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[2004] WASC 28
Supreme Court of WA
2004-03-04
Mr P
Original judgment source is linked above.
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
CITATION : WENDT & ORS -v- ORR & ANOR [2004] WASC 28
Wills - Trustees - Breach of Duty - Whether profit on share sales capital or income - Extrinsic evidence - Review of executor's discretion - Payment of legal fees from the estate - Removal of executor - Reimbursement to estate of distribution and legal fees
Orders for repayment to the estate of the distribution to the defendant and legal fees and for removal of the executor
Re Tempest (1866) LR 1 Ch App 485
Scott v National Trust [1998] EWHC 318; [1998] 2 All ER 705
Swanson v Emmerton [1909] VicLawRp 68; [1909] VLR 387
(i) Section 94 of the Trustees Act 13
(ii) The use of extrinsic evidence to determine the 16
(iii) The power of the Court to review the exercise 19
(iv) Whether the profit on the sale of shares is income 25
(v) Whether profit on the sale of shares can be classified by the 33
executor as income pursuant to cl A3 of the Schedule to the Will
(vii) The payment of executor's and beneficiaries' legal fees from 41
(viii) Whether the executor has breached his duty in distributing 64
the profit from share sales to the income beneficiary
(ix) Whether the executor has breached his duty in paying his own 68
and the income beneficiary's legal fees with respect to the
(x) Whether the moneys in dispute should be repaid 69
1 This is an application pursuant to s 94(1) of the Trustees Act 1962 brought by the capital beneficiaries of a deceased estate for orders reviewing the decision of an executor to treat the profit on the sale of shares of the estate as income for distribution to the income beneficiary. A review is also sought of the executor's decision to pay legal fees from the estate to himself and to the income beneficiary.
2 The relief sought is repayment of the moneys by the income beneficiary or, alternatively, by the executor, together with interest. Further, an order is sought that the first-named plaintiff be appointed as co-trustee of the estate with the executor. Alternatively, the executor is to be restrained from selling any shares of the estate without the express approval of the capital beneficiaries. The application also calls for the income beneficiary or, alternatively, the executor to personally pay the costs of these proceedings.
3 The following facts were not in dispute between the parties.
4 The plaintiffs have an interest in remainder under the Will of Donald Clarence Wendt ("the deceased"). The deceased died on 4 September 1997 leaving a will dated 6 December 1995 ("the Will"). The first defendant, George Stanley Orr, is the executor and trustee of the Will. The second defendant, Joan Agnes Wendt, is the wife of the deceased, the income beneficiary under the Will and the sister-in-law of the first defendant. For ease of reference I will refer to the first and second defendants by name.
5 The deceased and Mrs Wendt were married on 21 June 1973. They had commenced cohabitation approximately 11 years earlier when the deceased moved into Mrs Wendt's house in Bunbury. The deceased retired approximately seven years after they married. Mrs Wendt had no knowledge of the amount of the deceased's income prior to his retirement, but understood that his post-retirement income was derived from interest on investments.
6 The domestic arrangements following the deceased's retirement were that Mrs Wendt kept the house and the deceased paid the accounts. Mrs Wendt paid for food, clothing and linen from her own funds and the deceased paid rates, taxes, electricity and water costs. The deceased did not pay rent. Approximately four years prior to his death, the deceased suffered a serious stroke. Mrs Wendt cared for him until his death. Mrs Wendt still resides in her Bunbury home.
7 Mr Orr was granted probate of the Will by this Court on 6 November 1997. The estate included, inter alia:
(i) shares and/or options in Elders Limited, Savage Resources Limited ("Savage"), Carnarvon Petroleum NL, First Australian Resources NL, Hargreaves Resources NL ("Hargreaves"), Westralian Farmers Co-operative Ltd, Wesfarmers Ltd ("Wesfarmers") and Qantas Airways Ltd ("Qantas");
(ii) an aluminium boat and trailer;
(iii) a demountable home;
(iv) WA Government Bonds to a total value of $166,000 with bonds to the value of $114,000 due to mature on 1 December 1998.
8 Mr Orr purchased the boat and trailer from the estate on or about 20 January 1998 for the sum of $1500. Prior to the purchase, repairs had been effected to the boat which were paid out of the estate at a cost of $589.15. The issue of whether the demountable home was wholly owned by the estate was a matter of dispute between the beneficiaries. Ultimately, Mr Orr allowed Mrs Wendt to purchase the demountable home by paying to the estate half the value of the home. No claim is made in relation to the purchase by Mr Orr of the boat or the purchase by Mrs Wendt of the demountable home. The issues are raised, and have been dealt with in the course of the trial, as going to Mr Orr's conduct as an executor and his credibility generally.
9 Mr Orr kept a journal in which he recorded all transactions in relation to the administration of the estate. The following entries appear in the journal:
Joan Wendt - Income from investment of purchase and sale of shares $45,000 in Optus
Joan Wendt - income profit from sale of CWBank shares
10 The journal also reveals that in April 1999 the Savage shares were compulsorily acquired for a cash settlement resulting in a profit to the estate of $87.19. The Hargreaves shares were compulsorily acquired in December 1999 for a monetary loss of $364.40 and for shares in Durban Roodeport Deep Ltd ("Durban"). The Durban shares still form part of the estate, as do the other shares in the estate at the time of the grant of probate.
11 It can be seen from the journal that during the 1998-1999 financial year Mr Orr purchased Cable and Wireless Optus Limited ("Optus") shares and then sold them for a profit of $32,113.95. He also purchased Commonwealth Bank Ltd ("CBA") shares and then sold them for a profit of $9631.30. The gross profits from the Optus share sale were distributed to Mrs Wendt on 10 January 1999. The gross profits from the CBA share sale were distributed to Mrs Wendt on 9 April 1999. During the 1999-2000 financial year Mr Orr purchased 40,000 Optus shares and later sold them for a profit of $47,436.22. The gross profit was distributed to Mrs Wendt on 17 December 1999. The term "gross profits" described the profits on the share sale less the costs of the share trading but without deduction of capital losses.
12 On 6 July 2000 the plaintiffs commenced these proceedings. During the period 9 May 2000 to 17 May 2001 Mr Orr has authorised the payment from estate funds of legal expenses in relation to the issues the subject of these proceedings. The payments, and the person on whose behalf they were made, are summarised as follows:
13 In total, up to 17 May 2001, Mr Orr authorised payments on behalf of himself and Mrs Wendt in the sum of $15,200.30.
14 The following clauses of the Will are relevant to the issues to be decided in this case:
"4.1 Subject to clause 4.2, I give the whole of my estate to my Executor on trust:
4.1.1 to give George Stanley Orr $4,000.00 (four thousand dollars) if he acts as my Executor;
4.1.2 ...
4.1.3 to sell my tools, furniture, any motor vehicles ... any boats ... and transportable/demountable home in Augusta ...
4.1.3.1 my Executor and beneficiaries may buy at a fair value any of these assets at public auction or by private contract or treaty on the same terms my Executor may grant to a purchaser from my estate;
4.1.4 to pay the income from the balance of my estate to my wife JOAN AGNES WENDT during her lifetime;
4.1.4.1 my wife JOAN may apply to my Executor to be paid part of the capital if she can establish that her income (including the income she derives from my estate) is insufficient for her reasonable needs;
4.1.5 to give the residue of my estate equally to such of my children DOUGLAS RONALD WENDT, LYNETTE MAY JOHNSTON and LORRAINE McCARTHY (being the children of my marriage to DOROTHY MAY HUGHES) as survive me;
...
4.3 I have not given more to my wife JOAN because I believe I have given her much during my life and I believe she will be able to look after herself sufficiently with the assets and income she has and the income she derives from my Will."
15 Clause 8 of the Will confers on the executor, in addition to the powers he has at law, the powers, rights, discretions and the indemnity set out in the schedule to the Will ("the Schedule").
16 The provisions of the Schedule relevant to this claim are as follows:
"A. My Executor may in his discretion:
...
3. determine whether receipts or outgoings are capital or income or partly income or capital so as to bind the beneficiaries even though the receipts are from a company that has made a decision on the matter;
D. I declare my Executor will not be liable for any loss not attributable to:
1. his dishonesty; or
2. the wilful commission by him of any act known by him to be a breach of trust."
17 A number of different issues require resolution in order to conclude the dispute which has arisen in the administration of the deceased's estate. Some are essentially legal in nature and concern the construction of relevant clauses of the Will and a consideration of the Court's powers to review the conduct of a trustee. The following issues fall within this category:
i. The jurisdiction of the Court to review the executor's actions under s 94 of the Trustees Act 1962;
ii. The use of extrinsic evidence to determine the intentions of the testator;
iii. The power of the Court to review the exercise of a discretion by an executor;
iv. Whether profit on the sale of shares is income or capital under the Will;
v. Whether profit on the sale of shares can be classified by the executor as income pursuant to cl A3 of the Schedule to the Will;
vi. Executors/trustees' duties and entitlement to obtain directions from the Court;
vii. The payment of executor's and beneficiaries' legal fees from trust property;
18 The next category involves the determination of whether there has been in this case any breach of duty. Such a determination necessarily requires an assessment of the evidence and the making of factual findings. The following issues fall within this category:
viii Whether the executor has breached his duty in paying to Mrs Wendt the gross profits from the sale of shares;
ix Whether the executor has breached his duty in paying both his own and the second defendant's legal expenses in relation to the matters the subject of this claim.
19 The final category of issues addresses the effect of any finding that the executor has acted in breach of trust. The issues are:
x Whether the money in dispute should be repaid to the estate:
(i) by the First Defendant;
(ii) by the Second Defendant.
The issue of whether the second defendant should reimburse the estate involves a consideration of the application of s 65(8) of the Trustees Act.
xi Removal of the executor or the appointment of a co-executor.
(i) Section 94 of the Trustees Act
20 The defendants submit that the plaintiffs' application fails at the jurisdictional threshold. It is said that the power conferred on the Court by s 94 of the Trustees Act is limited to circumstances in which the trustee is exercising a power conferred by the Act and does not extend to the exercise of powers conferred by the trust instrument.
21 Section 94(1) of the Trustees Act is in the following terms:
"Any person who has, directly or indirectly, an interest, whether vested or contingent, in any trust property, and who is aggrieved by any act, omission or decision of a trustee in the exercise of any power conferred by this Act, or who has reasonable grounds to apprehend any such act, omission or decision of a trustee by which he will be aggrieved, may apply to the Court to review the act, omission or decision, or to give directions in respect of the apprehended act, omission or decision, or to give directions in respect of the apprehended act, omission or decision; and the Court may require the trustee to appear before it, and to substantiate and uphold the grounds of the act, omission or decision that is being reviewed, and may make such order in the premises as the circumstances of the case require." [emphasis added]
22 Part IV of the Act (s 27 to s 57) sets out the general powers conferred on trustees under the Act. Section 17 confers a further power to invest and reinvest trust funds and to vary or realise an investment, unless expressly prohibited by the instrument creating the trust.
23 Support for the defendants' position can be found in a number of legal texts. In Dal Pont's "Annotated Trustee & Trustee Companies Legislation" (1997 Edition) the learned author states, at [8.10]:
"... The Western Australian provision (ie section 94) is limited to where the applicant is aggrieved by virtue of the exercise of a power conferred under the Trustee's Act, not one conferred by the trust instrument or the general law. If the trustee is exercising only the power conferred by the trust instrument the section cannot be invoked: see Re Havill (Decd) [1968] NZLR 217 at 223."
24 In "Hardingham & Baxt, Discretionary Trusts" (2nd ed) the learned authors state, at page 118, in dealing with s 94 of the Act:
"... the section only countenances the review of powers conferred by the Act itself. In most discretionary trusts, the powers held by the trustees will be conferred, not by any act, but by the instruments creating them. Once again, the provision could be made more acceptable by amending it so that it extends to 'any power conferred by this Act or by the instrument (if any) creating the trust'. Such words are to be found in the Queensland provision."
25 In determining the scope of s 94, it is useful to consider the case of Re Havill (decd) [1968] NZLR 1116 which is relied upon by the author of Dal Pont's "Annotated Trustee & Trustee Companies Legislation". The Court there dealt with a power to appropriate property conferred on the trustees both by the Trustee Act 1956 (NZ) and by the Will. The trustees' notice of appropriation and partition expressly stated that they had exercised powers vested in them under both the Will and the Trustees Act. Section 68 of the Trustees Act provided that any person who is beneficially interested in any trust property and who is aggrieved by any act or omission or decision of a trustee "in exercise of any power conferred by this Act" may apply to the Court to review the act or omission or decision. Macarthur J held (at 223) that if the trustee "is exercising only the power conferred by the trust instrument, clearly s 68 may not be invoked" (emphasis included).
26 It is certainly the case, as submitted on behalf of the defendants, that there are a number of provisions in the Trustees Act which are consistent with a legislative intention to preserve the supremacy of the instrument creating the trust: see, for example, s 19(1) and s 105(3) of the Act. However, I do not consider that Re Havill (decd) is authority for the broader proposition that, where a power is contained in both the trust instrument and in the Trustees Act, the trustee can be said to be exercising only the power conferred in the trust instrument, thereby excluding the operation of s 94. In my view, the right to review a decision conferred by s 94 of the Act should not be unduly confined and s 94 may be invoked where the power being exercised appears both in the Trustees Act and in the trust instrument.
27 That conclusion does not dispose of this issue. It is necessary to consider the actual power said to have been exercised before a decision can be reached as to whether the Court has jurisdiction under s 94 of the Trustees Act.
28 On behalf of the defendants it is said that the discretionary power conferred by cl A3 of the Schedule to the Will ("cl A3") to determine whether receipts or outgoing are capital or income is not a power that falls within ss 27 - 57 of the Act. The plaintiffs argue that the fact that the Trustees Act also gives extensive powers, including the power in s 17 to invest, re-invest and realise an investment of trust funds, means that the executor was also exercising a power conferred under the Trustees Act. Of course, s 94 contains an additional requirement that the application be brought by a person who is "aggrieved by any act, omission or decision of a trustee in the exercise of any power conferred by this Act". It is necessary then to identify the conduct of which complaint is made. If the conduct is the exercise of the discretion under cl A3 to classify profits on share sales as income for the purpose of distribution, then, in my view, that conduct does not fall within s 17 simply because the funds in question result from an investment. Nor would it fall within the provisions of Pt IV of the Trustees Act. The consequence is that s 94 of the Trustees Act would not apply.
