a failure of machinery, the type of failure that provisions such as s 63A of the Trustee Act 1958 were designed to rectify and could not be regarded as a triggering factor or basis for saying that the whole beneficial interest was not disposed of by the settlor and that, consequently, a resulting trust arises in favour of the settlor by operation of law. In less extreme circumstances than the present, where the Equity Incentive Plan continued to operate, it could not have been said that there had been a failure to dispose of the whole of the beneficial interest on the part of the settlor merely because the donee of the power to appoint Residual Beneficiaries had not acted or was failing or refusing to act.

34 The amendment proposed by the plaintiff, as set out in Schedule 1 to the Amended Originating Motion, provides, in effect, for the termination of the Trust on the commencement of the winding up of Babcock & Brown Ltd on 24 August 2009.[41]

35 The approval of the Court to this (and a related minor amendment) was sought pursuant to s 63A(1)(b) of the Trustee Act; a provision which is, relevantly, in the following terms:

"63A. Power of Court to vary trusts

(1) Where property, whether real or personal, is held on trusts arising, whether before or after the commencement of this Act, under any will settlement or other disposition, the Court may if it thinks fit by order approve on behalf of-

(b) any person (whether ascertained or not) who may become entitled, directly or indirectly, to an interest under the trusts as being at a future date or on the happening of a future event a person of any specified description or a member of any specified class of persons, so however that this paragraph shall not include any person who would be of that description, or a member of that class (as the case may be) if the said date had fallen or the said event had happened at the date of the application to the Court;

...

any arrangement (by whomsoever proposed and whether or not there is any other person beneficially interested who is capable of assenting thereto) varying or revoking all or any of the trusts, or enlarging the powers of the trustees or managing or administering any of the property subject to the trusts:

Provided that except by virtue of paragraph (d) of this subsection the Court shall not approve an arrangement on behalf of any person unless the carrying out thereof would be for the benefit of that person."

36 The Court's approval was sought on behalf of all persons who might be determined to be Employees for the purposes of the Trust Deed. It was submitted that such persons may become entitled to an interest under the Trust on the termination of the Trust. It was further submitted that the amendment sought was for the benefit of those persons because it would bring forward the termination date of the Trust and thus the date on which distributions may be made to the Residual Beneficiaries.

37 The authorities indicate that the power conferred on the Court by s 63A of the Trustee Act is discretionary.[42] The Trustee submitted that this discretion should be exercised for the reasons given in the affidavit of Margaret Cole, who is a director and shareholder of the plaintiff.[43]

38 In considering an application under s 63A of the Trustee Act, it is important to keep in mind the nature of the discretionary power conferred upon the Court by its provisions.[44] This is made very clear in the speech of Lord Reid in In re Holmden's Settlement Trusts; Inland Revenue Commissioners v Holmden[45] where, referring to the English Variation of Trusts Act 1958 from which the Victorian provision[46] was derived, his Lordship said:[47]

"Under the Variation of Trusts Act the court does not itself amend or vary the trusts of the original settlement. The beneficiaries are not bound by variations because the court has made the variation. Each beneficiary is bound because he has consented to the variation. If he was not of full age when the arrangement was made he is bound because the court was authorised by the Act to approve of it on his behalf and did so by making an order. If he was of full age and did not in fact consent he is not affected by the order of the court and he is not bound. So the arrangement must be regarded as an arrangement made by the beneficiaries themselves. The court merely acted on behalf of or as representing those beneficiaries who were not in a position to give their own consent and approval."

