Saul & Ors v Lin

1 On 15 April 2004, I gave judgment in this matter, making a declaration that a valid trust existed of which the Defendant was trustee and the Plaintiffs were beneficiaries: Saul v Lin [2004] NSWSC 307. The Plaintiffs also sought an order that the Defendant be removed as trustee of the trust on the ground that he was incapable of managing his affairs, an order having been made under s.13(1) Protected Estates Act 1983 (NSW) on 8 September 2003 appointing the Protective Commissioner as manager of his estate. 2 In my reasons for judgment I held that it was expedient to remove the Defendant as trustee of the trust on the ground of his incapacity and to appoint new trustees. However, in accordance with the general practice of the Court, I expressed reluctance to appoint as new trustees the persons put forward by the Plaintiffs because those persons had close family ties to the beneficiaries of the trust: see judgment paragraphs 23 and 24. 3 I stood the proceedings over to 21 April to enable the Plaintiffs either to find suitable independent new trustees or else to adduce further evidence showing special circumstances warranting the appointment of the presently proposed new trustees. 4 When the matter came on for hearing on 21 April Mr Ashhurst, who appears for the Commissioner, filed in Court a Notice of Motion, which was made returnable instanter without objection from Ms Needham, who appears for the Plaintiffs. By that Notice of Motion the Defendant, by his Tutor the Protective Commissioner, seeks an order pursuant to s.71(1) Protected Estates Act that the Commissioner "may exercise in the name and on behalf of the Defendant the powers of the trustee of the trust … as if named as the trustee of the trust" . 5 In the alternative, the Commissioner seeks an order pursuant to s.70(2) Trustee Act 1925 (NSW) that he be appointed as trustee of the trust in place of the Defendant. 6 The Plaintiffs submitted that neither order sought by the Commissioner should be made. Ms Needham submitted that if the Court declined to appoint as new trustees the persons proffered by the Plaintiffs, then the Court should appoint the Public Trustee rather than the Commissioner.

• whether the persons proffered by the Plaintiffs should be appointed as new trustees and, if not, whether the Public Trustee should be appointed;

• whether an order in general terms can be made under s.71(1) Protected Estates Act that the Protective Commissioner may exercise all of the powers of a trustee under a trust and, if so, whether such an order should be made in the present case;

• whether the Protective Commissioner himself should be appointed new trustee of the trust under s.70(2) Trustee Act .

8 In my earlier judgment I referred briefly to the general rule that the Court is reluctant to appoint as trustees persons who have close family ties to the beneficiaries. Ms Needham submits that:

• the trustees proposed by the Plaintiffs are not "close family members" within the contemplation of the early cases, which deal generally with proposals to appoint sons or spouses of beneficiaries;

• as the trust in the present case establishes a life estate in the income from shares in a company with the remainder in the corpus vested in the Plaintiffs, there would be no tension in the administration of the trust between the interest of the life tenant and the interests of the remaindermen so that there is no risk of a decision being made by the proposed new trustees which is partial to the interests of one class of beneficiary as against another;

• the proposed trustees represent the interests of all beneficiaries: one is a relative of the life tenant and the other is a relative by marriage of the remaindermen;

• no more appropriate or independent person is proffered. 9 In my opinion, the general rule that the Court will not appoint as new trustees persons who have close family ties to the beneficiaries is applied as carefully today as it ever was in the old cases. The reason is obvious - Sir John Romilly MR put it in a nutshell in Wilding v. Boulder (1855) 21 Beav 222 (52 ER 845): "I have always observed that the worst breaches of trust are committed by relatives who are unable to resist the importunities of their cestuis qui trust, when they are nearly related to them."

