Rankine, Pountney & Ors v Rankine & Ors [1998] QSC 48

Most of the defendants (all, that is, except Roy and Muriel) contend that in 1965, the children's trustees effectually sold their interests in the partnership, and that over time, the children received (at least) their full entitlements. Those defendants rely on other and alternative defences, and also seek relief as necessary under s.76 of the Trusts Act.

That provides no more than a very broad introduction to the matter. Before proceeding to more detail, I note that there was not any substantial relevant conflict within the body of evidence. There was some variance between the evidence of Trevor Rankine and the evidence of the children, but not in areas of great significance to the resolution of the case. There was also some variance between the approaches of the accountants, Mr Vincent and Mr Cooper, but again that has not mattered much to its determination.

Prior to 1 October 1963, the brothers and their wives were carrying on the partnership business in the Malanda area under the name "Rankine Brothers". By that stage the business included sawmilling, plymilling, logging and earthmoving contracting. As at 1963, their relationship was regulated by a partnership agreement dated 1 July 1958.

In October 1963, the then partners - the four brothers and their wives - transferred interests in the partnership to the four brothers, in various combinations, as trustees for the various Rankine children. Combinations of two brothers, as joint trustees, held partnership interests on behalf of various children, in varying proportions.

This is evidenced by an unsigned deed dated 1 October 1963, between the existing partners (called "the continuing partners") and the various trustee combinations of the brothers (called "the incoming partners"). Although that deed is unsigned, subsequent documentation confirms that the transfers it contemplated were effected. Although the defendants (other than Roy and Muriel) for some time resisted the concession that the children then gained beneficial interests in the partnership, they did not maintain that position at the trial. The confirmatory subsequent documentation is conveniently summarised in paras 3.3 to 3.17 of the report of the chartered accountant, Mr Cooper, Exhibit 14. Because there is now no issue about the creation of the children's interests, I need not elaborate on that aspect.

The table below identifies the disposition of brothers, as trustees, to the particular children.

1. Trevor and Ailsa (first assigning partners) assigned to Roy and Keith (first incoming partners) six hundred thirty-two hundredths (600/3200) of the partnership for a deposit of £120 plus a share of the valuation of assets of the partnership (£74 634/16/8) to be held on trust for Trevor's children.

2. Keith and Patricia (second assigning partners) assigned to Trevor and Roy (second incoming partners) four hundred thirty-two hundredths (400/3200) of the partnership for a deposit of £80 plus a share of the valuation of the assets of the partnership to be held on trust for Keith's children.

3. Ralph and Hazel (third assigning partners) assigned to Trevor and Keith (third incoming partners) six hundred and forty thirty-two hundredths (640/3200) of the partnership for a deposit of £160 plus a share of the valuation of the assets of the partnership to be held on trust for Ralph's children.

4. Roy and Muriel (fourth assigning partners) assigned to Trevor and Ralph (fourth incoming partners) four hundred and eighty thirty-two hundredths (480/3200) of the partnership for £60 plus a share of the valuation of the assets of the partnership to be held on trust for Roy's children.

To complete the picture, I set out the breakup of the partners' shares following the 1963 reorganisation.

Trevor One hundred thirty-two hundredths (100/3200)

Patricia Two hundred thirty-two hundredths (200/3200)

Roy One hundred and sixty thirty-two hundredths (160/3200)

Muriel One hundred and sixty thirty-two hundredths (160/3200)

Six hundred and forty thirty-two hundredths (640/3200)

Four hundred and eighty thirty-two hundredths (480/3200)

The fourth plaintiff, Wayne, was born on 15 July 1968. Each of his elder siblings, George, Dawn and Alexander (the first to third plaintiffs) had been entitled beneficially to a one-twentieth share. The siblings were to share equally, so with the birth of Wayne, the respective shares of the first four plaintiffs reduced to 3.75% (see the evidence of the accountant Mr Vincent at page 135 line 50.)