39 There are, however, situations where it has been found appropriate that the trustee or trustees, where there are more than one of them, make application to the Court for approval under this variation of trusts legislation. Again in relation to the equivalent English provisions, Russell J said in In re Druce's Settlement Trusts:[48]

"The application was made not by a beneficiary but by the trustees. This is a disadvantage, particularly in a case such as the present, where the interests of the persons for whom the court is concerned are not exactly the same as those of some respondent. It means that there is no counsel whose sole task is to protect and support those interests. Where the trustees make the application their counsel is there to argue for the acceptance of the scheme: but at the same time his duty and that of the trustees is to be the watchdog for (for example) unborn interests. Let me say at once that Mr Brightman for the trustees, while recognising the disadvantage, overcame admirably the duality of his position. To change the metaphor, his performance as touch judge was not marred by the fact that he started in the line-out, and I was grateful for his assistance. Nevertheless, the disadvantages of this duality exist. Counsel for the applicant trustees must have an instinctive reaction against a criticism from the bench, designed to safeguard or benefit those unborn interests, which would be lacking in a respondent trustee, an instinctive tendency to be against alteration of the scheme for the approval of which he is applying. Moreover, if the criticism be in fact unsound, it is likely to take longer for the judge to be dissuaded from it because of that very duality. There are, of course, cases of applications to vary beneficial interests where it is necessary and proper that the trustees should make the application, notwithstanding the disadvantage I have mentioned. This case was one of them, the trustees being satisfied that the scheme was beneficial to their beneficiaries and no beneficiary being willing to make the application. But, in general, the trustees should not be the applicants in applications to vary beneficial trusts, unless they are satisfied that the proposals are beneficial to the persons interested and have a good prospect of being approved by the court, and further, that if they do not make the application no one will. In particular, it would not be right if it became the general practice for such applications to be made by the trustees upon the supposition that should the application fail it will be more probable (though not, of course, certain) that the costs of all parties will be directed to be met out of the trust funds."

40 In the present circumstances, the application under s 63A of the Trustee Act was properly brought by the plaintiff, as the trustee, because the persons who might be determined to be entitled as Residual Beneficiaries on termination of the Trust were not ascertained. They were not ascertained because of the requirement that Residual Beneficiaries be nominated by the Remuneration Committee, a committee not now in existence.[49]

41 The plaintiff submitted that the Court is concerned in considering the exercise of the discretionary power under s 63A of the Trustee Act whether the arrangement as a whole is, in all the circumstances, such that it is proper to approve it. In the present circumstances, it was submitted that the proposed variation is for the benefit of all persons and charities who might be appointed as Residual Beneficiaries.[50] In this respect, it was submitted that it is important to distinguish between the amendment proposed, which accelerates the date for termination of the Trust, and the power of appointment of Residual Beneficiaries. It was submitted that the amendment is plainly for the "benefit" of the whole class, whether considered as a class or as individual beneficiaries, by reason of the bringing forward of the termination date.[51] Further, it was submitted that the effect of the proposed variation is not to deprive any member of the class, or any individual of a beneficial interest.[52] It was said that the Court is being asked to make a bargain on behalf of the beneficiaries which is reasonable and (where the class of beneficiaries includes infants) one that an adult would be prepared to make.[53]

42 The defendants argued against the approval of the proposed amendment to the Trust Deed on the basis, as indicated, that the Trust has failed so that there has been an incomplete disposal of the beneficial interest and, consequently, there is a resulting trust, by operation of law, in favour of the settlor.

43 It was common ground that the parties did not and would not have anticipated the corporate death of an entity such as Babcock & Brown Ltd and the associated corporate entities and the failure of the extensive businesses conducted by these corporate entities within the Babcock & Brown group. Consequently, it was said that, in all the circumstances, it would not have been anticipated by the settlor that the situation would ever arise that there was no Remuneration Committee in existence as the donee of the power to nominate Residual Beneficiaries or that there would not be a Board of Directors of Babcock & Brown Ltd in existence to act in the place of the Remuneration Committee or to appoint a Remuneration Committee as contemplated under the provisions of the Trust Deed.[54]

44 It was suggested that it would be open to the liquidator of Babcock & Brown Ltd to exercise the powers of the Board of Directors; either to appoint a fresh Remuneration Committee or to act, in effect, in that capacity as the donee of this power. In my view, the authorities are clear that although a liquidator, in general terms, stands in the shoes of the board of directors of the company of which he or she is liquidator, it does not follow that the liquidator necessarily has capacity to exercise all the powers of the board of directors in whatever capacity. This was made clear in the judgment of McLelland CJ in Eq in Butterell v Docker Smith Pty Ltd[55] where his Honour reviewed a number of authorities which, in my opinion, though not directly analogous to the present circumstances, establish matters of principle with respect to the differing functions and capacity of a board of directors and a liquidator which are relevant in the present circumstances:[56]