29 However, the conduct of which the plaintiffs complain is the distribution of the profits from the share sales to Mrs Wendt as income from the estate. Distribution of the funds of the estate is a fundamental aspect of an executor's role and integral to the various powers and duties contained in the Trustees Act, in particular the power under s 17 to invest and realise an investment of trust funds. In my view, this application is properly brought under s 94 of the Trustees Act.
30 Even if I am wrong in that conclusion, it does not follow that the plaintiffs' action fails at the outset. This Court has an inherent jurisdiction to supervise trusts and trustees and make appropriate orders to protect the interests of beneficiaries of a trust, including making orders compensating for breaches of trust: "Principles of the Law of Trusts", Ford and Lee, ch 17; "Law of Trusts in Australia", Jacobs, 6th ed, [2203] at p 660; Pope v DRP Nominees Pty Ltd [1998] SASR 6933 at [57] and [59]. The finding that s 94 of the Trustees Act has no application simply means that the plaintiffs' action will be governed by equitable rules rather than the terms of the statute: Tonkin v Western Mining Corporation Ltd (1998) 10 ANZ Ins Cas 61-397 and Tonkin v Western Mining Corporation Ltd & Anor, unreported; SCt of WA (Scott J); Library No 960302; 31 May 1996 at 10.
31 This action was commenced by originating summons rather than by writ, as would be the case if the Court's equitable jurisdiction were invoked. In my view, this variation in the initiating process has not caused prejudice to the defendants. I consider that the issues were adequately defined by the originating summons, as amended, and the affidavit material filed. Further, a hearing was held at which the parties were given the opportunity to call and to question witnesses. For these reasons, I consider it appropriate to proceed to determine this matter, regardless of whether the Court is exercising its statutory or inherent jurisdiction.
(ii) The use of extrinsic evidence to determine the intentions of testator
32 At trial, the plaintiffs challenged the admissibility of evidence of statements allegedly made by the deceased of an intention to have the estate administered so as to maximise the benefit to Mrs Wendt. My ruling was that the evidence was relevant to the issue of the exercise of the executor's discretion and therefore admissible. The issue of whether the evidence was also admissible for the purpose of identifying the testator's intentions was left for determination at the conclusion of the hearing.
33 The plaintiffs maintain their position that the extrinsic evidence of the intentions of the testator is inadmissible. They rely on the general principle of interpretation that, if the words of the Will are clear, the Court will not admit evidence to demonstrate that the testator used the words in anything other than their natural and ordinary meanings: Hiscocks (decd) v Hiscocks [1839] EngR 65; (1839) 5 M & W 363, 367 - 370; Hardwick v Hardwick (1873) LR Eq 168; Shelton v Anna Kilsby as Executor of the Estate of the Deceased & Ors [2000] WASC 180 at [4].
34 As Lord Shand stated in the House of Lords decision of Higgins v Dawson [1902] AC 1 (at 9):
"I agree with His Lordship in thinking that even if it could be shown that the intention of the testator was something different from the language of the Will, that intention would not prevail, but the language of the Will must settle the rights of the parties."
35 See also Lord Davey in Higgins v Dawson, above, at 11; McRobert v McRobert [1920] HCA 5; (1920) 27 CLR 331 at 333.
36 It is conceded that where the words of the Will are not clear, the Court can apply the "armchair principle" and look at the testator's habits of speech, family, property, friends and acquaintances so that the Court may read the Will from the position of the person making it. However, the plaintiffs maintain that the Court may not accept extrinsic evidence of the testator's direct intentions, even in cases of ambiguity: Hiscocks (decd) v Hiscocks at 367 - 370; Hardwick v Hardwick; Shelton v Anna Kilsby as Executor of the Estate of the Deceased at [4].
37 The only other circumstance in which extrinsic evidence may be adduced is in the very limited situation where the evidence resolves an "equivocation" as to what property or person is referred to in the Will: Hiscocks (decd) v Hiscocks at 367 - 369. In Hiscocks (decd) v Hiscocks the Court concluded (369):
"It appears to us that in all other cases, parol evidence of what was the testator's intention ought to be excluded, upon this plain ground, that his will ought to be made in writing; and if his intention cannot be made to appear by the writing, explained by the circumstances, there is no will."
38 On behalf of the first defendant it is said that the evidence can be relied upon to assist in the categorisation of the profits as income. Reliance is placed on the statement of Barwick CJ in Hughes v National Trustees, Executors and Agency Co of Australasia Ltd [1979] HCA 2; (1979) 143 CLR 134 at 137 where his Honour said:
"Evidence of the reasons given by a testator or a testatrix for making or not making a provision by will are, in my opinion, admissible as evidence of those reasons. Such statements are not evidence of the facts they assert: they provide evidence only of the subjective attitude or beliefs of the testator or testatrix."
39 In my view, this statement is not authority for the proposition that evidence of the intention of a testator is admissible for the purposes of interpreting a Will. The statement of Barwick CJ was made in the context of determining whether the distribution of a testatrix's estate made adequate provision for the proper maintenance and support of her son. He observed (at 138):
"When attempting to decide what a particular testator or testatrix ought as a just and wise father or mother to have done, those reasons which that testator or testatrix actually entertained for his or her decision cannot, it seems to me, justly be ignored. Of course, if the evidence in the matter does not support such reasons, they cannot be acted upon simply because the deceased asserted or entertained them."
40 I consider the statement of Barwick CJ to have no relevance to the admission of extrinsic evidence in the interpretation of a testamentary instrument. The statement cited on behalf of the first defendant does not bear an interpretation which would contradict the long line of authority rendering that type of evidence inadmissible. That being the case, as the plaintiffs rightly observe, the defendants have failed to refer to any authorities which would make the statements of the deceased admissible as to his testamentary intention.
41 In my view, the words of the Will are clear and unequivocal. Mrs Wendt was to have the income for life and the plaintiffs were to have the capital. If Mrs Wendt required additional funds she was entitled to make an application to receive a portion of the capital of the estate: cl 4.1.4.1. The terms "capital" and "income" have natural and ordinary meanings. It would not be appropriate to receive evidence to suggest that the term "income", when used in the Will, is to be given other than its ordinary meaning. If the deceased intended something else, he should have instructed his solicitors to address those intentions in drafting the Will.
(iii) The power of the Court to review the exercise of a discretion by an executor
42 This issue falls to be addressed in the context of the executor's assertion that the distribution to Mrs Wendt of the gross profits of the sale of shares was made in the exercise of the discretion conferred on him by cl A3.
43 It is a well-established principle that, subject to one exception, the exercise by a trustee of a discretionary power will not be examined or reviewed by the Courts so long as the essential component parts of the exercise of the particular discretion are present: Karger v Paul [1984] VicRp 13; [1984] VR 161, per McGarvie J, at 163 - 164. The exception is that the validity of the trustees' reasons will be examined and reviewed if the trustees choose to state their reasons for their exercise of discretion: Karger v Paul (supra) at 164; Re Londonderry's Settlement [1965] Ch 918 at 928 -929, per Harman LJ; Re Beloved Wilkes' Charity [1851] EngR 375; (1851) 3 Mac & G 440.
44 The essential component parts are present if the discretion is exercised by the trustees:
(a) in good faith;
(b) upon real and genuine consideration; and
(c) in accordance with the purposes for which the discretion was conferred.
45 The effect of the principle in Karger v Paul is that, when it is established that the essential component parts of the exercise of the discretion are present, a trustee is not bound to disclose information which may bear upon or affect the exercise of his or her discretion. The application of this principle arose in the course of the hearing. An objection was taken on behalf of the second defendant to cross-examination of Mr Orr regarding his decision to distribute the profit from the share sales to Mrs Wendt. The decision in Karger v Paul was relied upon as authority for the proposition that a trustee cannot be questioned on any matter pertaining to the exercise of his discretion unless he has given reasons for his decision.
46 It is apparent from the decision in Karger v Paul that before the principle therein stated takes effect a threshold requirement must be met, and that is that the discretion has been exercised by the trustee in good faith, upon real and genuine consideration and in accordance with the purposes for which the discretion was conferred. They are described by McGarvie J at p 164 as "essential component parts of the exercise of the discretion". In my view, a close reading of Karger v Paul makes it clear that the case is not authority for the proposition that a trustee cannot be cross-examined in relation to the exercise of the discretion. It merely determines the purpose to which such evidence can be put. As McGarvie J noted (at 164):
"In my view, in this case it is open to the Court to examine the evidence to decide whether there has been a failure by the trustees to exercise the discretion in good faith, upon real and genuine consideration and in accordance with the purposes for which the discretion was conferred. As part of the process of, and solely for the purpose of, ascertaining whether there has been any such failure, it is relevant to look at evidence of the inquiries which were made by the trustees, the information they had and the reasons for, and manner of, their exercising their discretion. However, it is not open to the Court to look at those things for the independent purpose of impugning the exercise of discretion on the grounds that their inquiries, information or reasons or the manner of exercise of the discretion, fell short of what was appropriate and sufficient. ... The issues which are examinable by the Court are limited to whether there has been a failure to exercise the discretion in good faith, upon real and genuine consideration and in accordance with the purposes for which the discretion was conferred."
47 To summarise the position set out in Karger v Paul, once the whole of the evidence establishes that the exercise of the discretion was in good faith, upon real and genuine consideration and in accordance with the purposes for which the discretion was conferred, it is not open to the Court to rely on that evidence to impugn the exercise of the discretion: per McGarvie J at 166. Counsel for the second defendant also relied on the authority of Flegeltaub v Telstra Super Pty Ltd [1998] VSC 144 which purports to follow the decision in Karger v Paul. In that case a party challenging the decision of a trustee was not entitled to administer interrogatories designed to elicit from the trustee its reasons for making the determination which it did, and also the state of its mind at the time it did so. I have some difficulty with the decision in Flegeltaub. In my view, it appears to follow only part of the decision in Karger v Paul, with the result that it would be impossible to determine whether the threshold test had indeed been met. For that reason I would respectfully decline to follow it.
48 I consider the correct interpretation or application of the principle is that, once the threshold test has been met, a limitation is imposed on the use of any evidence obtained under cross-examination. In my view, that is an entirely different proposition to precluding an opposing party from testing under cross-examination the circumstances surrounding the making of the decision.
49 The practical operation of the principle in Karger v Paul, in particular what I have described as the threshold test, requires further consideration. I accept the second defendant's submission that the authorities establishing the principle reflect a public policy consideration not to interfere with discretionary judgments of a trustee unless made in bad faith, without real or genuine consideration, or contrary to the purpose of the trust. It is implicit in this statement of principle that, provided the exercise of the discretion is bona fide with no improper motive, it is immaterial that the Court, if it knew all the facts known to the trustees, would not have acted in the same way as the trustees; it is not open to the Court to substitute the Judge's opinion for that of the trustee as to the manner in which the discretion should have been exercised: Karger v Paul (supra) at 165; Re Londonderry's Settlement at 936 - 937, per Salmon LJ.
50 Consistent with that approach, the Court will presume that the trustee has acted bona fide and the applicant for review bears the heavy onus of showing that the exercise of the trustee's discretion was invalid: Tierney v King [1983] 2 Qd R 580 at 583, per Matthews J; Gordon v Australian and New Zealand Theatres Ltd (1940) 40 SR (NSW) 512; "Jacobs Law of Trusts in Australia", 6th ed, [1616].
51 Of course, the critical question is the type of conduct which would meet the threshold test. In "Trusts & Powers", D M McClean (1989), the author (at 57 - 58) referred to the following examples of conduct which might invalidate a discretionary decision:
"A discretion is exercised invalidly when it is done with mala fides. So too, a valid exercise of discretion is not made where the discretion has been exercised in a way which is perverse, arbitrary, capricious, wanton, irresponsible, mischievous or irrelevant to any sensible expectation of the settlor. A decision which is merely unreasonable is not invalid, although the difference between an unreasonable decision and a perverse or capricious decision is obviously a matter of degree."
52 The author also concedes that, strictly speaking, there is a distinction between mala fides and the types of conduct referred to in the authorities from which the examples given are drawn (at 58). Practically speaking, whether conduct is found to be mala fides will depend on the meaning attributed to the term. In the context of the exercise of discretionary powers mala fides has been held to include refusal to recognise that a discretion exists (Re Smith [1971] 1 OR 584), making a decision for an ulterior motive or purpose (Re Pauling's Settlement Trusts (No 1) [1964] Ch 303), and a refusal to take relevant considerations into account (Cock v Smith [1909] HCA 64; (1909) 9 CLR 773): see "Jacob's Law of Trusts in Australia", 6th ed, at [1610]. In Tierney v King at 583 Matthews J, with whom Kelly and Macrossan JJ agreed, also noted with approval the proposition referred to by Fry J in In re Roper's Trusts (1879) 21 Ch D 272 that in order to overturn a decision it must be shown that the trustee has not exercised a "sound discretion". As Megarry VC observed in Re Hay's Settlement Trust [1982] 1 WLR 202 at 209, where a trustee is given a power, he is bound to exercise it in a responsible manner according to its purpose. It is also the case that the Court will intervene where it is plain that the trustees have simply never addressed themselves to the sound exercise of the discretion which the testator has placed in them: French v Davidson [1818] EngR 688; (1818) 56 ER 550.
53 It can be seen that a wilful act of dishonesty is not an essential element of the threshold test. There are many circumstances, too numerous to identify, which will invalidate a decision made in the exercise of a trustee's discretion and justify the intervention of the Court. In my view, those circumstances include the making of a decision which is, objectively, so wholly unreasonable on all the facts of the case that it would be unjust to allow it to stand.
54 It was submitted on behalf of the second defendant that the principles to which I have referred apply equally to applications under s 94 of the Trustees Act. Section 94 confers on the Court the power to review the act, omission or decision of a trustee in the exercise of any power conferred by the Trustees Act. In exercising that power, the Court may require the trustee to appear before it, and to substantiate and uphold the grounds of the act, omission or decision that is being reviewed "and may make such order in the premises as the circumstances of the case may require". It is clear from the precise terms of the section that the Court has a discretion to make any order as the circumstances of the case may require. Counsel for the second defendant concedes that the right to review a decision conferred by s 94 of the Act should not be unduly confined, but submits that the Court should be guided by these principles, in particular the threshold test set out in Karger v Paul (supra). There is authority for the proposition that the object of a statutory provision to review the exercise of a trustee's discretion is not the substitution of a Judge's opinion for that of the trustee: see Tierney v King at 582 - 583, per Matthews J, a decision under s 8 of the Trusts Act 1973 (Qld) which is in terms equivalent to s 94 of the Trustees Act. There is also authority for the proposition that the traditional reluctance of the courts to interfere with the discretionary acts of private trustees, and the very good reasons for that approach, operate as a practical limitation on the Court's statutory power of review: Re Whitehouse [1982] Qd R 196, per Macrossan J, at 204. To that extent, at least the operation of s 94 is consistent with the general law. However, the extent to which the balance of the general law on the review of discretionary powers is of application to a review under s 94 remains open to debate. In "Hardingham & Baxt, Discretionary Trusts", 2nd ed, the authors state (page 118):
"Finally, section 94(2) gives rise to difficulties in that it leaves open the question as to what sort of conduct on the part of the trustee amounts to a breach of trust in this context. Will the trustee be in breach of trust for making an unreasonable decision?"