The unsigned deed of 1 October 1963 amended the then current partnership deed of 1 July 1958. One of the amendments, significant for present purposes, was to oblige the trustees of an interest held on trust, to assign that interest to the father of the children whose trustees they were. The only prerequisite was the giving of seven days' notice. The price fell to be agreed between the trustees and the father of the children beneficiaries, or failing agreement, arbitrated. Because this aspect assumes some importance in the resolution of the case, I will set out a sample of the clauses (clause 20) making that provision:

"If the said TREVOR GEORGE RANKINE (or his personal representatives) at any time gives one (1) week's notice in writing to the First Incoming Partners in respect of any one or more of the shares and capacities defined by Clause 4 hereof or to his wife in respect of her share of his desire to invoke the provisions of this Clause then the First Incoming Partner or his wife (as the case may be according to the tenor of such notice) shall be deemed to have retired from the partnership in respect of the share or shares which they or she hold in the partnership and named in such notice and on the expiration of such one (1) week such share or shares shall become immediately vested in the said TREVOR GEORGE RANKINE and/or his personal representatives who shall purchase the same. On such vesting the price or prices payable (as the case may be) by the acquiring party for the acquired share or shares shall failing mutual agreement be determined by arbitration as hereinafter provided and each of the nett prices shall be payable (unless otherwise agreed) without interest by five (5) equal annual instalments and the acquiring party shall take over and assume the proportionate shares of liabilities of the partnership."

This lent impermanence to the children's interests. That is consistent with what I accept was the attitude of the brothers - that this was only "a temporary arrangement" (Trevor's evidence page 287 line 20), unsatisfactory to the brothers partly because it may have ceded some influence in partnership affairs to the children (Trevor's evidence page 244, and Ralph's statement Exhibit 21, paras 48, 51, 52, 55), and that it should last only until the partnership accountant (Mr Thomas of Gosling Thomas & Co) and solicitors (Messrs Covacevich and McInnes of MacDonnell Harris & Co) devised a more acceptable model. As Trevor said in his evidence (page 176 lines 20-30), of the 1963 arrangement:

"It was never intended to last because in discussions Bill Thomas had with Tom Covacevich he advised me that Tom was looking for an arrangement to set up for his family business as well, and he said well he was continually looking to find something and at one stage he had done a trip to Sydney and talked to some of the big solicitors down there and when he came back he rang Thomas and said, `Look, I have found the answer', and he explained it to Thomas and Thomas explained it to us with forming the holding companies and setting up a new arrangement altogether."

In fact the 1963 arrangement did not concede any control to the children: it gave them a substantial beneficial interest in the partnership assets and income, but not control. In 1965, as will emerge, the trustees brought that arrangement to an end: they had wanted to do that, and could do so by lawful means.

An undated memorandum, copied as Appendix 14 to Mr Cooper's report, Exhibit 14, sets out the mechanisms of the intended reorganisation, and does so in great detail.

By this stage, the disposition of brothers as trustees among the children (Dean, Jodie and Howard having been born in the meantime), was as follows:

Essentially what occurred was that the defendants who were trustees for the plaintiffs - and the other children, sold their partnership interest to the existing partners (who included themselves and their wives) and twelve holding companies, in varying proportions. The price was the relevant proportion of the partnership's nett worth, calculated by reference to book values. Those holding companies issued "A" class shares to the brothers who controlled the companies (article 4), but did not participate in dividends which, subject however to their discretion (article 24), would be paid to the "B" class shareholders, which were the "new trusts". There were twenty-three new trusts, and the children were their beneficiaries. The majority of the defendants contend that the "old" trustees were owed debts, representing the value (or the purchase price) of the interests being sold, which they then lent, interest free, to the purchasers of those interests. The defendants point to specific power in the trust deeds to lend trust money interest free (clause 6(e)). Although the applicability of that clause is not entirely clear, I consider it did sufficiently authorise what the trustees did.