"However, in my opinion there are two reasons why such a term cannot properly be implied in the rules (and in the contracts of insurance incorporating the rules) in the present case. The first is that the winding up of the Society did not render impossible the exercise by the Board of its powers. What it did do was, relevantly, to make the continuance (and therefore the exercise) of any of those powers conditional upon the approval of the committee of inspection (or if there were no such committee, the approval of the creditors) - see s499(4) and cf Austral Brick Co Pty Ltd v Falgat Constructions Pty Ltd (1990) 21 NSWLR 389). The second reason is that it is far from obvious that insured members who were willing to subject themselves to the exercise of discretionary powers to impose liabilities on them by the Board, an elected collegiate body the members of which had to have special qualifications (see r4(2)), while the Society was a going concern, would have been willing that, in the event of the liquidation and insolvency of the Society, they be subject to equivalent powers vested in a liquidator, particularly where the funds to be raised by Supplementary Subscription are not necessarily confined to the payment of insurance claims made by insured members, but might extend to 'other expenses or outgoings which in the opinion of [the liquidator] necessarily and properly fall upon the Society in respect of [the relevant] Policy Year' (see r13(1)(A)). These might include liabilities of the Society unrelated to the Scheme.

Reliance was placed by counsel for the liquidator on the decision of Beach J in Pyramid Building Society v Howell (1994) 14 ACSR 633. In that case it was held that s 477(2)(d) of the Corporations Law empowered a delegate of the liquidator of a building society (to which the relevant provisions of the Corporations Law were made applicable) to sign a certificate so as to constitute prima facie evidence of the amount recoverable by the Society under a contract of guarantee for the purposes of a clause in that contract which was expressed to give such an effect to a certificate 'signed under the hand of any Director or Commercial Lending Manager or Loan Administration Manager of the [Society]'. If that decision is to be understood as propounding a general or prima facie principle of the transfer to a liquidator of all powers formerly exercisable by particular officers of a company, then with great respect I am unable to agree with it. Although to say that in a winding up the powers formerly exercisable by company officers are transferred to the liquidator is in a general sense loosely descriptive of what occurs, it is conceptually inaccurate. The office of liquidator is a statutory office, and the liquidator's powers derive solely from the relevant statute, in this case the Corporations Law. As Sackville J observed in Dallhold Investments at 342:

'Of course the fact that the directors cannot exercise any powers on behalf of the company does not, of itself, mean that all such powers have vested in the liquidator. The extent of the liquidator's powers must depend upon the powers conferred by the Corporations Law.'"

45 Consequently, the only means by which Residual Beneficiaries may be nominated is by the Court.[57] Nevertheless, in the context of the question whether the whole of the beneficial interest was parted with by the settlor, I am of the view that this present difficulty is to be regarded as one of machinery, curable by an exercise of discretion by the Court. For the reasons indicated, it is not a situation where part of the beneficial interest has been retained by the settlor, thus providing a basis for a resulting trust by operation of law.

46 Once it is decided that no resulting trust arises, the position is that without an amendment to the Trust Deed as proposed by the plaintiff, the Trust Fund will be held until the Trust terminates under the existing provisions of clause 2.5 of the Trust Deed, in 2084. Evidence was given that, although the Trust has until now been able to be administered at minimal cost as part of the Babcock & Brown group administrative services, this will now change as a result of the demise of that enterprise. This will mean that, unless the Trust is terminated, the Trust Fund would need to be managed "externally" at greater expense, with the result that it would likely be extinguished in paying administrative charges prior to its termination in 2084, as a result of effluxion of a great deal of time. Clearly, this situation is not in the interests of any of the potential Residual Beneficiaries and, consequently, I am of the opinion that this is an appropriate circumstance to exercise the Court's discretion under s 63A of the Trustee Act to approve the amendment to the Trust Deed as sought by the plaintiff.

