Plaintiffs v First Defendant

Supreme Court of Victoria|2013-10-24|Before: McMillan J

PROBATE - Application to remove trustees - Conflict of interest and duty - Whole of trust income due to beneficiary not paid during lifetime - Certain trustees of will also beneficiaries who stood to gain from repayment of unpaid entitlement income - Trustees removed

1 In this proceeding, the first[1] and second defendants, Murray Wales and Rohan Wales, seek, pursuant to s 48 of the , the removal of the trustees ('the plaintiffs' or 'the trustees') of four trusts on the ground that the trustees, Gladys Wales, Roslyn Matear and Suzanne Case, are in conflict with their interest and duty. The application is supported by the third defendant, Julian Wales.

2 The plaintiffs and the fourth defendant, Ashley Wales, oppose the application.

3 The plaintiffs are the trustees of the following trusts ('the Trusts'):

(a) The HN Wales 1954 Trust created by a deed of settlement on 11 October 1954, as varied by deeds dated 20 December 1957, 7 January 1960 and 3 September 1954, by Harry Norman Wales to provide for his wife, Marion Wales, and their three children, Murray Wales, Geoffrey Wales and Beverley Hutchison ('the HN Wales 1954 Trust').

(b) The HN Wales 1963 Trust created by deed made 8 July 1963 by Harry Wales to provide for his daughter, Beverley Hutchison.

(d) The MEM Wales Trust created by clause 4 of the will of Marion Elsie May Wales to provide for Beverley Hutchison.

4 Pursuant to the Trusts, Beverley Hutchison was entitled to the income for her life and, upon her death, the capital is to be distributed to Murray Wales and the children of Geoffrey Wales (who take their father's share), pursuant to the HN Wales 1954 Trust, and pursuant to the remaining three Trusts, to the grandchildren of Harry and Marion Wales.

5 The grandchildren of Harry and Marion Wales are the children of Geoffrey Wales and Murray Wales. The children of Geoffrey Wales are Roslyn Matear and Suzanne Case, the second and third plaintiffs. The children of Murray Wales are Rohan Wales, Julian Wales and Ashley Wales, the second, third and fourth defendants respectively.

6 Geoffrey Wales was appointed a trustee of the HN Wales 1954 Trust by deed dated 29 January 1963. He was appointed trustee of the remaining three trusts on their creations.

7 The first plaintiff was appointed a trustee of the HN Wales 1954 Trust, the HN Wales 1963 Trust and the MEM Wales Trust by deeds dated 19 July 1978. On 23 July 1985, the first plaintiff was appointed a trustee of the BMR Hutchison Trust.

8 The second and third plaintiffs were appointed as trustees of the Trusts in place of Geoffrey Wales on 15 December 2003, who retired as trustee due to the onset of dementia. Geoffrey Wales died on 25 July 2009.

9 On or about 29 March 2004, the current trustees retained Bell Potter Securities Limited ('Bell Potter') to manage the investments of the Trusts, comprising securities and deposits. Bell Potter continues to manage those investments. Prior to the retainer of Bell Potter, the trustees managed the investments in the Trusts. At the date of the hearing, the assets of the HN Wales 1954 Trust comprised approximately $11 million and the assets of the remaining three trusts comprised approximately $7.25 million.[2]

10 Beverley Hutchison died on 3 September 2010 without leaving any children. The remainder interests in the Trusts vested in possession on the death of Beverley Hutchison.

11 The will of Beverley Hutchison made 29 October 1976 appointed the first plaintiff as the executrix and trustee of her estate. A grant of probate of the will was made to the first plaintiff on 29 November 2010. Under her will, the second and third plaintiffs are the beneficiaries of her estate.

The Challenge to the Will of Beverley Hutchison

12 By proceedings filed 18 August 2011, the first defendant made application to set aside the grant of probate on the grounds that Beverley Hutchison lacked capacity generally and, specifically, at the time she made her will ('the capacity proceeding'). It was contended by the first defendant that Beverley Hutchison, who was born in 1934, suffered from bi-polar disorder from when she was about '30 or 40' years old. The capacity proceeding was settled on 13 June 2012.

13 The trustees deposed that, after the death of Beverley Hutchison on 3 September 2010, it was their intention to wind up the Trusts as soon as practicable.

The Requests by Certain Defendants for the Financial Records of the Trusts

14 From February 2011 onwards, the first, second and third defendants sought access to and inspection of the financial records of the Trusts. Access and inspection were given to them in respect of some of the financial records, but not all of the requests could be met for various reasons, as set out below.

15 By July 2011, the solicitors for the trustees forwarded to the defendants the statements of income and expenditure and balance sheets for the Trusts for the financial years commencing 2005 until 31 March 2011 and sought a release and indemnity from any claims by the defendants arising out of the Trusts. The requested releases and indemnities were not provided by all defendants and the communications between the parties as to the provision of the financial records of the Trusts continued.

16 On 17 October 2011, the trustees provided deeds of release and indemnity to be executed by the defendants. The deeds attached basic balance sheets and summaries of the financial position of each of the Trusts accounts for the period 30 June 2005 onwards. The trustees informed the defendants that it was their intention to distribute the income and capital of the Trusts after receiving the signed deeds. The deeds of release and indemnity provided for distribution of the Trusts equally between the five grandchildren, that is, each grandchild was to receive a 20 per cent share of the Trusts.[3]

17 In response to this request, the fourth defendant executed the release and indemnity. The first, second and third defendants refused to sign the deed and continued with their requests for inspection of the financial records of the Trusts.

18 The trustees stated that thereafter certain procedures and protocols were put in place to enable inspection of the financial records by the defendants. They stated that the procedures and protocols were needed because there had been intermingling of the records of the Trusts.

19 The issue of the provision of the financial documentation of the Trusts and the issue of the actions on the part of the trustees in their management of the Trusts remain contentious but do not form part of the current application for removal of the trustees.

Application by the Trustees for the Passing of Accounts

20 The refusal by the first, second and third defendants to sign the deed of release and indemnity caused the trustees to issue an originating motion on 30 March 2012 for the giving of directions for the winding up of the Trusts, for the Court to settle the accounts of the Trusts and to discharge the trustees of the Trusts upon the passing of those accounts.

The Emergence of the Issue of the Unpaid Income Entitlement Payable to Beverley Hutchison's Estate

21 In the course of giving instructions for the preparation of the accounts for the Trusts, the trustees deposed that their attention was drawn to a potential liability of the Trusts to Beverley Hutchison that remained a liability to her estate.

22 The trustees deposed that their solicitors informed them that the accountants for the Trusts had identified a deficit between the income appointed to Beverley Hutchison and the income actually paid to her during her lifetime ('the unpaid income entitlement').[4] It was considered that there might be a continuing obligation on the trustees to pay the unpaid income entitlement that had accrued to Beverley Hutchison before her death to her estate.

23 What had occurred was that, during the lifetime of Beverley Hutchison, certain amounts were paid to her or, on her behalf, by the trustees from the income of the Trusts but not all of the income was paid to her in any one year. The income that was not paid to her was retained and reinvested in the Trusts without distinguishing, in any way, that the unpaid income actually belonged to Beverley Hutchison.