The nine pages of the memorandum at Appendix 14 to Exhibit 14 set out in apparently painstaking detail what was to occur, and other documentation shows that the restructuring proceeded consistently with that memorandum. The sales of partnership interests effected on 1 July 1965 may be summarised as follows:

Hazel acquired from Trevor and Keith eighty thirty-two hundredths (80/3200)

Hazel acquired from Trevor and Keith sixteen thirty-two hundredths (16/3200)

J.C. Holdings acquired from Trevor and Keith sixty-four thirty-two hundredths (64/3200)

Roy acquired from Trevor and Ralph forty-eight thirty-two hundreds (48/3200)

Muriel acquired from Trevor and Ralph forty-eight thirty-two hundredths (48/3200)

G.E. Holdings Pty. Ltd. acquired from Trevor and Ralph sixty-four thirty-two hundredths (64/3200)

G.E. Holdings acquired from Trevor and Ralph sixty-four thirty-two hundredths (64/3200)

D.P. Holdings paid Trevor and Ralph for ninety-six thirty-two hundredths (96/3200)

D.P. Holdings acquired from Trevor and Ralph thirty-two thirty-two hundredths (32/3200)

A.R. Holdings acquired from Trevor and Ralph one hundred and twenty-eight thirty-two hundredths (128/3200)

Twelve "A" class shares were issued in each holding company, each brother taking three shares in each company. The shareholdings were held so that the children in each family group held the same number of shares as amongst themselves. The following table identifies the "B" class share allocation:

Because of the contention that these "sales" were shams, I will now set out more detail of what occurred, especially as relevant to whether or not the transactions truly bore the character of sales. As I have already suggested, the restructuring, as implemented, closely followed the blueprint to be found in the memorandum in Appendix 14 of Exhibit 14. Clauses 9 and 10 are important:

"9. A Balance Sheet should be drawn up as at date of take-over and from this the purchase prices payable on the multiplicity of sales mentioned in paragraph 5 ascertained and recorded. The purchase prices and the debts owing by the purchasers should be recorded in proper books but not recorded in the partnership books.

10. The old trusts are legally established and cannot be written off. However any funds available in the old trusts could be advanced to the Companies and in turn by the Companies to the partnership or lent to the new trustees and used in purchasing more shares on account of the new Trusts. Any such dealing would be on a free of interest basis and therefore the old trusts will not earn any income."

A price was ascertained, being the amount of the partners' capital account, as disclosed in the draft balance sheet for the Rankine Brothers partnership for the year ended 30 June 1965 (agreed bundle 46). That this figure was adopted as the value of the partnership capital account is confirmed by reference to the balance sheet for Rankine Brothers for the year ended 30 June 1966 (AB47). The Rankine Brothers journal records the reconstitution of the partnership with its consequent redistribution of capital. The journal (further agreed bundle 1) (Appendix 15 to Exhibit 14) records that "the partnership of 12" held the capital of the partnership in proportion to the interests acquired in 1963. On 1 July 1965 that capital account was redistributed in accordance with the shares specified in the memorandum.

Each of the twelve holding companies which were incorporated resolved to "purchase a 4 percent interest in the partnership of Rankine Brothers ... and that a deposit of £5 be paid in connection with each transaction" (AAB17-28).

On 1 July 1965 the purchasers (Trevor, Ailsa, Keith, Patricia, Ralph, Hazel, Roy and Muriel, together with the twelve holding companies) paid deposits of £5 each to the old trustees, for varying interests in Rankine Brothers. Those payments are evidenced by thirty-five receipts (AB43). The transactions are also recorded in the ledgers of the old trust. There are nineteen old trusts and each of those ledgers records the sale of shares in Rankine Brothers in the proportions indicated (FAB16).

In accordance with the resolution of the holding companies, each of the journals of the holding companies contains an entry recording a purchase of an identified interest in Rankine Brothers. Further, each holding company has an account styled "vendors account - trustees (old)" and identifies the relevant beneficiary (AB17-26).

The "multiplicity of sales" referred to in clause 9 of the memorandum are abundantly evidenced by the documents to which I have referred. As Mr Vincent agreed, there is at least a "very elaborate paper trail" (page 152, line 50). I do not, however, accept the further submission, by Mr Griffin QC for the plaintiffs, that the sales were "in name only". The transactions bore all the characteristics of sales. There are two points of challenge to which I should refer.

