Walker v Walker

Solicitors: Johnson & Sendall Pty Ltd (Plaintiff) Nelson & Hill Lawyers (First and Second Defendant) NSW Trustee & Guardian (Third Defendant) File Number(s): 2021/00357168

JUDGMENT

1. These proceedings concern a Deed of Settlement and Release dated 4 September 2020 (the Deed) between the plaintiff, David Alfred Walker, and the first defendant, Belinda Jane Walker by her tutor and financial manager, Victoria Kate Ogilvie, the second defendant. In particular, the question for determination is whether the first defendant is liable to pay to the plaintiff an amount of $1,000,000 under cl 2.2 of the Deed. For the reasons which follow, in my opinion the answer to that question is yes.
2. I will refer, as the parties did, to the plaintiff as David, to the first defendant as Belinda and to the second defendant as Kate, with no disrespect intended.

Relief claimed

1. David commenced these proceedings by a summons filed on 16 December 2021 by which he seeks the following relief: "1 A declaration that on a proper construction of the Deed dated 4 September 2020 between the plaintiff and the second defendant (as Tutor and Financial Manager of the first defendant) in circumstances where: a. Belinda Walker was the residuary beneficiary of a large estate being the estate of the late John Jeffrey Walker ('the estate'); b. The value of the residuary estate exceeds $7,000,000.00; c. By cl 2.2 of the agreement Belinda Walker agreed to pay to the plaintiff the sum of $1,000,000.00 within 14 days after the Administrators of the estate pay to her "the residue"; d. By cl 2.3 of the Deed Belinda's payments and entitlements in the deceased's estate are charged for the purpose of securing the payments referred to in cl 2.2; e. On 29 June 2021 an interim distribution from the residue was made to Belinda by the executors ('the distribution') in the sum of $6,000,000.00 which was described by the executors as a 'substantial part of estate residue'; f. The distribution well exceeded the sum of $1,000,000.00; and g. Despite request, Belinda Walker has refused to pay to the plaintiff the sum of $1,000,000.00 the distribution is: 1. subject to a charge in favour of the plaintiff in the sum of $1,000,000.00; and 2. the first defendant by her Tutor and Financial Manager the second defendant was obliged to pay to the plaintiff under the Deed the sum of $1,000,000.00 within 14 days of receipt of the distribution. 2 An order that the Deed be specifically performed and carried into effect so that the second defendant as financial manager of the first defendant forthwith pay to the plaintiff the sum of $1,000,000.00. 3 In the alternative, judgment against the first and/or second defendant in the sum of $1,000,000.00. 4 Interest on the sum of $1,000,000 from 14 July 2021 to date pursuant to s.100 of the Civil Procedure Act 2005 (NSW), … 6. That the defendants pay the plaintiff's costs on an indemnity basis."
2. Belinda and Kate filed a cross-claim on 14 April 2022 in which they seek the following relief: "1 A declaration that a proper construction of the Deed dated 4 September 2020 between the cross-claimant and the cross-defendants that the payment received by the second cross-claimant in her capacity as Financial Manager for the first cross-claimant on 29 June 2021; A. Did not trigger any entitlement by the cross-defendant pursuant to cl 2.2 of the Deed dated 4 September 2020; and B. Did not form part of the residue of the Estate. 2 Costs; … ."

Parties

1. The first defendant is the sole residuary beneficiary under the will and codicil of her late husband, John Jeffrey Walker (John) who died on 6 August 2017. The plaintiff is a brother of John and is not a beneficiary under the will.
2. The second defendant is the sister of Belinda and acts as her financial manager by an order of the NSW Civil and Administrative Tribunal (NCAT) made on 11 April 2018 and is her tutor under an appointment made in the probate proceedings referred to below.
3. The third defendant is the NSW Trustee & Guardian which has been joined as a defendant because its approval is required for any payment to be made by the second defendant from Belinda's estate pursuant to the orders made by NCAT. The third defendant has filed a submitting appearance in these proceedings.