55 The decision of the Full Court of Queensland in Tierney v King dealt with a refusal by trustees to provide copies of an actuarial report on the value of the assets and liabilities of the trust. On that issue the Court applied the principle that trustees acting in good faith are not bound to disclose information which may bear upon or affect those reasons. I consider that Tierney v King is authority only for the application of that aspect of the general law to statutory rights to review the decisions of trustees. In my view, the obiter comments do not support the submission that a review under s 94 is constrained by all the principles of the general law. Indeed, Matthews J cites with approval (at 583) the conclusion of Macrossan J in Re Whitehouse that the statutory right to review a decision should not be narrowly construed. Macrossan J explained (at 203):
"By this I mean that the jurisdiction should not be read down or unduly confined. On the other hand, I think it would be wrong to suggest that although the jurisdiction to undertake a review is wide, the court would lightly interfere with a discretionary decision made by a trustee. The courts will continue to bear in mind that discretionary trust powers are vested in trustees for the purpose of decision by them and the traditional reluctance to interfere with their decisions will, for good reason, continue. If, notwithstanding this reluctance, a proper case is made out, then I do not doubt that the court has wide power. Speaking for myself, I am not persuaded that it is possible or advisable to attempt to limit in advance the ambit of cases in which the court will move under its new statutory power of review."
56 I respectfully concur with and adopt that approach to a statutory review of a trustee's conduct. Whilst the Court should remain reluctant to interfere with discretionary decisions of a trustee and should not substitute its own view of the correct conduct, intervention must occur in appropriate cases. The circumstances of such cases will vary, but include situations where the trustees have not in fact exercised the discretion, have not addressed themselves to the sound exercise of the discretion, have made a decision for an ulterior motive or purpose, or have refused to take relevant considerations into account, including the impact of the decision on a beneficiary or class of beneficiaries. In my view, all are examples of improper, unreasonable and irresponsible conduct justifying intervention by the Court pursuant to s 94 of the Trustees Act.
(iv) Whether the profit on the sale of shares is income or capital under the Will
57 There is no dispute that the moneys which the plaintiffs seek to have repaid are the profit that the executor generated by share trading in respect of shares he purchased and then sold on behalf of the estate. Neither is it disputed that the money used to purchase the shares was returned to the estate after distribution of the share trading profits to the second defendant. The issue for resolution is whether the profit constitutes capital or income for the purposes of distribution under the Will.
58 It is a well-established principle of the interpretation of Wills that the words of the Will should be interpreted in the context in which they appear according to their usual or primary meaning: see "Wills & Intestacy in Australia and New Zealand", Hardingham, Neave & Ford, 2nd ed, at [1102]; Hardwick v Hardwick at 175; Shelton v Anna Kilsby as Executor of the Estate of the Deceased & Ors. As Gibbs J observed in Australian Broadcasting Commission v Australasian Performing Right Association Ltd [1973] HCA 36; (1973) 129 CLR 99 at 109 - 111:
"The whole of the instrument has to be considered ... and the meaning of every clause must, if possible, be construed so as to render them harmonious one with another ...".
(See, also, Gleeson v Fitzpatrick [1920] HCA 81; (1920) 29 CLR 29 at 35, per Isaacs J.)
59 The plaintiffs submit that, in order to argue that the term "income" includes capital profit, it would be necessary to show that the Will so provides. Since the Will does not define income or capital, the words fall to be defined in terms of the Will, "as the Will is its own dictionary": Hill v Crook (1873) LR 6 HL 265. Further, as Dixon J stated in Brennan v Permanent Trustee Co of NSW Ltd [1945] HCA 17; (1945) 73 CLR 404 at 414 - 415:
"The language of the testator must be read in a sense in which he himself appears to have attached to the expression that he used."
60 In this case, the terms "income" and "capital" are used in contradistinction in the Will: see cl 4.1.4 and cl 4.1.4.1.
61 The first and second defendants submit that the disputed amounts paid to the second defendant should be classified as income as they were produced from buying and selling shares with moneys from the estate with the intention of creating an income stream for the second defendant. It is also said that the profit made clearly falls within the ordinary English usage of "income" as outlined in the dictionary definitions. The Short Oxford English Dictionary defines "income" to mean:
"The (amount of) money or other assets received or due to be received from employment, business, investments, etc, esp. periodically or in the course of a year."
62 The Macquarie Dictionary (2nd ed, 1981) defines "income" as "the returns that come in periodically, esp. annually, from one's work, property, business, etc; revenue; receipts." "Capital" is defined in the Macquarie Dictionary as "the wealth, whether in money or property, owned or employed in business by an individual, firm, etc, an accumulated stock of such wealth". However, while funds may constitute income of the estate for certain purposes, it does not automatically follow that the same funds will constitute income for the purposes of distribution to beneficiaries under the terms of the Will.
63 In support of their argument, the first and second defendants rely on income tax cases and rulings. Section 6 of the Income Tax Assessment Act 1937 defines income in the following terms:
"[A]ny profit arising from the sale by the taxpayer of any property acquired by him for the purpose of profit-making by sale or from the carrying on or carrying out of any profit-making undertaking or scheme."
64 The Court was also taken to Taxation Ruling 92/3 which, in effect, holds that if intention to make a profit is a significant purpose of a profit-making transaction, such profit constitutes income: see, for example, Federal Commissioner of Taxation v Myer Emporium Ltd [1987] HCA 18; (1987) 163 CLR 199 at 209 - 210.
65 Myer Emporium Ltd ("Myer") acquired a company, later renamed Myer Finance Ltd ("Myer Finance"), to which it lent $80,000,000 pursuant to a loan agreement which provided that the principal would be paid to Myer on or before a specific date and also provided for interest payments to be made to Myer at the rate of 12.5 per cent per annum on specified dates and for specified amounts. Myer later assigned to Citicorp Canberra Pty Ltd ("Citicorp") the moneys due or to become due as the interest payments and interest thereon under the loan agreement. The consideration for the assignment was the sum of $45,370,000. Whether this sum was income or capital in the hands of Myer was the principal question on the appeal. The Court held (at 209 - 210):
"Although it is well settled that a profit or gain made in the ordinary course of carrying on a business constitutes income, it does not follow that a profit or gain made in a transaction entered into otherwise than in the ordinary course of carrying on the taxpayer's business is not income. Because a business is carried on with a view to profit, a gain made in the ordinary course of carrying on the business is invested with the profit-making purpose, thereby stamping the profit with the character of income. But a gain made otherwise than in the ordinary course of carrying on the business which nevertheless arises from a transaction entered into by the taxpayer with the intention or purpose of making a profit or gain may well constitute income. Whether it does depends very much on the circumstances of the case. Generally speaking, however, it may be said that if the circumstances are such as to give rise to the inference that the taxpayer's intention or purpose in entering into the transaction was to make a profit or gain, the profit or gain will be income, notwithstanding that the transaction was extraordinary judged by reference to the ordinary course of the taxpayer's business."
66 This decision must be considered in the context of the statutory definition which does no more than determine what will be taken to be income for the purposes of the Act. It does not necessarily change or determine the categorisation of the profit in any other context.
67 As counsel for the plaintiff submits, the common law definition of income makes no provision for subjective considerations. Even the courts have acknowledged the distinction to be drawn between decisions made in the context of trusts and those made in the taxation cases. In Commissioner of Income Tax (Qld) v Brisbane Gas Company [1907] HCA 49; (1907) 5 CLR 96 the Court observed (at 104):
"The majority of the learned Judges of the Supreme Court and the learned Judge of the Court of Review, thought the case was to a great extent governed by the principles laid down in Bouch v Sproule but that was a case between a tenant for life and remainderman, under the terms of a will by which the income was given to the tenant for life. Very different questions arise in a case of that sort. There, what the Court had to do was to discover what was the meaning of the testator's words. When he said that the tenant for life was to have the income, did he intend to cover the case of a division of past accumulated profits. Here the question is the construction of a taxing Act ... . All we are concerned with is the interpretation of the Statute."
68 In contrast, when considering the meaning of the terms "capital" and "income" in the context of trusts, and particularly conflicts between income beneficiaries and capital beneficiaries, the courts have consistently concluded that the capital of the trust is what is held; the proceeds accruing from (rather than to) the capital is income. Increases in the value of a capital asset are part of the capital and the proceeds of the sale of such a capital asset (including any increase in value) are part of the capital.
69 In Sinclair v Lee & Anor [1993] Ch 497 shares had been left in a company and there was a reconstruction. The original shares were reduced in value but shares in another company were given instead. The Court held that the shares given were capital and not income. In reaching this conclusion, the Court noted (at 506):
"In the simplest of cases, there is, in principle, no difficulty in distinguishing between income receipts and capital receipts ... . A is entitled to the income arising from lettings, after deducting outgoings properly payable out of income; or he may be entitled to occupy the building, such as a house and use it himself ... . In the fullness of time the property will pass to B. If it has been sold meanwhile, B will obtain the benefit of any appreciation in the value of the property. A is entitled to any increases obtainable in rents but not to capital profits. This accords with the presumed intention of the testator or settlor, in the absence of any indication by him to the contrary."
"If the company were wound up, the ordinary person would regard the money distributed to the members as capital even though it included substantial sums of reserves representing accumulated undistributed profits. In a winding up, what the trustee shareholders receive takes the place in the trust fund of the shares themselves. The receipts are as much capital as would be the proceeds of sale if trustees had sold the shares."
71 The case of In re Armitage; Armitage v Garnett [1893] 3 Ch 337 concerned a gift of shares as residue with the income to be given to another beneficiary. The company was wound up and another company bought out the shares resulting in a profit. The proceeds of the shares were held to be capital even though they came out of a reserved dividend fund that could have been distributed as dividends if the company had chosen to classify that way. Lindley LJ stated (at 346):
"What does a man mean when he leaves shares to a tenant for life? He means that the tenant for life shall have the income arising from the shares in the shape of dividends or bonuses declared during the life time of the tenant for life. He does not mean that the tenant for life shall receive profits in any other sense. He does not mean him to have such profits, for example, as arise by a realisation of the shares; he never dreamed of such profits going to the tenant for life."
"When you have replaced the capital I think it perfectly clear that the balance which remains over and above is profit ... but I come to the conclusion beyond any doubt that this excess is to be regarded as capital and not as income and is not to go to the tenant for life. There is an argument in support of this view to which no answer has been given. It is admitted that if the shares had been sold by the executors: ₤9 5s. 6½d. per share before the sale en masse of all the shares to the new company the excess ... per share would have been regarded as capital and would not have gone to the tenant for life. How does the fact that there has been a sale to this new company, instead of an ordinary sale in the market by the executors, convert that which would otherwise be regarded as capital into income."
73 The case of Re Mulligan (decd) [1998] 1 NZLR 481 concerned a breach of trust action against trustees who had complied with the wishes of the life tenant widow and invested exclusively in high interest mortgage investments which did not give any capital appreciation, but gave high income to the income beneficiary. The capital beneficiaries claimed, and the Court found, that there was a breach of the duty to act impartially by not investing some of the capital in equities like shares that would have appreciated in value and been a hedge against inflation. The failure to do so caused loss of appreciated value to the estate and to the capital beneficiaries. The implication was clearly that the capital beneficiaries would have received the capital appreciation, whereas the income beneficiary would only receive the income such as interest.
74 There are few cases which deal with circumstances similar to those which here apply. Most are concerned with issues such as whether payments or additions to property should be defined as capital or income. The Courts have, however, consistently maintained the stated definitions of "income" and "capital". Thus, it has been held that "capital" included:
(a) new shares issued out of the earnings of a company, even if a dividend could have been issued instead: In re Ezekiel Barton's Trust (1868) LR 5 Eq 238;
(b) distribution of accumulated profit as a bonus dividend if the accumulated profit had become part of the capital: Bouch v Sproule (1887) 12 App Cas 385; or where the shareholder is in practice required to direct the bonus dividend back in payment of new shares: Hawkins v Hawkins (1920) SR (NSW) 550;
(c) amounts paid to trustee shareholders by way of lawful reduction of capital or winding up: In re Armitage; Armitage v Garnett;
(d) where a company diluted the value of shares on a reconstruction and shares in another company were provided instead, the shares in the other company were treated as capital: Sinclair v Lee;
(e) bonus shares out of accumulated income: In re Wilkinson (decd); Elders Trustee & Executor Co Ltd v Henley [1954] VLR 48;
(f) proceeds of the sale of preferential rights to subscribe for shares or the shares acquired under the exercise of such rights: In re Wilkinson (except where the Will gave a specific direction for any profit to be held as income: In re Hart (decd); Trustees Executors & Agency Co Ltd v Brash [1954] VicLawRp 34; [1954] VLR 239;
(g) the payment of amounts owing to a business run by the testator that would have been income if the testator was still alive and running the business: In re Davis (decd) [1953] VicLawRp 85; [1953] VLR 639.
75 The defendants submit that the court should view the statements of principle in these authorities with some caution in applying them to the facts of this case. The difference in principle in In re Armitage; Armitage v Garnett is said to be that in that case the capital which produced the profit was not in the estate from the outset. Re Mulligan is distinguished on the basis that it deals solely with the issue of trustees investing in hazardous investments with the potential for loss to the residuary beneficiaries. Here, it is said that there has been no loss to the beneficiaries.
76 The cases of Re Barton's Trusts, Bouch v Sproule, Hawkins v Hawkins and Re Wilkinson are distinguished on the basis that the shares were already part of the estate. Here, the shares were subsequently purchased. The cases of Eisner v Macomber [1919] USSC 119; (1919) 64 L Ed 521 and Sinclair v Lee were also distinguished; the latter on the basis that it involved a share swap, hence, a swap in capital assets. It is asserted that the authority is, therefore, inapplicable to the circumstances of this matter.
77 It is the case that the cases quoted by the plaintiff in support of the proposition that profits on the sale of shares are capital rather than income relate to assets in the estate at the time of death. However, while the facts may differ in the cases to which I have referred, that difference does not, in my view, remove the relevance of the basic principles. There is one particular point of difference upon which the defendants seek to rely to distinguish these authorities; the distinction between selling existing shares in the estate, as opposed to taking cash from the estate to engage in a short burst of share market transactions to maximise the income stream. It is said that, in removing money from another type of investment in order to trade on the share market, the executor is simply swapping one form of income to the estate for another and doing so without detriment to the capital beneficiaries.
