Court of Appeal (WA)|2005-12-07|Before: Wheeler JA

Southern Wine Corporation Pty Ltd (In Liq) v Frankland River Olive Co Ltd & Anor [2005] WASCA 236 (7 December 2005)

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA

CITATION : SOUTHERN WINE CORPORATION PTY LTD (IN LIQ) -v- FRANKLAND RIVER OLIVE CO LTD & ANOR [2005] WASCA 236

BETWEEN : SOUTHERN WINE CORPORATION PTY LTD (IN LIQ)

Jurisdiction : SUPREME COURT OF WESTERN AUSTRALIA

Citation : SOUTHERN WINE CORPORATION LTD (IN LIQ) -v- FRANKLAND RIVER OLIVE CO LTD & ANOR [2004] WASC 276

Equity - Equitable charge - Whether trustee had beneficial interest in trust property for remuneration

Associated Alloys v ACN 001 452 106 Pty Ltd (2000) 202 CLR 588

Bray v Ford [1896] AC 44

Chief Commissioner of Stamp Duties v Buckle [1998] HCA 4; (1998) 192 CLR 226

Cinema Plus Ltd (Administrators Appointed) v Australia & New Zealand Banking Group Ltd [2000] NSWCA 195; (2000) 157 FLR 204

Coates v McInerney (1992) 7 WAR 537

Day v William Hill (Park Lane) Ltd [1949] 1 KB 632

First Industry Corp v Goh [2003] WASC 216

General Steel Industries Inc v Commissioner for Railways (NSW) [1964] HCA 69; (1964) 112 CLR 125

Hardoon v Belilios [1901] AC 118

Hospitals Contribution Fund of Australia v Hunt (1982) 44 ALR 365

In re Thorley [1891] 2 Ch 613

In Re White [1898] 2 Ch 217

Montagu v Earl of Sandwich (1886) 32 Ch D 525

National Provincial & Union Bank of England Ltd v Charnley [1924] 1 KB 431

Octavo Investments Pty Ltd v Knight [1979] HCA 61; (1979) 144 CLR 360

Perpetual Trustees WA Ltd v Kelly (1993) 8 WAR 480

Re Androma Pty Ltd [1987] 2 Qd R 134

Re Bank of Credit & Commerce International SA (No 8) [1998] AC 214

Re Charge Card Services [1987] Ch 150

Re Cunningham; Hawker Siddeley Building Supplies Pty Ltd v Hanson [1965] WAR 115

Re Duke of Norfolk's Settlement Trusts [1982] Ch 61

Re Global Finance Group Pty Ltd (In liq) [2002] WASC 63; (2002) 26 WAR 385

Re Westfield Holdings Ltd [2004] NSWSC 458; (2004) 49 ACSR 734

Swiss Bank Corporation v Lloyds Bank Ltd [1982] AC 584

Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd [1968] HCA 8; (1968) 118 CLR 429

White v Conroy (1921) 21 SR (NSW) 257

Howard v Brownhill (1853) 23 LJQB 23

Re Spectrum Plus Ltd (in liq) [2005] UKHL 41; [2005] All ER (D) 368

Tobin v Dodd [2004] WASCA 288

1 WHEELER JA: I have had the advantage of reading in draft the reasons for decision of McLure JA. I agree with those reasons and have nothing to add.

2 MCLURE JA: The appellant appeals from orders made by Master Sanderson on 15 February 2005 striking out the appellant's statement of claim and dismissing its action. The appeal was instituted as of right. The respondents do not challenge its competency.

3 The first and second respondents had applied under O 20 r 19(1)(a) and (b) of the Rules of the Supreme Court ("Rules") to strike out the statement of claim on the grounds that it failed to disclose a reasonable cause of action or was frivolous or vexatious. At the hearing of the application the focus of the parties and the Master was on a minute of proposed amended statement of claim ("the statement of claim"). Evidence is not admissible in an application under par 1(a) (save for documents pleaded in the statement of claim) but is admissible in an application under par 1(b) of O 20 r 19 of the Rules. A claim will be struck out as giving rise to no reasonable cause of action or as frivolous or vexatious if it is so obviously untenable that it cannot possibly succeed: General Steel Industries Inc v Commissioner for Railways (NSW) [1964] HCA 69; (1964) 112 CLR 125 at 130.

4 I proceed on the basis that the facts pleaded in the statement of claim are true. The appellant was the responsible entity of a managed investment scheme registered under the Corporations Law, known as the "SWC MIS" ("the Scheme"), from December 1998 to 21 July 2003. The Corporations Act 2001 (Cth) ("the Law") now applies. The object of the Scheme was and remains the growing of wine grapes upon land leased to the appellant and known as the Preston Vale Vineyard.

5 The first respondent replaced the appellant as the responsible entity of the Scheme from 21 July 2003. In about November 2003 the first respondent appointed the second respondent to manage the Scheme on its behalf.

6 The appellant claims it is entitled to unpaid management fees for the financial year ending 30 June 2003. It contends it has an equitable charge over the proceeds of sale of the Preston Vale Vineyard grape harvest for the year ending 30 June 2004 to the extent necessary to discharge its entitlement to payment of the management fees. The appellant relies on the terms and conditions of the Scheme Constitution and a Licence and

Management Agreement with each member of the Scheme ("Management Agreement").

7 The Constitution is contained in a Deed between the appellant and "Growers". Grower is defined as a grower pursuant to a Management Agreement and a member of the Scheme (cl 1.1). The Management Agreement forms part of the Constitution (cl 1.4).

8 The Constitution provides that the responsible entity shall hold on trust the Scheme property (cl 9). Clause 9 of the Constitution is in conformity with s 601FC(2) of the Law which provides that the responsible entity hold scheme property on trust for scheme members. Scheme property has the meaning given to the term by the Corporations Law (cl 1.1). Scheme property is defined in s 9 of the Law to mean:

"(a) contributions of money or money's worth to the scheme; and

(b) money that forms part of the scheme property under provisions of this Act or the ASIC Act; and

(c) money borrowed or raised by the responsible entity for the purposes of the scheme; and

(d) property acquired, directly or indirectly, with, or with the proceeds of, contributions or money referred to in paragraph (a), (b) or (c); and

(e) income and property derived, directly or indirectly, from contributions, money or property referred to in paragraph (a), (b), (c) or (d)."

9 Section 601GA(2) of the Law provides that if a responsible entity is to have rights to be paid fees out of scheme property, or to be indemnified out of scheme property, those rights must be specified in the scheme's constitution. Clauses 3.2 and 3.3 of the Constitution provide:

"3.2 The Responsible Entity shall be entitled to be paid all such fees as are provided for in the Licence and Management Agreement from SWC MIS Property in relation to the proper performance of its duties with respect to the SWC MIS.

3.3 The Responsible Entity shall be entitled to be indemnified from SWC MIS Property with respect to any liability, cost or expense incurred by the Responsible Entity in the proper performance of its duties with respect to the SWC MIS."

10 Under the Management Agreement, the responsible entity grants to the Grower a licence to plant, propagate, cultivate and develop vines on the Grower's Area identified in a schedule to the Management Agreement. In consideration of the licence, the Grower is required to pay an annual licence fee (cl 4).

11 Under cl 8 (and subject to cl 11 and 18), the Grower appoints the responsible entity for the term (the earlier of 30 June 2019 or the termination of the Management Agreement) to manage the "commercial viticulture business of growing wine grapes for sale or for wine production conducted by the Grower on the Grower's Area" (defined as the "Grower's Project") and to harvest grapes from the vines on the Grower's Area.

12 The responsible entity is responsible for the day-to-day running of the Grower's Project which includes, inter alia, the employment of staff necessary to provide the services, sales, marketing, advertising, negotiating and implementing long-term arrangements for the processing of Growers' grapes into wine and the conduct of all financial, accounting and management services.