Background to the Deed

1. The Deed arose out of a claim which David brought against the executors of John's will in the circumstances described below.
2. During his lifetime John conducted a farming enterprise on a property at Yass, New South Wales called "Tulla Park", which was owned as tenants in common in equal shares by two companies, Fred Walker (Yass) Pty Ltd (FWY) and Esdale Pastoral Company Pty Ltd (EPC). FWY and EPC purchased Tulla Park in 1987 and operated a primary production business in partnership on the property under the name "Lena Pastoral Co".
3. The issued shares of FWY and EPC comprised A class shares (preference shares with limited rights) and B class shares (ordinary shares). John held the A class shares in both companies. The B class shares in FWY were held by the trustees of a discretionary trust called the FJ Walker Trust and the B class shares in EPC were held by a discretionary trust called the JJ Walker Trust. John and David (and their respective spouses) were discretionary objects of both the FJ Walker Trust and the JJ Walker Trust (the Trusts).
4. On 30 June 2017, Belinda and the other trustees of the FJ Walker Trust signed a resolution which had the effect of advancing the vesting date of that trust to 30 July 2017.
5. On the same day, Belinda signed a resolution in her capacity as the sole trustee of the JJ Walker Trust, which had the effect of advancing the vesting date of that trust to 30 July 2017.
6. The effect of the vesting of each Trust was that at the time of John's death on 6 August 2017, he was beneficially entitled to both the A and B shares in FWY and EPC. Given the rights attaching to the B class shares, the effect of the vesting of the two trusts was to cause a significant increase in the value of John's estate (in the order of $8 million).
7. David brought a claim against the executors of the will that John's estate was not entitled to the assets of either Trust because at the time Belinda signed each resolution, she lacked legal capacity and in those circumstances the resolutions were of no effect and liable to be set aside. David's contention was that if that claim was upheld, the assets of each Trust would not be part of John's estate but would rather devolve to him.
8. John's will is relatively simple. Belinda was one of five persons named as the executors. The dispositive provision of the will is cl 6 which (as amended by a codicil) provides relevantly as follows: "6. My executors hold my estate on trust: (a) (i) TO GIVE my property at [Narooma NSW] to Kathryn Jane Berrell for her sole use and benefit absolutely; (ii) TO GIVE a legacy of five hundred thousand dollars ($500,000) to Yass Aged Care Trust subject to the following conditions: (a) My executors shall be allowed a period of 5 years within which to pay the said legacy. (b) Notwithstanding (a), the said legacy shall be payable upon the completion of the sale of "Tulla Park" if that sale shall be completed within 5 years of my death. (b) to give the rest and residue of my estate to my wife Belinda;"
9. Belinda suffers from both multiple sclerosis and cognitive problems which led to Kate being appointed her tutor in probate proceedings brought against her by the other four executors under John's will. Those proceedings led to a mediation in May 2019 which was attended by the four executors who were the plaintiffs in the probate proceedings, Belinda and David. According to David a binding heads of agreement was entered into at the mediation which provided that he would receive $1,000,000 from Belinda in return for giving up all of his claims and rights to the assets of the two Trusts. Some of the participants in the mediation (but not Kate acting as tutor for Belinda) disputed that any binding agreement had been reached.
10. Subsequently, a further mediation took place in September 2020, the outcome of which was that David and Belinda entered into the Deed which, as between them, reflected what had been agreed at the earlier mediation except that it required the approval of the third defendant, as a consequence of the order made by NCAT. The third defendant stated that it would approve the Deed provided that the Supreme Court gave its approval.
11. On 12 May 2021, Rein J approved the settlement contained in the Deed pursuant to s 75(2) of the Civil Procedure Act 2005 (NSW). In the course of his Honour's judgment given on 12 May 2021, he said: "[20] I raised with Mr Rich a concern in respect of the Deed of Settlement; namely, that it required Belinda to pay $1,000,000 on receipt of the residue of John's estate and did not contain any requirement that the residue be of any particular amount. Ms Ogilvie's solicitors have now obtained a letter from the administrators of the Estate, Mr Richard Neal and Mr Kellin Kristofferson on 10 May 2021 (Exhibit F), which confirms that the amount which Belinda will be entitled, subject to due administration of the estate, is at least $6,060,000. Mr Neal and Kristofferson were appointed as administrators on 26 March 2021 (pursuant to the orders made previously by Hallen J on 10 November 2020). Realistically then, Belinda will receive far more out of the estate than she has undertaken to pay to David when she does receive the residue of the estate."
12. The probate proceedings were resolved by consent orders made on 11 November 2020 by Hallen J, including an order that Richard John Neal and Kellin Kristofferson (the Administrators) be appointed as administrators with the will and codicil annexed and the formal grant was made to them on 26 March 2021.

Terms of the Deed

1. Clause 2 of the Deed provides as follows: "2.1 Belinda by her tutor and financial manager will use her best endeavours to facilitate the making of a grant of probate or letters of administration in relation to the last will of the deceased. 2.2 Victoria Kate Ogilvie as Tutor and Financial Manager of Belinda will, within fourteen (14) days after the Administrators pay to her the residue of John's estate will make a payment to David Alfred Walker in the sum of $1,000,000.00. 2.3 Belinda's payments and entitlements in the deceased's Estate are charged for the purpose of securing the payments referred to in the above paragraph. 2.4 This agreement is subject to the consent or approval of the NSW Trustee & Guardian pursuant to orders made by NCAT in proceedings No. 2018/00049542 and if such approval is not obtained then the provisions of this Deed will not operate and any releases will be null and void. 2.5 The parties hereto will expeditiously take all steps necessary to obtain the consent of NSW Trustee & Guardian to this Deed. 2.6 The parties also agree to obtain the approval of the Court to this Deed if necessary and to take all steps necessary in order to obtain such approval."
2. What is at issue in the present case is the proper construction of cl 2.2.
3. Under cl 3, David gave a release in the following terms: "3.1 David unconditionally releases John's Estate from any and all Claims which he, but for this Deed, had and/or may have had in relation to the vesting of the Trusts and an assertion that John's Estate now holds assets of those Trusts on trust for those Trusts. 3.2 For the avoidance of doubt, on the receipt of the payment in clause 2.2 above, David will release and discharge Belinda and the FJ Walker Trustees and JJ Walker Trustees from any and all claims he has or might have had concerning the vesting of the FJ Walker Trust and the JJ Walker Trust, John's estate and Belinda's estate."
4. While David's claim was against John's estate and the trustees of the Trusts (as stated in the recitals to the Deed) it was Belinda who received the release given by David, as the only parties to the Deed are David and Belinda. Clause 3.2 therefore serves the purpose of enabling Belinda to obtain a release from David in favour of the trustees of the Trusts once the payment under cl 2.2 has been made.

