Welker v Rinehart

Judgment 1Before the Court are two inter-related motions: the plaintiffs' filed on 19 July 2012 in which they seek leave to amend the Statement of Claim; and the first defendant's filed on 14 August 2012 in which she seeks summary dismissal of the proceedings. As the grounds relied upon by the first defendant, whose application is supported by the second defendant, for summary dismissal, are also relied upon (together with some additional grounds) in opposition to the application for leave to amend, it is convenient to deal with the summary dismissal application first.

2In the substantive proceedings, the background to which is described in several earlier judgments of the Court and of the Court of Appeal [Welker & Ors v Rinehart & Anor (No 2) [2011] NSWSC 1238; Welker & Ors v Rinehart & Anor (No 4) [2011] NSWSC 1636; Rinehart v Welker [2012] NSWCA 95], the plaintiffs primarily claim removal and replacement of the first defendant, their mother, as trustee of the Hope Margaret Hancock Trust, on grounds that, particularly in connection with giving consideration to the extension of its vesting date in September 2011, she so misconducted herself as to demonstrate unfitness to retain the office of trustee. At the core of this are allegations that, as the vesting date approached, she misrepresented to the beneficiaries that they would incur capital gains tax liabilities with catastrophic financial consequences for them unless she exercised her discretion to extend the vesting date, but also informed them that she would so exercise her discretion only if they gave her comprehensive releases in respect of the whole of her past and future trusteeship, and they entered into nuptial agreements with their respective partners, thereby placing immense pressure on the beneficiaries to obtain benefits for herself as the price of her performing her duties as trustee. Whether or not those allegations are established will be in issue at any trial; but on an application for summary dismissal of this kind, where it is not contended that, on the evidence, it will be impossible to establish at trial the crucial allegations of fact, the plaintiffs' case must be taken at its highest. 3Since then, on 30 April 2012, the first defendant has caused the trust to vest with effect from that date, so that she now holds its assets - which comprise a 17.5% shareholding in Hancock Prospecting Pty Limited (HPPL) (in which the first defendant holds the balance of the shares) - upon trust for the plaintiffs and their sister the second defendant absolutely. Moreover, she has stated that she stands prepared to transfer the trust shares to the beneficiaries upon being called on by them so to do, subject only to her taxation and analogous obligations as trustee. 4At its core, the defendants' case for summary dismissal is that no reasonable cause of action for removal of the trustee survives the vesting of the trust, and that the maintenance of the proceedings in that light is frivolous and vexatious and an abuse of process. The defendants rely particularly on the absence of demonstrable risk to the trust property, given the vesting of the trust, the ability of the plaintiffs to call for their shares, and her powerful incentive not adversely to affect the trust property since it is constituted by shares in a company in which she holds four times a larger interest. The case was concisely and cogently put by Mr Kunc SC for the second defendant, that (1) where the second defendant had been subjected to the same conduct of the first defendant as the plaintiffs, but opposed her removal; (2) where in the light of the vesting of the trust she (like the plaintiffs) did not wish to call for her shares but (unlike the plaintiffs) wished the first defendant to remain in office as trustee; (3) where she opposed the appointment of the plaintiffs' nominees as replacement trustees (being two of the plaintiffs, both beneficiaries, who are resident abroad, with whom she is in conflict); and (4) where the trust had vested, so that the trustee's remaining duties were limited; (5) it was inconceivable that an order would be made for removal of the trustee. 5The test for summary dismissal is well-established: the case must be shown to be "hopeless", "without prospects of success", or "doomed to fail". Where a case must go to trial on some issues, the court will not too readily summarily dismiss other related issues in it [Wickstead v Browne [1992] NSWCA 272; (1992) 30 NSWLR 1, 5 (Kirby P), 19 (Handley and Cripps JJA)]. 