Bankruptcy Act 1966 (Cth) - s.116

Trustee Act 1925 (NSW) - s.6(3)

Ex p. Gilchrist In Re Armstrong (1886) 17 QBD 521

Hudson v. Gray [1927] HCA 31; (1927) 39 CLR 473 at 515

The Duke of Portland v. Topham [1864] EngR 339; (1864) 11 HLC 32; 11 ER 1242

In re Skeats' Settlement (1889) 42 Ch D 522

Counsel for the 1st and 2nd Respondents: J.S. Wheelhouse

Solicitors for the 1st and 2nd Respondents: Webster and O'Halloran

The Court Orders that the application for injunctive relief be dismissed with costs.

NOTE: Settlement and entry of orders is dealt with in Rule 124 of the Bankruptcy Act.

DAVIES J Leslie Ross Burton was made bankrupt on 8 July 1993 and the trustee of his bankrupt estate is Mr Hugh Jenner Wily. Mr Burton's affairs are complicated. The present issue concerns matters arising under the Ross Burton Family Trust, a discretionary trust which was established by deed dated 30 November 1981.

2. The only documentary evidence of the current existence of the trust and of its affairs tendered before me in proceedings has been an income tax return for the year ended 30 June 1987. No other books or records of the trust estate have been adduced in evidence. However, it appears to be accepted by all concerned that the trust owns one half of the shares in a corporation named Ross Burton Transport Pty Limited, a corporation which is apparently solvent.

3. The original trustee of the Ross Burton Family Trust was Ross Burton Pty Limited, which later changed its name to Locpat Pty Limited and is now in liquidation. Locpat is still registered as the holder of the shares in Ross Burton Transport Pty Limited.

4. The deed of 30 November 1981 provides by clause 4 that "the Appointor" may:

"at any time or times and from time to time during the

currency of these presents and without the consent of any

person or persons by deed or deeds remove any Trustee of the

Trusts hereby created from his office of Trustee of all the

trusts hereby created and may at any time or times and from

time to time during and whether in conjunction with the

removal of any Trustee as aforesaid or not (without any

consent as aforesaid) by deed or deeds appoint any company

or person or persons to be a Trustee or Trustees of the

trusts hereby created ...". (the emphasis is mine)

5. On 1 July 1992, a deed was executed to which the parties were Ross Burton Pty Limited, Urmar Pty Limited and Mr Burton. By the deed, Mr Burton purported to remove Ross Burton Pty Limited as trustee of the Ross Burton Family Trust and to appoint Urmar Pty Limited as trustee thereof. Although the seal of Ross Burton Pty Limited was affixed and Mr Burton as director signed to the affixation of that seal, Mr Burton did not, on the face of the document, execute the deed personally as Appointor. The validity and effect of the deed has been raised in proceedings which commenced in the Supreme Court of New South Wales and which have been transferred to this Court. A question in the proceedings is whether Urmar Pty Ltd on the one hand, or Ross Burton Pty Ltd (now Locpat Pty Ltd (In Liquidation)) on the other, is the present trustee of the Ross Burton Family Trust.

6. The issue with which I am now dealing is different but related. Beneficiaries in the Ross Burton Family Trust are concerned about the present position, for they wish Urmar Pty Ltd to become registered as the proprietor of one-half of the shareholding in Ross Burton Transport Pty Limited and for that company to vote in favour of a resolution to remove and replace one of the directors of Ross Burton Transport Pty Limited, Mr G. Kekatos. They are anxious that Mr Burton should again exercise his power of appointment so as to remove the doubt created by the deed of 1 July 1992. However, Mr H.J. Wily, the trustee of the bankrupt estate, seeks orders protecting the interests of the creditors of Mr Burton's estate. Mr Wily's application seeks the following orders:-

"1. That Leslie Ross Burton be restrained from exercising

his power of appointment under clause 4 of the Deed of

Trust of the Ross Burton Family Trust until further

order of the Court or permanently.

2. That the power of appointment vested in Leslie Ross

Burton by clause 4 of the Ross Burton Family Trust

Deed of Trust is 'property' within the meaning of

Section 116 of the Bankruptcy Act and that such

property is vested in the Trustee of the bankrupt

estate of Leslie Ross Burton."

In substance, Mr Wily seeks to restrain Mr Burton from further exercising his power of appointment under clause 4 of the deed of trust of 30 November 1981.

7. Section 116 of the Bankruptcy Act 1966 (Cth) provides, inter alia:-

"(1) Subject to this Act:

(a) all property that belonged to, or was vested in, a

bankrupt at the commencement of the bankruptcy, or has

been acquired or is acquired by him, or has devolved

or devolves on him, after the commencement of the

bankruptcy and before the discharge;

(b) the capacity to exercise, and to take proceedings for

exercising, all such powers in, over or in respect of

property as might have been exercised by the bankrupt

for his own benefit at the commencement of the

bankruptcy or at any time after the commencement of

the bankruptcy and before his discharge;

...

is property divisible amongst the creditors of the bankrupt.