The nomination of Residual Beneficiaries and the distribution proposal

47 The plaintiff's proposal for distribution on the termination of the Trust was, in essence, that the Court should appoint as Residual Beneficiaries all persons who were each an "Employee", as defined in the Trust Deed, at the date of termination (being the date of the commencement of the winding-up of Babcock & Brown Ltd on 24 August 2009). The plaintiff, as trustee, further proposed that no charity should be appointed and that the amounts should be distributed to the Residual Beneficiaries, calculated by reference to the unsatisfied Awards previously granted to each Employee.

48 The plaintiff, as trustee, submitted that the class of persons who satisfied the definition of Employee at the date of termination of the Trust as a result of the amendment should be constituted by persons:

(1) who accepted an Offer of an opportunity to acquire, or who received a Confirmation of, individual allocations of Share Awards and/or Option Awards under cl. 2.4 of the Trust Deed in the period from 24 September 2004 to 24 August 2009; and

(2) who were, as at the date of liquidation of Babcock & Brown Ltd, receiving salary or wages within the meaning of sec 136 of the Fringe Benefits Tax Assessment Act 1986.[58]

Thus the plaintiff's proposed method of distribution is by reference to unsatisfied Awards made to employees. The plaintiff submitted that it would not be appropriate to make distributions by reference to satisfied Awards. It was said that, where Awards have been satisfied in full, the employees can have no further expectations in relation to them. Nevertheless, it was also said that, given that it was a purpose of the Trust to provide incentives for employees, the plaintiff considers it consistent with that purpose for a method of distribution to be adopted that takes account of unsatisfied Awards to persons who continued to serve the employer or company until the commencement of liquidation of Babcock & Brown Ltd.

49 Finally, in relation to the proposed distributions, the plaintiff expressly noted that its two directors, Margaret Cole and Michael Larkin, stand to receive distributions according to the proposal put by the plaintiff in the sums of up to $74,551.79 and $173,659.63 respectively. It was submitted that this was an important matter to bring to the Court's attention in the exercise of the power to nominate Residual Beneficiaries and the proportions in which they would receive distributions. This is, naturally, a proper approach, particularly where directors of a trustee are in the position of making submissions in favour of the exercise of a statutory discretion by a court of equity in relation to a trust where they may be in the position of receiving a substantial benefit. It was also submitted that there was no question of a conflict of duty and interest on the part of the plaintiff, as trustee, because it is the Court, rather than the trustee, exercising discretionary power. It was also said that the amounts of the Awards by reference to which the proposed distributions are calculated were determined by the Remuneration Committee while it existed, and not by the plaintiff as trustee. In all the circumstances, I am satisfied that there is no impropriety on the part of the directors of the plaintiff, as trustee.[59] Nevertheless, I am of the view that, in other circumstances, a conflict of duty and interest might arise having regard to the nature of the power exercised by the Court under s 63A of the Trustee Act because, as indicated previously, that power is in the nature of a power to approve a proposal by beneficiaries or by a trustee on behalf of beneficiaries, rather than a direct power of variation which is exercised by the Court.[60]

50 The plaintiff, in its submissions, readily acknowledged that charities are within the class of potential appointees as Residual Beneficiaries. In my view, so much is clear from the definition of "Residual Beneficiaries" in clause 1.1 of the Trust Deed. The plaintiff submitted that no charity should be nominated as a Residual Beneficiary because the purpose of the Trust was to provide benefits to employees and it can properly be assumed that the inclusion of charities as objects of the power was simply to ensure that the Trust would not fail for want of a beneficiary.[61] As indicated previously, I accept the view submitted on all sides that the purpose of the Trust as a vehicle for the provision of an employee incentive scheme has failed. The Babcock & Brown group enterprise has ended and there is clearly no purpose in a fund operating to provide incentives to employees in these circumstances. For such of the Employees who may still be employed during the process of liquidation, incentives are meaningless because their employment will end with the finalisation of the winding-up in any event. For former Employees, incentives are clearly pointless because their employment has ended and the enterprise has gone. The incentive scheme established under the Equity Incentive Plan was an incentive plan provided by or on behalf of the Babcock & Brown group for the benefit of its employees. This is not an employee superannuation scheme in the more usual form which involves contributions from both the employer and also the employee.[62] In those circumstances, the situation would be somewhat different. The present circumstances, on the other hand, is made clear by various express provisions of the Trust Deed, particularly Recital F, clause 2.3(b) and (e), and also clause 6(a).