Interim Distribution to Belinda

1. On 29 June 2021 the Administrators paid to Belinda the amount of $6,054,662. The background to the making of this payment is as follows.
2. In around 2016, Mr Tony Parker who was John's accountant during his lifetime and one of the executors named in the will, sought advice from the accounting firm Nexia Australia as to the ability of FWY and EPC to claim the small business 15-year capital gains tax (CGT) exemption under subdiv 152-B of the Income Tax Assessment Act 1997 (ITAA 1997) on the sale of Tulla Park. It appears that Nexia Australia advised that the exemption would be available. This advice predated the actual sale of the property and the death of John.
3. On 28 September 2017, FWY and EPC entered into a contract for the sale of Tulla Park for a price of $7,300,000 which completed on 9 November 2017. The capital gain realised on the sale was $6,054,662.
4. On 17 April 2019 Nexia Australia provided a detailed letter of advice to Mr Parker on the availability of the CGT exemption in light of the facts as they existed at the time of the sale (Nexia Advice). That letter of advice is in evidence and a copy was provided to Belinda's solicitors on around 1 August 2019 (prior to execution of the Deed). It is sufficient for present purposes to note the following. 1. Section 152-110 of the ITAA 1997 provides that a company can disregard a capital gain arising from a CGT event if the conditions set out in that section are satisfied. Nexia Australia advised that all these conditions were satisfied in relation to the capital gain made by FWY and EPC from the sale of Tulla Park of $6,054,662 (CGT exempt amount). 2. Section 152-125 provides that if (a) under s 152-110 a capital gain of a company is disregarded, (b) the company makes one or more payments relating to the CGT exempt amount to an individual (whether directly or indirectly through one or more interposed entities) within 2 years after the relevant CGT event (in this case, by 28 September 2019), and (c) the individual was a "CGT concession stakeholder" of the company just before the relevant CGT event, then the payment will be a tax free distribution to the individual (subject to a limit specified in s 152-125(2)). 3. Nexia Australia advised that the requirements in s 152-125 were satisfied in relation to Belinda as the "CGT concession stakeholder" in respect of the entirety of the CGT exempt amount so that the CGT exempt amount could be distributed to Belinda tax free in her hands, provided it was made by 28 September 2019.
5. Under s 152-125(4) of the ITAA 1997 the Commissioner of Taxation may extend the time limit for the making of the payment to the individual who is a CGT concession stakeholder in relation to the relevant company. Mr Parker (acting on behalf of FWY, EPC and Belinda) subsequently obtained a binding private ruling from the Australian Taxation Office (ATO) which extended the date for making the payment to Belinda to 30 June 2021.
6. A copy of the ATO's ruling was annexed to an affidavit of Mr Parker filed in the probate proceedings and hence was known to all the parties before the Deed was signed. The solicitor for Belinda gave evidence that he had received copies of the Nexia Advice and the ATO ruling before the Deed was executed. The solicitor for David gave evidence that he and David were aware at the time the Deed was executed that if the sum of $1,000,000 was paid to the plaintiff from the estate rather than from Belinda's distribution from the estate, then there may be a CGT liability to the estate as the sale proceeds from the sale of "Tulla Park" had to be distributed to a beneficiary in order to qualify for the full CGT exemption.
7. The Administrators made their first report regarding administration of the estate on 12 February 2021.
8. On 6 April 2021, which was shortly after the Administrators received the formal grant of letters of administration with will annexed, they issued a notice under s 92 of the Probate and Administration Act 1898 (NSW) (Probate Act) thereby obtaining protection against claims by creditors and others of which they had no notice in respect of any distribution of the property in the estate more than 30 days after that date.
9. By letters dated 29 April, 4 May and 7 May 2021, the solicitors for Belinda drew the attention of the Administrators to the need to make a distribution of $6,054,562 from the estate to Belinda by 30 June 2021 in order that the amount would be tax free in Belinda's hands. It was in this context that the Administrators provided the letter to the Court on 10 May 2021 that the amount which Belinda would be entitled to receive as residuary beneficiary, subject to due administration of the estate, would be at least $6,060,000: see [18] above.
10. On 8 June 2021, Belinda's solicitors sent a letter to the Administrators' solicitors which states relevantly: "2. The distribution can only be made by the estate from Belinda's entitlement to the residuary estate and can only be made by the administrators. According to Mr Parker, he says that a failure to meet this requirement "then immediately 50% of the net capital gain would be deemed to be taxable because the 50% CGT discount provision which is available to individuals is not available to a corporate entity and here, the two companies would automatically have a potential tax liability of $3,027,281 @ 27.5% = 832,502.27. 3. As Belinda is a protected person and therefore subject to the parens patriae jurisdiction of the Court, it would seem essential that the distribution be made by the administrators before the 30th of June 2021 in the full amount of $6,054,562."
11. The first sentence of [2] quoted above is relevant context to the Administrators' characterisation of the interim distribution when they made it shortly afterwards. The letter is, in effect, an instruction to the Administrators to make the distribution as a distribution of residue by 30 June 2021, because otherwise a significant adverse tax liability will arise which is quantified as being $832,502.57 and would effectively be borne by Belinda as residuary beneficiary.
12. It is doubtful whether the statement attributed to Mr Parker as to the nature of the tax liability that would arise if the payment was not made by 30 June 2021 is entirely accurate. Where the conditions set out in s 152-110 of the ITAA 1997 are satisfied the capital gain derived by the company from the disposal of the asset is exempt from CGT under s 152-110. What s 152-125(3) then does is allow the company to distribute an amount equal to the exempt capital gain to a shareholder in a tax free form if the shareholder was a CGT concession stakeholder in relation to the company at the time of the disposal of the asset. Hence, the problem was that if FWY and EPC were to distribute all or part of the CGT exempt amount to their sole shareholder (being the Administrators during the course of administration and then Belinda when administration was complete) after 30 June 2021, that distribution would be taxed in the shareholder's hands as a dividend or deemed dividend as the exemption under s 152-125(3) would not apply. Ultimately, it does not matter whether Mr Parker was entirely correct. The important point is that the Administrators were told that there would be a very significant tax liability which would, one way or another, be borne by Belinda (as residuary beneficiary) if the CGT exempt amount was not distributed to her by 30 June 2021.