Human nature has not changed since those words were uttered. 10 Ms Needham says that the proposed new trustees are not "nearly related" to the beneficiaries. The evidence shows, however, that although the proposed trustees are not members of the immediate families of the beneficiaries, they have longstanding close family ties. 11 In my opinion, the general rule that the Court prefers not to appoint relatives of beneficiaries as new trustees is not confined to the appointment of relatives of any particular degree of propinquity to the beneficiaries. It is a commonsense rule and it is to be applied in a commonsense way whenever it is apparent that the proposed new trustees have such family connections with the beneficiaries as to be susceptible to the influences and partialities which almost inevitably pervade family histories and family affairs, particularly where money is concerned. 12 In the present case, I am not satisfied by the evidence that the relationship between the proposed new trustees and the beneficiaries is such as to render them impervious to family influences and partialities. Nor am I satisfied by the evidence that they possess such professional qualifications or business experience as to make it particularly advantageous to appoint them in preference to other independent trustees. 13 Ms Needham says, however, that in reality no harm can be done by the appointment of the persons proffered by the Plaintiffs because the administration of the trust is straightforward: the Defendant is to have all the income of the trust during his life and after his death the beneficiaries are to have the corpus absolutely. 14 I do not think that the administration of the trust is quite so simple. The trust estate comprises two "A" class shares and two "B" class shares in Wakalla Holdings Pty Ltd ("Wakalla"), which has nett assets of approximately $4.2M, mostly in cash. The "A" class shares have voting rights but no dividend rights. The "B" class shares have dividend rights but no voting rights. The Articles of the company provide that "each holder of an 'A' share shall be entitled to appoint one director for each 'A' share held" . The "A" class shares held by the trust enable the trustee to control the constitution of the board of Wakalla. 15 It appears that Wakalla had owned a building on the Pacific Highway at Chatswood. The building was disposed of and the company's assets now represent the proceeds of the realisation. The company has the benefit of a capital gains tax roll-over relief ruling from the Australian Taxation Office but in order to take advantage of that ruling the company must acquire a replacement property by 30 June 2004. 16 The directors of Wakalla will have to make a decision very quickly as to what sort of property the company is to acquire if it is to take advantage of the capital gains tax roll-over relief. The directors may decide that Wakalla should acquire a property which is tenanted and provides a good income return - which will benefit the Defendant as life tenant. On the other hand, the directors may decide that the company should acquire a property which has a high potential for capital appreciation on resale but will produce no regular income for a substantial period, if at all - which will disadvantage the life tenant but benefit the Plaintiffs as remaindermen. 17 In short, it is clear, in my opinion, that the new trustees will be in a position, if they so desire, to administer the trust by the appointment of directors to Wakalla in such a way as may benefit the life tenant to the disadvantage of the remaindermen, or vice versa. This consideration calls for trustees who will act impartially as between all beneficiaries. 18 I am not satisfied that no other independent persons can be found by the Plaintiffs who could act as new trustees, so that there is no choice but to appoint those proposed by the Plaintiffs. The Plaintiffs have given no evidence of their endeavours to find such independent trustees. 19 Accordingly, I am of the view that I should not appoint the persons proposed by the Plaintiffs as new trustees. Construction of s.78(1) Protected Estates Act

20 The first order sought by the Commissioner in his Notice of Motion filed on 21 April is an order that the Commissioner "may exercise in the name and on behalf of the Defendant the powers of the trustee of the trust … as if named as the trustee of the trust" . Mr Ashhurst submits that the Court has power under s.71(1) Protected Estates Act to make such a general or blanket order. The effect of such an order, if made, will be that the Defendant will remain as trustee of the trust, although incapable, but the Commissioner will make every decision in the name of the Defendant which the Defendant might have made as trustee of the trust. 21 Ms Needham submits that s.71(1), on its true construction, does not permit such a general order to be made. 22 Neither Counsels' researches nor my own have revealed any authority directly on this point. Despite the very early antecedents of the section, no precedent for such an order can be found at any of the old texts such as Highmore's The Law of Idiocy & Lunacy (1807), Pope's Law & Practice of Lunacy (1890) 2nd Ed., Elmer's Practice in Lunacy (1892) 7th Ed., Seton's Judgments & Orders (1912) 7th Ed., or in texts in this country such as Miller & Horsell Equity Forms & Precedents . 23 The Protective Commissioner himself has sworn an affidavit in which he says: "The Court has authorised me to exercise the powers of a trustee under Section 71(1) of the Protected Estates Act 1983 on occasions. The usual order by the Court is to the effect that the Protective Commissioner in the name and on behalf of the protected person may exercise the powers vested in the protected person as trustee of the specified trust. I am not aware of the Court having made orders which have required me to seek further orders or directions from the Court prior to the exercise of any discretion or power vested in the trustee."