24 The trustees' failure to pay the whole of the income due to Beverley Hutchison occurred over an unknown number of years during the lifetime of Beverley Hutchison and is believed by the trustees to have occurred over many years and certainly pre-dated the appointment of the first plaintiff as trustee of various trusts in 1978. The trustees stated that the pattern of the management of the Trusts appears to have been that, in any one year, Beverley Hutchison was paid less income than she was actually entitled to receive from the Trusts.

25 The trustees say that the available documents for the period from 1 July 1998 to date enable the calculation of a firm estimate of what was not paid. For the period preceding 1 July 1998, the trustees are unable to calculate the amount of any unpaid income entitlements, owing to a lack of documentation. The trustees do not propose to attempt a calculation of the unpaid income entitlement for the period prior to 1 July 1998. The reasons given were that the only people who would suffer in this circumstance would be the second and third plaintiffs as beneficiaries of the estate of Beverley Hutchison and that any attempt to calculate the unpaid income entitlement before 1 July 1998 would adversely affect the other beneficiaries of the Trusts.[5]

26 The trustees deposed that it was not until August 2012 that they appreciated that the legal obligations of the trusts 'may include a liability to Beverley, and now Beverley Hutchison's estate, for income which had not been paid to her' when the accountants were instructed by the trustees.[6] The trustees estimated that the liability of the Trusts to the estate of Beverley Hutchison for the unpaid income and the capital growth from reinvestment for the period from 1 July 1998 to the date of death of Beverley Hutchison was around $2 million.[7] This amount was said by the trustees to be based on the accountant's estimate that, for the period 1 July 1998 to the date of Beverley Hutchison's death, the amount of unpaid income was approximately $1 496 774. The remaining balance was the trustees' estimate of the capital growth of the unpaid income entitlement for the same period.

27 The first plaintiff's evidence was that Beverley Hutchison was aware that she was not receiving all of the income and that '[s]he knew [the income] was there if she wanted something big and [Geoffrey Wales] agreed it was', that Beverley Hutchison was 'happy the way it is and [they] kept going that way', that they were trustees 'for her benefit and [they] did whatever she wanted',[8] that Geoffrey Wales knew that Beverly Hutchison was entitled to be paid all of the income and that she [the first plaintiff] and Geoffrey Wales liked to have a reserve or a 'nest egg' for Beverley Hutchison.[9]

28 The plaintiffs deposed[10] that, although the former and current trustees of the Trusts did not pay all of the income to Beverley Hutchison each year, the full amount of income due to Beverley Hutchison was declared in her tax returns. This was the case notwithstanding that the trustees were aware of the issue of the unpaid income entitlement for some time as follows:

(a) an undated file note produced by Bell Potter pursuant to orders made in this proceeding. From the content of the file note, the file note appears to have been prepared in either 2003 or 2004. The Bell Potter file note refers to a meeting on 22 April between the first plaintiff, the second plaintiff and the husband of the third plaintiff. The note records, amongst other things, that 'the trustees wish to continue re-investing the excess income and cash reserved in the respective trusts for the benefit of the future beneficiaries'. From the file note, the future beneficiaries mean the second and third plaintiffs and the second, third and fourth defendants;[11] and

(b) a letter dated 1 April 1977 from a firm of solicitors to Geoffrey Wales advising him that the whole of the income from the Trusts is due to be paid to Beverley Hutchison during her lifetime.[12]

29 In addition, Mrs Patricia Wales, the wife of the now deceased first defendant, Murray Wales, deposed in her affidavit and gave oral evidence about a conversation she had with Geoffrey Wales that she clearly remembered took place on 8 February 1977. In that conversation, Geoffrey Wales told her that 'he was acting "illegally" by not paying all the Trusts' income to Beverley'.[13] In her oral evidence, Patricia Wales was very clear as to the reasons why she remembered both the date and content of the conversation even though it took place in 1977.[14]

30 Following the identification of the unpaid income entitlement in August/September 2012, the accountants sought instructions from the trustees as to whether the accounts should be prepared on the basis that the unpaid income was a liability owing to the estate of Beverley Hutchison or an entitlement of the residuary beneficiaries of the Trusts.

31 Advice was obtained by the trustees and, as a result, the trustees sought directions from the Court as to the basis on which the accounts of the Trusts should be prepared having regard to the unpaid income entitlement.

32 As a consequence of the issue of the unpaid income entitlement, by summons dated 30 November 2012, the first and second defendants sought the removal of the plaintiffs as the trustees of the Trusts on the grounds that the trustees are in a position of conflict of interest and duty:

in now seeking to raise the issue (long after the death of Beverley Hutchison and the settlement of proceedings by [the first defendant] against [the estate of Beverley Hutchison]), as to whether or not the trustees ought make payment of arrears of income (extending back to 1998) to [Beverley Hutchison's] estate, when in fact [the first plaintiff] is the executor and [the second and third plaintiffs] are the only beneficiaries of [the estate of Beverley Hutchison], the trustees are in an indisputable position of conflict and interest.[15]

33 On 5 December 2012, the plaintiffs sought and obtained leave to amend their originating motion filed 30 March 2012 by seeking the further relief that the Court settle the accounts of the Trusts for the financial years ending 30 June 2004 to 30 June 2012 and any later financial year or part-year as the case may be.

Some Effects Caused by the Unpaid Income Entitlement Issue

34 The issue of the unpaid income entitlement necessarily affects the settlement of the capacity proceeding against the estate of Beverley Hutchison. The capacity proceeding was settled on 13 June 2012 before the issue of the unpaid income entitlement was said to be apparent to the trustees. If the unpaid income entitlement were included as an asset of the estate, the value of the estate of Beverley Hutchison would increase, on the estimate given by the trustees, by approximately $2 million. The trustees concede that, if the unpaid income entitlement were now paid to the estate of Beverley Hutchison, that would be a ground to re-open the capacity proceeding.[16] Because the plaintiff in the capacity proceeding (the first defendant in this proceeding) has since died, the position may now be irreparably damaged.

35 A further issue that will arise in both the capacity proceeding and the unpaid income entitlement calculation is that, during the lifetime of Beverley Hutchison, she purchased the leasehold interest in a building known as the 'Connault' at 41 Yarrbat Avenue, Balwyn ('the Connault'), valued at $396 000. Initially, the trustees asserted that the Connault was purchased using the capital from the Trusts and was, therefore, an asset of the Trusts but, in the terms of settlement in the capacity proceeding, it was acknowledged that the Connault was an asset of the estate of Beverley Hutchison.

36 The issue of the requests by the first, second and third defendants for the documentation of the Trusts remains on foot.

37 The circumstances in which a Court will remove a trustee and substitute another are summarised in Letterstedt v Broers, where Lord Lang said:

Story says, s. 1289, 'But in cases of positive misconduct, Courts of Equity have no difficulty in interposing to remove trustees who have abused their trust; it is not indeed every mistake or neglect of duty, or inaccuracy of conduct of trustees; which will induce Courts of Equity to adopt such a course. But the acts or omissions must be such as to endanger the trust property or shew a want of honesty, or a want of proper capacity to execute the duties, or a want of reasonable fidelity'.[17]

...

In exercising so delicate a jurisdiction as that of removing trustees, their Lordships do not venture to lay down any general rule beyond the very broad principle ... that their main guide must be the welfare of the beneficiaries.[18]

...

It is quite true that friction or hostility between trustees and the immediate possessor of the trust estate is not of itself a reason for the removal of trustees. But where the hostility is grounded on the mode in which the trust has been administered, where it has been caused wholly or partially by substantial overcharges against the trust estate, it is certainly not to be disregarded.