13. On 23 June 2021 the Administrators' solicitors responded by letter advising that the Administrators had decided to make interim distribution of the full CGT exempt amount (described as one "to be made on account of your client's interest in residue") "subject to dealing with one aspect of the estate administration in relation to that distribution". This was said to be the imposing of a "condition" relating to the payment of costs due to Belinda as a result of various court orders which would be dealt with by Belinda signing a "Receipt and Acknowledgment" in the form annexed to the letter. The condition was expressed in paragraph [4] of the Receipt and Acknowledgment as follows (emphasis added): "4. Acknowledge that the Administrators pay the capital gains tax exempt amount by way of an interim distribution to me of residue of the Estate on a condition imposed by them that the costs of all proceedings to which I am a party relating to the Estate, companies associated with the Estate, any associated non-litigious work or any legal work, the cost of which I might otherwise look to the Estate for payment and that the proceedings with David Walker are borne out of that distribution. Without limitation, this also extends to the indemnity costs order in favour of my financial manager Victoria Kate Ogilvy in proceedings 2018/67508."
14. On 25 June 2021, Belinda's solicitors responded by letter stating that they would treat the letter of 23 June 2021 as a "proposal" and put a "counter proposal" that: "1. Belinda accepts that the payment to David Walker will be made by her from the CGT distribution. 2. That the two costs orders involving Kate as tutor be also satisfied from the CGT payment."
15. Paragraph 1 quoted above is relied on by David as an admission by Belinda and Kate that David was entitled to be paid the amount due under cl 2.2 once the interim distribution was paid. I reject that submission as the proper construction of the Deed is a question of law not a question of fact. [1] Paragraph 2 quoted above relates to the costs orders made in favour of Kate (acting as tutor for Belinda) in the probate proceedings before Hallen J and the proceedings for approval of the Deed before Rein J.
16. On 28 June 2021 Belinda's solicitors informed the Administrators that the Receipt and Acknowledgment could not be signed without the approval of the third defendant which could not be obtained before 30 June 2021.
17. On the same day, the Administrators' solicitors responded by letter, relevantly as follows (emphasis added): "In relation to the Acknowledgment and Receipt form please submit it to NSW Trustee and Guardian for approval and, in due course, provide the Administrators with the signed document. In the meantime, the Administrators intend to make the interim distribution to Belinda Walker by 30 June 2021 on the full basis set out in the Acknowledgment and Receipt. In relation to your firm's legal costs (including disbursements and counsel's fees), the Administrators are of the opinion that it would aid the efficient administration of the Estate for your legal costs to be dealt with as between you and your client out of the distributed residue, without reference to the Administrators, which would incur additional costs for your client depleting what she would receive."
18. It may be noted that the emphasised words in the second paragraph quoted above adopt the acknowledgment in paragraph [4] of the Receipt and Acknowledgment that the interim distribution would be "of residue of the Estate" and that the third paragraph in the quote above confirms that the interim distribution was being treated by the Administrators as "distributed residue".
19. On 29 June 2021, the Administrators deposited $6,054,562 to the account of Belinda with Westpac sourced from the funds previously held by Lena Pastoral Co (being the partnership of FWY and EPC).
20. Subsequently, a dispute arose between David and Belinda as to whether the obligation under cl 2.2 of the Deed had arisen. Belinda's solicitors contended (as they do now) that the obligation would not arise until the estate was fully administered. David's solicitors made enquiries of the Administrators' solicitors as to when a final distribution to Belinda as residuary beneficiary could be expected. On 3 November 2021, the Administrators' solicitors sent an email to David's solicitors which stated relevantly as follows (emphasis added): "The reconciliation of the estate's debts and expenses has not yet been completed due to the need for further clarification of certain claims for re-imbursement made on the estate. In addition, the progress of the administration of the estate has been delayed in part due to the NSW Covid-19 NSW health restrictions and the complex nature of the deceased's business structures. To assist you with your enquiry we summarise as follows: * An interim distribution of a substantial part of estate residue was made to the residuary beneficiary on 29 June 2021. We note you were advised of that distribution payment. * The interim distribution made on 29 June 2021 to the residuary beneficiary was sufficient to enable the residuary beneficiary to meet financial obligations made to third parties. * The Administrators were not a party to the deed entered into with the residuary beneficiary and your client. As such, they do not consider there is an obligation to make a payment to your client from the remaining funds to be collected on behalf of the estate. The obligation to pay the settlement funds to your client remains with the residuary beneficiary. It follows then that it would be more appropriate for your client to seek enforcement of that obligation from the residuary beneficiary through her legal representatives. * The estate assets remaining to be collected will be used to pay out claims for re-imbursement of professional fees, the estate's legal costs, the winding up of the estate's business entities and any other matters which may arise to complete the administration of the estate including whether or not the Administrators need to make an application for judicial advice to conclude the administration of the estate. * It is not anticipated that a final distribution will be paid to the residuary beneficiary until the matters set out above are finalised. In that regard, it is not possible to indicate a timeframe for that to occur."
21. This first paragraph quoted above indicates that the delay in completing the administration of the estate was due to the need to clarify "certain claims for reimbursement made on the estate" and this appears from the penultimate paragraph to concern claims for reimbursement of legal fees. There is also a statement in that paragraph that the assets of the estate remaining to be collected will be used to pay these amounts and other costs and expenses to complete the administration of the estate. Importantly, there is no suggestion in the email that those amounts cannot be met from the assets held by the estate or remaining to be collected. Also, the email states, consistently with the earlier correspondence, that the interim distribution had the character of a "substantial part of estate residue".
22. The evidence does not indicate what the potential application to the Court for judicial advice might relate to, but it is possible that it concerned the allegations which Belinda's solicitors had raised with the Administrators about the conduct of the executors prior to the grant of letters of administration to the Administrators in March 2021. In particular, there was a suggestion in some correspondence from Belinda's solicitors of irregularities in the disbursement of estate funds prior to the appointment of the Administrators, and a suggestion that the Administrators should bring a claim against one or more of the executors for breach of duty. Ultimately, the only relevance of the potential delay in final administration of the estate is that if Belinda's contention as to the meaning of cl 2.2 of the Deed is correct, the time at which the obligation to pay the sum of $1,000,000 to David will arise is uncertain.

