Rutter & Anor v McCusker & Anor

CATCHWORDS : PROBATE - Whether executrix placed in position of such conflict of interest and duty that grant should be revoked and probate granted to independent person - principles.

LEGISLATION CITED : Corporations Act 2001 (Cth) - s 421A, s 436A, s 439A Family Provision Act 1982 (NSW)

• Bates v Messner (1967) 67 SR(NSW) 187 - Bramston v Morris; Estate of Murray (BC9303644) 20 August 1993, SCNSW, per Powell J CASES CITED : - Mavrideros v Mack (1998) 45 NSWLR 80 - Monty Financial Services Ltd v Delmo (1996) 1 VR 65 - Rutter v McCusker [2008] NSWSC 269 - Upton v Downie [2007] NSWSC 1095

David Andrew Rutter (First Plaintiff/First Cross Defendant) PARTIES : Jane Elizabeth Rutter (Second Plaintiff/Second Cross Defendant) Anne Maire McCusker (First Defendant) Designplace Sydney Pty Ltd (Second Defendant/Cross Claimant)

COUNSEL : F. Kunc SC, S.W. Aspinall (Plaintiffs/Cross Defendants) M.S. Willmott SC (Defendants/Cross Claimant)

SOLICITORS : Gadens (Plaintiffs/Cross Defendants) Swaab Attorneys (Defendants/Cross Claimant)

1 The Plaintiffs/Cross Defendants are beneficiaries of the will of their late father, Barry Rutter, who died on 29 March 2004. The First Defendant is the de facto widow of the deceased and was granted probate of his will on 14 September 2005. 2 By these proceedings, the Plaintiffs seek the revocation of the grant of probate to the First Defendant and they seek the grant of probate to an independent person, Mr Hancock. The primary basis of the application is the Plaintiffs' allegation that the First Defendant is in a position of substantial and irreconcilable conflict between her duty as executrix of the estate, and her personal interest as sole director and shareholder of the Second Defendant/Cross Claimant, Designplace Sydney Pty Ltd ("Designplace"), which is said to be a substantial debtor of the estate. 3 A secondary basis of the Plaintiffs claim is that the First Defendant, as executrix, has failed to act even-handedly in the interests of all beneficiaries of the estate. 4 The facts are in short compass and, at least for the purposes of these proceedings, they are not in dispute. The facts