51 On the basis that the Trust Deed was established with the express purpose of providing benefits to both "Employees and/or charities" and that its purpose has failed with respect to the provision of benefits to "Employees", I am of the opinion that the power of the Court to nominate Residual Beneficiaries should be exercised in favour of a nomination of charities solely, as this is now the only intended beneficiary or group of beneficiaries within the contemplation or intention of the settlor as evidenced by the provisions of the Trust Deed, properly construed.[63] It is true that the stated purpose of the Trust in clause 2.3 does not refer to charities, but, for the reasons indicated, construing the document as a whole, I am of the opinion that though its principal or dominant purpose may have been to provide an incentive scheme for employees, a trust for the benefit of charities is also part of the purposes of the Trust.

52 Issues were raised in a memorandum from Mr Kevin Lewis of Chang, Pistilli & Simmons (CP & S), Corporate Lawyers, to Mr Michael Larkin as a director of Babcock & Brown International Pty Ltd, dated 7 May 2010, in relation to possible ambiguity in the definition of Residual Beneficiaries in clause 1.1 of the Trust Deed. This memorandum was provided to the Court.[64] In view of the importance I attach to the reference to "charities" in this definition, it is desirable to make reference to the critical part of the memorandum addressing the issue of potential ambiguity:[65]

"As mentioned previously, the expression 'Residual Beneficiaries' is defined in clause 1.1 to mean 'Employees and/or charities nominated by the Remuneration Committee from time to time'.

There is a potential ambiguity in the drafting here - namely, do the words 'nominated by the Remuneration Committee from time to time' qualify just 'charities' or do they qualify both 'Employees' and 'charities'?

That ambiguity has led to a suggestion by Freehills that the Trustee should apply for judicial advice under Order 54 of the Victorian Rules of the Supreme Court (or, alternatively, under the corresponding provisions in section 63 of the Trustee Act 1925 (NSW)) for guidance as to how the definition of 'Residual Beneficiaries' should be interpreted and that it should argue the case that:

(a) the better construction of the definition is that the words 'nominated by the Remuneration Committee from time to time' only qualify 'charities'; and hence

(b) all 'Employees', as defined, are Residual Beneficiaries of the Trust.

We foresee considerable difficulties in persuading a Court that this argument is correct.

Given the absence of the definite article before the words 'Employees' and 'charities' and the use of the phrase 'and/or' to conjoin those two words, the natural reading of the definition of 'Residual Beneficiaries' is that the words 'nominated by the Remuneration Committee from time to time' qualify both 'Employees' and 'charities'. In other words, that definition extends to any of the following:

• any Employees nominated by the Remuneration Committee to be Residual Beneficiaries from time to time; or
• any charities nominated by the Remuneration Committee to be Residual Beneficiaries from time to time; or
• any Employees nominated by the Remuneration Committee, and any charities nominated by the Remuneration Committee, to be Residual Beneficiaries from time to time.

This interpretation clearly leads to a more sensible commercial outcome than the alternative suggested by Freehills and is substantially more likely to accord with BBIPL's probable intentions when it established the Trust. In this regard, it is hard to conceive that BBIPL would have intended to make a gift to all of its Employees of any assets remaining in the Trust upon its termination. It is far morel likely that BBIPL [Babcock & Brown International Pty Ltd] would have intended that the Remuneration Committee - the body charged with overall responsibility for administering the Plan and with the power under clause 5.4 of the Trust Deed to instruct the Trustee on how to exercise its powers under the Trust Deed - would have the power to select which Employees and/or which charities would be the Residual Beneficiaries of the Trust when it terminated.