However, the Commissioner has not produced or referred to any example of such an order. 24 Both Mr Ashhurst and Ms Needham found their submissions entirely on the construction of s.71 of the Protected Estates Act , which is in the following terms: " Manager may act as trustee or guardian in certain cases

(1) Where a power is vested in a protected person in the capacity of a trustee or guardian, or the consent of a protected person to the exercise of a power is necessary in the like capacity or as a check upon the undue exercise of the power, and it appears to the Court to be expedient that the power should be exercised or the consent given, as the case may be, the Protective Commissioner or the manager of the estate of the protected person, as the case may be, in the name and on behalf of the protected person, under an order of the Court made upon the application of any person interested in the exercise of the power, may exercise the power or give the consent, as the case may be, in such manner as the order may direct.

(2) Where under this Act the Protective Commissioner or the manager of an estate, under order of the Court, exercises in the name and on behalf of a protected person a power of appointing new trustees vested in the protected person, the persons who shall after and in consequence of the exercise of the power be the trustees shall have all the same rights and powers as they would have had if the order had been made by the Court under any law for the time being in force relating to trusts.

(3) Where, on an application to the Court for an order under subsection (1) in relation to a trust it seems to the Court to be expedient, it may make any other order respecting the property subject to the trust which might have been made on such an application under the provisions of any law relating to trusts on the appointment of new trustees." 25 Mr Ashhurst submits that the words "a power" in s.71(1) may be read as "any power"; one could regard the all-encompassing power of a trustee to administer the trust in all respects and for all purposes as "a power … vested in the protected person in the capacity of a trustee", within the meaning of the section. Ms Needham submits that the section is not to be construed so widely and that the words "a power … vested" refer to a particular power which is to be exercised by a trustee in the circumstances of a particular case. 26 Section 71 Protected Estates Act has its roots in the ancient English law of lunacy. From the earliest times the Crown, by virtue of its prerogative as parens patriae, had the care and custody of persons and estates of those lacking the mental capacity to take care of themselves. The first known statute dealing with the Crown's protective custody is De Praerogativa Regis , frequently cited as 17 Ed II, c 9 & 10, but of uncertain date and sometimes attributed to the reign of Edward I: Pollock & Maitland The History of English Law (1923) 2nd Ed., Vol.I p.481; Highmore (op cit) 15ff. The Crown's prerogative right of custody and care was from the beginning administered by the Chancery: Highmore (op cit) 28ff. 27 A particular difficulty arose when an incapable person was a trustee or mortgagee of land or other property and was required by the terms of the trust or the mortgage to execute conveyances. A trustee is the holder of the legal estate and under the common law "an Idiot or Fool Natural is incapable of making a Testament nor can he dispose of his Lands or Goods" : Brydall The Law Relating to Natural Fools, Mad-Folks, and Lunatick Persons (1700) at p.8, citing 34 & 35 Henry VIII c.5. 28 To overcome this difficulty, a number of statutes were enacted, the first of which was 4 Geo II c.10 (1731), which is the earliest antecedent of s.71(1) Protected Estates Act . That statute relevantly provided that it shall be lawful for trustees being "Ideot, Lunatick and Non-Compos Mentis" , or for their committees in their name, by direction of the Court, signified by an order made upon the hearing of all parties concerned, on the petition of the persons for whom they were seized in trust, to convey such lands in such manner as the Court shall direct and that such conveyance shall be as valid as if the person executing had been of sound mind. 29 By 36 Geo III c.90 (1796), provision was made, inter alia, for the transfer of stock held on trust by a lunatic. 30 The cases dealing with 4 Geo II c.10 and 36 Geo III c.90 show that those statutes were applied for the purpose of effecting specific transfers of particular property or the exercise of specific trust powers; there is no case in which a committee was granted a general power of administering the trust of which the lunatic was trustee: see Highmore (op cit) pp.139-142. 31 Other legislation was enacted piecemeal to surmount various difficulties in the administration of trusts where the trustee had become incapable: 1 & 2 Geo IV c.114; 6 Geo IV c.74; 7 Geo IV c.43; 11 Geo IV & 1 Will IV c.60. The Trustee Acts of 1850 and 1852 made provision for the transfer of real and personal property vested in lunatic trustees and mortgagees and enabled the court to direct the transfer of the property, to vest it in another person and to appoint a new trustee in the place of the lunatic trustee. 32 In 1853 an Act consolidating previous enactments as to lunacy was passed, 16 & 17 Vic c.70. Section 137, the predecessor of s.71(1) Protected Estates Act , was in the following terms: "Where a Power is vested in a Lunatic in the Character of Trustee or Guardian, or the Consent of a Lunatic to the Exercise of a Power is necessary in the like Character, or as a Check upon the undue Exercise of the Power, and it appears to the Lord Chancellor intrusted as aforesaid to be fit and expedient that the Power should be exercised or the Consent given (as the Case may be), the Committee of the Estate, in the Name and on behalf of the Lunatic, under an Order of the Lord Chancellor intrusted as aforesaid, made upon the Application of any Person interested in the Exercise of the Power, may exercise the Power or give the Consent, as the case may be, in such Manner as the Order shall direct."