13 Clause 9 deals with the consideration payable to the responsible entity. It materially provides:

"9.1 In consideration of the Management Fees payable in accordance with Clause 12.1, the Responsible Entity covenants for the Term to manage the Grower's Project at its own expense in a proper, efficient and diligent manner on a day to day basis in accordance with good viticultural practice ...".

14 I infer from cl 9.1 that the management fee is intended to cover, inter alia, the responsible entity's costs and expenses of managing the Grower's Project. Clause 11 deals with the harvesting of grapes and the distribution of net profits to Growers. The Grower has the full right, title and interest to any grapes produced from the vines from the Grower's Area together with the right to sell such produce (cl 11.1). It may be inferred that all other property is Scheme property. A Grower can elect to collect and market the grapes produced from the vines from the Grower's Project but before collecting them must pay the responsible entity any outstanding moneys, defined to include any management fees (cl 11.2). A Grower who does not make such an election is a "Participating Grower".

15 Pursuant to cl 11.4, the responsible entity is authorised as the Participating Grower's agent to collect and market the grapes produced from the Participating Grower's Project with those produced by other Participating Grower's for sale or for use in the production of wine by the responsible entity. The responsible entity is also appointed as agent of the Participating Grower for the purpose of selling the grapes. This is the full extent of the express appointment of the responsible entity as the agent of the Growers.

16 The responsible entity must distribute to each Participating Grower the net income from their licensed areas in accordance with each Participating Grower's proportional interest (cl 11.5). The net income is the Participating Grower's Gross Project Income less total expenses, being all amounts payable by the Participating Growers to the responsible entity under the Management Agreement.

17 Clause 12 deals with management fees and other matters. Management fees are defined to mean "the fees payable by the Growers from SWC MIS Property to the Responsible Entity for management and maintenance services in relation to the Grower's Area ...". Clause 12 materially provides:

"12.1 In consideration of the Responsible Entity agreeing to carry out at its expense the management services as provided for in this Agreement, the Grower agrees to pay to the Responsible Entity the Management Fees and the Responsible Entity shall be entitled to the Management Fees from SWC MIS Property as follows:

(a) ...

(b) ...

(c) ...

(d) for Years 4 to 20 of the Grower's Project, the sum of $1,957 per Licensed Area or $978.50 per Half Licensed Area payable annually in advance on or before 30 June of each Year commencing on 30 June 2002 and each anniversary thereafter which Management Fees shall be payable from the Participating Growers' Gross Project Income ...; and

(e) if the Participating Growers' Gross Project Income in any Year is not sufficient to pay the Management Fees for that Year, such Management Fees may be deducted from Participating Growers' Gross Project Income in any subsequent Year or Years and the Responsible Entity may provide funding for any shortfall from the Responsible Entity's own resources, borrow such funds secured against the future Participating Growers' Gross Project Income or require a Grower by notice in writing, subject to approval in general meeting pursuant to Clause 12.5, to make such additional contributions to SWC MIS Property as are required to make up any shortfall. The Responsible Entity may recover the reasonable costs of borrowings from SWC MIS Property".

18 Paragraphs (a) to (c) relate to years 1 to 3 respectively and impose an obligation on the Grower to pay a specified amount in advance to the responsible entity. The phrase "Participating Growers' Gross Project Income" means the sum of each Participating Grower's gross income. Gross income is defined as the gross income of the Grower's Project, including the Grower's proceeds from the sale of grapes, grape product and wine.

19 At a meeting called pursuant to cl 12.1(e) for the purpose of seeking additional contributions, the Growers can approve the additional contributions, wind up the Scheme or implement other measures to provide future funding to the Scheme (cl 12.6).

20 Clause 18.4 deals with removal of the responsible entity. It provides:

"The Grower may elect to remove the Responsible Entity in accordance with the terms of the Constitution in relation to the SWC MIS and appoint a new responsible entity in relation to the SWC MIS ('New SRE') in accordance with the provisions of the Corporations Law provided that the Responsible Entity shall be entitled with respect to the proper performance of the Responsible Entity's duties to be indemnified in full from SCW MIS Property for the cost of satisfying all contractual commitments made by the Responsible Entity in operating the SWC MIS which do not become the rights and obligations of the New SRE under Section 601FS of the Corporations Law ...".

21 Under s 601FS of the Law, the rights, obligations and liabilities of the former responsible entity become rights, obligations and liabilities of the new responsible entity save for, inter alia, any right of the former responsible entity to be paid fees for the performance of its functions before it ceased to be the responsible entity and any right to be indemnified for expenses.

22 The legislative history and framework for managed investment schemes is relevant. Under the Law prior to the introduction of Ch 5C there was a division of responsibility between the trustee (who held the scheme assets) and the management company (who operated the scheme) of what were then known as prescribed interest schemes. One of the main purposes of Ch 5C was to eliminate the former dual responsibility by having a single responsible entity combining both functions of holding the scheme property as trustee and operating the scheme (s 601FB(1)). As the Law requires the scheme property to be held in trust, the general law rights, duties and powers of trustees apply. The extent of their application may be affected by the structure of individual schemes. Consistent with the general law of trusts, the responsible entity is obliged to hold scheme property separately (s 601HA). Further, the Court has jurisdiction to give judicial advice to the responsible entity under the Trustees Act 1962 (WA): Re Westfield Holdings Ltd [2004] NSWSC 458; (2004) 49 ACSR 734.

23 Within the statutory parameters of Ch 5 of the Law, the legal structure of the Scheme is sourced in the Constitution and the Management Agreement, both of which are contracts. The general law of contract, agency as well as trusts apply.

24 The learned Master concluded that the Appellant's claim that the Constitution and Management Agreement created an equitable charge was unarguable. In reaching that conclusion, he accepted that the creation of a charge requires that there be an intention to make property available for the payment of a debt and that the property be definite and ascertainable: First Industry Corp v Goh [2003] WASC 216. He relied on two grounds for his conclusion. Firstly, he said there was no certainty as to what the amount of the fund might be from time to time and, as a result, there was no intention to create an equitable charge. Secondly, he said the appellant was seeking security for a trustee's remuneration which it could not do, relying on Perpetual Trustees WA Ltd v Kelly (1993) 8 WAR 480 per Anderson J at 486.

25 The appellant raises four grounds of appeal, two of which overlap. The first ground is that the Master erred in considering the position as between the appellant and the respondents when he was obliged to construe the Constitution and the Management Agreement. There is substance in this ground to the extent the Master refers in his reasons to the intention on the part of the respondents to establish an equitable charge (par 10) and the contractual arrangements as being between the appellant and the respondents (par 16). The respondents are not parties and their intention is irrelevant. The question is whether the contracting parties intended to create an equitable charge. However, the error does not materially impact on the outcome of his analysis.

26 The appellants also contend the Master erred in concluding that there was no certainty as to the Participating Growers' Gross Project Income and therefore no arguable intention to create an equitable charge over that income. There can be a valid equitable charge over future or after acquired property: Montagu v Earl of Sandwich (1886) 32 Ch D 525. Future property can be definite and ascertainable notwithstanding the possibility of it never coming into existence. If and when the fund from which the management fees are payable does come into existence, which is when the charge attaches, there will be no difficulty in satisfying the requirement that the fund be definite and ascertainable. I accept that this part of the Master's reasoning was in error.

27 In its remaining grounds of appeal, the appellant contends the Master should have concluded that an equitable charge in favour of the appellant was created over the assets of the Scheme by cl 3.2 of the Constitution and, alternatively, by cl 12 of the Management Agreement. In the course of considering those grounds I will deal with the issue of security for the appellant's remuneration and Perpetual Trustees v Kelly.