6The defendants' case depends largely on the proposition that, the trust having vested, the trustee's duties are limited and her discretions gone, such that she is "functus officio". This, however, considerably overstates the position. Notwithstanding "vesting" of the trust in accordance with its terms, such that the discretions in respect of income and variation which were exercisable only before the vesting date have lapsed, the trustee remains, in every sense of the word, a trustee, holding trust property upon trust for the beneficiaries, with equitable obligations annexed. Pursuant to cl 6, upon the vesting date, the trustee stands possessed of such of the shares to which the first defendant has not become entitled pursuant to cl 4, together with any income that has not been applied or set aside, upon trust for the plaintiffs as tenants-in-common in equal shares. The general powers of the trustee in respect of the trust fund, including the express powers conferred by the schedule to the trust deed, survive. The trustee continues to hold the trust property, to exercise votes in respect of the trust shares, and to receive and distribute trust income; she could sell the trust property and reinvest the proceeds; she has all the usual rights, powers and duties of a trustee. She is not functus officio, although she no longer enjoys the discretionary powers that she had before the vesting date. 7I accept that the circumstance that the trust has vested, and that to that extent the trustee's powers are reduced, and her duties more limited than they formerly were, is a relevant consideration in deciding whether, in the interests of due administration of the trust, her removal is warranted [Re Wrightson [1908] 1 Ch 789, 802-3]. So too are other considerations urged by the defendants, including that there is no apparent risk of jeopardy to the trust assets, and that the first defendant's deeds (as distinct from words) apparently demonstrate a proper approach to the discharge of her fiduciary duties. But in this respect, while the defendants emphasised observations in the authorities that suggested that the touchstone was the safety of the trust property, that is not the only consideration: while hostility between the trustee and the beneficiaries is of itself not enough - particularly where that hostility is generated by the beneficiaries - nor a mere preference of a beneficiary to have a different trustee [Fay v Moramba Services Pty Limited [2009] NSWSC 1428, [25]], a trustee can be removed where he or she demonstrates a want of honesty, of capacity to exercise, or of reasonable fidelity, to the duties of a trustee [Guazzini v Paterson (1918) 18 SR (NSW) 275, 292-3]. In Letterstedt v Broers (1884) 9 App Cas 371, Lord Blackburn, speaking for the Judicial Committee, said (at 385-387) (emphasis added): Story (Equity Jurisprudence) says, s. 1289, "But in cases of positive misconduct, Courts of Equity have no difficulty in interposing to remove trustees who have abused their trust; it is not indeed every mistake or neglect of duty, or inaccuracy of conduct of trustees, which will induce Courts of Equity to adopt such a course. But the acts or omissions must be such as to endanger the trust property or to show a want of honesty, or a want of proper capacity to execute the duties, or a want of reasonable fidelity." 8In Re Wrightson [1908] 1 Ch 789, Warrington J said (at 803) (emphasis added): You must find something which induces the Court to think either that the trust property will not be safe, or that the trust will not be properly executed in the interests of the beneficiaries. 9The principles were described by Dixon J in Miller v Cameron (1936) 54 CLR 572, as follows (at 580-581) (emphasis added): The jurisdiction to remove a trustee is exercised with a view to the interests of the beneficiaries, to the security of the trust property, and to an efficient and satisfactory execution of the trusts and a faithful and sound exercise of the powers conferred upon the trustee. In deciding to remove a trustee the court forms a judgment based upon considerations, possibly large in number and varied in character, which combine to show that the welfare of the beneficiaries is opposed to his continued occupation of the office. Such a judgment must be largely discretionary. A trustee is not to be removed unless circumstances exist which afford sound ground upon which the jurisdiction may be exercised. 10The touchstone has been variously described as "the welfare of the beneficiaries" [Letterstedt v Boers; Miller v Cameron; Craven-Sands v Koch (2000) 34 ACSR 341, [204]], or (in the context of a discretionary trust) the "welfare of the trust" [Fay v Moramba Services, [24]]. Indeed, in Miller v Cameron, Latham CJ (at 575) and Starke J (at 579) considered the welfare of the beneficiaries to be "the dominant consideration" and "the only guide" respectively. But I reject the defendants' submission that the safety of the trust estate is the essential consideration. The due administration of the trust is one of the court's central concerns, if not the predominant one. While the safety of the trust estate is undoubtedly an important element of this, it is far from the only one, and a conclusion that a trustee did not understand the nature of the fiduciary obligation, or had manifested an inclination to act inconsistently with it, might well justify removal, even in the absence of any threat to the safety of the trust property. This is because there would in those circumstances be a risk to the due administration and performance of the trust, even if not to the safety of the trust property. 