78 For myself, I consider the point of distinction to be of no relevance. After acquired shares are bought from the assets of the estate and become part of the assets of the estate. Everything that is in the estate at any point in time is property belonging to the estate which must be dealt with in accordance with the terms of the trust. I know of no authority which draws any distinction between after acquired assets and those which were in the estate at the time of a testator's death when it comes to distribution under the Will. Neither can I see any reason in logic why such shares should be treated differently.
79 The argument put by the defendants for classifying the profit as income also relies heavily on the assertion that the capital beneficiaries are in no worse position because the acquisition costs of the shares are returned to the estate following sale. This is a very narrow interpretation of detriment. It involves looking at the value of the estate at the time of death and excluding the potential for growth in capital. The capital of the estate may not be depleted, but neither is it growing. Further, if the share trading had been unsuccessful, the loss would be suffered by the estate. In that way, the residuary beneficiaries bear the risks, but obtain none of the benefits.
80 Further, I remain unpersuaded that no loss results to the estate in any real sense. Prior to sale, the shares form part of the capital of the estate. The value may change due to fluctuations in the market, but the asset has value and adds to the value of the estate as a whole. Once sold, unless the whole of the sale price is returned to the estate, the corpus of the estate does indeed suffer a loss, much in the same way as a downturn in the property or share market decreases the value of the capital to be distributed to residuary beneficiaries.
81 It was submitted that the contrary interpretation that the profit is capital results in a detriment to the income beneficiary that may never have been intended by the testator. In my view, no such detriment arises. The income beneficiary obtains the income irrespective of the type of investment. If the profit is returned to the estate as capital and reinvested, the income stream to the income beneficiary is increased.
82 It is also said by the defendants that there is in the authorities no statement of principle which applies to the circumstances of this case. I consider one such statement to be the well establish obligation on a trustee to act strictly impartially and even-handedly between income and capital beneficiaries. However, the defendants submit that this principle should be disregarded in the absence of an application alleging that the trustee is improperly acting to the advantage of one beneficiary over the other. The application not being of that type, it is said that the question of whether the profits constitute capital or income should be answered without reference to the consequence on the capital beneficiaries. There might be some merit in that submission if it were not the case that the defendants rely on the absence of any detriment to the estate in support of their argument that the profits should be considered income.
83 I have reached the conclusion that the authorities to which I have been referred correctly state the law in the context of trusts. I consider the cases dealing with income in the context of the taxation law not to be of assistance. I do not accept that the authorities can be distinguished on the basis of when the profit producing asset was acquired. Such a proposition is without authority. It would also permit executors to deliberately set out to advance one type of beneficiary over another, a practice which is undesirable and in conflict with decided cases on that issue.
84 I have no hesitation in concluding that, other than where a contrary intention is manifest, profits derived from trading in shares, even if the shares were acquired during the course of administration of the trust, is capital for the purposes of distribution.
(v) Whether profit on the sale of shares can be classified by the executor as income pursuant to cl A3 of the Schedule to the Will
85 The consequence of the conclusion that the profit on the sale of shares is capital is that, in order for Mrs Wendt to have an entitlement to the profits, the Will would have to specifically provide for it.
86 On behalf of the defendants, it is submitted that cl A3 authorises the executor to classify the profit as income and distribute it to Mrs Wendt. It is said that the issue of what is income and what is capital depends very much on the particular circumstances of each case and the very purpose of cl A3 is to avoid disputes as to categorisation. Clause A3 provides the executor with the discretion to determine whether receipts or outgoings are capital or income or partly income or capital so as to bind the beneficiaries. It is said that the effect of the clause is to give the executor the power to decide "in a situation such as this" whether profits constitutes income. In fact, if this interpretation is accepted, it gives to the executor the power to arbitrarily determine, in any circumstances, whether receipts or outgoings are capital or income. Such a discretion would be unfettered and cannot be reviewed by the Court unless the trustee has failed to meet the threshold requirements set out in Karger v Paul. In effect, on the defendants' submission, cl A3 confers a power to override testamentary intention.
87 It is further said that there exists no reason to believe that the testator did not intend the power to operate in this fashion. I consider that one reason would be the conferral on Mrs Wendt under cl 4.1.4.1 of the Will of a right to apply to be paid part of the capital if she can establish that her income is insufficient for her reasonable needs. The conferral of such a right is, in my view, inconsistent with a power in the executor to categorise capital as income for the purpose of distribution to the income beneficiary. I am unpersuaded by the defendants' argument that because cl A3 requires the income beneficiary to establish need, the two provisions serve different functions. In my view, the existence of different requirements does not equate with different functions. Indeed, it is the very fact that, as reflected in cl 4.1.4.1, the testator considered it necessary for the income beneficiary to establish need before being given access to the capital of the estate which militates against the conclusion that cl A3 may properly be construed as conferring on the trustee a general discretion to distribute capital to the income beneficiary. In other words, the terms of the Will itself are inconsistent with the interpretation of cl A3 advanced on behalf of the defendants. The interpretation advanced would render cl 4.1.4.1 superfluous.
88 In written submissions the first defendant also relies on and refers to a statement of Murray J in Tipperary Developments Pty Ltd v The State of Western Australia, unreported; SCt of WA; Library No 960620; 31 October 1996. His Honour's words are misquoted in the written submissions. The correct statement is in the following terms (at 9):
"The trust deed establishes the trust in what may be described as a relatively usual form. The corporate trustee is given very wide powers of a business character. ... It has wide powers of investment and it may allocate receivables to capital or income. ... The trust is in that form which is usually described as discretionary in relation to the distribution of income among classes of discretionary beneficiaries, withholding any such distribution, capitalising income and otherwise acting in accordance with the powers and duties of a trustee."
89 It is apparent from a reading of the case that the above quotation is a mere recitation of the primary terms of the trust under consideration. The trust, being a discretionary trust, included an express discretion in relation to the distribution of income amongst classes of beneficiaries. The issue before the Court was the question of security for costs. In this case, no discretionary trust is created under the Will. In my view, the decision in Tipperary Developments Pty Ltd v State of WA is of no assistance in the interpretation of cl A3.
90 On behalf of the plaintiffs it is said that cl A3 should not be interpreted as conferring on the executor an unfettered power to define what is income and what is capital for all purposes. A different explanation for the purpose and a different interpretation of the scope of the clause is put forward.
91 As the plaintiffs assert, the clause is a standard one referred to in such texts as "Hutleys Australian Wills Precedents", Rowland and Tamsitt, 5th ed (1994), at 2614 ("Hutleys"). The text recommends the use of a clause in similar terms in order to overcome and exclude the difficulties created by the rule in Allhusen v Whittell (1867) LR 4 Eq 295 and Howe v Earl of Dartmouth [1802] EngR 197; (1802) 32 ER 56. In Allhusen v Whittell the Court held that, in order to achieve equity, it was necessary to adjust rights between the life tenants and remaindermen by ascertaining what part of the capital and income for the year would be required for payment of debts and other charges and make a calculation so that the life tenant only received the income arising from that part of the capital that was not required for the payment of those debts and liabilities (at 303). This requires the executor to engage in a complex calculation to work out the appropriate income that belonged to the capital of the estate and what was income from the net estate. The rule in Howe v Earl of Dartmouth has a similar purpose. It was held that there was a duty to convert wasting reversionary or hazardous assets and to invest in income bearing investments as part of the duty to act impartially. Even if the conversion to income bearing investment was not carried out in fact, the trustees were still expected to apportion the income as if, notionally, that conversion had been done and calculate a source of income provided for the life tenant (at 61 - 62).
92 The author of "Hutleys" concludes that the simplicity of administration is best served by excluding the rule in Allhusen v Whittell. One method suggested is to give executors a discretion as to apportionment between capital and income, and the text includes a form to achieve that purpose which is in relevantly similar terms to cl A3: see also "Butterworths Australian Encyclopaedia Forms and Precedents" at s 2850, page 13,215 - 13,216.
93 The meaning and purpose of the standard precedent clause is confirmed in the case of Re Wynn (decd); Public Trustee v Newborough [1952] 1 All ER 341 at 344 - 347. In Re Wynn (decd) the relevant clause was in the following terms:
"I authorise and empower ... my trustees to determine ... whether any moneys are to be considered as capital or income ... and I declare that every such determination ... shall be conclusive and binding upon all persons interested under this my will or any codicil hereto."
94 It can be seen that this clause is in substantially similar terms to cl A3. The Court held that the purpose of such a clause was not, as had been contended, to give an unlimited discretion to the trustees to classify moneys as income or as capital, but merely to exclude the complexities of those particular rules.
"... but it seems to me that the clause does no more than exclude the rules in Howe v Earl of Dartmouth and Allhusen v Whittell, which settle the incidence of costs and expenses and other matters between beneficiaries, and it is well established, I think, that a testator may vary the rights of the beneficiaries taking under his will by excluding those rules."
96 The affidavit evidence of Mr Paonni supports the plaintiffs' argument that cl A3 was intended to have a more limited application than that submitted by the defendants and one consistent with overcoming the effects of the rules referred to in Re Wynn (decd). Mr Paonni clearly states that the powers set out in the Schedule were merely the standard range of powers that he includes in all Wills. Clause A3 can be contrasted with cl 4.1.4.1 which Mr Paonni was specifically instructed by the testator to include and would be unnecessary if cl A3 had the effect suggested by the defendants.
97 In Re Wynn (decd) the Court concluded (at 346):
"It seems to me that I am bound to hold, on the authority of Re Raven, that a provision which refers to the trustees the determination of all questions and matters of doubt arising in the execution of the trusts of a will, and which attempts to make the determination of the trustees conclusive and binding on all persons interested under the will, is void and of no effect, because it is both repugnant to the benefits which are conferred by the will on the beneficiaries and also because it is contrary to public policy as being an attempt to oust the jurisdiction of the court to construe the will and to control the administration of the testator's estate."
98 Counsel for the first defendant submits that, if the effect of the clause is to oust the jurisdiction of the court as suggested by the plaintiffs, it would not be included in leading texts as a standard precedent. I consider this submission to have no substance. It is only if the clause is given the wider construction relied upon by the defendants that it could be said to attempt to oust the jurisdiction of the court, thereby invalidating the clause. The narrow construction put forward by the plaintiffs does not have that effect and is consistent with inclusion in any book of standard precedents.
99 I consider the plaintiffs' argument on this point, supported as it is by authority, to be compelling. At its highest, cl A3 gives the executor flexibility to determine what is income or asset in the very narrow circumstances outlined in the authorities to which I have referred. Any broader interpretation would render the clause void. The consequence is that if the executor did indeed rely upon cl A3 to determine that the profits of the share trading were income rather than capital and distribute it to the income beneficiary without consideration to the interests of the capital beneficiaries, this Court is entitled to intervene.
(vi) Executors/trustees' duties and entitlement to obtain a determination from the Court
100 In Re Mulligan (decd) Pankhurst J identified three general principles relating to the duties of trustees, two of which are directly applicable to this case. The first is the duty of trustees to act with due diligence and prudence in the discharge of their duties. Pankhurst J referred to what he described as the "classic statement" of Lindley LJ in In re Whitely; Whitely v Learoyd (1886) 33 Ch D 347 at 355:
"The duty of a trustee is not to take such care only as a prudent man would take if he had only himself to consider; the duty rather is to take such care as an ordinary prudent man would take if her minded to make an investment of the benefit of other people for whom he felt morally bound to provide."
"This passage serves to emphasise the importance of the subject matter of a trust. Protection of personal assets is different to the protection of a fund which belongs to beneficiaries. The purpose for which a trust fund is established commonly dictates a different approach as well."
102 Of course, loss of trust money or diminution in the real value of a trust fund does not, of itself, render a trustee liable. It must be shown that the loss or diminution arose from some failing on the part of the trustee, which can be properly characterised as a breach of trust.
103 The second general principle referred to in Re Mulligan (decd) is the duty of impartiality. Pankhurst J described the obligation of a trustee to act with strict impartiality and to endeavour to maintain a balance between the interest of life tenant and remaindermen as "elementary". After referring to Hoffmann J's statement of the impartiality concept in Nestle v National Westminster Bank plc (Chancery Division HCt, 29 June 1988) at 4 - 5, Pankhurst J emphasised the concept of fairness as being a relevant factor when attempting to balance the competing interests of those to whom the duty is owed (at 501).
104 The duty of a trustee at law and in equity to act impartiality between beneficiaries has been reinforced by statute in Western Australia. Section 19(1) of the Trustees Act provides as follows:
"Any rules and principles of law or equity that impose a duty on a trustee exercising a power of investment including, without limiting the generality of those duties, rules and principles that impose -
(a) a duty to exercise the power of a trust in the best interests of all present and future beneficiaries of the trust;
(b) a duty to invest trust funds in investments that are not speculative or hazardous;
(c) a duty to act impartially towards beneficiaries and between different classes of beneficiaries; or
(d) a duty to take advice,
continue to apply except to the extent that they are inconsistent with this or any other Act or the instrument creating the trust."
105 In the circumstances of this case it is important to recognise that the duty to act impartially is not qualified by any expression of wishes which the testator makes to his designated executor during his life time: Tanti v Carlson [1948] VicLawRp 70; [1948] VLR 401 at 405. In Re Burbidge (No 2), unreported; SCt of NSW (Young J); 6442 of 1992; 25 June 1993, Young J did not consider the decision in Tanti v Carlson to be authority for the proposition that an executor is not entitled to have regard to the wishes of the deceased not expressed in the Will. I respectfully agree with that view. As Young J observed (at 10):
"It is only when exercise of a discretion by a trustee in accordance with the deceased's wishes collides with some higher obligation that the wishes must be put to one side".
106 In this case the higher obligation is to act in accordance with the terms of the Will and impartially as between the classes of beneficiaries.
107 Further, while the obligation to be impartial and even-handed between beneficiaries or classes of beneficiaries can be varied, it can only be done by express provisions in the trust document: Bakewell v Holme (1943) 44 SR (NSW) 150. However, not every provision affecting the respective interests of classes of beneficiaries will displace the duty of impartiality. In Rowds v Bibb [1900] 2 Ch 107 at 116 Lindley MR held that, in the context of a discretionary power to postpone conversion for such period as to the trustees shall seem convenient, the discretionary power was nothing more than a power in the nature of a power of management. The power did not displace the trustees' traditional duty of even-handedness and authorise the trustees to prefer the interests of the remaindermen to those of the life tenants.