This interpretation is also reinforced by the fact that the Trust Deed does not confer any express power on the Remuneration Committee to determine the proportions in which the Residual Beneficiaries participate in the assets of the Trust when it terminates. It might be possible to imply such a power if the words 'nominated by the Remuneration Committee from time to time' qualified both 'Employees' and 'charities' (by construing the definition of 'Residual Beneficiary' to mean, in effect, 'such Employees and such charities, in such respective proportions, as the Remuneration Committee may select from time to time'). No such power could be implied, however, if the words 'nominated by the Remuneration Committee from time to time' only qualified 'charities' and not 'Employees', with the consequence that all of the Employees and any charities selected by the Remuneration Committee would take as Residual Beneficiaries in equal shares. Given that, at the height of its powers, the Babcock & Brown Group employed some 1,600 Australian employees who potentially fell within the definition of 'Employee', this would effectively mean that the individual distributions to each Residual Beneficiary - including any charity that the Remuneration Committee sought to favour - would be quite small. Again this favours the more natural and commercially sensible construction mentioned above, rather than the alternative construction suggested by Freehills."

The plaintiff did not make any submissions to the contrary or argue against this approach. Rather, as indicated above,[66] it submitted that the reference to charities was in essence merely a gift over to ensure that the Trust would not fail for want of a beneficiary. In any event, I am of the view that the natural reading of the definition is that the words "nominated by the Remuneration Committee from time to time" qualify both "Employees" and "charities". Nevertheless, having regard to the position I have reached with respect to the proper construction of the Trust Deed and the failure of the Trust with respect to the provision of benefits to "Employees", any potential ambiguity in the definition of Residual Beneficiaries is not significant in terms of the ultimate outcome of these proceedings. If my opinion as to the proper construction of this definition is correct, the ultimate outcome relies on the exercise of the power of the Court to nominate charities in place of the now non-existence Remuneration Committee. If not, the ultimate outcome depends on the exercise of the powers of the Court in the course of the application of the cy-près doctrine to a charitable trust.

53 For the preceding reasons, I am of the opinion that the application by the plaintiff to amend the Trust Deed as proposed should be granted, with the result that clause 2.5 is amended to provide for termination of the Trust on the liquidation of Babcock & Brown Ltd as proposed in Schedule 1 of the Amended Originating Motion (together with the minor consequential amendment sought). Further, the nomination of "Residual Beneficiaries" as defined in clause 1.1 of the Trust Deed, by the Court, is exercised solely in favour of charities. It follows that the summons issued on behalf of the first and second defendants, dated and filed 21 October 2010, should be dismissed.

54 I reserve the question of the particular charities to be nominated as Residual Beneficiaries for further submissions by the parties. I also direct that the parties forward a copy of my judgment to the Attorney-General and inform him of my intention to hear submissions in this respect, with a request that he appear to assist the Court as parens patriae.[67]

55 In relation to costs, I note the agreement of the parties that the costs of this proceeding should be borne by the Trust Fund itself. Nevertheless, I reserve the question of costs pending hearing any submissions which the Attorney-General may wish to make in this respect.

[1] The Trust Deed defines the "Babcock & Brown Group" as meaning "Listco and its Related Bodies Corporate" (clause 1.1). "Listco" is Babcock & Brown Limited.

[2] See Trust Deed, clause 1.1 and see below, paragraph 15.

[3] See Trust Deed, clause 1.1. and see below, paragraph 15.

[4] Referring to clause 2.5 of the Trust Deed.

[5] See paragraph 1 and Schedule 1 to the Amended Originating Motion (26 October 2010).

[6] As to the agreed position with respect to contributions to the Trust Fund, see below, paragraph 12.

[7] See summons issued on behalf of the first and second defendants, dated and filed 21 October 2010.

[9] See also, Plaintiff's Outline of Submissions at paragraph 16.

[10] These Rules were adopted by resolution of the Board of Directors of Babcock & Brown Ltd on 6 September 2004 and subsequently amended on 29 April 2005, 21 February 2006 and 10 April 2007. Clause 2 of the Rules describes the purpose of the Plan in the following terms:

(a) encourage participation by Employees in the Group's goals and to align their interests with those of the Company's shareholders through the opportunity for share ownership and through the offer of other incentives; and

[11] Cf the provisions of clause 12 of the Rules, which applies on cessation of employment other than in circumstances of liquidation of the Company.