I note that Mr Brebber, who arranged the payments in 1989, spoke of "cleaning out accounts" rather than paying prices (page 228, lines 38-43), a matter to which Mr Griffin particularly referred. But Mr Brebber's adoption of that phraseology does not alter the fact that it was a price being paid, if years after the transfers.

Point was also made of Trevor's lack of detailed appreciation of the transactions qua sales. The reality is that the brothers left the detail of these matters to others, particularly their accountant and solicitors. The brothers were not men of high education with the experience or even perhaps the capacity to comprehend the close detail of these matters. It is not surprising that they relied on appropriate experts. In determining whether what appear to be sales were truly sales, Trevor's lack of acute appreciation of the matter itself lacks significance.

It was suggested to Trevor that he had attempted to suppress or conceal the 1963 transaction (transcript pages 249 line 50 to 250 line 1). That suggestion does not withstand scrutiny of the available financial records. The aggregation of the financial records for the trusts, both new and old, and partnership accounts, financial records of the holding companies, together with the various company minutes and the existence of the memorandum itself, tell strongly against there having been any such concealment. Rather there seems to have been careful detailing and recording of every aspect from both sides of the record.

There are nineteen ledgers for nineteen trusts; twelve ledgers and journals for each of the holding companies. Entries record the transactions in the partnership accounts. The prices were specified, as it was put in evidence, "down to the last twopence" (transcript page 139 line 29). The obligations created by the transactions are recorded in the vendor's account in respect of each individual beneficiary (FAB17). Those obligations are recognised as continuing interests, subsisting until their discharge in 1989-1990. That continued recognition of the obligations further undermines any suggestion that the transaction was anything but what it appears to be: a sale of various interests in the partnership effective from 1 July 1965.

To gauge whether these transactions were what they appear to be, it is also legitimate to have regard to the subsequent conduct of the parties (cf. Winks v. W.H. Heck & Sons Pty. Ltd. (1986) 1 Qd.R. 226, 233 and Australian Energy Ltd v. Lennard Oil N.L. (1986) 2 Qd.R. 216, 237). The parties did act as though there had been a sale of the interests in Rankine Brothers creating a new partnership. The partnership agreement of July 1965 (AB45) makes no reference to the four male partners continuing as members of the partnership as trustees. Instead, the partnership deed records that eight natural persons and twelve bodies corporate constituted the partnership. Taxation records were prepared and submitted which recorded the distribution of income to the new partners (AB47). There is no reference to the male partners continuing to hold an interest in the partnership as trustees. A memorandum (Appendix 16 to Exhibit 14) was brought into existence recording the change.

New trusts were created in which the trustees hold "B" class shares in those holding companies on trust for named beneficiaries, being the 23 "second generation" Rankines. Dividends were declared in respect of those "B" class shares and were paid (FAB28). These were in turn advanced to the relevant holding company by the shareholder.

Those advances were eventually reconciled, and discharged, in 1989-1990. The manner of calculation of the amounts due to the children was flawed, as explained by Mr Cooper - see para 6.8 to 6.16 of Exhibit 14. But in fact, as explained in his oral evidence which I accepted, all beneficiaries were in the end paid their respective entitlements, or more.

The plaintiffs' contention may be taken from the written submissions of their counsel, Mr Griffin QC and Mr Flanagan:

"The 1965 transaction was a reconstitution of the partnership which did not involve any sale of the plaintiff's interest to the partnership of 20. The plaintiffs submit that, for the purposes of reconstituting the partnership, their interests were either assigned or transferred, for no consideration, to the new partnership. The various entries in the books of account of the "old trust" and the holding companies constitute evidence of nothing more than "window-dressing". The purpose of this window dressing was to give the transaction the appearance of the trustees having complied with their obligations pursuant to clause 6(b) of each of the relevant trust deeds. That is, the entries served the purpose of attempting to demonstrate a sale rather than a transfer or assignment for no consideration."