108 Even if cl A3 were to be interpreted as the first and second defendants assert, it is plain that, both at law and under statute, a general discretionary power conferred by the trust deed does not override the trustee's duty to be fair to and impartial between all beneficiaries. Clause 4.1.4.1 would, in my view, be an example of an exception created by the trust deed referred to in s 19(1) which would entitle a trustee to make a decision which operated to the benefit of one class of beneficiary and to the detriment of another. However, the questioned distributions were not made pursuant to that clause of the Will. I do not consider cl A3 to be an example of such an exception for the reasons to which I have already referred.
109 Because of the consequences of acting in breach of duty, a prudent executor who is unsure of the appropriate action to take will obtain legal advice and/or apply to the Court for a determination of the issue. In this way the executor avoids the risks inherent in himself deciding the respective rights of the beneficiaries or in exercising a power or discretion where the propriety of such exercise might afterwards be called in question by the beneficiaries: "Jacob's Law of Trusts in Australia", R P Meagher and W M Gummow, 6th ed, at [2132]. As Maughan AJ observed in Alcock v Public Trustee (1936) 53 WN (NSW) 192 (at 193):
"If all the persons interested be not sui juris and accessible, or if, being sui juris and accessible, they are not unanimous as to the course which the trustee or executor is to pursue, the latter should ask the Court for judicial advice as to his conduct. Such judicial advice if obtained upon a fair statement of the facts known to the executor or trustee will be a complete protection to him as against the beneficiaries and will entitle him to complete indemnity out of the trust estate which he is representing, although of course it will not in any way affect the adverse claimant either as to the subject matter of his claim or as to his costs."
110 An application to the Court for directions is available under the general law and under statute. Section 92(1) of the Trustees Act provides that any trustee may apply to the Court for directions concerning any property subject to a trust, or respecting the management or administration of that property, or respecting the exercise of any power or discretion vested in the trustee. In In re Beddoe; Downes v Cottam [1893] 1 Ch 547 Bowen J pointed out the rationale behind the entitlement to apply to the Court for directions and the relative ease with which such assistance can be obtained. He said (at 562):
"If a trustee is doubtful as to the wisdom of prosecuting or defending a lawsuit, he is provided by the law with an inexpensive method of solving his doubts in the interests of the trust. He has only to take out an originating summons, state the point under discussion, and ask the Court whether the point is one which should be fought out or abandoned. To embark in a lawsuit at the risk of the fund without this salutary precaution might often be to speculate in law with money that belongs to other people."
111 Section 97 of the Trustees Act further confers on the Court a discretion to order the costs and expenses of and incidental to any such application to be paid from the trust property. Even apart from this section, a trustee is generally entitled to his costs of any application to the court as part of his general right to indemnity, providing the trustee adopts the appropriate approach and procedure: Gleeson v Fitzpatrick at 38, per Rich J.
112 However, because of the ease and comparatively small expense involved in obtaining directions of the Court, if a trustee brings or defends an action unsuccessfully, he bears the onus of establishing an entitlement to his costs: In re Beddoe per Bowen J at 562.
113 In equity a trustee is protected from the legal obligations attaching to the performance of his office as trustee and this indemnity is the price paid by the beneficiaries for the benefit of the services of trustees: Hardoon v Belilios [1901] AC 118 at 125. Accordingly, a trustee is entitled to be reimbursed out of the trust property in respect of all the charges and expenses properly incurred in the execution of the trust: Worrall v Harford [1802] EngR 342; (1802) 32 ER 250 at 972; Re Grimthorpe [1958] 1 WLR 381; Carver v Duncan [1983] 1 WLR 494 at 502.
114 The restrictions on the principle, in particular the scope of the term "properly", have also been judicially considered. As Bowen LJ observed in In re Beddoe at 562:
"A principle of law to be applied appears unmistakably clear. A trustee can only be indemnified out of the pockets of his cestui qui trust against costs, charges, and expenses properly incurred for the benefit of the trust - a proposition in which the word 'properly' means reasonably as well as honestly incurred."
115 Consistent with this approach, the principle has been held to apply only to those who act in good faith: Re Grimthorpe; Carver v Duncan at 502. The principle does not apply where the costs charges and expenses which have been incurred arise from the trustee's own default: Field v Peckett (No 3) [1861] EngR 388; (1861) 29 Beav 576; Chambers v Smith (1846) 2 Coll 742; Smith v Chambers (1847) 2 Ph 221.
116 The statutory position is to like effect. Section 71 of the Trustees Act provides that a trustee may reimburse himself for or pay or discharge out of the trust property all expenses reasonably incurred in or about the execution of the trusts or powers. In my view, the restrictions on reimbursement identified in the general law are equally applicable to reimbursement pursuant to s 71 of the Trustees Act.
117 Consistent with this principle, a trustee is entitled to employ a solicitor to carry out legal work on behalf of the estate and, in relation to work not involving litigation, disputes or arbitrations, the trustee will normally be entitled to an indemnity for the whole of the costs providing they are reasonable. The practical effect is that the trustee may pay for legal work of this type from trust moneys without seeking an actual indemnity from the beneficiaries or directions from the Court.
118 The position with respect to legal fees arising from disputes and resulting in litigation requires further consideration. The starting point is the principle that a trustee who reasonably engages in litigation with outside parties in order to protect the trust property is entitled to be indemnified out of the trust property against expenses even though the action does not result in his favour: Re Stanhill Development Finance Ltd (In liq) [1966] VicRp 70; [1966] VR 499 at 502 - 503. Generally speaking, the same principle applies to the costs of taking legal advice on commencing or defending the litigation: Re Corbett's Settlement (1907) 24 WN (NSW) 30 at 31; "Law of Trusts and Trustees", Underhill, 12th ed, page 368. The principles are essentially the same where the litigation involves the trustee and the beneficiaries rather than the trustee and third parties.
119 In the absence of any provision to the contrary, where both the income beneficiary and the capital beneficiary benefit from the litigation, the costs are payable out of the corpus. However, in Perpetual Trustee Co Ltd v Holt (1895) 11 WN (NSW) 141 costs were held to be payable out of the income because the application was one simply for the benefit of the income beneficiary.
120 The entitlement to be indemnified out of the trust property is said to be "as of right" unless the trustee has by his unreasonable conduct caused litigation or has otherwise been guilty of some inequitable conduct as may amount to a violation or culpable neglect of his duty: Turner v Hancock (1882) 20 Ch D 303 (CA) at 305; Re Aitken and Barron's Bill of Costs; Ex parte Perpetual Trustee Co Ltd (1932) 49 WN (NSW) 224 at 225; "Law of Trusts in Australia", Jacobs, 6th ed, at [2136]; In re Beddoe at 558 per Lindley LJ. As the entitlement to be reimbursed is qualified, even if the decision to litigate is based on legal advice, it does not automatically follow that the trustee will be entitled to his costs: In re Beddoe (supra) at 558 and 562. For example, in Palairet v Carew [1863] EngR 300; (1863) 55 ER 222 at 224 a trustee who acted unreasonably with respect to the trust was removed and was made to pay all the costs of the suit up to and including the hearing: see also Price v Loaden [1856] EngR 252; (1856) 52 ER 955.
121 Because reimbursement from the estate of the trustee's costs of litigation is subject to restraints, it is for the Court to determine the trustee's entitlement at the conclusion of the litigation when the full circumstances are known. Similarly, whether a beneficiary participating in the litigation is entitled to costs from the estate or from the trustee falls to be determined by the Court.
122 There is no statutory provision entitling an executor to independently, and without reference to the Court, decide to pay the legal fees of parties to litigation from the estate. Neither has the Court been taken to any authority which approves such a course of action.
123 Before addressing the remaining issues it is necessary to consider the evidence adduced on behalf of the parties and to make the relevant findings of fact.
124 The plaintiffs relied on the affidavit evidence of the first-named plaintiff, Douglas Ronald Wendt, who swore affidavits on his own behalf, and that of the other plaintiffs. He was not required by the defendants to give oral evidence. Amongst the annexure to the affidavits were a series of letters between the parties' solicitors concerning the distribution of capital. On 22 May 1998 the plaintiffs' solicitor wrote to Mr Orr's solicitors outlining the plaintiffs' concerns about the possibility that he would distribute capital to Mrs Orr pursuant to cl 4.1.4.1 of the Will. This clause allowed for distribution of capital by application on establishment of need. Mr Orr's solicitors were further advised that if he intended to exercise his discretion under the clause, the plaintiffs' solicitors would seek instructions to apply to the Court for a declaration. The letter concludes with a request for notice of Mr Orr's intentions in respect of the particular clause.
125 By letter dated 9 June 1998 the first defendant's solicitors advised the plaintiffs' solicitors in the following terms:
"The executor has no present intention of paying any part of the capital to Mrs Wendt. Although it appears unlikely that Mrs Wendt could establish any reasonable need to be given any part of the capital given the size of the estate and the income likely to be generated by it, it is simply not possible to say that a valid request will never arise ...
We suggest this compromise, that our client, with the knowledge of Mrs Wendt, give an undertaking to your clients to give say 21 days notice of any intention to pay part of the capital to Mrs Wendt."
126 By letter dated 12 June 1998 Mr Orr was put on notice, in clear terms, that should any amount of capital be paid from the residue of the estate in favour of the life tenant, then the plaintiffs would look to recover any loss from him.
127 In relation to the purchase of the boat, the plaintiffs' evidence was that Mr Orr did not at any time ask for their consent to repair or upgrade the boat and trailer.
128 As to the demountable home, one annexure to the first-named plaintiff's affidavit is a document dated 19 May 1999 which purports to be a receipt signed by Mr Orr, as executor, acknowledging the payment to him by Mrs Wendt of $10,000 "for the estate's half share in the holiday transportable unit". Mr Orr was not cross-examined on this document, although evidence to which I will later refer indicates that he did not in fact receive these moneys from Mrs Wendt, nor was the amount deducted from any distribution of income made to her. Rather, that amount was treated in the estate's financial statements as a loan to her.
129 The plaintiffs also relied on the affidavit of Sam Peter Paonni, the solicitor who took instructions from the deceased and drafted the Will. Mr Paonni was not required by the defendants to give oral evidence. Mr Paonni stated that he included in the Will a schedule that set out what he referred to as "the standard range of powers" that he includes in all wills, unless he has instructions to the contrary. He said that it is his usual practice to advise clients to include this standard range of powers in order to give the executor sufficient flexibility to properly administer the estate in all circumstances. He did not remember including any of these powers outlined in the schedule on specific instructions from the deceased. This is in contrast to cl 4.1.4.1 which he was specifically instructed to include.
130 The first defendant's case consisted of the affidavit and oral evidence of Mr Orr and the affidavit evidence of Philip Hartley, the accountant and tax agent employed by Mr Orr who prepared the estates financial statements for the years ended June 1999 and 2000.
131 Mr Hartley deposed to the fact that the profits from the sale of shares were recorded in the 1998-1999 financial statements as capital gains. It was considered that the volume, frequency and nature of the sale of shares were not sufficient to meet the requirements of a share trader classification for income tax purposes. The profits were included in the financial statements as income to the trust and recorded as capital gain on assets. The same approach was taken in the 1999-2000 financial statements.
132 Mr Hartley also referred in his affidavit to the fact that the 1998-1999 financial statements included capital losses on the sale of the demountable home and the Savage shares. For income tax purposes the capital losses were offset against the capital gains on the shares. However, Mr Orr paid out the gross income and the gross capital gain without offsetting any of the capital losses. For accounting purposes the capital loss was allocated to the income beneficiary to be consistent with the tax treatment. This resulted in the income beneficiary account being overdrawn by $10,250. This amount was reduced to $9448 due to the fact the trustee has not paid certain interest due to the income beneficiary.
133 Mr Hartley made no reference to any instructions given to him by Mr Orr as to how to categorise the profits on share sales.
134 In his affidavit evidence Mr Orr denied that the moneys paid to the Mrs Wendt were capital gains. He considered them to be income. He said that he had many conversations with the deceased prior to him making his will concerning how the will was to be drafted to give effect to the deceased's wishes. He alleges that on one occasion the deceased said words to him to the following effect:
"I have looked well after Joan during my life, she has sufficient assets of her own and I want her to receive any income or money made out of the Estate [emphasis added]."
"From the discussions I had with the Deceased over the course of our relationship, it became apparent to me through those conversations that his intention was that money that I made from his estate be given to his widow, the second defendant for her use ... The impression I was given by the Deceased was that so long as the amount that he left at death was maintained or preserved, less fair running costs, anything made was to be distributed to the second defendant during her life. Through conversations with the Deceased I got the impression that his intention was that administration fees and other associated fees were to come out of the estate and were not to be borne by the second defendant [emphasis added]."
136 According to Mr Orr, on the basis of his discussions with the deceased and relying on the terms of cl A3, he considered that he had a discretion to determine how to categorise any money made, and distribute it in accordance with the balance of the Will, in particular cl 4.1.4. In conflict with his oral evidence, in his affidavit Mr Orr does not assert that the profit was in fact income, as opposed to capital gains. He simply states that, based upon his discussions with the deceased, he determined to exercise his discretion under cl A3 to classify the profit as income.
137 Under cross-examination on behalf of the plaintiffs, Mr Orr was taken to the estate's financial statements, in particular the entries relating to sums ultimately paid to Mrs Wendt. Mr Orr agreed that it was apparent from the financial statements that all the expenses of the estate had been charged to the capital of the estate and not deducted from the income that was paid to Mrs Wendt. He also acknowledged that even Mrs Wendt's legal fees also came out of the capital of the estate rather than the income. Mr Orr agreed that whenever he received profits from the sale of shares, the full amounts were simply paid over to Mrs Wendt by cheque very shortly after without any portion being retained to see if there was going to be a capital loss incurred, although the expenses relating to the share dealing were deducted. He described this as the "net profit". The balance of the proceeds was returned to the estate.
"You didn't wait to see if there were any capital losses that were going to be incurred so that you might deduct those from the payments to her?---How could there be capital losses if I made a profit?"
139 This was the first indication that, in administering the estate, Mr Orr was separating the profits of a particular transaction, from the financial activities of the estate as a whole.
140 In relation to the financial statement for the 1998-1999 financial year, Mr Orr acknowledged that the figures identified in the financial statements as capital gains were the profits made on shares belonging to the estate which were either sold by him or were the subject of a compulsory acquisition. In relation to the same financial year, Mr Orr also acknowledged that the estate incurred capital losses from the sale of the demountable home and in relation to the Savage shares.