[13] Air Jamaica Ltd. v Charlton [1999] UKPC 20; [1999] 1 WLR 1399 (PC) at 1411.

[14] Thomas and Hudson, The Law of Trusts, 2nd ed (2010), [26.27]. See also Jacobs' Law of Trusts in Australia, 7th ed, (2006) at 236, [1205]; James Miller Holdings Ltd. v Graham (1978) 3 ACLR 604, at 613-614.

[15] As to the effect of the failure of the purpose provided for in clause 2.3 on the liquidation of Babcock & Brown Ltd, see Thomas and Hudson, The Law of Trusts, 2nd ed (2010), [26.27] and following in relation to applicable principles; and, particularly [26.37] to [26.50] in relation to situations of "surplus" property.

[16] [1999] UKPC 20; [1999] 1 WLR 1399.

[17] At [1999] 1 WLR 1413.

[18] See the definition of "Residual Beneficiary" contained in clause 1.1 of the Trust Deed.

[19] Thomas on Powers (1998), [2-76]ff, citing Brown v Higgs (1803) 8 Ves Jr 561, at 570-571.

[20] Mettoy Pension Trustees v Evans [1990] 1 WLR 1587, at 1614.

[21] In re Baden's Deed Trusts [1970] UKHL 1; [1971] AC 424, at 456-457 (Lord Wilberforce); Mettoy Pension Trustees v Evans [1990] 1 WLR 1587, at 1617.

[22] Affidavit of Margaret Cole, pars [57]-[66].

[23] See McPherson's Law of Company Liquidation (looseleaf ed), [7.510].

[24] Contra Report to Creditors, 12 August 2009, par. [5.7]: MC-1, 116-117. See also Re Crest Realty Pty. Ltd. [No 2] [1977] 1 NSWLR 664.

[25] Butterell v Docker Smith Pty. Ltd. (1997) 41 NSWLR 129, at 137; IACS Pty. Ltd. v Australian Flower Exports Pty Ltd (1993) 10 ACSR 769, at 772.

[26] Butterell v Docker Smith Pty Ltd (1997) 41 NSWLR 129, at 136.

[27] Corporations Act 2001 (Cth), secs. 477(2)(m), 506(1)(b); Mettoy Pension Trustees v Evans [1990] 1 WLR 1587, at 1616 (Warner J); Re William Makin & Sons Ltd. [1993] BCC 453, at 458-460 (Vinelott J).

[28] Amended Originating Motion (26 October 2010).

[29] As to which see PW Young, C Croft and ML Smith, On Equity (Lawbook Co., 2009) (Young, Croft and Smith) at [6.940]-[6.950], [6.10000]; GE Dal Pont & DRC Chalmers, Equity and Trusts in Australia (Fourth Edition, Lawbook Co., 2007) (Dal Pont) at [26.15]; JD Heydon & MJ Leeming, Jacobs' Law of Trusts in Australia (Seventh Edition, LexisNexis Butterworths, 2006) (Jacobs) at [1201]-[1202].

[30] Ibid. See also CEF Rickett & R Grantham, "Resulting Trusts - The True Nature of the Failing Trust Cases" (2000) 116 LQR 15.

[32] Jacobs at [1205] referring to, inter alia, Essery v Cowlard (1884) 26 Ch D 191.

[33] Young, Croft and Smith at [6.1000] citing Re Hedderwick's Trustees v Hedderwick's Executor [1910] SC 333.

[34] Dal Pont at [26.35]; Jacobs at [1207]-[1208].

[35] Cunnack v Edwards [1896] 2 Ch 679; Re Gillingham Bus Disaster Fund [1958] Ch 300; [1958] 1 All ER 37 (affirmed on appeal: [1958] 2 All ER 749).