Looking therefore at the whole circumstances of this very peculiar case, the complete change of position, the unfortunate hostility that has arisen, and the difficult and delicate duties that may yet have to be performed, their Lordships come to the conclusion that it is necessary for the welfare of the beneficiaries that the Board should no longer be trustees.[19]

38 This statement of principle in Letterstedt v Broers was adopted by Latham CJ in Miller v Cameron[20] and expanded upon by Dixon J, who said:

The jurisdiction to remove a trustee is exercised with a view to the interests of the beneficiaries, to the security of the trust property and to an efficient and satisfactory execution of the trusts and a faithful and sound exercise of the powers conferred upon the trustee. In deciding to remove a trustee the Court forms a judgment based upon considerations, possibly large in number and varied in character, which combine to show that the welfare of the beneficiaries is opposed to his continued occupation of the office. Such a judgment must be largely discretionary. A trustee is not to be removed unless circumstances exist which afford ground upon which the jurisdiction may be exercised.[21]

39 Ashley J, in Monty Financial Services Ltd v Delmo, referred with approval to Miller v Cameron as follows:

Latham CJ made it clear at 575 that misconduct need not necessarily be present. Starke J at 579 emphasised that 'the only guide is the welfare of the beneficiaries'.[22]

40 His Honour then referred to the quote from Dixon J at paragraph [38] above.

41 Ashley J concluded (following Passingham v Sherborne[23] and Letterstedt v Broers) that proof of actual misconduct is not necessarily required for the removal of a trustee and that a conflict of duty and interest may suffice.[24]

42 In Manocchio v Wilson,[25] Habersberger J dealt with an application to remove a co-executor on the ground of unfitness to act, owing to there being a conflict of interest and duty. He said:[26]

Unfitness to act can be constituted not only by 'matters such as unwarranted delay in administration of the estate, failure to communicate with beneficiaries, failure to account, and unreasonable delay in paying beneficiaries their entitlement' but also by 'a situation in which an executor has a conflict of duty and interest in carrying out his executorial duties'.[27] Not every conflict of duty and interest should result in removal of an executor.[28] An executor's conflict of duty and interest of a kind likely 'to affect the efficient and satisfactory administration of the estate is a proper basis for removing an executor ... '.[29]

43 The authorities demonstrate that a trustee will not necessarily be removed because of a position of conflict between duty and interest; but in some cases it may be sufficient. Proof of actual misconduct is not required for the removal of a trustee. Each case depends on the facts and it is a matter of what is best for the welfare of the trust estate as a whole.

44 Examples of cases where a trustee has not been removed when in a position of conflict between duty and interest are McKenna v Lowe[30] and Porteous v Rinehart.[31]

45 In McKenna v Lowe, although it was held that the sale of the deceased's real estate to a trustee be set aside, the actions of the trustee were not considered harshly in the circumstances because it was clear that the sale was a mistake on the part of the trustee.[32]

46 In Porteous v Rinehart, the plaintiff sought to remove the defendant as an executrix and trustee of a deceased estate.[33] White J was satisfied that there was a clear conflict of interest and duty in the circumstances of that case, yet he refused the application for removal. He did not however preclude the possibility of a similar application if circumstances warranted it in the future.[34]

47 The conflict in Porteous v Rinehart concerned whether an asset was an asset of the estate in circumstances where one of the executors and trustees maintained that the asset belonged to her personally. White J considered that the conflict was one that the deceased would not have foreseen.[35] His Honour said:

If the defendants are successful in the Action, no doubt the present application will turn out to have been unnecessary from a practical point of view. If the plaintiff is successful in the Action, on the other hand, the result will be that the Estate will be held to own very substantial assets which will have to be administered in accordance with the Will. The defendants have undertaken to abide the decision of the court in the Action.[36]

48 White J reviewed the principles relevant to the court's jurisdiction to remove trustees. His Honour set out the principles highlighted above:

Apart from the provisions of the Trustees Act, the court has an inherent jurisdiction to remove trustees and the dominant consideration in exercising either the statutory or inherent jurisdiction to remove trustees must be the welfare of the beneficiaries: see Letterstedt v Broers (1884) 9 AC 371; Miller v Cameron [1936] HCA 13; (1936) 54 CLR 572; Re Matheson; Ex parte Worrell v Matheson [1994] FCA 1021; (1994) 121 ALR 605; Gava v Grljusich (unreported, Supreme Court, WA, No 3031 of 1991, Library No 960010; 11 January 1996). This is a power which will be exercised cautiously.[37]

49 His Honour also referred[38] to Passingham v Sherborne,[39] Hobkirk v Ritchie[40] and Hunter v Hunter, in which it was stated:

As I understand the principle, it is sufficient if the evidence shows, (i) that there is a conflict between interest and duty; (ii) that the trustees have failed to recognise this conflict and to take steps to ensure that their interest should not prevail as against their duty, and have disregarded the interests of the infant cestui que trust; and (iii) that a state of hostility exists between the trustees and the immediate possessor of the trust estate which is calculated to work against the true interests of the estate. In my opinion, that is the position in this case irrespective of any other grounds, though there are here other grounds found by the learned trial judge which make all the more necessary the removal of the trustees from their office.[41]

50 White J also referred approvingly to Monty Financial Services Ltd v Delmo.

51 White J found that the application for removal had not been diligently pursued, with the result that the conflict of interest had given rise to completed acts on the parts of the defendants and nothing further was to be done pending the determination of the action. He further found that new executors and trustees would not be able to do anything to advance the interests of the estate pending the determination.[42]

52 He was also persuaded that, while there was the potential for an operative conflict to arise, there was no immediate threat of mischief in the continuation of the executors and trustees in their roles and there was nothing to indicate that the trust property would not be safe pending the determination of the action.[43]

53 Examples of cases where a trustee has been removed when in a position of conflict between duty and interest are Passingham v Sherborn,[44] Hunter v Hunter,[45] Titterton v Oates,[46] Hill v Fry[47] and Hobkirk v Ritchie.[48]

54 In Passingham v Sherborn, the removal of the trustees on the ground of conflict between interest and duty was ordered even though the position in respect of which the conflict arose was expressly authorised by the testator.

55 In his will, the testator gave power to his trustees to become lessees of certain trust property. One of the trustees availed himself of this power. At the instance of the cestuis que trust, the trustee lessee was removed on the ground of the inconsistencies of his duties as lessee and trustee. The Court concluded that it was not right to permit trustees to remain in a situation in which their interests must necessarily conflict with their duty, notwithstanding that the difficulty did not arise from any misconduct of theirs but rather that they were led into it by the testator himself. It was held that the circumstances surrounding the trust property showed that the union of the two characters of trustee and lessee would create an impediment to the due performance of the duty of the trustees towards the estate.

56 In Hunter v Hunter, the Court of Appeal in New Zealand upheld the decision of the trial judge for the removal of trustees of an estate in circumstances where it was found that the trustees had allowed or permitted their interests to conflict with their duty. Smith J, whose decisions were affirmed on appeal,[49] referred to Passingham v Sherborne and said:

But it is plain that, if the Court can find a trustee whose interest does not conflict with his duty, the Court prefers such a trustee. ... The jurisdiction is therefore largely in the discretion of the Court.[50]

57 In Hunter v Hunter, the life tenant and the trustees were in a state of hostility from which there was no immediate prospect of relief. The hostility between the trustees and the immediate possessor of the trust estate was 'grounded on the mode in which the trust has been administered'.[51] This was considered pertinent to the decision to remove the trustees, as there was a close relationship between the conflict of interest and the hostility in the circumstances of the case.