141 With respect to the financial statement for the 1999-2000 financial year, Mr Orr again acknowledged that the figures identified in the financial statements as capital gains were the profits made on shares belonging to the estate which were sold by him. Mr Orr also acknowledged that the capital loss to the estate from the sale of the demountable home had been carried over and that the estate had also incurred capital losses in relation to the Savage shares and options and the Hargreaves shares. Mr Orr was uncertain as to why his accountant listed the profit on the share sales as capital gains when he had instructed the accountant that it was being regarded as income for the purposes of the Will. As I have noted, in his affidavit, Mr Hartley makes no mention of being given any instructions with respect to preparing the financial statements of the estate.
142 Mr Orr was unable, or unwilling, to grasp the concept that if capital gain were to be distributed to Mrs Wendt, in fairness to the other beneficiaries, it should at least be a net gain. Mr Orr's responses were evasive and unsatisfactory. Ultimately he blamed the taxation consultant for failing to advise him that certain items should be deducted from the distribution to Mrs Wendt. However, even if sought and received, such advice would have been difficult to comply with due to Mr Orr's practice of distributing the profit to Mrs Wendt almost immediately it was received by the estate.
143 As I have indicated, it was at times difficult to discern from Mr Orr's evidence whether he considered the profit on the share sales to actually be income or whether he was exercising the discretion under cl A3 to classify it as income. He had great difficulty in giving a satisfactory answer to questions which addressed this issue. After initially stating that he was not qualified to say, his later position was that he regarded the money he invested on shares as income and the sale of certain parts of the existing estate as capital. He explained that he drew this distinction based on the discussions he had with the deceased before he died and on the terms of the Will. I did not find Mr Orr's statements when cross-examined by counsel for Mrs Wendt that he had relied on cl 3 to be persuasive. The leading manner of questioning, although permissible, detracted significantly from the weight which could be attached to the responses.
144 On his own evidence, Mr Orr relied to a considerable extent on the conversations with the deceased prior to the execution of the Will and to which he had deposed. Mr Orr was unable to recall the exact words used in the various conversations. He was asked what the deceased said to give Mr Orr the impressions referred to in the affidavits. He simply referred to the terms of his affidavit. Significantly, he admitted that there was no discussion specifically concerning how capital profits should be dealt with.
145 Mr Orr was questioned about the fact that the Will itself draws a distinction between income which was to be distributed to Mrs Wendt and capital for which she was required to make an application; a distinction which does not sit comfortably with classifying capital as income and distributing it to Mrs Wendt without her having made an application. Mr Orr's responses to questions of that type, in particular his attempts to rely on the exercise of a discretion under cl A3, were less than convincing. Mr Orr conceded that he did not seek any legal advice as to whether the profits from the share sales should be considered as income or capital. This was despite having lawyers acting for the estate. He said that he did not need to ask them because it was quite explicit in the Will. When pressed, he said that it was his interpretation of the Will. I will shortly return to this explanation.
146 Mr Orr was also taken to the correspondence between solicitors for the plaintiffs and his solicitors to which I have already referred. Mr Orr agreed that he had seen the correspondence and the replies were based on his instructions. It was put to Mr Orr, and is an inescapable conclusion from the correspondence, that from May 1998 the plaintiffs were concerned about payment of any capital to Mrs Wendt. Mr Orr did not respond to that proposition. Despite the obvious concern of the capital beneficiaries, they were given no notice of Mr Orr's intention to make the payments to Mrs Wendt, but were merely provided with copies of the financial statements after the event. Mr Orr's explanation for not obtaining their views was that he was not instructed in any way to do so. To my mind, this response supports a conclusion that Mr Orr fails to appreciate his obligations as a trustee, a situation fraught with problems in circumstances where he is also resistant to obtaining advice or direction. Whilst Mr Orr may not have been obliged to give the capital beneficiaries an opportunity to be heard, it would have been prudent to do so. However, once he had given an undertaking to advise them of any distribution of capital to Mrs Wendt, he should have complied with that undertaking.
147 Mr Orr was also asked why he did not seek the directions of the Court to assist him with respect to what was clearly a matter of dispute between him, as executor, and the capital beneficiaries. He again maintained that his directions were quite explicit in the Will. Of course, the Will expressly provides that distributions of capital were to be made on application and only where need is established. The Will contains no explicit directions in the Will to distribute the profit from share sales to Mrs Wendt. However, the greater concern which arises from Mr Orr's response is that he considers himself completely capable of expressing a concluded opinion on matters in dispute under the Will without recourse to legal advice or a determination of the Court.
148 Mr Orr did accept that one of the duties of the executor of the estate would be to take reasonable steps to recover any moneys which were not properly distributed from the estate or any moneys owing to the estate. He agreed that by letter of 8 March 2000 he was asked by the plaintiffs to take steps to recover moneys from the life tenant that had been wrongly paid to her. Mr Orr took no steps to recover any moneys from Mrs Wendt. To his recollection, neither did he seek Mrs Wendt's response to the demands in that letter. Again, no advice or assistance was obtained to determine whether the distribution in dispute had been properly made.
149 When Mr Orr was cross-examined by counsel for Mrs Wendt the approach taken by him to the administration of the estate became apparent. Mr Orr stated that when he became executor there were some shares already in the estate. Mr Orr stated that he never sought to trade in them because he did not buy them and, therefore, did not consider it was his place to sell them. That statement alone represents a failure to appreciate his obligations as an executor. It seems that Mr Orr drew a distinction between shares purchased by the deceased (described as capital investment share) and shares purchased by Mr Orr as executor (described as income investment shares). Mr Orr stated that the profit from the sale of the capital investment shares would go into the estate. However, it is apparent that he that he had no intention of trading in these shares, notwithstanding that in more recent times they have been providing little or no returns. The detriment to the capital beneficiaries of this policy are manifest. For example, the Telstra shares acquired by the deceased are now worth less than was paid for them. The capital beneficiaries have suffered this loss. Further, Mr Orr sold the after-acquired Qantas shares for a profit of $33,000 to the benefit of the income beneficiary but did not take the opportunity to sell the existing Qantas shares and make a profit for the benefit of the capital beneficiaries.
150 Mr Orr was pressed on his decision to distribute the profit from the sale of shares purchased by him as income. He was asked:
"Why are they income rather that capital?---Because I invested it, made a profit and determined that it was income for the purpose as the will wanted me to provide for Mrs Wendt."
151 Mr Orr asserted that all share purchases made by him were made from moneys in fixed deposit which had matured. He described this as money that was virtually idle, earning a very minimal rate of interest. Rather than reinvest in government bonds, Mr Orr took the moneys out. He said that he used the funds to purchase the Optus shares. It should be noted that the journal entries reveal that the moneys received by the estate on 3 December 1998 from the maturity of the investment in the government bonds amounted to $114,000. I can find no prior entry for the receipt of moneys from WA government bonds. The purchase of Optus shares a fortnight later cost $132,970. It is apparent that the entire cost of the Optus shares was not met by the maturity of the investment in government bonds. Mr Orr said that he would have used the funds from the sale of the CBA shares to fund the second purchase of Optus shares. However, the journal reveals that the second purchase of the Optus shares pre-dates the sale of the CBA shares.
152 Mr Orr was also questioned in relation to the payment of legal fees from the estate. He said that the legal fees referred to in his affidavit were all paid following the receipt of legal advice that the fees were to be paid out of the estate. He took the same approach with the account for legal fees for which the first-name plaintiff required payment. He could not remember exactly who gave him this advice or whether it was in writing. It was put to Mr Orr that a payment of legal fees made on 18 June 2001 in the sum of $973.50 was made after the originating summons in this action had been amended to question the payment to him of legal fees from the estate. Mr Orr said that he did not know but he had to pay them. He further said that there was no direction that he could not pay legal fees. Mr Orr was taken to an extract from a memorandum of counsel's advice to the following effect:
"Regardless of whether those proceeds are income or capital as their destination is the matter in issue it would appear to be appropriate that the costs of this advice be paid from the proceeds of the share trading."
153 Mr Orr said that he had no recollection of this advice, although he conceded that he undoubtedly did receive it and read it. Clearly he did not act upon it.
154 In addition to questions directed to the issues in dispute, Mr Orr was also questioned on his handling of other aspects of the estate for the dual purpose of addressing his credibility as well as his suitability to remain as executor. Examples of such matters are the sale of the demountable home, the purchase by Mr Orr of the boat and the remuneration claimed by him from the estate.
155 Mr Orr was taken to his affidavit evidence in which he stated that the half share of the demountable home loss should not be considered a capital loss. When first questioned, he was unable to explain why the amount should not be considered as a capital loss. He then said that he was so advised by his taxation consultant. He then stated that it was indeed a capital loss. Next, he said that it was too far back for him to remember. Mr Orr then said that he agreed with what was written in the affidavit and that he would have received that information from a taxation consultant.
156 At one point he asserted that there was no capital loss because the demountable was not, in his view, owned by the estate in its entirety, but was half owned by Mrs Wendt. However, when it was pointed out to him that, in that case, half of the amount would be a capital gain, his response was, "I didn't say that." His next position was that, in his opinion, the demountable house did not belong to the estate but to Mrs Wendt. It should be noted that no such explanation appears in Mr Orr's affidavit. It was also pointed out to him, and he agreed, that the deceased, under his Will, actually left the house as one of his assets. Mr Orr became evasive when it was put to him that, if it did not belong to the estate, it should not appear in the financial statements of the estate. When asked when he intended to seek repayment, Mr Orr stated that he did not intend to because the moneys were not loans. He then added that he would have to consult with his accountant "to get the definitions of what he has got here properly". However, when it was put to him that he knew that he was paying Mrs Wendt more money than she was entitled to, he responded by saying that it was remiss of him. Then, when he was asked if he had ever asked her for the money back, he said, "No, I haven't because it's not a loan, I'm trying to tell you." He went on to assert that the reason why a loan was recorded was explained to him, presumably by the accountant or taxation consultant, but he could not now recall what that explanation was.
157 On the second day on which he gave evidence, Mr Orr was again asked about the loss on the demountable home. Mr Orr recanted on his evidence given the previous day that the demountable home belonged to Mrs Wendt. He conceded that the demountable home did in fact at least partly belong to the estate. He said that, on further consideration, he conceded that it was a capital loss but that he instructed his accountant that the estate was to bear the loss and not Mrs Wendt. This is in conflict with later testimony that it was his accountant who told him that he regarded the loss on the demountable home as a capital loss. Mr Orr explained that if he were required to retrieve the moneys, it would be deducted from payments made to Mrs Wendt in the future. According to Mr Orr, he had advised Mrs Wendt, some time back, that she might have to repay the money. Ultimately, his position was that the sum was a capital loss, but was not one that Mrs Wendt had to pay. This is contrary to his statement in his affidavit that the amount "should not be considered as a capital loss".
158 Mr Orr was also questioned on the repairs carried out on the boat at the expense of the estate. The Will provided that the boat belonging to the estate could be sold to Mr Orr. Mr Orr's explanation was that he incurred the costs to get the boat up to saleable standard. He could not recall whether he obtained a valuation for the boat without the repairs. He said, "The boat needed repairing and I got it repaired." He said that he had the minimal required amount of repairs done to make it useable and saleable.
159 The final credibility issue addressed was the fees which Mr Orr received from the estate. Mr Orr deposed in his affidavit to the fact that, other than reimbursement for vehicle travelling expenses, he had only received the sum of $4000 from the estate in accordance with par 4.1.1 of the Will. However, there are entries in the journal which relate to claims for Mr Orr's time at $20 per hour. He then admitted that the statement in his affidavit was not correct. It is unnecessary to decide whether it was appropriate for Mr Orr to claim an hourly fee for his administration of the estate. The significance of this evidence is that his affidavit evidence contains at least one clear inaccuracy and must be viewed with caution.
160 I have referred to the evidence of Mr Orr in some detail in order to highlight the numerous inconsistencies between his affidavit evidence and his oral evidence, as well as the inconsistencies in the accounts given in the course of his oral evidence. In my opinion, he was a most unsatisfactory and unreliable witness. I noted a marked and unexplained difference in his demeanour between the first and the second day of giving evidence, but no improvement in consistency or credibility. Mr Orr was defensive and unco-operative in responding to questions from counsel and gave contradictory explanations on significant issues. On the second day of evidence he was more restrained, although he remained evasive and inconsistent in his response to questions. He displayed little comprehension of his responsibilities as a trustee and was at times unable to proffer a reasonable explanation for important decisions that he made in administering the estate. It was apparent from his attitude and demeanour that he resented any questioning of his actions.
161 Having considered Mr Orr's evidence as to his purchase of the boat from the estate, I do not accept that Mr Orr obtained a valuation of the boat. He paid from the estate repairs for a boat he was purchasing, without recourse to the beneficiaries and without obtaining a valuation. I consider such conduct to be unwise and indicates, if only in a small way, Mr Orr's failure to comprehend the seriousness of his obligations as a trustee and executor.
162 As to Mr Orr's account of the recording of the sale of the demountable house, the only conclusion which can be drawn is that, irrespective of how the sale of the half interest was to be recorded in the financial statements of the estate, Mr Orr had no intention of requiring Mrs Wendt to meet any capital loss arising from the sale. Not only does Mr Orr's evidence on this issue reflect poorly on his credibility, it supports the conclusion that he was highly motivated by a desire to maximise the benefit to Mrs Wendt, even if it were to the detriment of the other beneficiaries.
163 As to the payments the subject of this claim, Mr Orr stated on more than one occasion that the decision to distribute the profits to Mrs Orr was based on his conversations with the deceased and also on cl A3. Even on the affidavit evidence, at its highest, the conversation with the deceased created a mere impression that the deceased intended that the money made from the estate be given to Mrs Wendt. When questioned further, Mr Orr could not recall any portion of the conversation and admitted that there was no discussion specifically concerning how capital profits should be dealt with. I do not accept that such a conversation took place. Even if it did, it does not provide a reasonable basis for an executor to distribute capital to an income beneficiary, particularly where the Will draws a distinction between entitlement to capital and income and specifically provides for an application to be made by the income beneficiary for access to capital.
164 Neither do I accept that at the time the relevant distributions were made, Mr Orr was exercising a power under cl A3. Counsel for the second defendant referred to the letters to Mrs Wendt accompanying the payment of the profits on the share sales in which the payments are identified by Mr Orr as income. That description is said to support a conclusion that Mr Orr has made a decision to classify the profits as income. Without recourse to cl 4.1.4.1, Mrs Wendt's only entitlement to estate funds is to income, it is hardly surprising that any distribution to her would be so described. I do not consider that the letters are evidence of the exercise of a discretion to classify capital as income.