Submissions of the Parties

1. David submits that on 29 June 2021 the Administrators paid to Belinda the sum of $6,054,662 by way of interim distribution of residue, which triggered an obligation on Belinda to pay the amount of $1,000,000 to David under cl 2.2 of the Deed. This is because, on the proper construction of the Deed, within 14 days from the date when the Administrators paid to Belinda residue from the estate by way of distribution, whether interim or otherwise, Belinda is required to make the payment of $1,000,000 to David. There are no limiting words or conditions that require the whole of the residue of John's estate to be paid to Belinda before the obligation under cl 2.2 arises.
2. David points out that cl 2.3 of the Deed provides that Belinda's "payments and entitlements" in the estate were immediately charged in favour of David for the purpose of securing the debt of $1,000,000. The 14 day period between the receipt of Belinda's entitlements from the estate and the requirement to pay David from the funds explains the imposition of a charge over those funds so that such funds could not be dissipated in the 14 days pending payment to David. The parties intended that from those charged moneys, David would be paid the full amount owing. The use of the plural "payments and entitlements" in cl 2.3 makes it clear that the parties anticipated the possibility of segmented payments of the residue to Belinda.
3. David submits that a further relevant background fact is that David's claim which he compromised was a claim against the estate not a claim against Belinda, and that it is clear that the reason the payment to David was to be made to Belinda was so that the full amount of the capital gain could be distributed to Belinda before 30 June 2021 so as to obtain the CGT exemption.
4. David submits that the court is required to take a common-sense approach to the construction of the Deed on the basis that the parties intended to produce a commercial result and one which makes commercial sense. Reference was made to Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37 at [46]-[51]; and Eureka Operations Pty Ltd v Viva Energy Australia Ltd [2016] VSCA 95 at [45]-[46]. David submitted that it did not make commercial sense to construe cl 2.2 as requiring David to wait until Belinda has received her full entitlement to the residue, particularly in light of cl 2.3 which precludes Belinda from being able to use any of the interim distributions of residue received without first discharging her debt to David.
5. Belinda and Kate submit that there are three reasons why no obligation has arisen under cl 2.2 of the Deed. The first is that the "residue" of an estate comprises all property not already disposed of by the will, after the payment of debts, liabilities and other devises or legacies thereunder, and the residue is not ascertained until those payments have been made. Reliance was placed on Armstrong v The Children's Hospital at Westmead [2008] NSWSC 1315 at [16]; Carrington v Wallace [2019] NSWSC 1301 at [22]; and Federal Commissioner of Taxation v Whiting (1943) 68 CLR 199 at 216. In the present case the interim distribution of $6,054,662 was not a distribution of residue because the residue had not yet been ascertained and, consequently, the construction contended for by David is inconsistent with the ordinary meaning of "residue".
6. Second, cl 2.2 is expressed as requiring payment to David after receipt of "the" residue, not "some" residue. As the residue has not, at this stage been fully paid to Belinda, the obligation under cl 2.2 of the Deed has not yet been triggered.
7. Third, the payment of the CGT exempt amount to Belinda was required to be paid to her by 30 June 2021 to enliven the CGT exemption in s 152-125 of the ITAA 1997, but that did not make it a distribution of residue.

Consideration

1. Two issues arise: (a) whether the payment to Belinda of the CGT exempt amount had the character in her hands of a distribution of residue and (b) if so, whether on that payment being made to Belinda, she became subject to an obligation to pay David an amount of $1,000,000 within 14 days pursuant to cl 2.2 of the Deed, which turns on the proper construction of cl 2.2.