"6. Without in any way derogating from the wide powers hereby conferred upon the trustees and for the purpose of greater clarity it is declared that the trustees may -

(b) sell..the whole of the trust property or any part thereof or any interest therein and either for cash or other valuable consideration and generally upon such terms and conditions as the trustees shall think proper...")

The plaintiffs allege (para 15F Amended Statement of Claim) that the 1965 transaction was a sham. A sham is a transaction which is not what it purports to be, or a transaction which is intended to be mistaken for something else. "It is not genuine or true, but something made in imitation of something else or made to appear to be something which it is not. It is something which is false or deceptive." (Sharrment Pty Ltd and Ors. v. The Official Trustee in Bankruptcy (1988) 18 F.C.R. 449, 454 per Lockhart J.). See also Snook v. London and West Riding Investments Ltd (1967) 2 Q.B. 786, 802.

As would be clear from what I have said already, I do not accept that these apparent sales were shams. The plaintiffs have particularised their contention as follows (para 15F Amended Statement of Claim). I will set out the seven particulars, taken from the pleading, respectively, with my responses.

"(a) the transaction or transactions was or were unfair and amounted to the taking of improper advantage of the position of the first, second and third defendants as trustees, and occurred in breach of fiduciary duty;"

I understand this to be based essentially on breach of the "self dealing" rule (Tito v. Waddell (1977) Ch.106, 240 and Doneley & Anor v. Doneley & Ors No. 2285 of 1985, Supreme Court of Queensland unreported judgment of 30 July 1997). Mr Fleming QC for the fourth and eighth defendants and Mr Griffin QC both referred me to Doneley. A major difference between this case and Doneley is that these trustees were specifically authorised to sell to themselves.

"7. Neither of the trustees shall be prevented by their office from contracting with any person including themselves or either of them in their individual capacity in relation to the trust property either as vendor purchaser..or otherwise nor shall any such contract..in which they or either of them may have a personal interest...be avoided nor shall the trustees be liable to account to any beneficiary for any profit realised by any such contract..by reason of the trustees holding that office or of the fiduciary relationship hereby established."

I later also set out clause 3(a), also important in this context in allowing trustees to deal with the trust property as if absolute owners.

Such provisions should be given their apparent effect. As put in Meagher and Gummow: "Jacobs Law of Trusts in Australia" 6th edition, para 1619 page 414:

"A settlor or testator can amend, alter or modify any of the powers, duties and discretions which would otherwise apply. He can also determine what consequences flow from the breach of a duty. Just as the law of contract permits the parties to a contract to determine its terms, subject to any relevant legislation, the law of trusts permits the settlor or testator to determine the incidents of a trust."

With reference to a provision such as clause 7, the authors also say (para 1744 page 464):

"The rules which prevent a trustee from dealing with trust property to his own advantage do not apply when permission so to do is given to him by the trust instrument."

See also Finn: Fiduciary Obligations, 1977, Law Book Co. (para 100):

"But while harsh where it operates the conflict rule has its limits. For it to apply to a particular decision several pre-conditions must be met. First the fiduciary must not have an express authority to benefit himself...Consequently the rule can have no application at least in circumstances -

(1) where the power being exercised by the fiduciary expressly contemplates that he can have a personal interest;"

I refer as well to Armitage v. Nurse [1997] EWCA Civ 1279; (1997) 3 W.L.R. 1046, 1056-7.

The existence of these special powers circumscribes the duty to which the trustees would ordinarily be subject, and distinguishes Doneley. They circumscribe the duties, subject to an irreducible core of obligations "to perform the trusts honestly and in good faith for the benefit of the beneficiaries" (per Millett LJ in Armitage). Dishonesty or lack of bona fides are not raised here - a matter to which I will return, and I also deal subsequently with the question of protection of the interests of beneficiaries.