58 In Titterton v Oates, the Court followed the principles set out in Miller v Cameron stating that the jurisdiction to remove a trustee 'must be exercised with a view to the interests of the beneficiaries, the security of the trust property, the efficient and satisfactory execution of the trusts and a faithful and sound exercise of the trustee's powers'.[52] In Titterton v Oates, the trustee,[53] who was a daughter of the deceased and later became sole trustee, was a residuary beneficiary of the trust. The sister of the trustee, who was also a beneficiary, sought her removal on the basis that she had failed to provide information or distribute income efficiently, that she had conflicts of interest with her brother and herself, and that she had misunderstood the nature of discretions exercisable by her in favour of her brother.

59 Crispin J determined that, although a conflict of interest or a breach of trust will not necessarily lead to removal of a trustee,[54] the removal of the trustee should be ordered in that case for various reasons. Inter alia, the trusts had not been executed in an efficient and satisfactory manner in the past (although past failures do not necessarily justify a prediction that similar failures will occur in the future); there was no evidence that the divisions between the parties had been healed; the Court was not satisfied that the trustee would or could now prevent those divisions from influencing her discretionary decisions as trustee; the Court could not discount the risk of further disruptions to the administration of the trust; and the Court was unable to be satisfied that the trustee would exercise her powers soundly in respect of the defendant's needs.[55]

60 In Hill v Fry, Mandie J ordered the removal of the trustees of an estate and said it was 'most desirable that independent trustees be appointed who can be defendants to any proceeding brought by the defendants to the present proceeding and who can act impartially in accordance with the terms of the deceased's will as it presently stands'.[56] The reasons for the removal were that the defendants were

in a situation of acute conflict of interest in that there was a conflict between their duties as trustees and their personal financial interests. ... The plaintiff on the one hand, and the first defendant on the other, presently have a significant dispute about their entitlements under the will of the deceased. The first defendant (and, naturally, his son, the third defendant) clearly intend to establish their claimed entitlement to the sole ownership of the business interests operated by the various companies in which the estate is said to have a shareholding. To that end, they intend to seek revocation of probate and/or rectification of the will. I say nothing about the validity of those claims one way or the other but they are clearly in conflict both with their obligation as trustees to uphold the existing will and also in conflict with the apparent entitlement of the plaintiff as the will stands.[57]

61 In Hobkirk v Ritchie,[58] the Court considered the applicable principles,[59] referring to Letterstedt v Broers and Re Wrightson,[60] in which Warrington J stated:

You must find something which induces the Court to think either that the trust property will not be safe, or that the trust will not be properly executed in the interests of the beneficiaries.[61]

62 In Hobkirk v Ritchie, the Court ordered that one of the trustees should be removed from that position not only because of the conflict between his personal interest as a beneficiary and his duty as trustee, but also because he had to mortgage his interest under the will in order for the firm he was a partner in to meets its liabilities, and that firm were the solicitors to the estate. Clark J held that, in those circumstances, there was such a degree of risk that the discretionary trusts of the will would not be properly exercised that the trustee should be removed.[62]

63 The first and second defendants rely on Fysh v Coote,[63] See v Hardman,[64] Manocchio v Wilson,[65] and Monty Financial Services Ltd v Delmo in support of the contention that a conflict of the kind in these facts constitutes grounds for removal of the trustees. In oral submissions, counsel for the plaintiffs suggested that those cases in fact support the plaintiffs' position. An outline of the key principles in each of those cases is set out below.

64 In Fysh v Coote,[66] which concerned the removal of an executor[67] pursuant to s 34 of the Administration and Probate Act 1958, Ormiston JA (with Batt and Chernov JJA agreeing) relied on the statements of principle of Ashley J in Monty Financial Services Ltd v Delmo, the Privy Council in Letterstedt v Broers[68] and Dixon J in Miller v Cameron.[69] In particular, his Honour noted Ashley J's comment that unfitness to be an executor could be constituted 'by matters such as unwarranted delay in administration of the estate, failure to communicate with beneficiaries, failure to account, and unreasonable delay in paying beneficiaries their entitlement'[70] and that unfitness comprehends a situation in which an executor has a conflict of duty and interest in carrying our his executorial duties.[71]

65 His Honour approved of this statement by Dixon J in Miller v Cameron:

The jurisdiction to remove a trustee is exercised with a view to the interests of the beneficiaries, to the security of the trust property and to an efficient and satisfactory execution of the trusts and a faithful and sound exercise of the powers conferred upon the trustee. In deciding to remove a trustee the Court forms a judgment based upon considerations, possibly large in number and varied in character, which combine to show that the welfare of the beneficiaries is opposed to his continued occupation of the office. Such a judgment must be largely discretionary. A trustee is not to be removed unless circumstances exist which afford ground upon which the jurisdiction may be exercised. But in a case where enough appears to authorize the Court to act, the delicate question whether it should act and proceed to remove the trustee is one upon which the decision of a primary Judge is entitled to especial weight.[72]

66 In Fysh v Coote, Ormiston J determined that the sole remaining executrix was unfit to act and should be removed as an executrix primarily because her conduct and attitude towards both her former co-executrix and the beneficiaries had placed her in a position of such conflict as between her own interests, the interests of the estate and the interests of those beneficiaries as to make it impracticable for her to administer the estate.[73] His Honour also pointed to the executrix's limited knowledge of the difficult legal issues raised. One of the conflicts arose from the executix's desire to buy out the interests of the other beneficiaries in a unit in Mont Albert where she could not agree on an appropriate purchase price. Another conflict arose out of the appellant's occupation of the unit for a number of years without paying any rent.

67 Another conflict was the appellant's insistence that her sister[74] account to the estate for what the appellant alleged were improper appropriations of their father's money during his lifetime. This would have reduced the net entitlement to her sister as a beneficiary. Ormiston JA noted that, while it was commendable for the appellant as executrix to try and bring in as many assets as possible into the estate, in this case she had caused long delays and had not progressed with the original allegations against her sister. His Honour said:

A competent executor would have brought those matters to a head well before now, however intransigent the other parties might have been, or at the least would have taken proper legal steps so as to show the other beneficiaries of this relatively small estate that it remained worthwhile pursuing them. Not only has she not taken any significantly useful steps to that end, but all the other beneficiaries have insisted that she conclude the administration of the estate, which nevertheless she has failed to do. She seems never to have contemplated the possibility of that dispute remaining outstanding, if possible, while the rest of the estate was administered. In particular, although a few small bank accounts have been got in and distributed, the principal asset remains unconverted and therefore undistributed between the beneficiaries. She does not appear to have realised that her dispute with one beneficiary or group of beneficiaries could not justify depriving the other beneficiaries of their rightful inheritance (or at least part thereof), so convinced has she been of the righteousness of her campaign against Mrs Burley and her estate. Because she has otherwise been so concerned to obtain the right to purchase the unit, she has put her interests ahead of that of the whole estate by placing an irrelevant condition on its realisation.[75]

His Honour also noted that the appellant needed to account to the estate for the rent owed by her for her extended rent-free occupation of the Mont Albert unit.[76]