Section 138 was the predecessor of s.71(2). 33 The Lunacy Act 1890 consolidated and re-enacted the laws relating to lunacy in England, but not in Scotland or Ireland. Section 128, which is in terms very similar to s.71(1) Protected Estates Act , provided: "where a power is vested in a lunatic in the character of trustee or guardian, or the consent of a lunatic to the exercise of a power is necessary in the like character, or as a check upon the undue exercise of the power, and it appears to the Judge to be expedient that the power should be exercised or the consent given, the committee of the estate, in the name and on behalf of the lunatic, under an order of the Judge, made upon the application of any person interested, may exercise the power or give the consent in such manner as the order directs."

Section 129 of the Lunacy Act is in similar terms to s.71(2) and (3) Protected Estates Act. 34 The Lunacy Act repealed those provisions of the 1850 and 1852 Trustee Act which had provided for lunatic trustees and re-enacted them in s.135 to s.143. So far as is presently material, those sections provided as follows. 35 By s.135, where a lunatic was seized of land on trust, the Judge in Lunacy was empowered to vest the land in such persons for such estates as he directed. This provision enabled a transfer to be effected according to the terms of the trust. Section 136 made similar provision in the case of stock and choses in action. Section 141 provided that in any case in which the Judge in Lunacy had jurisdiction to order a conveyance or transfer of land or stock or to make a vesting order, he might also make an order appointing a new trustee or trustees. 36 In New South Wales the provisions of s.128 and s.129 of the Lunacy Act 1890 were enacted in substantially the same terms in s.159 and s.160 of the Lunacy Act 1898-1955 (NSW). With some immaterial variations, these sections became s.71 Protected Estates Act . 37 There are few reported cases containing a general discussion as to how the jurisdiction under the predecessors to s.71 Protected Estates Act was exercised. I have not been able to find any case in which the Court ordered that the committee of a lunatic trustee should be empowered, by order under the section, to administer the trust generally. However, a strong suggestion that this would never have been done appears in In re Currie (1878) 10 Ch D 93. 38 In that case, a settlor under a marriage settlement settled a considerable fortune upon three trustees upon trust for Mr Currie for life or until other contingencies occurred, and thereafter upon other trusts. By the same settlement another fund was settled upon trust for Mr Currie for life and thereafter for Mrs Currie absolutely. When Mr Currie died, there was only one surviving trustee of the marriage settlement but he was found to be of unsound mind. Mrs Currie and the executors of Mr Currie's will presented a petition in Lunacy seeking an order that the right to transfer the fund ultimately held on trust for Mrs Currie absolutely should be vested in Mrs Currie and that the other fund should vest in Mrs Currie and the executors of Mr Currie's will as the legal representatives of Mr Currie. 39 At 94 James LJ, with whom Baggallay and Thesiger LJJ agreed, said: "You are asking us to administer a trust in Lunacy, which it is our settled rule never to do. We therefore cannot make the order asked. But as affidavits have been made shewing that the Petitioners are proper persons to be appointed new trustees, we can make an order appointing them new trustees of the settlement, and vesting the right to transfer the funds in them as such trustees upon the petition being amended for that purpose and inituled in the Chancery Division as well as in Lunacy." 