Character of the interim distribution

1. On 29 June 2021 when the interim distribution of $6,054,662 was made to Belinda, the estate was not fully administered. However, it is clear that the funeral and testamentary expenses, the debts of the deceased and the legacy under the will had all been paid. While the transfer of the property at Narooma to Ms Berrell may not have been made by that date (the evidence does not disclose this either way) it is clear from the Administrator's report dated 26 May 2021 that it was a straightforward conveyancing matter. The estate had also by that time paid an amount of $1,000,000 to Ms Berrell following a family provision order made in her favour under s 59 of the Succession Act 2006 (NSW). What remained outstanding at the time of the interim distribution were the matters referred to at [43]-[45] above.
2. Before dealing with the character of the interim distribution in Belinda's hands, it is necessary to state some uncontroversial propositions. First, on the grant of letters of administration with will annexed to the Administrators, all the real and personal property of John was vested in the Administrators from the time of John's death: Probate Act, s 44.
3. Second, while the Administrators are not executors, they have the same rights and liabilities, and are accountable in the same way, as if they were executors: Probate Act, s 74A. Accordingly, when describing the nature of the respective duties of executors and administrators with will annexed, each may be referred to interchangeably as a legal personal representative.
4. Third, the core duty of a legal personal representative is to hold the property of the deceased for the purposes of carrying out the functions and duties of the administration. This involves getting in the assets of the deceased, paying the debts of the deceased and the expenses of the administration, paying the legacies under the will and distributing the residue of the estate in accordance with the will. The legal personal representative is in a fiduciary relationship with the beneficiaries under the will and one of the key features of that fiduciary relationship is that the legal representative is required to act in the interests of the beneficiaries and not for the legal personal representative's own benefit. [2] In the present case, at the time of the interim distribution to Belinda, the sole beneficiaries to whom the Administrators owed this fiduciary duty were Belinda as residuary beneficiary and, in relation to the Narooma property, Ms Berrell.
5. Fourth, while the legal personal representative is not a trustee in the strict sense, and consequentially the residuary beneficiary does not have a beneficial interest in the property held by the legal personal representative during the course of administration, the residuary beneficiary has a right to secure the proper administration of the estate which is a chose in action held by it. [3]
6. Fifth, the legal personal representative will become a trustee for the residuary beneficiary of the property remaining in the estate once the administration is complete and the residue is ascertained. [4] It is at this point that the residuary beneficiary's interest is transmogrified from a chose in action against the legal personal representative to an equitable proprietary interest in the property comprising the residue of the estate.
7. One of the consequences of the limited rights of a residuary beneficiary during the course of administration of a deceased estate is that the residuary beneficiary is not presently entitled to the income of the estate during that period. This was established by Federal Commissioner of Taxation v Whiting (1943) 68 CLR 199, which concerned a deceased estate in the course of administration which comprised assets (including a partnership interest in a Queensland pastoral business) which were insufficient to pay the debts of the estate and the annuities and legacies provided for in the will. The High Court held that as the administration was incomplete, the residuary beneficiaries were not "presently entitled" to income of the estate for the purposes of s 97(1) of the Income Tax Assessment Act 1936, and consequently the executors were subject to tax on that income under s 99 of that Act. Latham CJ and Williams J said at 216 (emphasis added): "Numerous authorities, many of which are collected in the recent decision of this Court in Robertson v. Deputy Federal Commissioner of Land Tax, have established that until an estate has been fully administered by payment or provision for the payment of funeral and testamentary expenses, death duties, debts, annuities, and legacies and the amount of the residue thereby ascertained, the income of the residuary estate is the income of the executors and not of the residuary beneficiaries. ... The crucial question is at what moment of time, having regard to these general principles and to the provisions of the trust instrument, can it be said that a beneficiary has become presently entitled to a share in the income of a trust estate. A beneficiary under a will may become entitled to a share of such income as an annuitant legatee or a residuary beneficiary. His right to share in such income would be determined by the trusts in the will ... The only part of an estate which can be made available to satisfy the claims of the beneficiaries is that part which remains after the funeral and testamentary expenses, death duties and debts have been paid or provided for, if necessary out of the whole estate, including any income earned by the estate during the period of realization. Entries made in the books of the estate to adjust the rights of the beneficiaries in the income and capital of the estate can only operate subject to the satisfaction of the claims of and cannot affect the rights of the creditors. But, as has been made clear in the authorities already mentioned, the existence of mortgage debts does not prevent the administration of the estate advancing from the stage when the liabilities to creditors are in process of discharge to a stage when the beneficial trusts of the will can attach to assets which are not required to satisfy the mortgage debts …"
8. What is important about this passage in the present context is the statement that in order for the residue to be ascertained it is necessary that the funeral and testamentary expenses, debts, annuities and legacies needed to be paid or provided for. Recognition that it was sufficient that those prior claims could be "provided for" rather than paid leads to the next proposition.
9. Sixth, it is recognised that in certain circumstances a legal personal representative can come under a duty to make an interim distribution of residue to a residuary beneficiary prior to the estate being fully administered. [5]
10. In Gonzales v Claridades (2003) 58 NSWLR 188; [2003] NSWSC 508, Campbell J (as his Honour then was) said (emphasis added): "[47] Sometimes it can be the duty of a legal personal representative to make an appropriation of estate assets so that he or she can pay a pecuniary legacy or distribute a specific legacy or devise, or make an interim distribution of pecuniary legacies or interests in residue, even though the duties of administration are not complete. If the legal personal representative is in a situation of knowing that there are some distributions of the estate which could be made in accordance with the will or the rules of intestacy which govern the distributions of that estate, that there was no realistic prospect that that distribution could be cut down or affected by those aspects of administration of the estate which remained unperformed, and that the remaining tasks of administration were not likely to be completed soon, then it may be the duty of the legal personal representatives to make an interim distribution to that extent." After referring to two decisions where a duty to make an interim distribution was recognised, his Honour then said: "[50] A further example can arise if there were expenses of administration which would need to be paid in the future from the estate. If those expenses were of uncertain amount (as could be the case if the legal personal representative were engaged in litigation on behalf of the estate) the legal personal representative would be entitled to adopt a very cautious (though not unrealistically cautious) view about what the possible extent of those expenses might be, in deciding whether, or to what extent, a gift might be cut down. If, however, after taking such a cautious view of what the expenses of the estate might be, it was clear that the assets of the estate were more than enough to meet them, and if there were no other problems of administration outstanding, it could be the obligation of a legal personal representative to make an interim distribution of those assets in the estate which are not at risk of being used up in the future administration of the estate, at least in circumstances when it was clear who the correct recipient of those assets was."
11. There is a clear recognition in these observations that a duty to make an interim distribution of residue can arise even if the residue has not been finally ascertained because the expenses of the administration were uncertain, provided that on a cautious view those expenses of administration could be adequately provided for. There are several examples in the authorities where an interim distribution of residue has been accepted as necessary and appropriate in such circumstances. [6]
12. I will now apply these principles to the present case.
13. As noted above, the fiduciary obligation imposed on a legal personal representative requires it to act in the best interests of all the beneficiaries. In the present case it was open to the Administrators to conclude that they had a duty to make an interim distribution of residue to Belinda prior to 30 June 2021 of the CGT exempt amount of $6,054,662 if proper allowance could be made for the further costs and expenses required to finalise the administration of the estate. This is for three reasons.
14. First, it is the duty of a legal personal representative to act with due diligence in realising the estate's assets, discharging debts and expenses of administration and then distributing the estate to the beneficiaries. [7] The interim distribution was made nearly four years after John's death. While this delay was not due to any fault on the part of the Administrators as they were not appointed until November 2020, the elapse of time since John's death and what had occurred in relation to the estate in the interim meant that the Administrators had an onus to justify any further delay beyond 30 June 2021.
15. Second, at the time the interim distribution was made, the only person entitled to a distribution of the residue was Belinda, and all other gifts under the will had been paid or provided for. A notice had been issued under s 92 of the Probate Act giving the Administrators the protection provided by that section. The substantive matters remaining to be done were those referred to at [43]-[45] above which were for Belinda's benefit as the residuary beneficiary.
16. Third, the Nexia Advice indicated that unless the distribution of the CGT exempt amount was made to Belinda by 30 June 2021 a distribution of that amount to her at a later time would not be tax free in her hands. It would clearly not be in the best interests of Belinda as the sole beneficiary entitled to residue to delay an interim distribution of residue beyond 30 June 2021 in those circumstances if proper allowance could be made for the further costs and expenses of administration.
17. It is clear that the Administrators, both of whom are solicitors experienced in probate matters, were alive to the potential adverse tax consequences for Belinda if no interim distribution was made by 30 June 2021. It is also clear that they considered that proper allowance could be made for the further costs and expenses of administration given the stage at which the administration had reached. In these circumstances they could properly form the view that it was their duty to pay the CGT exempt amount to Belinda as an interim distribution of residue by 30 June 2021 and it is apparent from [40]-[41] above that they did so.
18. It follows in my opinion that the interim distribution to Belinda was made in respect of her interest in residue of the estate and therefore was a distribution of residue. It follows that I reject the submissions by Belinda and Kate referred to at [50] and [52] above.