68 Ormiston JA concluded that the appellant was 'unfit' to continue as executrix because the circumstances showed that this was contrary to the welfare of the beneficiaries.[77] His Honour added that the appellant did not recognise her lack of capacity to continue in this role in view of, for example, her continued rent-free occupation of the unit or the delays in the administration of the estate brought on by her clear desire to purchase the unit at the lowest possible price.[78]

69 In See v Hardman,[79] the plaintiff, a daughter of the deceased and a beneficiary under the will, brought a proceeding seeking the removal of the trustee and executor of her mother's estate (who was the only surviving son of the deceased). One of the dispositions in her will was the freehold of the Unity Hall Hotel in Balmain, which was given to her four surviving children in equal shares as tenants in common. That gift was 'subject nevertheless to any lease or agreement to grant a lease which [the deceased] may have entered into in respect of the said property and subject to any mortgage which [the deceased] may give or have given in order to secure borrowings of [the deceased's grandson]'.[80] Prior to her death, the deceased held a number of assets including a property known as the Unity Hall Hotel in Balmain and 1000 shares[81] in Holilol Pty Ltd. Holilol was the owner of the hotel's licence and its directors were the deceased, the grandson and a Mr Larosa, who became a director on 23 May 2000.[82]

70 Prior to her death, the deceased was a party to an agreement dated 23 May 2000 whereby Holilol sold the hotel's licence and its plant, stock and goodwill to Hawksun Pty Ltd[83] for a purchase price of $4 203 000. An essential term of the agreement was that the deceased agreed to cause Holilol to grant a lease of the hotel for 10 years with an option for a further 10 years. The grandson executed the agreement as director for Holilol, as sole director for Hawksun, as a principal himself and as attorney under power for the testatrix. The testatrix did not otherwise participate in the agreement. There was substantial evidence, however, that the deceased had given clear instructions prior to her death that this agreement was to take place and that she appreciated that it was advantageous to the grandson.

71 The evidence was that the executor had already made some interim distributions to the beneficiaries, but had not yet transferred the freehold to himself and his sisters, as required by the will. This was due to the plaintiff's refusal to agree to mortgaging the property to Westpac.[84]

72 Bryson J noted the relevant authorities on an application to remove a trustee,[85] including Miller v Cameron, Letterstedt v Broers, and Hunter v Hunter. The thrust of all of these authorities is that, in exercising its jurisdiction to remove a trustee, the interests of the beneficiaries is the primary concern of the Court.

73 The plaintiff alleged that the defendant should be removed as executor and trustee for three reasons. The first was that the business was sold under market value. The second reason was the defendant's failure appropriately to investigate the prospects of bringing a claim on behalf of the estate against the grandson and Hawkson for remedies relating to the sale of the business. The third reason was that the defendant had a conflict between his duty to the estate and his interest as a potential investor in Hawksun and due to his relationship with the grandson (the defendant's son).

74 After a detailed consideration of the evidence about the competing valuations of the hotel and licence, and in light of strong evidence that the deceased had intended to enter into the transaction and make a gift of her assets in the way that she did, His Honour determined that Holilol disposed of its assets at an appropriate price and that no remedy arose on this issue.

75 His Honour also determined that no conflict arose, because the defendant's duty was to carry out the wishes of the testatrix in relation to the hotel, for example to uphold the lease, and those wishes were not adverse to the interests of the defendant. His Honour stated that, '[i]f it were the defendant's duty as executor or as trustee to take a position adverse to the effectiveness of those transactions, his conflict of duty and interest would make him an altogether unsuitable person to conduct that part of estate affairs' and this would enliven the Court's power to replace the defendant with some other person.[86]

76 In Manocchio v Wilson,[87] a co-executrix applied to the Court for an order removing her brother as co-executor of their late father's estate on the basis that her brother was 'unfit' within the meaning of s 34(1)(c) of the Administration and Probate Act 1958. Habersberger J noted the applicable authorities,[88] and determined that the brother was in a position of conflict of duty and interest because he had occupied the house, which was the principal asset of the estate, for over two years without paying any rent. Despite agreeing in writing to pay rent, he did not do so. This put the brother in conflict with the other beneficiaries of the estate (who were his two sisters) because they had received no benefit from their one-third entitlement to the house.[89] His Honour noted that the brother was also conflicted when faced with deciding whether to agree to accept an offer of $112 000 to purchase the house. This was because 'the defendant's consideration was always going to be impacted by his personal interest in delaying the sale so that he could continue living rent free at the property'.[90] The Court noted with concern that the brother failed to understand or appreciate the nature of his responsibilities as co-executor and, when the conflict was pointed out to him, believed that he was not in a position of conflict.[91]

77 In Monty Financial Services Ltd v Delmo, the plaintiffs applied for an order that the defendant, Mr Delmo, who was the executor of his late mother's estate, be removed from that position on the basis that there was a conflict between Mr Delmo's duties as executor properly to administer the estate and his claim upon the estate as a creditor. Mr Delmo claimed that the estate owed him moneys that he provided towards the cost of extensions to his late mother's home in Kew, which were carried out in 1989 and 1990. Mr Delmo asserted that he spent $158 646.90 towards these renovations. He asserted that, as at 30 June 1993, the total amount of capital and interest outstanding was $271 349.53. By her will, the deceased made certain bequests, then divided the remainder of her estate equally between her son, Mr Delmo, and her daughter, Mrs Dwyer, as tenants in common. Although the deceased had appointed both of her children as executors, Mr Delmo was the only executor to take the grant because Mrs Dwyer renounced probate. The first plaintiff was a judgment creditor of Mrs Dwyer, and the second plaintiff was her trustee in bankruptcy.

78 If Mr Delmo's creditor claim succeeded, this would have substantially reduced Mrs Dwyer's residuary beneficial interest, which was of obvious concern to her trustee in bankruptcy. Ashley J conducted a comprehensive and meticulous review of the relevant authorities and determined that Mr Delmo should be removed as executor for the following reasons:

[His removal] is not required because he is at once executor and a beneficiary. It is required because in the particular circumstances of this case there is a conflict of duty and interest, the conflict necessarily requiring a decision by the executor whether to accept or reject his own truthfulness. A critical question to be resolved is not simply whether Mr Delmo spent money on the Kew property. It is whether the money spent was a gift or a loan.[92]

79 Finally, the case of Re Carey; State Trustees Ltd v Howden[93] deals with an alleged potential conflict of duty and interest in circumstances where the Court was asked to determine who should be appointed administrator of an intestate estate.

80 The deceased died intestate and the persons entitled to benefit from her estate were her two adult children. The son executed an authority authorising State Trustees to apply for letters of administration. State Trustees made an application for letters of administration and the adult daughter objected to the appointment. In determining the issue of the appointment of the administrator, Habersberger J was required to consider whether the existence of a loan by the deceased to the daughter should disqualify her from being appointed as the administrator of the estate.[94]

81 In reaching his conclusion, his Honour took into account that the adult daughter did not dispute that she was in debt to the estate, put forward full details of the amount outstanding and some supporting documentation for the loan. His Honour distinguished Monty Financial Services Ltd v Delmo, stating that the circumstances:

constitute a very different situation from that in Delmo. In that case Ashley J observed that the executor was possibly making claims on his behalf to a greater share of the estate in order to reduce the share that would otherwise go to his bankrupt sister in order to defeat her creditors.[95]

82 The cases referred to establish that the relevant key principles are generally consistent and the particular facts of each case will determine the result.