Legal Principles - Equitable Charge and Right of Indemnity

28 Generally, an equitable charge is a security over property which has been created by an inter vivos act, consensual or otherwise, by the owner of the property. In a contractual setting, the question is whether the contractual parties have expressly or impliedly evinced an intention to appropriate property for the discharge of a debt or other obligation and to give the creditor a present right to have the property made available: National Provincial & Union Bank of England Ltd v Charnley [1924] 1 KB 431 at 449 - 450 per Atkin LJ; Swiss Bank Corporation v Lloyds Bank Ltd [1982] AC 584 at 595 - 596 per Buckley LJ.

29 An equitable charge gives a right of realisation of the property by judicial process in case of non-payment: Hewett v Court [1983] HCA 7; (1983) 149 CLR 639 at 643; Chief Commissioner of Stamp Duties v Buckle [1998] HCA 4; (1998) 192 CLR 226 at 246 - 247.

30 The Constitution and the Management Agreement give to the responsible entity (the trustee/manager) a right to appropriate its fees from Scheme property and a right of indemnity in respect of liabilities, costs and expenses. For the purposes of this analysis I proceed on the basis that the contractual right of indemnity is intended to be a right of the nature that a trustee has under the general law. A trustee has an entitlement under the general law to be indemnified out of trust assets for liabilities incurred in the course of administering a trust. The right to indemnity involves a right to appropriate from the trust assets the trust related liabilities paid by the trustee (recoupment) or the amount of liabilities incurred by the trustee but unpaid (exoneration). A right of indemnity is more than a power over trust assets. The trustee with a right of recoupment and exoneration has an equitable charge or lien which arises by operation of law and which gives to the trustee an equitable proprietary interest in the trust assets: Octavo Investments Pty Ltd v Knight [1979] HCA 61; (1979) 144 CLR 360 at 367; Commissioner of Stamp Duties v Buckle at 247. Accordingly, a former trustee can claim against persons to whom title to the trust assets has passed. Loss of office does not deprive a trustee of an accrued right of indemnity: Coates v McInerney (1992) 7 WAR 537. The right of indemnity arises when a relevant trust-related liability is incurred.

Whether Claim of Equitable Charge Manifestly Untenable

31 The following analysis is necessarily provisional as the question is whether the appellant has an arguable claim of an equitable charge on the Participating Grower's Gross Project Income ("Gross Income") for 2004 or the Scheme property generally.

32 A relevant preliminary issue is whether the Gross Income is Scheme (and therefore trust) property. I would answer that question in the affirmative. Firstly, it falls within par (e) of the definition of Scheme property. The Growers are obliged to make a number of payments in advance under the Management Agreement. They include in years 1 to 3 licence fees and management fees and in years 1 and 2 moneys for the installation of irrigation, the purchase and planting of vines and for buildings to be used for the Scheme. Thus, in the initial years Growers' payments fund the establishment of the Scheme businesses and in years 4 to 20 the intention is that the obligations to pay licence and management fees be funded out of the Gross Income generated by the business.

33 Secondly, the opening paragraph of cl 12.1 provides that the responsible entity is entitled to management fees from "SWC MIS Property as follows", thereafter referring to payment of management fees from the Gross Income. This is consistent with the definition of management fees. Thirdly, notwithstanding that the grapes are the property of the Growers and the responsible entity is appointed the agent for sale, it is clear the income is paid to the responsible entity who is required to deduct, inter alia, the management fees and then pay the net income to the Grower. The Gross Income in the hands of the responsible entity is clearly held by it as trustee. This conclusion would follow even if the Gross Income was not Scheme property: Re Global Finance Group Pty Ltd (In liq) [2002] WASC 63; (2002) 26 WAR 385.

34 No evidence was adduced as to what the management fee was intended to cover. However, as previously noted, it can be inferred from cl 9.1 that the management fee is to compensate the responsible entity for all liabilities, costs and expenses incurred by the responsible entity, or on its behalf, in operating the Scheme. Such liabilities, costs and expenses are the subject of the right of indemnity in cl 3.3 of the Constitution and (subject to the possibility that the scope of liabilities may be narrower) under cl 18.4 of the Management Agreement. Further, I will assume in the absence of evidence, that the management fee also has a remuneration component for time and effort.

35 The appellant does not rely on its rights of indemnity as an alternative claim to the management fee. It contends that cl 12.1(e) of the Management Agreement creates an equitable charge over the 2004 Gross Income. Paragraphs (d) and (e) of cl 12.1 concern years 4 to 20 of the term of the Scheme. In that period, the management fee must be paid annually in advance on or before 30 June from the Gross Income. If there is insufficient Gross Income, par (e) of cl 12.1 applies. Prima facie that paragraph identifies a number of alternatives: such management fees (1) may be deducted from Gross Income in any subsequent year or years, (2) the responsible entity may provide funding for any shortfall from its own resources, (3) borrow such funds secured against the future Gross Income or (4) require a Grower to make such additional contributions to the Scheme property as are required to make up any shortfall. Having regard to the wording of the clause, it seems the second and third options are interim funding measures pending receipt of subsequent Gross Income which when received is then paid to the responsible entity for itself or the third party lender respectively. It is only the additional contribution from Growers that is a true alternative to applying Gross Income from future years. However, that avenue depends on the approval of the Growers. In certain circumstances the alternatives may not provide realistic or practical alternatives to waiting until Gross Income is available.

36 It is clear from the statement of claim that the shortfall in management fees for 2003 was not funded by the appellant from its own resources, from borrowed funds or from additional contributions. As the appellant is no longer the responsible entity, it can take no steps under cl 12.1(e). Moreover, the parties concede (at least for present purposes) that a responsible entity, including the appellant, has no in personam rights against the Growers in debt or in damages for the failure to pay the appellant the management fee for the year ending 30 June 2003. With the lack of such rights and the interposition of the trust relationship, the question of the capacity to create a charge over a debt when the chargee owes the debt to the chargor arguably does not arise.

37 Thus, the sole source of satisfaction of the responsible entity's entitlement to be paid accrued management fees is the Scheme property. That is the effect of cl 3.2 of the Constitution and cl 12.1(d) and (e) of the Management Agreement. Subject to two possible exceptions, cl 12.1 narrows the scope of Scheme property that can be used to pay management fees. The two possible exceptions are when the Scheme is wound up and where (as here) the claimant is a former responsible entity. It is unnecessary to determine whether in those cases the entire Scheme property is to be available for payment of management fees. For the purposes of this analysis, I will assume cl 12.1(e) is intended to apply where the claim is that of a former responsible entity.

38 Under cl 12.1 the responsible entity has an obligation to appropriate available Gross Income to satisfy the obligation to pay management fees and has a right to appropriate future Gross Income in the event the available Gross Income is insufficient. The right in relation to future Gross Income is contingent but only to the extent that existing Gross Income must first be applied in satisfaction of the obligation to pay management fees.

39 Whether a contract gives rise to an equitable charge depends on the intention of the parties. Intention can be express or implied. The intention is to be garnered from the terms and conditions of the contract and its commercial purposes. The Court should not adopt a narrow or pedantic approach to construction, particularly in the case of commercial arrangements: Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd [1968] HCA 8; (1968) 118 CLR 429 at 437 per Barwick CJ.

40 No particular form of words is required to create a charge. The language is immaterial if the meaning is plain. In Murphy v Wright (1992) 5 BPR 11,734 the New South Wales Court of Appeal held by a majority that an agreement that a person may place a caveat on another's title demonstrated an intention to create an equitable charge even though it was contingent on default. Moreover, if a debtor undertakes to segregate a particular fund or asset and to pay the debt out of that fund or asset, the inference may be drawn, in the absence of any contrary indication, that the parties' intention is that the creditor should have a proprietary interest in the segregated fund as will enable it to realise out of it the amount owed by the debtor: Swiss Bank v Lloyds Bank at 595 per Buckley LJ.

41 If the Gross Income is trust property but not Scheme property, the responsible entity would be obliged to hold the Gross Income separately. It is unclear whether that would be so if, as I have concluded, the Gross Income is Scheme property. I will assume there is no duty to segregate the Gross Income from other Scheme property.