(2) Subsection (1) does not extend to the following property:-

(a) property held by the bankrupt in trust for another person;

..."

8. Mr Burton has undertaken to the Court that he will not exercise the power of appointment so as to constitute himself trustee of the Ross Burton Family Trust. However, it was submitted by counsel for Mr Wily that, as Mr Burton was a beneficiary under the trust and also the Appointor, he was empowered to exercise the power of appointment so as to appoint a trustee which he could control. He could thereby ensure that a distribution of income or capital was made in his own favour. The submission was made that the power to appoint a new trustee was, in the circumstance that Mr Burton was himself a discretionary beneficiary, the equivalent of a general power of appointment, and that it vested in his trustee in bankruptcy.

9. This submission equates the powers under the trust with "property" as described in para (a) of s.116(1) or with a power in over or in respect of property "as might have been exercised by the bankrupt for his own benefit" for the purposes of para (b) of s.116(1).

10. Even a general power of appointment is not property: Ex p. Gilchrist In Re Armstrong (1886) 17 QBD 521; Hudson v. Gray [1927] HCA 31; (1927) 39 CLR 473 at 515. But perhaps the more important point is that the power to remove a trustee and to appoint a new trustee is neither a general power of appointment nor a power which may be executed in the interests of the Appointor. The interests of persons other than the Appointor must be taken into account. The power is a trust or fiduciary power, being a power conferred by a deed of trust, and must be exercised accordingly, in the interests of the beneficiaries.

11. A power, even though not a fiduciary power, must be exercised solely in furtherance of the purpose for which it was conferred. In The Duke of Portland v. Topham [1864] EngR 339; (1864) 11 HLC 31; 11 ER 1242, the Lord Chancellor, Lord Westbury said at 540 (and at ER 1251):-

"Without farther dwelling on the matter, inasmuch as your

Lordships concur in opinion, I think we must all feel that

the settled principles of the law upon this subject must be

upheld, namely, that the donee, the appointor under the

power, shall, at the time of the exercise of that power, and

for any purpose for which it is used, act with good faith

and sincerity, and with an entire and single view to the

real purpose and object of the power, and not for the

purpose of accomplishing or carrying into effect any bye or

sinister object (I mean sinister in the sense of its being

beyond the purpose and intent of the power) which he may

desire to effect in the exercise of the power."

When the power is contained in a deed of trust, the donee of the power is even more constrained to act in the interests of the persons for whose benefit the power was conferred. Thus, in In re Skeats' Settlement (1889) 42 Ch D 522, Kay J held that, as a power of appointing new trustees was fiduciary power, the donee of the power may not exercise it so as to appoint to himself. At 527, his Lordship said:-

"... the universal rule is that a man should not be judge in

his own case; that he should not decided that he is the best

possible person, and say that he ought to be the trustee.

Naturally no human being can be imagined who would not have

some bias one way or the other as to his own personal

fitness, and to appoint himself among other people, or

excluding them to appoint himself, would certainly be an

improper exercise of any power of selection of a fiduciary

character such as this is."

See also In re Newen; Newen v. Barnes (1894) 2 Ch 297 at 308-9. Statutory provisions, such as s.6(3) of the Trustee Act 1925 (NSW), which permit such an appointment to be made, do not affect the underlying equitable principle.

12. Thus, as the interests of the beneficiaries must be taken into account, and the power exercised in their interest, the power which Mr Burton holds as Appointor is not "property" which vests in his trustee in bankruptcy nor a power "as might have been exercised by the bankrupt for his own benefit." The power is not encompassed by paras (a) and (b) of s.116(1) of the Act. Cf. In Re Taylors Settlement Trusts (1928) 1 Ch 435. Re F.J. Matheson; Ex parte Worrell (Applicant), Matheson (Respondent) (unreported, Federal Court, Spender J, 14 April 1994).

13. It therefore follows that the power remains with Mr Burton and he may exercise it.

14. The evidence discloses that, in view of the problem which has arisen as to the effectiveness of the deed of 1 July 1992, it may be appropriate for Mr Burton again to exercise the power so that Urmar Pty Ltd is appointed trustee, or its appointment is put beyond doubt. This is particularly so as the other contender for the position of trustee, Locpat Pty Ltd, is in liquidation.

15. No evidence has been given that Mr Burton intends or is likely to use his power other than as he should as Appointor under the trust. If it were shown that the power would be likely to be used, not in furtherance of the trust, but to frustrate Mr Burton's personal creditors, an injunction could issue. However, the present evidence does not establish any such fact.

16. There is no evidence that Urmar Pty Ltd would use its position as trustee otherwise than in accordance with the deed of trust and in the interests of the beneficiaries.

17. It follows that Mr Wily's application for injunctive relief must be dismissed with costs.