[36] Rees v Dominion Insurance Co of Australia Ltd (in liq) (1981) 6 ACLR 71; Davis v Richards & Wallington Industries Ltd [1991] 2 All ER 563; Air Jamaica Ltd v Charlton [1999] UKPC 20; [1999] 1 WLR 1399. See also Re Canada Trust Co and Cantol Ltd (1979) 103 DLR (3d) 109; Dal Pont at [28.150]-[28.155]; Jacobs at [2946]. However, it should be noted that superannuation trust funds have some particular characteristics, as to which see eg Finch v Telstra Super Pty Ltd [2010] HCA 36 at [33]- [34].

[37] Dal Pont at [26.15], [26.35]. Re Trusts of the Abbott Fund [1900] 2 Ch 326.

[38] Young, Croft and Smith at [6.940], citing Air Jamaica Ltd v Charlton [1999] UKPC 20; [1999] 1 WLR 1399. See also Dal Pont at [28.155].

[39] See also clause 6(a) of the Trust Deed.

[40] See Lewison, The Interpretation of Contracts (4th ed, 2007), [7.02] and [7.03].

[42] In re Oakes' Settlement Trusts [1959] 1 WLR 502; Thomas and Hudson, The Law of Trusts, 2nd ed (2010), [24.24].

[43] The affidavit was sworn on 23 August 2010 and filed in support of the Amended Originating Motion (dated 26 October 2010).

[44] See Ford and Lee, Principles of the Law of Trusts (loose-leaf) ("Ford and Lee"), [15.070] to [15.090].

[45] [1967] UKHL 7; [1968] AC 685 (HL); and see Muhling v Perpetual Trustees WA Ltd [2001] WASC 225 at [25] (Hasluck J).

[47] [1965] AC 685 at 701.

[48] [1962] 1 WLR 363 at 370-371; and see Ford and Lee, [15.090].

[49] The issue of, and consequences of, the non-existence of the Remuneration Committee is discussed further below, see paragraphs 47 to 51; the non-existence of the Remuneration Committee also meant that the provisions of clause 7 of the Trust Deed (Variations to this Deed) could not operate without the assistance of the Court.

[50] Cf Memorandum re Babcock & Brown Australian Incentive Trust dated 7 May 2010: MC-1, p 209.

[51] See Thomas and Hudson, The Law of Trusts, 2nd ed (2010), [24.27]ff.

[52] cf In re Cohen's Settlements [1965] 1 WLR 1229.

[53] In re Cohen's Settlements [1965] 1 WLR 1229, at 1236 (Stamp J); Re Blocksidge [1997] 1 Qd R 234, at 237-238 (Williams J).

[55] (1997) 41 NSWLR 129.

[56] (1997) 41 NSWLR 129 at 137-8.

[57] And see above, paragraph 14, as to the position of former directors.

[58] See the definition of "Australian Employee" to which reference is made in the definition of "Employee": Trust Deed, cl. 1: MC-1, p. 8.

[59] This is also consistent with the provisions of clause 14(f) of the Trust Deed, provisions which negate any argument that the trustee would be prevented from exercising any power because one of its directors had a personal interest in the exercise of the power.

[60] See In re Holmden's Settlement Trusts; Inland Revenue Commissioners v Holmden [1967] UKHL 7; [1968] 1 AC 685 (HL) 701 (Lord Reid); and see above, paragraph 38.

[61] And see affidavit of Margaret Cole, sworn 23 August 2010 (paragraph 86).

[62] Cf Air Jamaica Ltd v Charlton [1999] UKPC 20; [1999] 1 WLR 1399 (PC) at 1407; referred to in Finch v Telstra Super Pty Ltd [2010] HCA 36 at [33] (French CJ, Gummow, Heydon, Crennan and Bell JJ).

[64] Exhibited to the affidavit of Margaret Cole, sworn 23 August 2010), with the authority of Babcock & Brown International Pty Ltd and Babcock & Brown Australia Pty Ltd (see paragraph 70).

[65] Memorandum of CP & S (7 May 2010), pp 12 and 13.

[67] See National Anti-Vivisection Society v Inland Revenue Commissioners [1947] UKHL 4; [1948] AC 31 (HL) at 62 (Lord Simonds); and see Dal Pont, Charity Law in Australia and New Zealand (OUP, 2000), 266-8.