42 However, there are other indications the parties intended that the responsible entity have an equitable charge over the Gross Income. Firstly, the responsible entity has express obligations and rights to appropriate from the Gross Income (being Scheme property held on trust by the responsible entity) the amount of accrued management fees to which it is entitled. The language of cl 3.2 and 12.1(d) and (e) is inconsistent with the responsible entity having a mere power of appropriation. Secondly, the language used in the Scheme documents for payment of management fees is similar to the language used for the responsible entity's rights of indemnity which do give rise to an equitable interest in the Scheme property. Indeed, payment of the management fee would prevent any claim by the responsible entity to an indemnity in respect of Scheme-related expenses. Thirdly, the contractual intention of the parties is that there be no contractual or other in personam remedy against the parties to the Scheme agreements by which the responsible entity can enforce its right to resort to Scheme property for payment of the management fees.

43 The fact that there is at least one alternative source of funding other than Gross Income does not prevent a finding that the parties intended an equitable charge on future Gross Income. A trustee with a right of indemnity from trust assets has a number of alternatives for payment of its trust-related liabilities, including an in personam right against beneficiaries: Hardoon v Belilios [1901] AC 118 at 123.

44 The respondents contended that, on a proper construction of the Constitution and Management Agreement, in particular cl 18.4, it is intended that a responsible entity's accrued right to management fees is lost or ceases on its removal from office. The contention, as I understand it, is that cl 18.4 identifies the sole right that survives the removal of the responsible entity. There are some difficulties with that proposition. The clauses granting the right to be paid management fees are not so limited. There is no other express limitation of that right in any of the contractual documents. The management fee is the consideration for the responsible entity operating the Scheme at its expense. However, because management fees are payable in advance, questions of pro rating the fee may arise. There is nothing about the relationship between the parties or its commercial context which would explain the curtailment of the appellant's rights to remuneration in the way suggested. To the contrary, the expectation, consistent with s 601FS(2)(a) of the Law, is that any right of the former responsible entity to be paid fees for the performance of its functions before it ceased to be the responsible entity would remain notwithstanding its removal.

45 Finally, the facts in this case are arguably different from those in Perpetual Trustees v Kelly. In that case, a trustee company to whom a secured creditor had appointed a receiver and manager applied for an order vesting the trust fund in the sole beneficiary. The plaintiff sought a declaration that it be paid its entitlement to remuneration. The plaintiff's claim did not distinguish between trust-related liabilities and expenses for which it was entitled to an indemnity and the remuneration component of the amount claimed. Anderson J refused the declaratory relief. He referred to the principle that in the absence of any special provision for remuneration, the services of a trustee were expected to be provided gratuitously, although he also noted that special provisions are usually inserted. Anderson J continued (at 486):

"But this is not to say that the right to remuneration thus obtained or conferred is protected by a charge or lien, or otherwise gives rise to a proprietary interest in the fund. I think that any such security would have to be expressly conferred. There is nothing in this trust deed, nor in any relevant legislation, conferring any security interest in respect of the trustee's commission. The trust deed does give the trustee the power and authority to 'retain' from the income and capital of the fund the trustee's proper entitlement to remuneration ... but I am unable to see how such a provision can be construed as giving rise to a proprietary interest in the fund. It seems to me to be nothing more than a power to deal in a particular way with so much of the fund as may be available for the purpose. It may be accepted that the power to retain is not merely a contractual right, it being a right conferred by the trust deed itself and thus a right arising non-consensually vis-a-vis the cestui que trust: see Re Duke of Norfolk's Settlement Trusts [1982] Ch 61 at 77. It may also be accepted that the effect is that the cestui que trust would not be entitled to call for a distribution of trust assets so retained. But as against a secured creditor, I do not see how it follows that an unqualified security interest granted by the trustee and the beneficiary over the whole of their interest in the fund, attaches only to that part of the fund as is not required to satisfy the trustee's entitlement to remuneration."

46 In contrast to the facts in Perpetual Trustees v Kelly, the parties to the Management Agreement intended the management fee to cover both the liabilities and the remuneration components; the responsible entity's rights go beyond a mere right to retain; and the parties intended the Scheme property be the sole source of payment of the management fees.

47 Further, and in any event, Fox LJ in Re Duke of Norfolk's Settlement Trusts [1982] Ch 61 at 77 - 78 regarded the right of a trustee to remuneration as giving rise to some type of equitable interest short of a vested and indefeasible beneficial interest. The type of equitable proprietary interest envisaged by Fox LJ may be the same as the nature of the equitable interest a trustee has in the trust assets pursuant to its right to indemnity, as explained in Commissioner of Stamp Duties v Buckle at 246 - 247. The trustee's equitable interest is not a beneficial interest, nor an encumbrance.

48 For these reasons, I am of the opinion that the appellant has an arguable claim against the respondents. Accordingly, I would allow the appeal and set aside the orders made by Master Sanderson on 15 February 2005. I would hear from the parties on the balance of the orders to be made. The appellant conceded the appeal was argued on a basis that was somewhat different from the argument before the Master. It may well be

that the appellant will wish to amend its statement of claim to reflect that difference.

49 PULLIN JA: This is an appeal against the order of Master Sanderson dismissing the appellant's application to amend its statement of claim.

50 As the Master explains at the beginning of his reasons, the application before him began its life as an application by the respondents to strike out the appellant's statement of claim. The appellant responded by filing a minute of proposed amended statement of claim and the matter was then argued on the basis that the respondents were objecting to the appellant amending the statement of claim in terms of the minute. That required the Master to consider whether, if amended, the statement of claim would be liable to be struck out. Leave to amend was to be refused only if the proposed case was unarguable. Great care must be exercised to ensure that the plaintiff is not improperly deprived of his or her opportunity for the trial of his or her case by the court: General Steel Industries Inc v Commissioner for Railways (NSW) [1964] HCA 69; (1964) 112 CLR 125 at 130. However, this does not mean that there cannot be argument, even extensive argument, to demonstrate that the plaintiff's case is so clearly untenable that it cannot succeed: General Steel Industries (supra) at 130. If there is any reasonable possibility that the law is developing, then the court should be careful not to risk stifling the development of the law by summarily rejecting a claim: Hospitals Contribution Fund of Australia v Hunt (1982) 44 ALR 365 at 373.

51 No evidence is admissible on an application of this kind, but the Court may refer to documents mentioned in the pleading: Day v William Hill (Park Lane) Ltd [1949] 1 KB 632 at 639. In this case both parties invited the Court to examine and construe two instruments which are referred to in the proposed statement of claim.

52 The minute of proposed statement of claim pleads that the appellant was the responsible entity of a registered managed investment scheme. Managed investment schemes are regulated pursuant to ch 5C of the Corporations Law. The managed investment scheme in this case was called the "SWC Managed Investment Scheme" ("Scheme"). The object of the Scheme was the growing of wine grapes upon land known as the Preston Vale Vineyard for the ultimate benefit of Investors who I will refer to interchangeably as either "Investors" or "Growers" or "members" of the Scheme. The proposed statement of claim also pleads that in December 1998 the appellant executed a deed styled "the SWC MIS

Constitution" ("Constitution"). By reason of s 601FC(2) of the Corporations Law and a provision in the Constitution the appellant, as responsible entity, held the SWC MIS property (which expression was defined as having the meaning given to "Scheme property" by the Corporations Law) on trust for the Investors.