165 There are a number of aspects of the evidence which are at odds with a conclusion that Mr Orr, unaided by legal advice, believed that cl A3 conferred on him a discretion to determine whether receipts or outgoings are capital or income or that he exercised that discretion. It is a fact that the profit derived from the relevant share transactions are recorded in the estate's financial statements as a capital gain and were signed and approved by Mr Orr. I do not accept Mr Orr's evidence that the description in the financial statements resulted from a failure by the accountant to follow Mr Orr's instructions, nor that it is merely an accounting practice. No evidence was adduced from Mr Hartley to that effect as would be expected if Mr Orr's assertions could in fact be supported by Mr Hartley: Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298.
166 It is also the case that each distribution to Mrs Wendt was of gross profit without offsetting any losses, although there was a deduction of the costs of the share trading. Indeed, distributions of share sale profits were made to her immediately without retaining any portion to cover subsequent losses. Even Mr Orr conceded that all the expenses of the estate, including legal fees, were charged to the capital of the estate and not deducted from the income that was paid to Mrs Wendt. Even when Mrs Wendt owed money to the estate, no moneys were deducted from the distributions to her.
167 It is clear from Mr Orr's own evidence that at an early stage in his administration of the estate he drew a distinction between shares held by the estate at the time of the deceased's death and shares acquired after his death. He explained that he drew this distinction based on the discussions he had with the deceased before he died and the terms of the Will. As I have already indicated, I do not accept that the conversation took place. Even if it did, I do not accept that an executor acting reasonably, fairly and impartially would, without more, rely on that conversation to act as Mr Orr did. In my view, there is nothing in the Will which would reasonably authorise adopting such a course of action. Not only does it unfairly benefit the income beneficiary, it fails to optimise the capital to which the capital beneficiaries were entitled.
168 Mr Orr's explanation that he did not trade in the shares which were already in the estate because he did not buy and did not consider it his place to sell them was a wholly inadequate explanation and shows a complete misunderstanding of his responsibilities as an executor. In any event, not all the moneys used to trade in shares for the purpose of making income for distribution to the income beneficiary were from the maturity of the bond. Mr Orr was in fact using pre-existing capital, but still conferring all the benefit on the income beneficiary.
169 Finally, Mr Orr was aware from June 1998 that the plaintiffs were concerned about any capital payments being made to Mrs Wendt, yet he took no steps to discuss with them the issue of the profit on the sale of shares before the payments were made or, more importantly, to address the issue by obtaining independent legal advice or resolve the issue by making an application to the Court for directions.
170 All these factors lead me to conclude that Mr Orr did not in fact rely on cl A3. I am satisfied that he simply formed an intention to confer on Mrs Wendt the benefits of the share transactions as part of an overall intention to maximise the benefit to Mrs Wendt from the estate. That this course had a potentially detrimental effect on the benefit that the residuary beneficiaries would ultimately receive was not a matter which Mr Orr chose to take into account.
171 Nor do I accept Mr Orr's evidence that he received legal advice that the legal expenses of the executor and the beneficiaries were to be paid from the estate. I am also unable to accept Mr Orr's evidence that he had no recollection of the written legal advice that the costs of legal advice on the issue should be paid from the proceeds of the share trading.
172 At the time of giving evidence Mrs Wendt was an elderly lady suffering from osteoporosis, emphysema and chronic asthma. These conditions cause her difficulties with breathing and mobility. Despite these physical problems, Mrs Wendt stated that she suffered no impairment of her ability to concentrate.
173 Mrs Wendt relied upon a series of affidavits sworn by her and filed in the action. Much of the material in the affidavit related to her current financial position and the moneys, she alleges, she would not have expended if she were aware that she might have to repay some of the funds distributed to her from the estate.
174 Mrs Wendt gave oral evidence about the moneys she received from the deceased prior to his death and referred to in cl 4.3 of the Will. On her evidence, the deceased transferred into her name over $60,000 in shares which were converted to cash. She denied that she received any greater sum. Mrs Wendt stated that she withdrew $20,000 to buy herself a new car. After her husband died, she withdrew the balance as she did not have sufficient money and she did not know when she would receive her entitlement under the Will. She used the money for her personal expenses.
175 Mrs Wendt said in her evidence that, even after distributions from the estate commenced, at one point she had quite a few accounts and her medications were costing her a significant amount. She said that she could not live on the income she was receiving. Mrs Wendt said that she was going to apply to the executor under cl 4.1.4.1 of the Will to see if she could get a little bit extra, but then she received the first large cheque from the estate and it became unnecessary for her to do so. Mrs Wendt claimed that she did not have sufficient money in the bank to cover all the payments she wanted to make. When it was suggested to her that she had a large amount of money in Treasury and State bonds, her response was that this money was tied up for a fixed period.
176 Mrs Wendt also deposes to the fact that she was advised by her solicitors that she could make a claim against the estate pursuant to the Inheritance (Family and Dependants Provisions) Act 1972 ("the Inheritance Act"). She states that, as it was her belief that she was entitled to both income and capital from the estate, she would therefore be adequately provided for from the estate. As a consequence, she did not instruct her solicitors to make an application under the Inheritance Act. When asked in cross-examination if her solicitors had given her any written advice to that effect, Mrs Wendt initially said that she did not think they ever told her. When the question was repeated, she said that she was not given written advice, but could have been given oral advice. Ultimately, she conceded that she could not recall exactly and admitted that she never asked for a legal opinion on whether she could make a claim.
177 Consequently, I do not accept that a belief in an entitlement to profits on share sales, in addition to income from the estate, played any part in a decision not to make application under the Inheritance Act. Indeed, the evidence does not support a conclusion that an Inheritance Act application was ever considered. To that extent, at least, Mrs Wendt has not acted to her detriment as a result of receiving the profits on the share sales.
178 Mrs Wendt also deposes to her assets as at 13 February 2003. She is the sole owner of her home on a quarter acre block in Bunbury. The property is not encumbered. Mrs Wendt estimates that the property is worth approximately $100,000, although she has no knowledge of the real estate market and has never had it valued. She has $100,000 invested in Western Australian State Bonds, an amount which accrued prior to the deceased's death. She applies the interest from this investment to the payment of her day-to-day living expenses. She also has $68,014.64 in a challenge Bank savings account. In addition, she maintains a cheque account with Challenge Bank into which she transfers funds from her other account. At the time of the affidavit there was between $3000 and $4000 in the cheque account, having transferred out $10,000 for the payment of legal fees. She values the contents of her home at $2000 and her motor vehicle at $4000. Her only income is from the estate, from the WA State Bonds investment and interest on her Challenge Bank savings account. In her oral evidence, Mrs Wendt agreed that she still owns the demountable home, although it was omitted from her list of assets.
179 Mrs Wendt was cross-examined on the various assets referred to in her affidavit. It was put to Mrs Wendt that she used to have WA State bonds totalling $153,000. The bonds were in three lots: one for $53,000, one for $67,000 and one for $33,000. Mrs Wendt said that she could not remember having that much money in her account, but when taken to the documents annexed to her affidavit, she agreed to the accuracy of those figures. She also agreed that she now has only $100,000 in State bonds. Mrs Wendt maintained that when the bonds matured, it was her practice to re-invest them in State bonds. She was unable to explain what had happened to the $53,000.
180 Mrs Wendt was also questioned about a significant reduction in the amount of money in her Challenge Bank account following the commencement of these proceedings. The records reveal that in July 2000 the balance in her account was just over $138,000. In January 2001 the balance in the passbook increased to over $147,000. However, as at February 2003, the balance had reduced to $68,000. Mrs Wendt's explanation for the fact that the balance of her bank account had reduced from $147,000 in 2001 to $68,000 in 2003 was the payment of solicitors' fees and the repairs and renovations she had done to her house, as set out in her affidavit of 11 February. She confirmed payments of $9000 and $10,000 to her then solicitors. She also agreed that on 5 July 2000 Mr Orr paid $11,000 to her solicitors, but was unsure as to the matter to which the payment was related. She said that she could not remember that far back.
181 Mrs Wendt acknowledged that, in accordance with her tax returns, in the financial year ending June 1998 she received from her husband's estate the sum of $20,550. To her knowledge, there was no capital gains component of that sum. She agreed that her total taxable income for that year then was $27,511. For the year ending June 1999 she received an income distribution from the estate, exclusive of capital gains, of $19,817. Her total income for the year was $28,767. The return also included, under the heading "Capital Gains", reference to an amount with respect to the estate of $32,745. Mrs Wendt agreed that she had signed the return as true and correct and that she knew that the amount of $32,745 related to capital gains. However, she denied knowing that the money came from the sale of shares. She did not know where it came from. She said she just thought it was money to which she was entitled. For the year ending June 2000 the distribution of income from estate was $45,533 and her total income exclusive of capital gains was $58,881.
182 It is also the case that Mrs Wendt paid tax on the funds paid to her from the estate. In the 1998 financial year she paid $4034 in tax on her income. In the 1999 financial year she paid $13,602 in tax on the income paid to her from the estate. Had she not received income from the estate, she would have paid $85 in tax. In the 2000 financial year Mrs Wendt paid $16,885 income tax on the income paid to her from the estate. Had she received no income from the estate, she would have paid $372 in tax.
183 In her affidavit evidence Mrs Wendt explained the credit entry in her Challenge Bank passbook of $50,000 on 30 December 1999. She states that it includes the amount of $47,436.22 sent to her by the Mr Orr and described by him as being income from investment in Optus shares. She could not recall why the deposit is for the exact amount of $50,000, but suggested that she may have increased the amount to $50,000 using cash held at her home.
184 In cross-examination, Mrs Wendt confirmed her belief that the deposit came from the estate. She denied that it could have come from an investment because her investments "wouldn't bring that much in". When it was put to Mrs Wendt that the estate accounts did not have a corresponding payment in that sum at that time, she said that she did not remember where it came from.
185 Mrs Wendt also denied holding cash at home. However, when reminded of her explanation in the affidavit that she had probably added cash held at home to the cheque from the estate, Mrs Wendt said that she could have had a bit of cash at home. Although it is reasonable that a woman of Mrs Wendt's age may well have forgotten the source of a particular deposit, I found her evidence under cross-examination in relation to the amount of cash she had at home somewhat contradictory and far from compelling.
186 Mrs Wendt also deposed in her affidavit to a belief that it was the deceased's intention that Mr Orr would maximise her income by deriving a profit from share trading. She also said that it was her understanding that, if any loss were suffered on the sale of shares, such loss would be set off against any profit derived on the sale.
"I verily believe, from discussion that I had with the Deceased prior to his death, some of which were in the presence of the First Defendant that it was the intention of the Deceased when executing his Will that the First Defendant would be entitled to trade in stocks and shares in order to maximise the income to which I would be entitled under the Will of the Deceased by virtue of the fact that it was never the intention of the Deceased that I should have his residuary estate but, rather, that I should receive any profits made by the First Defendant when trading in stocks and shares as part of that income."
188 However, it was apparent from Mrs Wendt's oral evidence that the sole basis for this view was that her husband and Mr Orr used to talk a lot about shares. She said that they often talked about the Will, but she never used to listen to them. Mrs Wendt conceded that she did not actually hear her husband and Mr Orr talking about what would happen with her income. She did not even understand some of the statements made in her affidavit. For example, she had no understanding of the statement made by her that the losses on any share sales would be set off against any profit derived on the sale. She further admitted that she had no knowledge of the deceased trading in shares as it was not discussed. In fact, the deceased did not discuss money matters with her at all.
189 It is clear that Mrs Wendt retreated from the assertions made by her in her affidavit, if indeed she understood she was making them in the first place. Even if the evidence as to the deceased's intentions were admissible as an aid in interpreting the Will, the evidence adduced does not justify a conclusion that it was the deceased's intention that Mr Orr would maximise Mrs Wendt's income by deriving a profit from share trading. Neither is it open to conclude that the alleged statements and actions of the deceased could reasonably have been interpreted by Mrs Wendt as an intention for her to receive the profits from share sales.
190 Mrs Wendt stated in her affidavit evidence that she received the disputed funds in good faith. The funds were paid by cheque, together with a note from Mr Orr that the moneys were either a dividend or interest on a certain investment. She was not provided with any significant information in relation to the source of the dividends or interest. The letters accompanying the distribution support her assertion. The content of them does not disclose any question as to her entitlement to receive the funds.
191 Mrs Wendt stated that the income paid to her from the estate was applied to her personal expenditure. In her affidavit filed in February 2003 she set out a list of items to a total value of $117,993.50. The list includes an entry for $21,000 being for petrol. This entry was in error and was later amended to $2100, bringing the total sum of expenditure to $99,093.50. However, Mrs Wendt stated that the amounts referred to in the affidavit are estimates as she does not recall the exact figures and has no supporting invoices. In her oral evidence, Mrs Wendt said that she would not have been able to pay for the expenses set out in her affidavit if she had not received the money from the estate. If she had paid for them, she would not have had very much money to live on. This evidence falls to be considered in light of the fact that funds held in bonds and in her two Challenge Bank accounts totalled $172,000. Her only other substantial asset was her house. Her revised expenditure over the four-year period was slightly less than $25,000 per annum.
192 According to Mrs Wendt, she genuinely believed she was entitled to the funds and had she not held such a belief, she would not have incurred some of the expenditure itemised in her affidavit and would have deposited the funds into her bank account until she was advised that her entitlement was certain. In her affidavit evidence, Mrs Wendt identified the items of expenditure that she would not have incurred as being the new linen, the electronic chair, the electric jug, the cordless phone and the vertical blinds. Mrs Wendt also stated that if she had known that she may not have been entitled to receive some of the moneys, she would have cleaned the house herself and done the gardening herself. She would also have made do with the clothing and footwear which she had at the time. She also stated that in the past she had attended to her own hair care and would have continued to have done so. The other items of expenditure which she would not have incurred were the daily papers and magazines, gifts for relatives, entertainment costs, charitable donations and a further item for cleaning, ironing and washing.
193 Mrs Wendt was questioned about the timing of some of the items on the expenditure list. The removal and replacement of the asbestos roof and the installation of a whirlybird ventilator took place in approximately November 2000. The fern house was restored just after the roof was repaired. The electronic chair was purchased in June 2001. These proceedings commenced in July 2000. Mrs Wendt remembers being served with the originating summons and knew that the plaintiffs were saying that that money should not have been paid to her. She denied having any discussions with Mr Orr before she was served with the summons. It is apparent that from July 2000 Mrs Wendt was aware that her entitlement to the money received from the estate was under review and that she incurred the expenses despite that knowledge.