"(b) the sale price was too low and did not constitute, and was not determined by reference to, a proper valuation of the partnership and did not reflect the true worth of the partnership;"

In accordance with para 9 of the memorandum, prices were calculated with reference to the aggregation of the capital of the partnership in the 1966 balance sheet and the draft balance sheet for 1965 (see the evidence of Mr Vincent, page 150 line 13 and Mr Cooper at pages 296-7). There is no evidence from which it could be concluded that the sale price was "too low". Mr Vincent did not conduct a valuation (page 153 line 19) warranting the conclusion that the book values did not reflect the real value of the partnership. The solicitor, Mr Byrne, whose evidence I accepted, confirmed that sales at prices fixed by reference to book value were not then uncommon (page 265 line 34). There is simply no evidence that the sale price was "too low": I am satisfied that it was appropriately calculated by reference to book value. The evidence of Mr Cooper and Mr Byrne supports that conclusion.

"(c) the purported sale or sales was or were not evidenced by any agreement or agreements in writing;"

This is true, and it may confidently be inferred that this was done to save stamp duty, as explained by Mr Byrne (page 264 line 1, to page 265 line 7). On the other hand, there is abundant documentary material evidencing the sales.

"(d) no part of the sale price, or alternatively only the sum of 5 pounds in each instance, was paid at the time of the sale or sales;"

The deposits were paid - the thirty-five receipts are in evidence (AB43). The plaintiffs have emphasised the circumstance that the balance purchase price was not paid until 1989 and later.

One observes, first, that para 10 of the memorandum (Appendix 14 of Exhibit 14) apparently contemplated an advance of the balance purchase price to the new partnership or some of its members free of interest. As I have concluded, the trustees had power to advance moneys interest free.

But more broadly, one should not infer, from the delay in payment, that the original transactions were not in truth sales. The mere fact of the existence of the substantial documentary record of the detail of the transactions still in evidence - years after the event - itself runs strongly against their being shams. There being an explanation for the delay in payment, that delay alone cannot swing the balance against the conclusion to be drawn compellingly from the other circumstances.

"(e) the first, second and third defendants, who effected the purported sale or sales on behalf of the plaintiffs, did not intend to obtain the consideration for the sale or sales on behalf of the beneficiaries, or alternatively only intended that the purchase price be paid at their discretion;"

A similar response should be made to this particular. I refer back, also, to what I said of

Trevor's lack of detailed knowledge: that was left to the solicitors and the accountant.

"(f) the purported sale or sales had the effect of depriving infant and unborn beneficiaries of their beneficial interest in the partnership, and substituting, therefor non-voting "B" Class shares in the holding companies referred to in paragraph 13 of the Further Amended Statement of Claim;"

I accept and adopt the written submission made with relation to this particular by Mr Chesterman QC and Mr Rolls, counsel for the majority of the defendants:

"Paragraph 15F(f) misunderstands the fact that the object of the memorandum was to create a new partnership with new members. The beneficiaries under the 1963 arrangements did not have their interests converted into "B" Class shares. Prior to the 1965 transactions each trust had an interest in the partnership which could be brought to an end on short notice. Further, each trust had a large liability consequent upon the acquisition of that interest. The effect of the 1965 transaction was to convert the volatile asset into a quantified debt due on demand. Although unsecured it had practical security through the involvement of the trustees in the management of Rankine Bros. The transaction was advantageous in that it resulted in discharging the old trusts' substantial debt to the original partners. Thus, the "sale" deprived the beneficiaries of nothing and the restructuring conferred upon them, independently of any sale, "B" Class shares which entitled the holders to receive dividends."

"(g) the sale or sales was or were for the first, second and third defendants' own benefit;"

I refer back to my response to (f). No doubt the restructure "re-established" the brothers' control, as they saw things, as had been intended since 1963 - not, as I have said, that the children gained control in 1963. But that does not mean that the transaction was a sham. I have referred earlier to clause 7 of the trust deeds, permitting the trustees to sell to themselves. I now add the reference to clause 3(a):

"3(a) In relation to the said sum hereby settled and any property acquired by the trustees in pursuance of the trust attaching hereto (... "trust property") and all income to be derived from the trust property the trustee shall have full and unfettered power to act and contract as if they were the absolute owners of the trust property as to which they are trustee and shall have power to do and suffer all acts matters and things (without exception) in relation to such property which they could lawfully do and suffer if they were the beneficial owners thereof."