83 In exercising the jurisdiction to remove trustees, the general rule and guiding principle is the welfare of the beneficiaries. Such a judgment is largely discretionary.

Submissions of the Parties Seeking Removal of the Trustees

84 The first and second defendants submitted that the issue of the unpaid income entitlement, including the mixing of the unpaid income entitlement with the capital of the Trusts, is an issue in which the plaintiffs now have a personal interest.

85 This is because the first plaintiff is the executrix of the estate of Beverley Hutchison and the second and third plaintiffs are the beneficiaries of her estate. If it is determined by them as trustees of the Trusts that the unpaid entitlement ought now be paid to the estate, then those moneys would be paid to the first plaintiff as the executrix of the estate and, ultimately, to the second and third plaintiffs as the sole beneficiaries of the estate.

86 The first and second defendants submitted that, by attempting to have the issue dealt with by way of direction from the Court, the plaintiffs seek to avoid bringing the two different conflicts together, that is, by avoiding having the executrix and beneficiaries of the estate make a formal demand for the unpaid income entitlement against themselves as trustees of the Trusts. It was submitted that this situation represents a classic case of conflict of interest and duty on the part of the plaintiffs.

87 The first and second defendants submitted that the conflict is demonstrated as follows:

if the [trustees] want to maintain ... that the long unpaid income entitlements ... must now still be paid to [the estate of Beverley Hutchison] ... then they clearly have a conflict of interest and ought be removed as trustees and an independent trustee ought be appointed.

However, if the [trustees] (in their capacity as sole Executor and sole beneficiaries, respectively of [the estate of Beverley Hutchison]) no longer seek to assert any entitlement to those long unpaid income entitlements, ... then there would be no need to appoint new trustees and their proceeding for the passing of accounts and final distribution of the trusts could then be prosecuted expeditiously.[96]

88 The conflict between interest and duty remains while the plaintiffs wish to assert that, as the executrices and beneficiaries of the estate of Beverley Hutchison, the unpaid income entitlement should now be paid to the estate and they should also remain as trustees of the Trusts.

89 The first and second defendants submitted that, in relation to the unpaid income entitlement, there remains the issue whether it becomes payable after the death of Beverley Hutchison at all. They accept that Beverley Hutchison was entitled to the income from the Trusts during her life, but they do not accept that the entitlement necessarily survives her death. It was submitted that this raises the question whether there may be defences taken by the trustees to a claim made by the estate of Beverley Hutchison and that, arguably, there could be the following defences available to the trustees:

(a) the awareness of the trustees that not all of the income was paid to Beverley Hutchison even though the trustees were aware that she was entitled to it;

(b) that the trustees acted in breach of trust in not paying all of the income entitlement to Beverley Hutchison during her lifetime;

(c) whether, in making a payment to the estate of Beverley Hutchison now, the trustees will profit indirectly from their own breach of trust;

(d) the fact that the first plaintiff, as the executrix of the estate of Beverley Hutchison, has failed positively to assert that the unpaid income entitlement must now be paid to the estate constitutes a waiver to the payment of the unpaid income entitlement;

(e) whether the trustees have equitable defences to a claim now made by the estate of Beverley Hutchison such as laches, lack of clean hands, estoppel of acquiescence; and

(f) whether the estate of Beverley Hutchison would be unjustly enriched if the unpaid income entitlement were now paid by the trustees to the estate of Beverley Hutchison.

90 The first and second defendants also relied on the fact that the accounting for the purchase of the Connault had been contradictory and problematic and that recent distributions made by the trustees of the Trusts to some of the beneficiaries of the Trusts were unequal.[97] Specifically, the second defendant and the second and third plaintiffs have received $62 945.36 each, the third defendant has received $132 945.36, whereas the fourth defendant, who opposes the application to remove the trustees, has received $453 673.54.[98] As stated, in support of their submissions, the first and second defendants rely on Monty Financial Services Ltd v Delmo, Fysh v Coote, Manocchio v Wilson and See v Hardman as authorities for the proposition that a conflict of this nature constitutes grounds for removal as trustees.

91 The third defendant supported and adopted the submissions of the first and second defendants in relation to the conflict issue. The third defendant added that the current problems had arisen because of the failure by the plaintiffs adequately to account for the Trusts. The third defendant made numerous other requests in relation to the provision of information and documents concerning the Trusts. A summons was issued in relation to requests he had outlined in his affidavit affirmed 20 March 2013. While the third defendant insisted that the material filed was relevant to both issues, he agreed during oral submissions that the determination of the question of the trustees' removal should be decided first.

92 The fourth defendant supported the retention of the trustees. The fourth defendant, in his affidavit affirmed 30 November 2012, sets out his position, which is that the unpaid income entitlement should not now be paid into the estate of Beverley Hutchison. In his submission, the Trusts should be distributed in accordance with the settlement conducted in relation to Beverley Hutchison's estate.

93 The plaintiffs submitted that any conflict between duty and interest was wholly addressed by including the issue of the unpaid income entitlement among the matters for the Court's directions, including for the preparation of two sets of accounts of the Trusts and for the Court to settle those accounts.

94 The plaintiffs referred to Pope v DRP Nominees Pty Ltd[99] and See v Hardman[100] in support of this submission, stating that the more appropriate path for the Court to take is to give effect to the directions sought by the plaintiffs on their original application 'by granting directions and relief directed to remedying some specific problem or difficulty'.[101] The plaintiffs prefer this approach to the alternative approach of removing a trustee. In closing submissions, counsel for the plaintiffs said of removing the trustees:

We would ask rhetorically, Your Honour, what would the appointment at this point in time of a different trustee achieve? The different trustee would need to become familiar with all of the documents, not just the documents that have been filed in the proceeding but all of the relevant documents. Presumably the trustee would need to consider the provisions of the trusts themselves and may take advice on the way in which the trusts operated but would in the end, Your Honour, be back in the same position as the trustees are here with a recognition that income that should have been paid to [Beverley] in her life hasn't been ...[1]

95 The plaintiffs contended that the circumstances of the case are neither exceptional nor appropriate for the replacement of the plaintiffs as trustees. In their written submissions, they stated that the potential conflict of duty and interest is not of a kind that would warrant replacement.[102] They point to the fact that the plaintiffs are not challenging the terms of the trusts.[103] They distinguish Monty Financial Services Ltd v Delmo on the basis that the resolution of the unpaid income entitlement issue, being the principal cause of the conflict of duty and interest, does not turn on the plaintiffs' evidence but on the terms of the Trusts and uncontested transactions.

96 The plaintiffs submitted that the position of all the parties is protected in the meantime by their determination not to make a final distribution of the Trusts' assets until the settlement of the accounts by the Court and that it is not in the interests of the Trusts or the welfare of the beneficiaries of the Trusts for the plaintiffs to be replaced as trustees of the Trusts at this stage of the administration of the Trusts.

97 They submitted that there is no substance in the criticisms of past conduct of the trustees in administering the Trusts and that the matters complained of could not affect the future administration of the Trusts. They say that, although the unpaid income entitlement was irregular and 'that in strictness there was a breach of trust because the trustees didn't in [Beverley's] lifetime distribute all of the income to her',[104] her unpaid income entitlement was not lost in that the trustees reinvested in the capital of the Trusts and the trust funds of the Trusts remain safe and that the management of the assets of the Trusts remains under the control of Bell Potter and will remain with Bell Potter for the time being.