53 The minute pleaded the existence of another document relating to the Scheme, this being called a Licence and Management Agreement ("Agreement") which the appellant entered into with each member of the Scheme. The effect of express terms in the Agreement were pleaded as follows:

"(a) the [appellant as responsible entity] agreed to grant to each Investor a licence to plant, propagate, cultivate and develop grape vines suitable for the production of table wines over an area of 0.165 hectares (a 'Licensed Area') or multiples thereof within the Preston Vale Vineyard to the Investor;

(b) the Investor could elect to appoint the [appellant] to manage a Licensed Area on behalf of the Investor;

(c) where the Investor elected to do so, for each financial year, commencing with the financial year ending 30 June 2003, the Investor would pay the [appellant] an annual management fee of $1957 for each Licensed Area to be managed by the [appellant], that fee to be paid in advance on 30 June of each year, commencing 30 June 2002;

(d) that fee, for each financial year commencing with the financial year ending 30 June 2003 year, would be paid from the gross income generated from the Licensed Areas managed by the [appellant] for that year;

(e) in the event that the gross income generated from the Licensed Areas for any financial year was insufficient to pay the fee for that year, the [appellant] was entitled to deduct the fee from the gross income generated by the Licensed Areas in any subsequent financial year or years;

(f) the [appellant] was entitled to elect, in its absolute discretion, to delegate or subcontract all or any of the duties and obligations to be performed or observed by the [appellant] in accordance with the Scheme."

54 The term pleaded in par (e) above, was a reference to cl 12(1)(e) of the Agreement which I will set out in full below.

55 It is pleaded that the Constitution provided that the responsible entity was entitled to be paid all fees provided for in the Agreement with respect to the Scheme. This is a reference to cl 3.2 of the Constitution which I will set out in full below.

56 The minute then refers to an agreement between the appellant and the second respondent, where by the appellant delegated or subcontracted to the second respondent the appellant's obligation to manage the licensed areas in respect of which the Investors had appointed the appellant pursuant to the term pleaded in subpar (f) above. It is pleaded that the second respondent carried out that obligation.

57 In consequence, the appellant pleads that it was entitled to receive the management fees for the year ending 30 June 2003; that the gross income generated from the licensed areas for that financial year was insufficient to pay the fees and as a result there was a shortfall of $1,600,000.

58 The appellant pleads that by reason of the above, the appellant had a lien or alternatively an equitable charge over the gross income of the licensed areas for the financial year ended 30 June 2004 until its fees, including the shortfall, was paid. Alternatively the appellant claims that it has an equitable charge over the whole of the Scheme property.

59 The minute also reveals that the appellant was replaced as the trustee and responsible entity on 21 July 2003; that the first respondent then appointed the second respondent to manage the Preston Vale Vineyard on its behalf; that the agreement between the respondents was that the second respondent was entitled to receive the gross income of the Preston Vale Vineyard and because of the association between the respondents, the respondents knew, and ought to have known, of the existence of either the lien or the equitable charge, and in consequence the appellant seeks a declaration that the second respondent holds the proceeds of sale of the income upon a constructive trust for the appellant so far as is necessary to discharge the appellant's entitlement to the payment of fees, including the shortfall.

The issues before the Master and on this appeal

60 The Master held that there was no equitable lien and the appellant does not any longer pursue that claim. The Master also considered the appellant's claim that it had an equitable charge as security for its fees. The Master held that it did not.

61 During the hearing of the appeal the question arose as to whether the responsible entity as trustee had a beneficial interest in the Scheme property to the extent of its fees. This was a new point not considered by the Master and not made the subject of any submission to him. It is not contended in the proposed pleading that the appellant had (equitable lien or equitable charge aside) a beneficial interest in the Scheme property but as it is a matter of law the point was considered. The point had not been addressed by the parties in their written submissions to this Court. Leave was given to the parties to make further written submissions. They were received after the hearing of the appeal and have been considered by the Court.

62 Before I refer to the detailed provisions of the Constitution and the Agreement (which both parties did during the hearing) I will state some principles which are relevant.

(a) equity regards trusts as honorary. In the absence of any special provision for remuneration the services of a trustee are expected to be provided gratuitously (Robinson v Pett [1734] EngR 54; (1734) 24 ER 1049; In re Thorley [1891] 2 Ch 613 at 624 per Lindley LJ; Bray v Ford [1896] AC 44 at 51 and Perpetual Trustees WA Ltd v Kelly (1993) 8 WAR 480 at 486 per Anderson J);

(b) no charge or lien exists as a matter of general law in respect of a trustee's remuneration (Perpetual Trustees' case (supra) 486);

(i) a remuneration provision in the trust instrument, or

(ii) agreement for remuneration by contract between the trustee and the beneficiaries of the trust.

(d) a trustee who incurs liability in the course of administering a trust is entitled to be indemnified out of trust assets by reason of the application of equitable principle (Worrall v Harford [1802] EngR 342; (1802) 32 ER 250; by statute Trustees Act (WA) s 71) or pursuant to the terms of the trust. A trustee's right of recoupment or exoneration in relation to liabilities is a proprietary interest in the trust assets (Octavo Investments Pty Ltd v Knight [1979] HCA 61; (1979) 144 CLR 360) and loss of office does not deprive a trustee of an accrued right of indemnity (Coates v McInerney (1992) 7 WAR 537).

(e) an equitable charge arises whenever in a transaction for value, both parties evince an intention that the trustee is to have security for payment of a debt over particular existing property or adequately described future property. There must be an intention that the chargee is to acquire a present equitable right to have the property made available, even though the present equitable right may only be enforced at some future date (National Provincial & Union Bank of England Ltd v Charnley [1924] 1 KB 431 at 449; Cinema Plus Ltd (Administrators Appointed) v Australia & New Zealand Banking Group Ltd [2000] NSWCA 195; (2000) 157 FLR 204 at [41]. An equitable charge creates a proprietary interest by way of security. It confers a right in rem which, subject to statutory qualifications and the equitable doctrine of notice, will be binding upon third parties and which will be unaffected by the insolvency of the owner of the charged property. Re Bank of Credit & Commerce International SA (No 8) [1998] AC 214 at 226,Cinema Plus Pty Ltd (supra) at [21] and [109]; Re Charge Card Services [1987] Ch 150 at 176 per Millett J.

(f) The intention of the parties must be objectively ascertained from the language used by the parties in the instrument: Cinema Plus (supra) [144]; Associated Alloys v ACN 001 452 106 Pty Ltd (2000) 202 CLR 588 [35]; White v Conroy (1921) 21 SR (NSW) 257; Swiss Bank Corporation v Lloyds Bank Ltd [1982] AC 584 at 595.

63 Although this is a pleading case, both parties invited this Court to examine and construe provisions of the Constitution and the Agreement.

64 The Constitution contained the following provisions. Clause 9 provided that the responsible entity should hold on trust the "SWC MIS Property". The latter phrase was defined as having the meaning given to "scheme property" by the Corporations Law. "Scheme property" of a registered managed investment scheme is defined in the Corporations Law s 9 to mean:

"(a) contributions of money or moneys worth to the scheme; and

(b) money that forms part of the scheme property under provisions of this Act or the ASIC Act; and

(c) money borrowed or raised by the responsible entity for the purposes of the scheme; and

(d) property acquired, directly or indirectly, with, or with the proceeds of, contributions or money referred to in paragraph (a), (b) or (c); and

(e) income and property derived, directly or indirectly, from contributions, money or property referred to in paragraph (a), (b), (c) or (d)."

"The Responsible Entity shall be entitled to be paid all such fees as are provided for in the Licence and Management Agreement from SWC MIS Property in relation to the proper performance of its duties with respect to the SWC MIS."

"the managed investment scheme registered in accordance with the Corporations Law in relation to the Growers Area;"

"4. ... Subject to this Constitution and the Corporations Law, the Responsible Entity shall have all the powers of a natural person to deal with, to invest and to borrow on security of SWC MIS Property.

...

7.2 The SWC MIS:

(a) indemnifies and agrees to keep indemnified the Responsible Entity ...

out of SWC MIS Property in relation to the period during which the Responsible Entity is the single responsible entity ... against any liability for costs and expenses incurred by the Responsible Entity or that officer in that capacity: ..."