Construction of cl 2.2 of the Deed

1. It was not in dispute that the meaning of cl 2.2 is to be determined objectively by reference to its text, context (which includes the entirety of the Deed) and purpose: Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37 at [46]-[51]; Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640 at 656; [2014] HCA 7 at [35]. The relevant principles were stated by French CJ, Nettle and Gordon JJ in Mount Bruce Mining as follows (footnotes omitted): "[46] The rights and liabilities of parties under a provision of a contract are determined objectively, by reference to its text, context (the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract) and purpose. [47] In determining the meaning of the terms of a commercial contract, it is necessary to ask what a reasonable businessperson would have understood those terms to mean. That enquiry will require consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract. [48] Ordinarily, this process of construction is possible by reference to the contract alone. Indeed, if an expression in a contract is unambiguous or susceptible of only one meaning, evidence of surrounding circumstances (events, circumstances and things external to the contract) cannot be adduced to contradict its plain meaning. [49] However, sometimes, recourse to events, circumstances and things external to the contract is necessary. It may be necessary in identifying the commercial purpose or objects of the contract where that task is facilitated by an understanding "of the genesis of the transaction, the background, the context [and] the market in which the parties are operating". It may be necessary in determining the proper construction where there is a constructional choice. The question whether events, circumstances and things external to the contract may be resorted to, in order to identify the existence of a constructional choice, does not arise in these appeals. [50] Each of the events, circumstances and things external to the contract to which recourse may be had is objective. What may be referred to are events, circumstances and things external to the contract which are known to the parties or which assist in identifying the purpose or object of the transaction, which may include its history, background and context and the market in which the parties were operating. What is inadmissible is evidence of the parties' statements and actions reflecting their actual intentions and expectations. [51] Other principles are relevant in the construction of commercial contracts. Unless a contrary intention is indicated in the contract, a court is entitled to approach the task of giving a commercial contract an interpretation on the assumption "that the parties … intended to produce a commercial result". Put another way, a commercial contract should be construed so as to avoid it "making commercial nonsense or working commercial inconvenience". [52] These observations are not intended to state any departure from the law as set out in Codelfa Construction Pty Ltd v State Rail Authority and Electricity Generation Corporation v Woodside Energy Ltd. …"
2. As their Honours stated at [51] above, a commercial contract should be construed so as to avoid making a commercial nonsense or working commercial inconvenience. [8]
3. A starting point is to consider the commercial purpose of the requirement of cl 2.2 that the relevant payment to David is to be made "within 14 days after the Administrators pay to [Belinda] the residue of John's estate".
4. The circumstances known to the parties at the date of the Deed which were relevant to the framing of cl 2.2 were as follows: 1. While David's claim was against the trustees of the Trusts and the executors of the will, it was Belinda, as the residuary beneficiary under the will, who would be affected if David's claim was wholly or partially successful. 2. If any part of the CGT exempt amount was not paid to Belinda by 30 June 2021 (or any further extension allowed by the ATO by a further binding ruling) Belinda would bear the burden of a tax liability which would be avoided if the CGT exempt amount was paid to Belinda by that date. Hence, it would be potentially disadvantageous to Belinda if the payment to David was made by the estate rather than by Belinda out of a distribution to her from the estate. 3. The CGT exempt amount could only be paid to Belinda in her capacity as a residuary beneficiary under the will. 4. While cl 2.2 effectively makes David's entitlement to the $1,000,000 contingent on Belinda's receipt of "the residue" the parties knew that she would be entitled to residue in an amount sufficient to make the payment of $1,000,000 to David. This was confirmed by the letter which the Administrators provided to the Court on 10 May 2021 referred to above, but it would also have been known to the parties in September 2020.
5. Hence, the purpose of tying the payment to David to the receipt by Belinda of a payment of "residue" from the estate was that it would preserve her entitlement to receive the CGT exempt amount in a tax free form, and reflect the true source of the funds necessary to make the payment to David.
6. Turning now to the text of cl 2.2, the following may be noted: 1. While cl 2.2 requires Belinda to "make a payment to [David] in the sum of $1,000,000", it should be read as requiring Belinda to make a payment or payments to David "in the sum of $1,000,000". This is for two reasons. First, cl 2.3 indicates that cl 2.2 could involve one or more payments to David (see the words "for the purpose of securing the payments referred to in the above paragraph"). Second, while cl 2.2 refers to "a payment" to [David] in the sum of $1,000,000", words in the singular include the plural unless the context otherwise requires (cl 1.2(a)) and the context does not otherwise require. Consequently, the words "a payment" in cl 2.2 should be read as referring to "a payment or payments". 2. The words "in the sum of" in cl 2.2 can readily be read as requiring a payment or payments in a total amount of $1,000,000. 3. While the obligation imposed on Belinda by cl 2.2 is expressed to be contingent on the payment to Belinda of "the residue of John's estate", the expression "the residue" does not mean the whole of the residue by application of the common-sense principle that the greater includes the less. [9]
7. Taking all the matters referred to in the previous paragraph together, it follows that the obligation under cl 2.2 can arise in respect of each distribution of residue made to Belinda up to the total amount of $1,000,000.
8. I reject the submissions of Belinda and Kate referred to at [50] and [51] above that this construction of cl 2.2 is inconsistent with the use of the expression "the residue" in cl 2.2. While the expression "the residue" in the context of a deceased estate is generally used to refer the property remaining after the payment (or provision for) the debts of the deceased, the expenses of administration and all other devises or legacies under the will, [10] that does not mean that the legal personal representative cannot make an interim distribution of the residue before the estate is fully administered as shown by the authorities referred to at [62]-[64] above. Further, the expression "the residue" in cl 2.2 of the Deed can accommodate an interim distribution of residue for the reasons given in [77] above.
9. In addition, I accept David's submission that his construction of cl 2.2 avoids a "commercial nonsense". This is due to cl 2.3 which creates an equitable charge in favour of David over Belinda's "payments and entitlements in the deceased's estate" to secure the due payment of the amount owing under cl 2.2. Belinda's "payments and entitlements in the deceased's estate" comprise her rights as residuary beneficiary under John's will and all payments received by her in respect of those rights, which would encompass an interim distribution of residue.
10. It is the essence of an equitable charge that it confers on the chargee a proprietary interest by way of security in the property charged. [11] Where, as here, the charge is a fixed rather than a floating charge, the charge attaches and continues to attach to the charged property until released by the chargee. [12]
11. At the time the Deed was executed in September 2020, Belinda was expected to receive a very large distribution of $6,054,662 by 30 June 2021 in respect of her entitlement to the residue because that was the only basis on which she could receive it. It was clear that this would not necessarily be her entire entitlement to the residue, given that probate of the will still had not been granted. It does not make commercial sense that the whole amount of $6,054,662 which she was expected to receive within the same financial year as the Deed was executed would be subject to the fixed charge under cl 2.3 for an indefinite period, ie. until administration of the estate was completed, and only be available for use by Belinda in that period with David's consent (as chargee). Rather, it would make commercial sense that the charge was intended to attach to payments to Belinda of residue for the short period (of 14 days) from receipt by her and payment over to David under cl 2.2. The interpretation of cl 2.2 set out at [77] above is consistent and harmonious with such a construction of cl 2.3 and this is a further reason why it should be preferred.