The manner of restructuring the partnership was, one infers, intended to save tax. I accepted Mr Cooper's evidence that there was no reason for including the twelve companies, taking the number of the members of the partnership to twenty, the maximum permitted by law, except to save tax (page 290 lines 4-10). Mr Cooper believed there were tax savings (page 290), and notwithstanding some vagueness in the evidence about this, I accepted that as a likely substantial consideration affecting what was done.

While the brothers may have benefited from the 1965 transaction, the children's interest generally was not harmed: they were paid for their beneficial interests, and took on new beneficial interests in the manner described in my response to the previous particular. Allowing for the latitude accorded by clauses 3(a) and 7, there was here no neglect of the "core obligations" to which I earlier referred.

It was also separately contended by the plaintiffs (and see para 15F(ii) amended Statement of Claim) that any "sales" did not result in a transfer of trust property until payment of the balance prices in 1989-1990 - 16 October 1989 (payment to the first to fourth plaintiffs) and 5 May 1990 (payment to fifth and sixth plaintiffs) "at the earliest". Nothing in the memorandum would support that conclusion. The trustees were selling present property, choses in action, interests in the partnership, which took effect immediately, with the passing of a beneficial interest to the assignee (The Commissioner of Taxation of the Commonwealth of Australia v. Everett [1980] HCA 6; (1978) 143 C.L.R. 440, 450).

Breach of Fiduciary Duty (Para 16(ii) Amended Statement of Claim) - "Fraudulent Breach of Trust" (Para 16(i)) - Ulterior Purpose (Para 16(c))

Submissions made for the plaintiffs came close to alleging dishonest exercise of the power of sale, should it be held that sales occurred. Mr Chesterman QC objected to such a case, on the basis that it had not been pleaded. Clarification of the case to be run by the plaintiffs appears in the correspondence Exhibit 1, suggesting two premises:

(i) The "fundamental premise" is that "the absolute interests of the plaintiffs in the partnership were, in 1965, wrongfully converted into lesser interests, i.e. "B" Class shares in the holding companies" (para 16 (ii)(a) Amended Statement of Claim). It is part of the "fundamental premise" that "such conversion..occurred in breach of trust...".

(ii) The sale of interests in the partnership held on trust for the plaintiffs which the defendants allege is, in fact, no sale at all but "a new structuring of the partnership". The sale is a sham. (para 15F Amended Statement of Claim.)

I accept the contention that no case of the dishonest exercise of the power of sale has been pleaded, references to ulterior motive and fraudulent breach of trust, which may have special, technical meanings in equity being insufficient. Further, as Mr Chesterman QC pointed out, "it was not put to Trevor Rankine that the 1965 transactions were an elaborate device to deprive the beneficiaries of their entitlements; nor was it put that he was dishonest when he said he thought the new partnership was for the benefit of the beneficiaries; nor that the defendants consciously acted to sacrifice the plaintiff's interest".

If I too narrowly interpret the pleadings, I would not in any event uphold a submission that the power of sale was dishonestly exercised. No doubt the brothers favoured this transaction as a means of re-establishing their control, which, they perceived, had been diminished, a restoration being considered desirable. But they also, as I accept from the evidence of Trevor, regarded it as beneficial to the children. I return to this below.

The concept of the dishonest exercise of trust power, or exercising the power for an ulterior motive, involves the notion that the trustees may not lawfully achieve what is done and misuse the power to bring about the desired result. Such a notion has no place here. The plaintiffs' case would have to be that the defendants could not deprive the beneficiaries of "control" because the partnership interests held beneficially for them were absolute: so the power of sale was exercised, not because the trustees thought the sale advantageous to the beneficiaries, but to remove that control. I have already said that the 1963 arrangement did not in fact confer a power to control upon the children.