"A. The Responsible Entity has registered the SWC MIS for the purpose of establishing a vineyard to be known as Preston Vale for cultivating and harvesting wine grapes in accordance with this Agreement, the Constitution and the Prospectus.

B. The Lessor has agreed to lease the Project Land in accordance with the Project Lease to the Responsible Entity.

C. The Responsible Entity has agreed to enter into this Agreement with the Grower to provide a licence to the Grower to use and occupy the Grower's Area for cultivating and harvesting wine grapes for sale or use in accordance with this Agreement.

D. The Grower has requested and the Responsible Entity has agreed to manage, maintain and harvest the Grower's Project on the Grower's Area in accordance with this Agreement.

E. The Grower has irrevocably appointed the Responsible Entity as the Grower's attorney to sign and date this Agreement and complete the Schedule to this Agreement in accordance with the application form for the Grower's Area provided for in the Prospectus."

"The Responsible Entity grants to the Grower and the Grower takes from the Responsible Entity a licence to plant, propagate, cultivate and develop Vines on the Grower's Area for the Term."

"... the gross income of the Grower's Project including the Grower's proceeds from the sale of the grapes, grape product and wine."

"... the commercial viticulture business of growing wine grapes for sale or for wine production conducted by the Grower on the Grower's Area;"

"... the Licensed Area or Half Licensed Area or any multiples of such areas held by the Grower as provided for in the Responsible Entity's plan of Growers;"

73 "Participating Growers' Gross Project Income", was defined to mean "the sum of each Participating Grower's Gross Income."

74 Clause 4 of the Agreement dealt with the licence fees payable by the Investor for the licence to use and occupy a Growers' area, but as the claim does not relate to licence fees, I need not set it out.

"In consideration of the Management Fees payable in accordance with Clause 12.1, the Responsible Entity covenants for the Term to manage the Grower's Project at its own expense in a proper, efficient and diligent manner ..."

"11.1 Subject to ... Clause 18 the Grower will at all times during the Term have full right, title and interest to any grapes produced from the Vines from the Grower's Area together with the right to sell such produce.

11.2 The Responsible Entity will notify an Electing Grower of the time and place at which the grapes from the Grower's Project are to be collected. The Electing Grower must collect the Electing Grower's grapes at the designated time and the designated place as notified to the Electing Grower by the Responsible Entity. An Electing Grower must pay to the Responsible Entity any Outstanding Moneys in accordance with this Agreement prior to the collection of the Electing Grower's grapes.

11.3 If the Electing Grower fails to collect the Electing Grower's grapes as provided for in Clause 11.2 or pay the Outstanding Moneys pursuant to Clause 11.3, then the Electing Grower will be deemed to be a Participating Grower and the Responsible Entity may recover any Outstanding Moneys owing to it pursuant to the sale of the grapes from the Grower's Area.

11.4 The Responsible Entity is hereby authorised as the Participating Grower's agent to collect and market the grapes produced from the Participating Grower's Project with those produced by other Participating Growers of the SWC MIS for sale or for use in the production of wine by the Responsible Entity.

11.5 The Responsible Entity is appointed as agent of the Participating Grower for the purpose of marketing and seeling grapes grown on the Grower's Area ..."

"In consideration of the Responsible Entity agreeing to carry out at its expense the management services as provided for in this Agreement, the Grower agrees to pay to the Responsible Entity the Management Fees and the Responsible Entity shall be entitled to the Management Fees from SWC MIS Property as follows:

...

[details of the fees were then set out for the years through to year 20]

(e) if the Participating Growers' Gross Project Income in any Year is not sufficient to pay the Management Fees for the Year, such Management Fees may be deducted from Participating Growers' Gross Project Income in any subsequent Year or Years and the Responsible Entity may provide funding for any shortfall from the Responsible Entity's own resources, borrow such funds secured against the future Participating Growers' Gross Project Income or require a Grower by notice in writing, subject to approval in general meeting pursuant to Clause 12.5, to make such additional contributions to SWC MIS Property as are required to make up any shortfall. The Responsible Entity may recover the reasonable costs of borrowings from SWC MIS Property;"

"Notwithstanding Clause 18.1, where the Grower fails to pay any Licence Fees or management Fees within 30 days of the notice of contribution issued by the Responsible Entity to the Grower pursuant to Clause 12.4 and such default is not remedied by the Grower within 14 days of distribution of a notice of default by the Responsible Entity, the Responsible Entity shall be entitled to terminate this Agreement in accordance with Clause 18.2 of this Agreement."

"The Grower may elect to remove the Responsible Entity in accordance with the terms of the Constitution in relation to the SWC MIS and appoint a new responsible entity in relation to the SWC MIS ('New SRE') in accordance with the provisions of the Corporations Law provided that the Responsible Entity shall be entitled with respect to the proper performance of the Responsible Entity's duties to be indemnified in full from the SWC MIS Property for the cost of satisfying all contractual commitments made by the Responsible Entity in operating the SWC MIS which do not become the rights and obligations of the New SRE under Section 601FS of the Corporations Law including, without limitation, any management or employment contracts with employees, any contracts for the provision of goods and services and any maintenance contracts."

80 Counsel for the appellant argued the appellant's case by stating that it was to be assumed that the Investor had no personal obligation to make payment of the fees; ie that the appellant had no recourse to the Investor personally. On the proposed case, only if the appellant can gain access to the gross project income in the hands of the second respondent or to the SWC MIS Property, can the appellant recover its fees.

The right of indemnity and the nature of the arrangement between the responsible entity and the Investors

81 I should immediately mention cl 18.4 of the Agreement only to dismiss it as irrelevant. Reference was made to it by the respondent. This clause merely re-states the appellant's right as a trustee to indemnity out of the trust assets for its liabilities. I have set out above the authorities dealing with this right. The right of indemnity of a responsible entity continues even if there is a change of responsible entity. See also s 601FS(2) of the Corporations Law. This right of indemnity is not relevant in this case. The appellant is not claiming indemnity for expenses incurred. It is suing for management fees.

82 I now turn to consider the effect of other provisions in the Constitution and the Agreement.

83 The Constitution and the Corporations Law provide that the responsible entity is the trustee of the SWC MIS Property for scheme members. It is clear enough that the responsible entity holds the leasehold estate in the Preston Vale Vineyard land on trust. It also seems clear that the licence fees paid by Investors for a licence over part of the land would become part of the trust property, ie the SWC MIS Property.

84 On the other hand, the Investors' right to go onto the Grower's Area and grow grapes is a right of the individual Investor. The grape crop and the investors' gross income from the sale of the crop are not trust property. The responsible entity may deduct management fees from the proceeds of sale of grapes. If regard is had only to the Agreement, that is a contractual right and not a right the appellant had as trustee. Thus, read on its own, the Agreement provides for management fees to be deducted from a "participating Grower's gross project income" in cl 12.1(e). This is an entirely contractual arrangement not affecting trust property (ie Scheme property).

85 However, the Agreement cannot be read alone. First, because cl 1.4 of the Constitution states that the Agreement "shall be taken to form part of this Constitution". Secondly, cl 3.2 of the Constitution authorises the payment of fees "provided for in the [Agreement]" out of SWC MIS Property "in relation to the proper performance of its duties with respect to the SWC MIS". As a result, it is clear that the management fees, even though coming due as a matter of contract, may be deducted from the SWC MIS Property, ie out of trust property. Thirdly, management fees could also be recovered by the responsible entity calling for additional contributions to SWC MIS Property. See cl 12.1(e) of the Agreement. Another, and fourth method of recovery of the management fee is provided for in cl 12.1(e) of the Agreement. This is that the responsible entity may pay the management fees out of his own resources (ie to pay itself). The idea may have been that it would then be able to resort to a trustee's right to indemnity (referred to above) out of the trust fund to meet liabilities.