Conclusion and orders

1. For these reasons, in my opinion cl 2.2 required Belinda to pay David $1,000,000 within 14 days after her receipt of the interim distribution of $6,054,662 on 29 June 2021.
2. Accordingly, I propose to make the following orders: 1. A declaration that the first defendant was obliged to pay to the plaintiff under the Deed dated 4 September 2020 the sum of $1,000,000 on or before 13 July 2021. 2. Judgment for the plaintiff against the first defendant in the sum of $1,000,000 plus interest on that sum from 13 July 2021 to date of judgment pursuant to s 100 of the Civil Procedure Act 2005 (NSW).
3. At the hearing the parties indicated that they wished to make separate submissions on costs after consideration of this judgment. I will hear the parties in relation to costs before making final orders. However, I indicate now that my preliminary view, based on the evidence currently before the court, is that the first defendant should pay the plaintiff's costs on the ordinary basis and not the indemnity basis.

Endnotes

1. The Life Insurance Company of Australia Ltd v Phillips (1925) 36 CLR 60 at 79; [1925] HCA 18; Westport Insurance Corporation v Gordian Runoff Ltd (2011) 244 CLR 239; [2011] HCA 37 at [82].
2. Commissioner of Stamp Duties (Qld) v Livingston [1965] AC 694 at 707; (1965) 112 CLR 12.
3. Official Receiver in Bankruptcy v Schultz (1990) 170 CLR 306 at 313-314.
4. Porteous v Rinehart (1998) 19 WAR 495 at 502-503.
5. Gonzales v Claridades (2003) 58 NSWLR 188; [2003] NSWSC 508 at [47], [50] (affirmed on appeal (2003) 58 NSWLR 211; [2003] NSWCA 117 at [16]); Ex parte Schneider [2009] NSWSC 566; 3 ASTLR 61 at [55]-[75]; Re Badstuebner (2020) 4 QR 490; [2020] QSC 144 at [35]; Re Ward [2020] VSC 467 at [49]. See also GE Dal Pont, Law of Succession (3rd ed, 2021, LexisNexis Butterworths) at [14.47]-[14.48].
6. Ford v Princehorn [2012] NSWSC 1165 at [27]-[29]; Dawson v Snedden [2019] NZHC 736; (2019) 5 NZTR 29-009 at [62]; Re Badstuebner [2020] QSC 144 at [35]; Re Ward [2020] VSC 467 at [49].
7. Re Tankard [1942] 1 Ch 69 at 72-73; Ford v Princehorn [2012] NSWSC 1165 at [28]. See also GE Dal Pont, Law of Succession (3rd ed, 2021, LexisNexis Butterworths) at [12.1] and [14.27].
8. Citing Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640 at 657 (3) and Zhu v Treasurer of New South Wales (2004) 218 CLR 530; [2004] HCA 56 at [82].
9. President of the Shire of Charlton v Rouse (1912) 14 CLR 220 at 226-227; Houghton v Immer (No 155) Pty Ltd (1997) 44 NSWLR 46 at 55; ISPT Nominees Pty Ltd v Chief Commissioner of State Revenue (2003) 59 NSWLR 196; [2003] NSWSC 697 at [375]; Deutsche Bank (Suisse) SA v Khan [2013] EWHC 482 at [214].
10. GE Dal Pont, Law of Succession (3rd ed, 2021, LexisNexis Butterworths) at [7.10] and cases there cited; Federal Commissioner of Taxation v Whiting supra.
11. Roberts v Investwell Pty Ltd (in liq) [2012] NSWCA 134; 88 ACSR 689 at [28].
12. B & B Budget Forklifts Pty Ltd v CBFC Ltd [2008] NSWSC 271; 216 FLR 294 at [32]-[34].

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