5 The deceased had two children by his first marriage: the Plaintiffs, David and Jane. Of his relationship with the First Defendant, Anne, he had a third child who is known and is referred to by all in these proceedings as Flossiy. I shall refer to the parties by their first names for convenience and without intending any disrespect. 6 The will of the deceased gave shares in a company to David together with a debt owed by the deceased to that company. It gave to Jane the deceased's interests in a yacht and a legacy of $150,000. The will gave the residue of the estate to Anne. 7 The estate which was sworn for probate comprised shares in proprietary companies and debts owed by various companies. The deceased's interest in real estate passed to Anne by survivorship. David and Jane contend that the estate is also owed a debt of $424,887 by Designplace. 8 It is common ground that there is not sufficient cash in the estate to pay Jane's legacy of $150,000 and that that legacy cannot be paid unless the debt owed by Designplace is called in and paid. However Anne, as sole director and shareholder of Designplace, disputes that the company owes any debt to the estate. 9 In May 2005, Flossiy commenced proceedings against the estate under the Family Provision Act 1982 (NSW). In March 2006, David and Jane also commenced proceedings under the Act against the estate. Both proceedings were heard together by McLaughlin AsJ commencing on 23 July 2007. The trial occupied seven days. His Honour delivered judgment on 28 March 2008: see Rutter v McCusker [2008] NSWSC 269. His Honour dismissed all Family Provision Act claims against the estate and reserved the question of costs, which were very large, for further judgment. 10 In the course of his judgment, his Honour reviewed the evidence as to whether Designplace was indebted to the estate for $424,877. His Honour found that it was. His Honour remarked, at [107]: "No attempt has been made by Anne, in her capacity as executor of the estate of the Deceased, to get in the foregoing indebtedness (whether interest be added thereto, or not) owing by Designplace to the estate. The obvious reason for that failure on her part to carry out one of the fundamental duties of an executor - to get in the assets of the estate - is doubtless that she is the sole shareholder and sole director of Designplace, and that she personally stands to benefit if that company is not required to pay its indebtedness to the Deceased." 11 Anne maintains that, despite his Honour's finding that Designplace is indebted to the estate, the company is still entitled to dispute that indebtedness. 12 On 22 April 2008, Anne filed a notice of intention to appeal from the orders of McLaughlin AsJ. Flossiy has also filed a notice of intention to appeal. While it is not open to Anne to appeal from orders which were entirely in favour of the estate, Flossiy may press her appeal again the dismissal of her Family Provision Act claim. It will be open to Anne to file a notice of contention seeking to reverse the findings of his Honour as to the indebtedness of Designplace to the estate. It is likely that Anne will do so. 13 On 29 July 2008 the solicitors for David and Jane wrote to Anne's solicitors requesting that Anne, as executrix, serve a demand on Designplace for repayment of the debt to the estate. Anne has declined to do so. 14 Further, by a Cross Claim in these proceedings filed in September this year, Designplace, which is joined as a party, seeks a declaration that it is not indebted to the estate in any amount. The Cross Claim is verified on oath by Anne. 15 On 20 October 2008, an administrator was appointed to Designplace pursuant to s 436A of the Corporations Act 2001 (Cth) at the instigation of Anne. 16 In those circumstances, the parties now agree that the Cross Claim by Designplace should not be determined at this stage of the proceedings. 17 A Report as to the Affairs of Designplace was prepared by Anne as required by s 421A of the Corporations Act . The report shows the debt of Designplace to the estate as a contingent liability, obviously because the debt is disputed. The Report also shows as a contingent asset of Designplace a claim by the company against the estate in a total of $700,000. 18 The Report as to Affairs is apparently the first occasion upon which this claim against the estate has been articulated. If this claim were allowed by Anne as executrix of the estate, it would more than offset the claim of the estate against Designplace. 19 The administrators of Designplace have prepared a Report to Creditors under s 439A(4) of the Corporations Act . It discloses that Anne is considering a Deed of Company Arrangement for the company, the details of which have not been formulated. The company's assets appear to be real estate valued at about $625,000, which is subject to a mortgage of $470,000. There is a fixed and floating charge in favour of St George Bank for an amount of $1,133,647 which would fasten upon the remaining equity in the real estate, still leaving a shortfall. 20 The Report to Creditors shows that, of the debt of $700,000 claimed to be owing by the estate to the company, $610,000 is particularised thus: "Portion of cross guaranteed business loan owed to St George Bank Ltd with Ms McCusker and other associated borrowings."

The remaining $90,000 is particularised thus: "Monies withdrawn from the company by Mr Barry Rutter without consent." 21 It would appear from this description that substantiation of these claims would depend largely, if not entirely, on the evidence of Anne. This is especially so in respect of the claim for $90,000, as the only person who could have given or withheld consent to withdrawal of monies from Designplace was its sole director and shareholder, that is, Anne herself. The applicable principles

22 The principles upon which the Court acts in revoking the grant of probate in circumstances involving conflict of interest and duty upon the part of the executor are clear and well established. The Court has an inherent jurisdiction to revoke a grant of probate. That is because the grant of probate is an order of the Court. The Court, in granting probate or revoking it, is concerned to ensure the due and proper administration of the estate in the interests of the beneficiaries. If circumstances arise after the grant of probate which make it clear that the due and proper administration is put in jeopardy or has in fact been prevented or frustrated by the executor, the Court will revoke the grant of probate to that executor and appoint another. 23 The circumstances justifying removal are not defined in closed categories. Each case is determined on its particular facts and ultimately calls for the exercise of a judicial discretion: see, for example, Mavrideros v Mack (1998) 45 NSWLR 80; Bates v Messner (1967) 67 SR(NSW) 187, at 191 and 192; Bramston v Morris; Estate of Murray (BC9303644) 20 August 1993, NSWSC, per Powell J; Upton v Downie [2007] NSWSC 1095 at [44]ff per Gzell J. 24 A potential for conflict between duty as an executor and interest as a beneficiary or debtor of the estate is not sufficient on its own to justify revocation of a grant to that executor, particularly if the testator has appointed the executor knowing of the potential for that conflict. An executor is assumed to know the facts existing at the time of appointment and the Court infers that he or she is nevertheless willing to trust in the loyalty and integrity of the appointee in administering the estate. For this reason, the appointment of a particular executor by a testator is not lightly to be set aside by the Court: see, for example, Monty Financial Services Ltd v Delmo (1996) 1 VR 65, Upton v Downie (supra) at [50]. 25 The appointment by a testator of a debtor of the estate as executor does not, of itself, involve the creation of conflict of interest and duty. The law assumes that it is in the interests of debtors to pay their just debts. Likewise, it holds that it is the duty of executors to get in the just debts owed to the estate. So far the interests of a debtor to the estate accord with the duty to the estate of that debtor as executor. 26 Problems may arise, however, when the debtor/executor disputes the debt to the estate after the testator's death. There may be cases in which the executor refuses to acknowledge a debt as an asset of the estate because the executor is himself or herself the alleged debtor, and accepts as truth a version of events which does not give rise to the alleged debt. There may be other cases in which the executor is willing to admit as a debt of the estate a disputed claim made by himself or herself which is based on assertion of fact substantiated solely or principally by the executor. In both of such cases the executor is in a position of conflict of interest and duty. The conflict is not potential. It is actual and present: see, for example, Monty Financial Services Ltd v Delmo (supra). Consideration