86 This hybrid arrangement providing for the payment of a contractual fee - the management fee - from trust property is part of the managed investment scheme. This is a case which in that regard very much involves the "flexible interplay of law and equity": Associated Alloys at [26] but, as will be seen, the main issue about whether there is an equitable charge or not will be resolved on a consideration of the contractual relationship between the appellant (in its capacity as responsible entity) and the Investors.

87 The question is whether the provisions set out above arguably reveal the existence of an equitable charge over the Grower's Gross Project Income to secure the payment of the management fees or reveal that the appellant, as trustee, had a proprietary interest in the SWC MIS Property in relation to the management fees.

Did the trustee have a beneficial interest in the trust property to the extent of its management fees

88 The management fees are not fees charged by the responsible entity for its services as trustee of SWC MIS Property. The management fees are fees due for management of the Investors' enterprise.

89 However, the Investors - the beneficiaries of the trust - have agreed that management fees may be paid from trust property, ie the SWC MIS Property, and so the question was raised at the appeal as to whether this meant that the appellant had a beneficial interest in the SWC MIS Property.

90 Reference was made during the hearing of the appeal to what was said by Fox LJ in Re Duke of Norfolk's Settlement Trusts [1982] Ch 61. In that case there was express provision for remuneration of the trustee. The trustee sought an increase above the rates provided for in the trust instrument. The Judge at first instance held that he had jurisdiction to authorise additional remuneration in respect of past work done, but no power in relation to future work. On appeal the Court of Appeal held that there was power to authorise an increase in fees in relation to future services. The Court had to consider whether there were any reasons why the Court should not increase the remuneration and two objections were raised. The first was the suggestion that the trustee was bound by contract to accept the fees specified in the trust instrument. Fox LJ said that he considered the submission that fees were set by contract to be quite unreal and dismissed the argument. He then said (at 76):

"The position it seems to me is this. Trust property is held by the trustees upon the trust and subject to the powers conferred by the trust instrument and by law. One of those powers is the power to the trustee to charge remuneration. That gives the trustee certain rights which equity will enforce in administering the trust. How far those rights can properly be regarded as beneficial interests I will consider later ..."

91 Fox LJ then came to the second objection which had been raised and said:

"It is said that the right to remuneration is a beneficial interest in the trust property and can only be varied by an order under the Variation of Trusts Act 1958 (or in accordance with the principles established in Chapman v Chapman [1954] UKHL 1; [1954] AC 429 ...)".

"I do not doubt that, to some extent the right of a trustee to remuneration is to be regarded as a beneficial interest".

93 His Lordship then referred to Re Pooley (1888) 40 Ch D 1; In re Thorley (supra) and In Re White [1898] 2 Ch 217. Fox LJ then continued at 78:

"In Re Thorley and Re White there were substantial reasons of policy why the remuneration should be treated as a beneficial interest ...

But, accepting that a trustee's right to remuneration may for certain purposes be treated as a beneficial interest in the trust property, I do not think that it comes within the principle laid down in Chapman v Chapman as to the general inability of the court under its inherent jurisdiction to vary beneficial interests."

94 It can therefore be seen that Fox LJ recognised that a trustee's right to remuneration may be treated as a beneficial interest "for certain purposes", but that otherwise he rejected the argument. This limited acceptance of the submission that the right to fees was a beneficial interest becomes clear when In re Pooley, In re Thorley and In re White are considered. The court reasoned in those cases that the trustees had no right to remuneration because they were obliged to act gratuitously, and therefore the right to fees must have amounted either to conditional gifts for the purpose of duty legislation, a "gift" within the meaning of the Wills Act, or bounty which was not claimable against creditors of an insolvent estate.

95 Brightman LJ in Re Duke of Norfolk's Settlement Trusts discussed the submission that the right to remuneration under the terms of trust was a beneficial interest and rejected the submission. His Lordship agreed that remuneration given to a trustee by a Will is an "interest" within the meaning of s 15 of the Wills Act 1837, that it was a "gift" upon a condition or for the purposes of the legislation which formerly charged legacy duty upon testamentary gifts, and that an executor remunerated by the Will cannot retain remuneration against creditors. He then added:

"It does not follow that a remunerated trustee is to be considered as a cestui que trust for the purposes of the principles laid down in Chapman v Chapman. If he were it is difficult, as Fox LJ says, to see what right the court would have to authorise remuneration to be charged by a prospective trustee, since such authority will have the inevitable effect of adding a new beneficiary to the trust at the expense of the existing beneficiaries."

Cumming-Bruce LJ agreed with the reasons of both Fox LJ and Brightman LJ.

96 Thus, when analysed, the Duke of Norfolk's Settlement Trusts case is not authority for the proposition that a trustee's right to remuneration under a trust deed gives the trustee a beneficial interest in the trust.

97 In my opinion it is not arguable that because a trustee has power to pay itself remuneration from trust property (and that is what cl 3.2 of the Constitution provides), the trustee therefore has a beneficial interest in the trust. If it were otherwise, it would be arguable that because a trustee has power to pay a person who supplies goods or services to the trust, that such a person would have a beneficial interest in the trust. That is untenable.

98 In my opinion, a trustee, who is entitled to fees out of trust property, merely becomes a creditor of the trust for unpaid fees (absent the independent creation of an equitable charge or lien or a specifically conferred beneficial interest).

99 To establish the existence of an equitable charge, it is not necessary to decide whether the charge was conferred on the appellant as trustee or pursuant to the purely contractual arrangement between Investor and responsible entity, or pursuant to the combined hybrid arrangement involving elements of trust and elements of contract.

100 As mentioned above, if there is an equitable charge, it must be shown from the language used by the parties that the parties intended that the charge should be created. In this case the word "charge" is not used in the Agreement or Constitution, and nor is there language similar to that in Charnley's case, where the document provided that the property was for the purpose of "further securing the payment of the moneys". This is relevant, and significant; but it is not determinative.

101 The appellant claims that the equitable charge arises on a proper construction of cl 12.1(e) of the Agreement. As I have already pointed out, the clause authorises the collection of unpaid management fee by four methods. They are:

(a) that the responsible entity may deduct them from a Participating Grower's Gross Project Income "in any subsequent year or years",

(d) by requiring additional contributions to be made to SWC MIS Property.

102 The claim by the appellant is that it had an equitable charge by reason of the first method as a result of the opening words in cl 12.1(e) which for convenience I repeat. They read:

"If the participating Grower's Gross Project Income in any year is not sufficient to pay the management fees for that year such management fees may be deducted from participating Grower's gross project income in any subsequent year or years."

103 The respondent denies that these words reveal the existence of any intention to create an equitable charge.

104 It is clear enough that the parties did not intend that if management fees were paid in full in the year work was done, that there should be an equitable charge over income in subsequent years. Even if there were a shortfall, the responsible entity under cl 12.1(e) could choose whether or not to deduct the outstanding fees from the income in subsequent years. The responsible entity could, for example, choose to require a Grower to make additional contributions to make up the shortfall. If it took that course and recovered the shortfall, then it is also clear that the parties did not intend that the management fees could still be deducted from the income in subsequent years. The responsible entity could also choose to borrow funds secured against the future participating Grower's gross project income and out of the borrowed funds pay itself in full. In those circumstances it is once again clear that the parties did not intend that the appellant could deduct the same amount from the Grower's income in subsequent years.

105 Thus the right to resort to the Grower's income was merely one course open to the appellant. That being so, it cannot be concluded that upon execution of the Agreement the parties intended that the appellant should then have "a present equitable right" over the Grower's gross project income in future years. The appellant had no more than the right or an option to resort to income in subsequent years in certain circumstances.