98 It was further submitted that, although there is now a problem of identifying what was the unpaid income entitlement, nothing was lost to the estate of Beverley Hutchison by the unpaid income entitlement remaining in the Trusts.[105] The consequence is that the unpaid income entitlement can still be identified and paid to the estate of Beverley Hutchison.

99 The plaintiffs submitted that it is the primary obligation of the trustees to comply with the Trusts, which, in this case, was to pay all of the income to Beverley Hutchison. They contend that, if a trustee is in breach of trust and fails to do something, and it is possible thereafter for the trustee to redress the failure, then it should be redressed by the trustee and that whoever is the trustee will have the same obligation.[106]

100 The plaintiffs submitted that a breach of trust does not necessarily lead to the removal of a trustee. It is a particularly significant step where there is nothing further to be done by the trustees, that is, where there is no discretion to be exercised and the funds of the Trusts are not at any risk of loss. The Court would not, and should not, remove trustees without some concrete foundation in fact, supported by legal authority, that makes the application of defences real, rather than illusory. The plaintiffs contend that any defences relied upon by the defendants in their submissions are illusory.

101 In relation to any alleged conflict of interest and duty, the plaintiffs submitted that, although the second and third plaintiffs are the beneficiaries of the estate of Beverley Hutchison, if the trustees paid the unpaid income entitlement to the second and third plaintiffs, they would be paying them no more than they would have received had the unpaid income entitlement been paid to Beverley Hutchison during her lifetime and invested by her as her unspent income.

102 The other reason why the plaintiffs contend that the second and third plaintiffs are not paying themselves as beneficiaries of the estate of Beverley Hutchison is that there is an intervening critical factor in this case. That critical factor is that it was the wish of Beverley Hutchison, from 1976, when she executed her will, that her estate pass to the second and third plaintiffs and no one else. For this reason, the plaintiffs submitted that it is now their responsibility to pay the unpaid income entitlement to the estate of Beverley Hutchison. The second and third plaintiffs are, in fact, benefitting from the terms of the will of Beverley Hutchison and not from the breach of trust by the trustees.

103 The plaintiffs submitted that, if the second and third plaintiffs were not beneficiaries under the will of Beverley Hutchison, this application for their removal would not have been made, because in such circumstances the trustees would be obliged to pay the unpaid income entitlement to the estate of Beverley Hutchison. It follows that the obligation to pay the unpaid income entitlement cannot turn on who might be the beneficiaries of the estate of Beverley Hutchison.

104 In answer to the submissions of the first, second and third defendants that, because Beverley Hutchison did not ask for the unpaid income entitlement, she did not wish for those moneys to be received by her in her lifetime, the plaintiffs contended that Beverley Hutchison did not waive her right to receive the income in her lifetime. This was supported by the fact that, in some years, she was paid more than the income received. This indicated that Beverley Hutchison and the trustees understood that the assets in the Trusts were a combination of capital and income, although the trustees conceded that, for most of the years, Beverley Hutchison did not take all of her income.

105 The plaintiffs also relied on Quinton v Proctor[107] and emphasised that the refusal to distribute a share of a trust fund to a beneficiary who is absolutely entitled may not justify removal where the refusal reflects genuinely held concerns as to the best interests of the trust.[108] In that case, Kellam J refused to make an order removing a co-trustee who had refused to agree to distribute a share of a trust fund to a beneficiary. The particular circumstances of that case included an allegation that the co-trustee had resisted the application on the basis that the life tenant lacked capacity, although he later conceded that she did have capacity. His Honour was not satisfied that this concern of the co-trustee was not bona fide, nor did he consider that the co-trustee's sense of moral obligation to the testator to follow through with the promises he had made to him provided a ground for removal.[109] His Honour considered that the co-trustee's views and concerns 'were genuinely held in what he sees as the interests of the trust' and he determined that he had not placed himself in a position of conflict.[110]

106 In their oral submissions,[111] counsel for the plaintiffs suggested that the cases relied upon by the first, second and third defendants supported the plaintiffs' position, rather than that of the defendants.

107 In the circumstances of this case, the trustees, and Geoffrey Wales as a former trustee, administered the Trusts in breach of trust by not paying all of the income to Beverley Hutchison during her lifetime. Although that unpaid income was lost to Beverley Hutchison in her lifetime, it has remained in the Trusts and is mixed with the capital assets of the Trusts.

108 Although the submissions of the first, second and third defendants as to the relevant conflict of interest and duty focussed on the fact that the first plaintiff is the executor of the estate of Beverley Hutchison and the second and third defendants are the sole beneficiaries of the estate, I consider that the trustees' conflict between interest and duty does not arise solely from those circumstances. In that regard, I accept the plaintiffs' submission that the obligation to pay the unpaid income entitlement cannot turn on who might be the beneficiaries of the estate of Beverley Hutchison.

109 In my view, the facts and circumstances in this case give rise to a conflict between interest and duty on two separate fronts.

110 The first conflict arises from the trustees' stated position that, consistent with their primary obligation to comply with the Trusts, they must now pay the unpaid income entitlement to the estate of Beverley Hutchison. This position is inconsistent with their long held practice for the payment of the income from the Trusts during the lifetime of Beverley Hutchison. This conflict between interest and duty exists irrespective of the identity of the executrix or the beneficiaries of the estate of Beverley Hutchison.

111 The second conflict does arise from the first plaintiff being the executrix of the estate of Beverley Hutchison and the second and third plaintiffs being the residuary beneficiaries of her estate. Again, by maintaining their stated position on the payment of the unpaid income entitlement, the trustees are now preferring the personal and financial interests of the second and third plaintiff when they failed to prefer the interests of Beverley Hutchison during her lifetime. The trustees' stated position ensures that the second and third plaintiff will now receive the financial benefit denied to Beverley Hutchison during her lifetime.

112 In the consideration of the cases concerning conflict of interest and duty, Monty Financial Services Ltd v Delmo has the factual situation most similar to the facts of this case. This is because Mr Delmo had to make a determination in his position as executor and creditor of the estate whether to pay to himself the moneys allegedly owed to him. This required him to rely on his own 'truthfulness'.[112] As stated, the plaintiffs distinguish Monty Financial Services Ltd v Delmo on the basis that the resolution of the unpaid income entitlement issue does not turn on the plaintiffs' evidence but turns on the terms of the Trusts and uncontested transactions. I do not accept this submission.

113 In my view, there will be contested transactions that will need to be assessed on the their merits. To understand how the trustees came to pay Beverley Hutchinson less than her income entitlement during her lifetime, and how that unpaid income came to be mixed with the capital of the Trusts without appropriate documentation, requires evidence from the trustees as to their past conduct and administration of the Trusts and an assessment of that conduct and administration over many years in administering the Trusts in breach of trust. As trustees, they will be required to assess the merits of their own conduct as well as any defences concerning the unpaid income entitlement. There will also need to be an assessment of the calculation of the quantum of the unpaid income entitlement, the effect of the purchase of the Connault in that calculation, the effect of the unpaid income entitlement on the settlement of the capacity proceeding, the possibility of the re-opening and a different settlement of the capacity proceeding. There is also the issue of the unequal distributions to the beneficiaries of the Trusts since the death of Beverley Hutchison in the context of this litigation. The trustees' past conduct in the administration and management of the Trusts is, in my view, central to the resolution of the unpaid income entitlement issue and would be best undertaken by an independent trustee.