11While the circumstances that the proposed replacement trustees are beneficiaries, resident abroad, and in conflict with another beneficiary, will be relevant considerations in whether they should be appointed as replacement trustees, I have previously explained [Welker v Rinehart (No 4), [30]] that, though relevant, they are not insuperable obstacles for the plaintiffs: While the submission that courts are often reluctant to appoint trustees resident outside the jurisdiction, or to appoint beneficiaries as trustees, is not without force, where the trust instrument contemplates or even encourages such a course, the court will no doubt give weight to that. 12It cannot be said that the countervailing considerations to which I have referred are so strong that it is inevitable that the plaintiffs' case for removal must fail. It is not possible to conclude that the conduct alleged against the first defendant could not conceivably demonstrate such unfitness as to warrant removal. That her duties and discretions might be reduced by the vesting of the trust does not mean that such a course would no longer be appropriate. In particular, that the trustee has announced that she is prepared to transfer the trust shares to the beneficiaries upon being called upon to do so does not necessarily extinguish any concern that might arise from her past alleged behaviour, for example that she might nonetheless seek to extract some concession or benefit as the price for doing so if and when the occasion arrives. 13Of course that is not to say that the plaintiffs will necessarily prove their allegations, nor that if proved the Court would necessarily be satisfied on the whole of the evidence that the first defendant was an unfit trustee, nor that the due administration of the trust warranted her removal. Those are issues that can be resolved only at a trial. 14The application for summary dismissal of the proceedings generally therefore fails. In conformity with Wickstead v Browne, the Court need not therefore scrutinise too closely particular subsidiary causes of action. However, particular argument was addressed to the plaintiffs' claim for production of trust documents and accounts for the period 1992 to date, in respect of which the first defendant says (and for present purposes I shall, without deciding, assume) that she has recently produced to the plaintiffs "all such documents to which they are entitled". She (unilaterally) defined such entitlement as excluding those documents that predate the Hope Downs Deed (of 2006) and, in the case of the second plaintiff, the Deed of Further Settlement (of 2007), on the basis that claims for documents that preceded those deeds had been released. 15By clause 6 of the Hope Downs Deed, the plaintiffs (a) released and discharged the first defendant from any "Claims", (b) irrevocably covenanted not to take any proceedings against any of the other parties in relation to any matter arising in respect of the "Claims", (c) withdrew and forever abandoned any and all of the allegations made against the first defendant in respect of or arising (in whole or part) directly or indirectly out of the Proceedings and any of the other "Claims", the subject matter of the Proceedings, or any claim relating to an undertaking given or costs orders made in the Proceedings. "Proceedings" were defined to mean "Supreme Court of Western Australia action number CIV 1327 of 2005 the parties of which are the HMH Trust and GHR and to which JLH is seeking to be joined". "Claim" was defined as including any claim made in the Proceedings, and "any claim made in any proceeding or any discontinued proceeding and any documents to support such claims and without limitation for clarity in the case of the Proceedings includes the unsigned draft affidavit of JLH". 16In his Notice of Intention to be joined as a party and to make cross-application filed in those Proceedings on 11 July 2005, the present second plaintiff sought removal of the trustee on the ground, inter alia, that she had not provided him with trust documents. However, he did not make a claim in those Proceedings for production of such documents. There is no evidence of any such claim having been made, and accordingly such a claim has not been released under clause 6(a) of the Hope Downs Deed. 17In the present proceedings, the plaintiffs claim an order for production of the trust documents and accounts. This claim is made independently of the claim for removal, and does not involve any allegation of breach of trust, or of an anterior failure to produce them. It does not depend on or refer to or repeat or raise in any way the allegation, such as it was, made in the earlier proceedings, of failure to produce documents. It does not relate to, but stands independently and separate from, any matter arising in respect of the "Claims" (within clause 6(b) of the Hope Downs Deed), nor is it an allegation in respect of or arising (in whole or part) directly or indirectly out of the Proceedings (within clause 6(c)). As Bathurst CJ has pointed out [Rinehart v Welker [2012] NSWCA 95, [126]], "In the present case the respondents by their respective statements of claim seek orders that GHR provide information concerning the Trust, relying on their entitlements as beneficiaries". 18The relevant claim in the earlier proceedings, which was released by the Hope Downs Deed, was not one for production of documents. The relevant claim in these proceedings, for production of documents, does not allege an anterior failure to produce them and does not depend on establishing any breach of trust, let alone one prior to the Hope Downs Deed. That claim is not caught by the releases. 19The application for summary dismissal therefore fails.