106 In Murphy v Wright (1992) 5 BPR 11,734 a similar conclusion was reached about the rights of the lender in that case. The respondent in that case guaranteed a loan made by the appellant to the borrower. The deed of guarantee contained a clause which stated that in the event of default by the borrowers in payment of money under the security documents the lender should, in addition to a personal right of recovery against the guarantor, be entitled to attach the debt due to any of the assets of the guarantor. This clause was construed as conferring on the lender an option which, if exercised on default, would create an equitable charge over the respondent's real property. Handley JA (Priestly JA agreeing) held that an equitable charge only arose when default occurred and the lender exercised its option to attach its debt to the subject property by lodging a caveat. Sheller JA considered that there was no intention to create a charge at any time.

107 In my opinion, cl 12.1(e) did not, upon execution of the Agreement, reveal any intention of the parties that an equitable charge should attach to the "participating Growers' gross project income" as soon as that income came into existence. The clause did no more than confer on the responsible entity the power to resort to the income if it preferred that course over the other courses also open.

108 Furthermore, it is my opinion that if the appellant had remained the responsible entity and made a decision that it would resort to the Grower's income to pay the shortfall, it would not, merely by making that decision, create an equitable charge. In my opinion this is the type of situation which Atkin LJ referred to in National Provincial & Union Bank of England v Charnley (supra) at 450, where he said:

"If, on the other hand, the parties do not intend that there should be a present right to have the security made available, but only that there should be a right in the future by agreement, such as a licence, to seize the goods, there will be no charge."

109 The statement, by Atkin LJ, that a contractual right to seize goods in the future is not a charge, is of particular relevance for present purposes. The first part of cl 12.1(e) confers a contractual right "deduct" the shortfall from the Grower's income in subsequent years. For reasons I have already given, that part of the clause does not, in my opinion, manifest an intention on the part of the parties to create any form of "present right" over the Grower's income. It confers a right to take steps in the future which would have the consequence that the shortfall would then be extinguished in whole or in part. This contractual right did not constitute a charge.

110 This is similar to the reasoning of Spigelman CJ in Cinema Plus Ltd (supra) at [42] and [47]. The appellant submitted that Cinema Plus was distinguishable because the alleged charge in that case was said to arise out of a banker's right to consolidate a customer's accounts. It is true that the facts were different, but the case is still relevant because it provides an example of a court identifying factors in an agreement which are relevant in deciding whether language in the agreement shows an intention to create a charge or not. The issue in Cinema Plus was whether a banker's contractual right to combine accounts created a charge. If it did, the bank could not enforce the charge while the company was in administration by reason of s 440B of the Corporations Law. Spigelman CJ, Sheller and Giles JJA all agreed that the right to combine did not constitute a charge. Spigelman CJ and Giles JA expressly held that the agreement did not reveal any intention to create a charge. See [46], [47], [142] and [144]. Sheller JA in effect reached the same conclusion when he said that no proprietary right was conferred on the banker and it's rights were contractual rights only [116]. There was a question about whether it was conceptually impossible for a bank to have security over a debt in the form of a deposit account it owed its depositor, but that point is irrelevant here and it does not affect the relevance of that decision. Spigelman CJ in deciding that the right to consolidate the customer's accounts did not manifest an intention to create a charge (after referring to the passage in Atkin LJ's judgment in Charnley's case) said at [42]:

"The reference by Atkin LJ that a contractual right to seize goods in the future is not a charge, is of particular relevance for present purposes. In my opinion, cl 21 is, in effect, a contractual right to 'seize' an account in the future. I have set out the section above. It does not manifest an intention on the part of the parties to create any form of present right over property of the company. It confers a right to take steps in the future, which have the consequence that the company's chose in action will be extinguished in whole or in part."

111 Giles JA said that the right to combine did not purport to confer a proprietary interest, and that the contractual right was a personal right which was not assignable. He held the parties had adopted a legal institution distinct from a charge ([144] and [145] per Giles JA).

112 Finally, I should mention three other cases referred to by the appellant. The first is Re Androma Pty Ltd [1987] 2 Qd R 134. In that case there was a deed whereby a borrower agreed that it undertook and agreed to execute, in favour of a lender within seven days of the grant of mining leases, a mortgage over the mining leases as security for the loan. This was held to constitute an equitable mortgage over future property. That merely illustrates the difference between the agreement in that case (a promise to execute a mortgage upon the property coming into existence) and cl 12.1(e) in the Agreement which merely conferred a power which might or might not be exercised, depending upon many circumstances. The agreement in Re Androma clearly revealed an intention to create a "present right" over the future property. The appellant also referred to Re Cunningham; Hawker Siddeley Building Supplies Pty Ltd v Hanson [1965] WAR 115. This case involved a debtor "irrevocably" authorising his accountant to pay money he was entitled to, when the accountant received it, to a creditor. That also revealed the intention at the time of the execution of the authority to create a charge over the future moneys in favour of the creditor. Finally, the appellant referred to the Swiss Bank Corporation case (supra). In that case there was a provision that repayment of borrowings should be out of the sale proceeds of foreign currency securities held by the borrower. It was held that this prevented repayment of the loan otherwise than from the sale proceeds, but it did not mean that the parties had, in the circumstances, any intention that this should create a charge.

113 It was suggested at the hearing of the appeal that it would be unreasonable to conclude that there was no equitable charge; that it would make no commercial sense because the appellant is now left with no means of recovering its fees. However, that argument is an appeal to sympathy rather than to law. Under the Corporations Law a responsible entity can only be removed after notice. If a responsible entity was given notice that it was to be removed and it feared that it would end up in the situation where it would not be able to deduct its management fees from future income, it could immediately have moved to use one of the other three methods to secure payment. Thus, it may have borrowed funds in order to pay itself. If it chose to exercise none of the other methods before it was terminated, then it only has itself to blame; it chose to enter into a non-recourse agreement which conferred limited rights to recover its management fees. The appellant failed to look after its own interests. The existence of the non-recourse arrangement may well have been what persuaded people to invest in the Scheme. The appellant now asks the Court to declare that it holds an equitable charge. In my opinion it is not arguable that there is an equitable charge.

114 The Master decided that it was not arguable that there was an equitable charge for two reasons. He considered that there was "no certainty as to what the fund might be and there could hardly be any suggestion of an intention to create an equitable charge". I do not agree that this is a reason for finding that there was no equitable charge. If there were a clear intention to create a charge over the income, it would not matter that the extent of the income was not known. I therefore agree with the appellant that the Master erred in this conclusion.

115 The Master's second reason was that the Master considered that the appellant was trustee and that in claiming it was entitled to an equitable charge ran counter to the proposition stated above, that a trustee has no charge or lien as a matter of general law in respect of the trustee's remuneration. The Master said that he considered there was nothing which expressly conferred such security. Unfortunately, the Master did not go on to consider whether the parties intended that there should be an equitable charge. I therefore agree with the appellant that the Master erred in not construing the Constitution and Agreement to determine whether the parties impliedly intended that there was to be an equitable charge.

116 However, having examined the Constitution and the Agreement, I agree with the Master in his conclusion that it is not arguable that there was an equitable charge. I reach that conclusion for reasons which differ from those of the Master. There was no notice of contention filed by the respondent, but the parties argued the appeal on the basis that this Court should construe the Agreement and the Constitution and reach a conclusion about whether they revealed any intention to create an equitable charge over the Grower's income.

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA

CITATION : SOUTHERN WINE CORPORATION PTY LTD (IN LIQ) -v- FRANKLAND RIVER OLIVE CO LTD & ANOR [2005] WASCA 236 (S)

Southern Wine Corporation Pty Ltd (In Liq) v Frankland River Olive Co Ltd & Anor [2005] WASCA 236

At a glance

Court

Decision date

Before

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Source

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Judgment (211 paragraphs)

Southern Wine Corporation Pty Ltd (In Liq) v Frankland River Olive Co Ltd & Anor [2005] WASCA 236 (7 December 2005)

Parties

Legislation Cited (1)

Cases Cited (11)