114 In maintaining the position that their primary obligation is to comply with the Trusts now, the trustees are making a determination in their positions as trustees without any assessment of the merits of any of the foreshadowed defences raised by the first to third defendants. In this sense, the trustees are, in reality, preferring the second and third plaintiffs, which, in turn, affects the entitlement of the beneficiaries of the Trusts.

115 I also do not accept the plaintiffs' submission that in paying the unpaid income entitlement of to the estate of Beverley Hutchison now the trustees would be paying the second and third plaintiffs no more than they would have been received if the income had been paid and the unspent income re-invested by Beverley Hutchison during her lifetime. The submission assumes that Beverley Hutchison would have re-invested her unspent income whereas the evidence of the spending habits of Beverley Hutchison during her lifetime was that, on balance, she would have used the unspent income rather than re-invested it. What Beverley Hutchison lost by not receiving her full entitlement of the income during her lifetime was her ability to deal with it during her lifetime.

116 The reliance by the trustees on the critical intervening factor of the will of Beverley Hutchison representing the wishes of Beverley Hutchison for her estate to pass to the second and third plaintiffs and no one else, in my view, is questionable because the issue of the capacity of Beverley Hutchison remains a live issue. It is conceded by the trustees that if the unpaid income entitlement were now paid to the estate of Beverley Hutchison, this would be grounds to re-open the capacity proceeding.

117 In my view, the seeking of directions from the Court and for the Court to settle the two sets of accounts rather than removing the trustees would not resolve the conflict inherent in the unpaid income entitlement issue as long as the trustees maintain their stated position on the unpaid income entitlement. In order to determine the issues between the parties, it is imperative that the Court have the benefit of the views of an independent person who is able to assess the various issues, including the merits of any defences. Without an independent trustee to do so, there is a danger that the Court will be presented with an unbalanced assessment of the evidence and the issues.

118 I consider that the welfare of the beneficiaries will also be assisted by the appointment of an independent trustee because of the friction and hostility that exist between the trustees and beneficiaries of the Trusts. Although this is not, in itself, a reason to remove the trustees, it is still a relevant consideration. The friction and hostility between the parties in this case are grounded in the manner in which the Trusts have been administered by the trustees over a long period of time and by their stated position on the unpaid income entitlement issue. Initially, the friction and hostility arose because of the issues concerning the production of documentation and financial information concerning the Trusts by the trustees to the beneficiaries. It has been exacerbated by the issue of the unpaid income entitlement. Other examples of issues that have caused friction and hostility are the unequal interim distributions made thus far to the residuary beneficiaries, the inability of the trustees to deal with the issues raised by the beneficiaries so far as the distributions are concerned, and the ongoing issue of the production of relevant financial documents. It is unlikely that the friction and hostility will heal while the trustees remain as trustees of the Trusts.

119 Insofar as it was contended that the appointment of an independent trustee would encompass a further financial cost, I accept that this would be the case because a new trustee would need to familiarise himself or herself with the many issues. The litigation thus far has already been costly. Although there will be extra cost in the appointment of a new trustee, it may still be less than if the trustees were to remain in their position. A new trustee will bring independence and objectivity that are lacking at present to the issues. A new trustee might also assist in resolving the issues by agreement or, at least, by substantially narrowing the issues.

120 I also consider that it is in the interests and welfare of the beneficiaries of the Trusts for the Trusts to be finalised. The assets of the Trusts vested in possession on the death of Beverley Hutchison. It is now more than three years since her death and the issues between the parties remain unresolved.

121 Finally, insofar as the trustees relied in their submissions on Quinton v Proctor,[113] I consider the case to be of limited applicability, because the co-trustee in Quinton v Proctor was not in a position of conflict of duty and interest. It is, however, useful as a general guide to trustees' conduct.

122 For the reasons set out, I consider the interest and welfare of the beneficiaries of the Trusts are best served by the appointment of an independent trustee in place of the existing trustees of the Trusts.

123 I shall hear the parties as to the appropriate person to be appointed as an independent trustee and the form of the proposed orders and costs.

[1] The first defendant died on 2 April 2013. His will dated 8 April 2011 appoints the second and third defendants and the daughter of the second defendant as his executors and trustees of his estate. The daughter consented to being appointed as the person to represent the estate of the first defendant in this proceeding pursuant to r 16.03(1)(b) of the Supreme Court (General Civil Procedure) Rules 2005 and being substituted as first defendant in the proceeding on behalf of the estate of the first defendant. Orders were made to that effect by consent of the parties to the proceeding at its commencement.

[2] Transcript of Proceedings, Wales v Wales (Supreme Court of Victoria, S CI 2012 1849, McMillan J, 7 May 2013) 54.

[3] Pursuant to the HN Wales 1954 Trust the distribution was, in fact, to be divided between Murray Wales as to half and the two children of Geoffrey Wales as to the remaining half.

[4] Affidavit of Gladys Wales affirmed 25 October 2012.

[5] Transcript of Proceedings, Wales v Wales (Supreme Court of Victoria, S CI 2012 1849, McMillan J, 7 May 2013) 52.

[6] Affidavit of Gladys Wales affirmed 16 November 2012, [21]-[24].

[8] Transcript of Proceedings, Wales v Wales (Supreme Court of Victoria, S CI 2012 1849, McMillan J, 7 May 2013) 106.

[10] Affidavit of Gladys Wales affirmed 16 November 2012, [21].

[11] Affidavit of Rohan Wales affirmed 30 November 2012, [10]

[13] Affidavit of Patricia Wales affirmed 16 April 2013, [3].

[14] Transcript of Proceedings, Wales v Wales (Supreme Court of Victoria, S CI 2012 1849, McMillan J, 7 May 2013) 31.

[15] Affidavit of Rohan Wales affirmed 30 November 2012, [17].

[16] Transcript of Proceedings, Wales v Wales (Supreme Court of Victoria, S CI 2012 1849, McMillan J, 8 May 2013) 208-9.

[24] Monty Financial Services Ltd v Delmo [1996] VicRp 7; [1996] 1 VR 65, 82.

[25] [2012] VSC 76 (8 March 2012).

[27] Monty Financial Services Ltd v Delmo [1996] VicRp 7; [1996] 1 VR 65, 73, 82.

[29] Fysh v Coote [2000] VSCA 150 (21 August 2000) [20] (Ormiston JA).

[35] Ibid 518. Although his Honour did say that, in appointing the defendants as his executors and trustees, the deceased did seem to contemplate that conflicts might arise.

[41] [1938] NZLR 520, 530 (Myers CJ).

[47] [2008] VSC 13 (7 February 2008) (Mandie J).

[49] Save for Blair J, who dissented on appeal on the question of costs.

[50] Hunter v Hunter [1937] NZLR 794, 797 (citations omitted).

[51] Hunter v Hunter [1938] NZLR 520, 531, quoting Letterstedt v Broers (1884) 9 App Cas 371, 389.

[53] Who initially shared that role with Burns Philip Trustee Co (Canberra) Ltd.

At a glance

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Judgment (247 paragraphs)

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Legislation Cited (2)

Cases Cited (5)