40 The "settled rule" to which his Lordship referred is, no doubt, that expressed in Re Ward (1850) 2 Mac & G 73 [42 ER 29], in which the court said: "It may be laid down as a general rule, that, whenever there remains any portion of the trusts of an instrument to be administered, the court invariably declines to administer the trust, it merely substitutes a trustee in the place of the lunatic." 41 These cases indicate that it was never regarded as appropriate to invoke the jurisdiction of the Court in Lunacy for the purpose of administering a trust generally, as could have been done under s.137 of the 1853 Act or s.128 of the Lunacy Act 1890 if those sections bore the construction for which the Commissioner now contends. Rather, under the predecessors to s.71(1) Protected Estates Act , the Court in Lunacy would resolve a difficulty arising when a particular trust power had to be exercised by an incapable trustee but the impossibility of the lunatic trustee administering the trust generally was to be resolved by the appointment of a new trustee either under the Trustee Acts or under the 1890 Lunacy Act. 42 With that historical review in mind, I turn to the words of s.71(1) Protected Estates Act . I see nothing in the words of the section to indicate that it is intended to change the construction which, it seems to me from a review of the old cases, has been placed upon its predecessors. 43 The section applies where "a power" is vested in a protected person as trustee and it enables the court to make an order enabling the Commissioner or the manager of the protected person's estate to exercise "the power … in such manner as the order may direct" . These words indicate that the Court is to give consideration to the exercise of the "power" with a view to making specific directions as to how it is to be exercised according to the circumstances of the case. The Court could not give specific directions in accordance with the section if what were sought were an order enabling the Commissioner or the manager to administer the trusts generally as if the Commissioner or the manager himself were the new trustee. 44 There are sound reasons why the construction urged by the Commissioner should not be favoured so that a trust may be administered by the Protective Commissioner or other manager under a general or blanket order made under s.71(1) Protected Estates Act . It would be highly undesirable to retain in office a trustee who is incapable of acting while authorising some other person, who is not in name and in law the trustee, to act as such. A person discharging the duties of a trustee under a trust instrument should be a trustee in name, in law and in fact. 45 For these reasons, I conclude that the Court has no power under s.71(1) Protected Estates Act to appoint the Protective Commissioner or any other manager of the estate of a protected person to exercise in the name of the protected person all of the powers of that person as trustee of any trust.

46 The Commissioner submits that he should be appointed as new trustee, basically for two reasons:

• it was the intention of the Defendant, as settlor of the trust, that he himself be trustee during his own life, doubtless so that he could have primary regard to his own interests as life tenant;

• the Court should, by the appointment of a new trustee, seek to give effect to the Defendant's wishes as settlor and should appoint the Commissioner, as the Defendant's manager, in the Defendant's place because the Commissioner is best able to have regard to the Defendant's interests as life tenant;

• it would unnecessarily impose two layers of fees for administration of the Defendant's affairs if the Public Trustee were to be appointed trustee of the trust because the Public Trustee as trustee would be entitled to fees out of the trust estate and the Commissioner, as the Defendant's manager, would be entitled to fees out of the Defendant's estate. 47 Ms Needham submits that:

• the new trustee should be impartial and should not be primarily concerned to protect the Defendant's interest as life tenant;

• it is a cause for concern that the Commissioner puts himself forward as trustee when he has previously taken the position that no trust exists at all. 48 There is no doubt that the Court has a wide discretion in the appointment of new trustees and that in the exercise of that discretion it has regard to the wishes of the settlor of the trust, if expressed or clearly implied in the trust instrument. However, the Court will not appoint a new trustee in order to further the interests of one beneficiary or class of beneficiaries over another but will, where possible, appoint a trustee who is impartial. Further, the Court takes into account whether the appointment of a particular trustee will promote or impede the administration of the trust: see In re Tempest (1866) 1 LR Ch App 485, at 487-488 per Turner LJ. 49 As to the first consideration, I am by no means persuaded that the Deed of Trust evidences an intention by the Defendant as settlor that any new trustee to be appointed should be one likely to have primary regard to his interests as life tenant. There is nothing in the Deed expressly to that effect and I do not see that the fact that the settlor has appointed himself as trustee and life tenant clearly implies such an intention. 50 The beneficiaries having an interest in remainder under the trust are the Defendant's daughter and grandchildren. It may well have been the case that the Defendant regarded himself as best placed, as trustee, to administer the trust in such a way as would benefit himself sufficiently but provide for his daughter and grandchildren in a manner that accorded best with their needs, as perceived by him, and with his own intentions inspired by natural love and affection. He may not have viewed with equanimity the prospect of decisions being made by a trustee, such as the Commissioner, who conceives his duty to be to have regard primarily to the life tenant's interests. 51 The assertion by the Commissioner that he is best placed to look after the interests of the Defendant as life tenant is significant in regard to the second consideration. That assertion, coupled with the fact that the Commissioner strenuously asserted, in the face of fundamental principles of trust law, that no trust existed lead one to doubt that the Commissioner is best placed to have regard to the interests of all beneficiaries as an impartial trustee is bound to do. 52 Concerns that a life tenant's representative will be placed in a position of conflict or difficulty if appointed by the Court as new trustee have led Courts to refuse to appoint a life tenant's solicitor. In Re Kemp's Settled Estates (1883) 24 Ch D 485, the life tenant's solicitor was proposed as a new trustee of the trust. In dismissing an appeal refusing the appointment, Cotton LJ, with whom Brett MR and Bowen LJ agreed, said at 487: "… how could Mr Wood [the solicitor] as one of the trustees, exercise a proper judgment on [the trustees'] behalf upon questions on which he had advised the tenant for life? It would be Mr Wood as trustee putting a check upon Mr Wood as solicitor to the tenant for life and he would be placed in a false position." See also: In re Earl of Stamford; Payne v Stamford [1896] 1 Ch 288, at 298; Re Spencer's Settled Estates [1903] 1 Ch 75; In re Moorhouse [1946] 4 DLR 542. 53 In the present case the Commissioner's duty under the Protected Estates Act is solely to look after and to advance the interests of the Defendant. If he were appointed trustee of the trusts he would be placed in a position of difficulty, if not conflict, having regard to his duty to the Defendant as Protective Commissioner and his duty as trustee to all beneficiaries. 54 In these circumstances, I do not think it appropriate to appoint the Commissioner as new trustee of the trust. I propose to appoint the Public Trustee. 55 I bear in mind that the Public Trustee will be paid fees out of the trust estate and that the Commissioner will be paid fees out of the deceased's managed estate. I do not think that this consideration outweighs the considerations in favour of appointing the Public Trustee. If I had appointed the Commissioner as trustee I am by no means sure that he would not have been entitled to fees out of the trust estate as trustee as well as fees out of the deceased's managed estate as Protective Commissioner. 56 I will stand these proceedings over for a short time to enable the parties to bring in Short Minutes of Order reflecting these reasons. I will then hear argument as to costs. - oOo -

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