27 In the present case, Anne, as the executrix, refuses to acknowledge as an asset of the estate a debt of Designplace which is recorded in accounts of the company for which she, as sole director, had primary responsibility. She contests the indebtedness upon facts which she asserts from her own knowledge. Similarly, on behalf of Designplace, she asserts a claim against the estate which is otherwise uncorroborated and is founded upon evidence which she herself would give. Thus, admission of an uncorroborated claim against the estate and refusal to collect an asserted asset of the estate depend the executrix's acceptance of her own veracity. 28 This is sufficient, in my opinion, to place the administration of the estate in jeopardy so that Anne's grant of probate should be revoked. 29 In this regard it is of great significance that there is a history of bitter animosity between David and Jane on the one hand, and Anne and Flossiy on the other. Despite this animosity, David and Jane as beneficiaries of the estate, are entitled to have it administered fairly and impartially in the interests of all beneficiaries. The fact that admission of a claim against the estate and rejection of an alleged asset of the estate depends upon the exercise of judgment by Anne founded upon her acceptance of her own veracity is, in the circumstances of this case, an underlying factor illustrating the jeopardy in which administration of the estate is placed. 30 I should note a submission made by Mr Willmott SC, who appears for Anne, that it is premature to make the order sought by David and Jane because McLaughlin AsJ may order that David and Jane pay substantial costs to the estate in respect of the Family Provision Act proceedings. Mr Willmott says that the judgment debt for costs in favour of the estate may exceed substantially the legacies of David and Jane, so that Anne may satisfy those legacies by offsetting against them the costs orders. If the legacies are satisfied in this way, Mr Willmott says, the only remaining beneficiary of the estate is Anne and the collectability of the debt said to be owed by Designplace is of no practical consequence. 31 I am unable to accept this submission. I agree with Mr Kunc SC, who appears for David and Jane with Mr Aspinall of Counsel, that the costs orders sought by the various parties in the Family Provision Act proceedings are exceedingly complex and the result is quite unpredictable at this stage. Indeed, it may be unpredictable for some considerable time to come as a result of appeals which are foreshadowed. 32 I agree with Mr Kunc's submission that, in the meantime, the beneficiaries of the estate, that is David and Jane, are entitled to have the estate administered by someone whose decisions as to matters of costs, as to enforcement of claims, as to set-off of debts, as to appeal and otherwise are not tainted with the conflict of interest and duty in which Anne is placed. 33 I do not need, in these circumstances, to consider the subsidiary claim of David and Jane that Anne as executrix has failed to act even-handedly in the interests of all beneficiaries. I have adverted to the history of hostility between the parties. That factor is a consideration in the primary basis upon which David and Jane seek Anne's removal as executrix. Orders

34 I note that a consent to appointment as executor of the estate has been provided by Mr Hancock, solicitor. I do not understand there to be any contest as to Mr Hancock's fitness and suitability to act as executor. 35 I order that the grant of probate of the will of Barry Rutter deceased to Anne Maire McCusker be revoked. 36 I order that, subject to compliance with the Rules of Court, probate of the will of Barry Rutter deceased be granted to Kenneth Bruce Hancock. - oOo -

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.