The contention would also overlook two further factors. First, by clause 20 of the partnership agreement, the beneficial interests of the partnership could be lost upon the giving of seven days notice. If the beneficiaries' control over the partnership was a matter of concern, the remedy was available and immediate. It therefore seems odd to surmise that the exercise of the power of sale would have been improperly motivated. Assuming that the brothers wished to remove the beneficiaries' "control" of the partnership, they could easily have achieved that without contravening any constraint of law or equity.

Second, the sale took place in accordance with comprehensive legal and accounting advice. It is improbable to think that the defendants were acting dishonestly or for an ulterior purpose when they acted in accordance with detailed advice from their solicitor. Whatever the brothers' own lack of understanding of the role and duties of a trustee, Mr McInnes (now deceased) should not be presumed to have been ignorant of those matters. I infer that Mr McInnes believed that it was advantageous to the beneficiaries that this transaction proceed. A trustee will not have acted dishonestly unless acting in the knowledge that what was done was contrary to the interests of the beneficiaries. Given the advice of the solicitors, it should not be supposed that the defendants had such a state of mind. In any event, where, as here, the trust deed expressly empowers the trustees to sell to themselves, in exercising that power they may have regard to their own interests. It is a proper exercise of the power of sale in a case like this for the trustee to benefit himself or herself, provided the interests of the beneficiaries are nevertheless sufficiently protected, consistently with what I have said about "core obligations".

I do not accept, as was asserted, that this sale was not to the beneficiaries' potential advantage. The point has been made already. The sale cannot be viewed in isolation. When the trustees decided to sell they knew that the twelve holding companies would be members of a new partnership sharing in its income and capital and that the new trustees for the twenty-three children would be subscribing for "B" class shares. This was to be in place of an interest in a partnership of uncertain duration.

I am satisfied, on the evidence of Trevor (especially page 179, lines 2-8) and other evidence in the case, that the brothers did not seek to harm the plaintiffs' interests, and I do not accept that they acted in reckless disregard of those interests.

Mr Fleming QC, for the fourth and eighth defendants, submitted that the "A" class shares in the holding companies are held on trust for the plaintiffs, that they constitute trust property received by the brothers with knowledge of a kind referred to in any of the first three categories specified in Baden v. Société Générale S.A. (1993) 1 W.L.R. 509, 575. The answer to this rests in the capacity of the trustees lawfully to accomplish the 1965 transaction in the manner I have already described. I am referring especially to clauses 3(a), 6(b) and 7, set out earlier in this judgment, the lack of any dishonest motivation, and the reasonable belief that the trustees were, through this transaction, not harming, but sufficiently protecting and respecting, and indeed potentially enhancing the children's interests. I refer back to my response to particular (f) of the plaintiffs' allegations as to the transaction being a sham.

The majority of the defendants alternatively relied on exoneration clauses (clauses 7 and 9) in the 5 September 1963 trust deeds, and sought if necessary to be excused under s.76 of the Trusts Act. They also relied on laches, and sections 19(2) and 27(2) of the Limitation of Actions Act 1974. Because of my conclusion on the primary issues, I need not discuss these others.

As to the quantum of the plaintiffs' claims, I note they are based on Mr Vincent's calculations (Exhibit 16 calculation 2) which assume the 1963 partnership would have subsisted until 1989. It is highly improbable, in view of the attitude of the brothers and their rights under clause 20, that the partnership would have continued in that form for any appreciable period beyond 1 July 1965. The beneficiaries were in 1989 paid what they would have received on a dissolution in 1965, based on book value. As to interest, it is also likely that the moneys would have been lent interest-free by the trustees as occurred pursuant to the sales. There is, in short, serious doubt whether, in any event, the plaintiffs could have established any substantial entitlement to compensation: it is almost impossible to identify any loss they may have sustained. I dismiss the claim and the counter claim. I appreciate that that involves declining to make the declarations sought as to the plaintiffs' 1963 interests, but since there clearly is no issue between the parties about that, there is no need for a declaration. As to the counter claim, in light of my findings on the primary issues, favourable to the defendants, there is again no need for any determination. I reserve the question of costs pending further submissions.