194 Mrs Wendt was further questioned about her assertion that she would not have spent the money if she knew that she might have to give it back. Her response was that there were certain items that she would have bought in any event. She was in fact quite open in so stating and gave evidence which was substantially against her interests. The costs which she said she would have incurred in any event were the security doors, the removal and replacement of the asbestos roof and the installation of the whirlybird, the fence, the fern house, the reticulation and the cordless phone. As to the costs of the cleaning lady, Mrs Wendt agreed that there was no time in which she actually had a cleaning lady when she did not need one. She agreed that she required a gardener and would have incurred that expense irrespective of whether she was required to repay money to the estate. With respect to clothes and footwear, Mrs Wendt stated that she practically had to get a new wardrobe because she lost a lot of weight. She agreed that she had to have clothes in any event. As to the reference to hair care, Mrs Wendt agreed that she would have spent this amount in any event. Mrs Wendt also agreed that she would have bought gifts for relatives irrespective of having to repay moneys to the estate, but added that she might not have bought gifts which were so expensive.
195 Mrs Wendt was cross-examined on the entries for cleaning, ironing and washing at a cost of $6000. She was unable to identify why there were two entries for the same type of service. She stated that her cleaning lady also did the ironing and the washing. Ultimately, she agreed that there should only be one entry and that she would have had to pay for these services in any event.
196 A number of other items were purchased shortly after the death of the deceased and, therefore, before any payment of share sale profits were made to her. The items in this category are the electric stove, the new linen and the vertical blinds. As to the painting of the outside of her house, Mrs Wendt conceded that she would have had it done anyway if she had enough money in the bank. Based on the balance of her Challenge Bank accounts during the relevant period, Mrs Wendt was clearly in a financial position to spend $1800 on painting her house. Mrs Wendt stated that she would have done without the magazines. However, she admitted that she had always bought them and they were not an item which she had elected to purchase in the belief that she was entitled to keep the money from the estate.
197 Mrs Wendt was unsure whether she would have bought the electric jug, installed the ceiling fans or spent the money on entertainment if she knew she was required to repay money to the estate.
198 Mrs Wendt firmly denied that she would have bought the letterbox or made the donation to the Kidney Foundation. Ultimately, they were the only items about which there is clear evidence that they would not have been purchased if Mrs Wendt had not received the distribution from the estate. The value of those items is stated to be $200. I do not accept that someone in Mrs Wendt's financial position was in any way forced to rely on income from the estate to pay for those items.
199 As to her credibility, although there was considerable conflict between her affidavit and her oral evidence, I found her oral evidence to be generally credible. Indeed, she made many concessions and a number of statements against her own interests which reinforce my impression that she was doing her best to give a truthful account of relevant events. That said, I do not consider that the whereabouts of the $50,000 paid to her on the maturity of one of the WA government bonds was adequately explained. Counsel for Mrs Wendt suggested that it may form part of the acknowledged $178,000 asset base, but if that were the case, one would reasonably expect bank records to identify the location of the money if it had been deposited rather then spent or distributed to another person. Ultimately, I am unable to determine whether the absence of a satisfactory explanation was the result of an unwillingness to acknowledge the whereabouts of the money or an inability to do so because of failing memory and the lapse of time.
200 As to the central issues for determination, in my view, the evidence does not establish that Mrs Wendt has acted to her detriment in relying on the additional funds received from the estate. I am, however, not convinced that at the time she received those funds she was aware that she might not be entitled to them.
(viii) Whether the executor has breached his duty in distributing the profit from share sales to the income beneficiary
201 Based on the evidence to which I have already referred, I make the following findings in relation to the conduct of Mr Orr in administering the estate:
(a) From the outset Mr Orr formed an intention to maximise the benefit the income beneficiary would derive from the estate.
(b) Mr Orr drew a distinction between shares held by the estate at the time of the deceased's death ("the existing shares") and shares acquired after his death ("the after-acquired shares").
(c) Mr Orr identified the existing shares as a capital asset of the estate which would not be traded and the after-acquired shares as shares acquired for the purpose of making income for distribution to the income beneficiary.
(d) Mr Orr failed to take any or any reasonable steps to preserve or increase the value of the capital assets represented by the existing shares.
(e) Mr Orr paid the whole of the profit (less expenses relating to the share trading) on the sale of the after-acquired shares to Mrs Wendt without offsetting capital losses. In the result, Mr Orr distributed to Mrs Wendt more than the actual income of the estate.
(f) The distributions to Mrs Wendt of the profit on the sale of shares were not made as a result of a mistaken belief that the profits were income rather than capital.
(g) The distributions to Mrs Wendt of the profit on the sale of shares were not made in the exercise of a discretion under cl A3 to categorise capital as income for the purposes of distribution.
(h) The consequence of the implementation of the approach taken by Mr Orr was that all risks, liabilities, day-to-day expenses of the estate and capital losses were borne by the capital beneficiaries.
(i) Mr Orr failed to take any steps to recover moneys owed to the estate by Mrs Wendt and continued to make distributions to her without deducting the moneys owed by her to the estate.
(j) Despite the fact that the capital beneficiaries questioned the distribution of capital to the income beneficiary, Mr Orr failed to inform himself of his obligations by seeking legal advice or by applying to the Court for directions under s 92(1) of the Trustees Act.
(k) Mr Orr failed to comply with the undertaking given by him as executor to the capital beneficiaries that he would advise them before any further distributions of capital were made.
202 I turn now to consider whether, in view of the findings I have made, Mr Orr's conduct was in breach of his duties as a trustee. I have already concluded that the distribution to Mrs Wendt of the profits from share sales was not made from a mistaken categorisation of the profits as income. It is, therefore, unnecessary to decide whether that error constituted a breach of trust. With respect to whether Mr Orr is otherwise in breach of his duty as a trustee, the second defendants submits that cl A3 conferred on Mr Orr, as trustee, the power to decide whether the profits on share sales should be categorised as capital or income. It is said that Mr Orr is entitled to exercise the discretion under cl A3 without challenge to the reason behind his decision because there is no evidence to suggest that the discretion exercised pursuant to the power was not in accordance with the essential components identified in Karger v Paul. The basis of the second defendant's submission is that the profit made by the estate on the sale of the shares arguably qualifies as income (see Myer (supra) or, alternatively, the usual dictionary meaning of "income"), can therefore be rationally supported on legal grounds and the exercise of that discretion cannot therefore be viewed as perverse, capricious or arbitrary. The second defendant submits that the heavy onus on the plaintiffs to establish that the discretion has been exercised in bad faith, without real or genuine consideration, or contrary to the purpose of the trust simply has not been discharged.
203 The submission of the first defendant is in slightly different terms. It is said that the deceased has given his trustee a discretion to determine whether profits from share sales are capital or income and a further power to supplement the income being paid to the widow if the income from the estate is not sufficient for her reasonable needs. The first defendant, as trustee, has exercised this power in a responsible manner according to the testator's primary purpose that his widow should be provided for and receive all income from the estate and, if that be insufficient, to supplement the income by the payment to her of capital. I consider the first flaw in this argument to be the classification of the interests of the income beneficiary as being of primary importance, thereby justifying any action even if it is to the detriment of the capital beneficiaries. There is, in my view, nothing in the terms of the Will to justify such an interpretation. The second flaw is to treat the right of the income beneficiary to apply for a payment of capital as support for the practice of using the discretion in cl A3 to supplement her income. For reasons to which I have already referred, I consider cl 4.1.4.1 to have the opposite effect; it is in fact the appropriate way to address the legitimate financial interests of the income beneficiary.
204 Of course, the defendant's submissions are all predicated on the assumption that the first defendant was indeed exercising a discretion under cl A3. As I have stated, I do not accept that Mr Orr was exercising a discretion under cl A3, merely that he later relied on that clause when required to justify the implementation of his decision to manage the estate to maximise the benefit to the income beneficiary.
205 The plaintiff submits that the first defendant has not complied with his duties of a trustee. It is said that Mr Orr has not acted honestly and in good faith in that he has acted to the sole benefit of the income beneficiary, has failed to make an informed decision, to take into account relevant considerations and has so acted in the knowledge that the capital beneficiaries were concerned about the distribution of capital. It is further submitted that Mr Orr's conduct must also be viewed in the context of his failure to comply with the undertaking that he would advise the capital beneficiaries before any capital was distributed. These submissions are not only relevant to the issue of the exercise of a discretionary power under cl A3; they are equally relevant to the question of whether the distribution of the profits was in breach of trust.
206 It was submitted on behalf of Mr Orr that he has addressed the needs of all beneficiaries and, whilst the stratagem he has developed with respect to share trading and distribution of the profits does not benefit the capital beneficiaries, there has been no breach of any duty to act impartially because there has been no loss to the capital beneficiaries. As I understand this submission, it is predicated on an assumption that the shares actually have no value and no profit accrues until they are sold; the shares may appear in statements of accounts with a value attributed to them, but the real value is determined only by the sale price. The capital beneficiaries may not be participating in the profits obtained from the trustee's share trading, but the capital that is being used to trade in shares is being returned to the estate and the capital beneficiaries are, therefore, not being deprived of the asset that pre-existed the share trading activities.
207 It is further submitted as relevant to the issue of whether the trustee has complied with his duty of impartiality that Mrs Wendt was entitled to apply for a payment from the estate's capital which would, in any event, give rise to a reduction in the capital available to the capital beneficiaries. Therefore, no greater detriment to the capital beneficiaries has occurred than would have occurred in any event.
208 I cannot accept either argument. As to the latter, the mere entitlement to apply for a capital distribution does not equate to an entitlement to receive a capital distribution. An invalid discretionary distribution or an impermissible partial act by a trustee cannot be justified by a right to obtain a similar payment by another means. If an application under cl 4.1.4.1 were made, Mrs Wendt would have to establish need and an entitlement to a specific sum of money to meet her need. The trustee would be obliged to exercise his discretion in accordance with all the duties imposed on a trustee. In the absence of such an application it will never be known whether need could be established and, more importantly, whether the proper exercise of a discretion on the available facts would have entitled her to the same amount which was in fact distributed to her.
209 As to the former argument, I have already found as a fact that, rather than identifying an appropriate method of investing estate funds, and then determining appropriate distributions of profits, Mr Orr determined that he would adopt a method of managing the estate which would be of greater benefit to the income beneficiary than to the capital beneficiaries. Such a stratagem is in conflict with the fact that all investments are part of the estate, that the money to buy the shares came from the estate and breaches the obligation to administer the estate for the benefit of all beneficiaries and not merely the life tenant. I consider such conduct to be in breach of a trustee's duty to act impartially and in an even-handed manner between beneficiaries. I further find the conduct to be deliberate.
(ix) Whether the executor has breached his duty in paying his own and the income beneficiary's legal fees with respect to the matters the subject of this claim
210 The findings of fact which I make in relation to this issue are as follows:
1. Mr Orr paid his own, Mr Wendt's and Mrs Wendt's legal fees from the capital of the estate without obtaining legal advice that he was entitled to do so.
2. Mr Orr paid his own and Mrs Wendt's legal fees from the capital of the estate after he had been advised that the plaintiffs objected and had applied to the Court to review the payment of legal fees from the estate.
3. Mr Orr paid his own and Mrs Wendt's legal fees from the capital of the estate despite receiving legal advice to the effect that "it would appear appropriate that the costs of this advice be paid from the proceeds of the share trading".
4. Mr Orr contributed to the escalation of legal fees incurred by continuing to manage the estate for the purpose of maximising the income to Mrs Wendt without obtaining legal advice or applying to the Court under s 92(1) of the Trustees Act.
211 The law provides that a trustee will only be indemnified out of the trust property for expenses reasonably incurred: s 71 of the Trustees Act. Where the trustee acts in violation of his duty, the indemnity is lost: Turner v Hancock at 305; In re Beddoe at 558. In view of my conclusion that the first defendant has acted in breach of trust in the approach taken to the administration of the estate and, in particular, to the distribution as income of the profits on the sale of shares, it would be inequitable for him to recover from the estate the legal costs of dealing with any dispute arising in relation to that conduct. For this reason, I consider that Mr Orr should repay to the estate any legal fees which he paid to himself, other than those which would stand as costs of this action. Legal fees which constitute costs of the litigation fall to be considered at the conclusion of this action.
212 There being no statutory provision or other authority entitling an executor to independently, and without reference to the Court, decide to pay the legal fees of parties to litigation from the estate, the legal fees paid to the second defendant should be repaid by her to the estate. Any legal fees which would stand as costs of the litigation will be covered by the costs order made at the conclusion of this action.
(x) Whether the moneys in dispute should be repaid to the estate and, if so, by whom
213 When a beneficiary has received distributions to which that beneficiary is not entitled, the beneficiary must repay those distributions to the trust. The trustee may recover the moneys by deducting the amount from subsequent distributions to the beneficiary: Dibbs v Goren (1849) 11 Beave 483. At common law, a beneficiary can only escape repayment of overpaid trust funds if they have changed their position to their detriment in good faith in reliance on the belief that they were entitled to the receipt of the money and can point to expenditure or financial commitment which can be ascribed to the overpayment: David Securities Pty Ltd v Commonwealth Bank of Australia [1992] HCA 48; (1992) 175 CLR 353, 385 - 386; Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548 at 580.
214 The defence is not available merely because the money was spent. The test is rather whether a beneficiary would have acted differently if they had not mistakenly believed that they were richer than they were and, because of this mistake, altered their position: United Overseas Bank v Jiwani [1976] 1 WLR 964 at 968 - 969. The beneficiary bears the onus of proving reliance: David Security at 385 - 386. The defence is only available where the beneficiary's position has so changed that it would be "inequitable in all the circumstances to require him to make restitution, or alternatively to make restitution in full" and will only avail the beneficiary to the extent that his position has changed: Lipkin Gorman v Karpnale Ltd per Lord Goff of Chieveley at 580 - 581. The defence is not available where the money has been spent on ordinary household expenses: David Securities at 386.
215 The statutory position is to a similar effect. Section 94(1) of the Trustees Act empowers the Court to "make such order in the premises as the circumstances of the case may require". Subsection (2)(a) provides:
"An order of the court shall not disturb any distribution of the trust property made without breach of trust before the trustee became aware of the making of the application to the court."
216 Although in this case distributions were made before the application was brought, I have concluded that they were not made "without breach of trust" and, hence, subs (2)(a) is of no application.
217 Sections 65(2) and 65(3) of the Trustees Act creates a statutory right to recover trust assets from "any person to whom any assets, to which the section applies, were distributed". This general right of recovery is restricted, inter alia, by the operation of s 65(8) which confers on the Court a discretion not to order repayment where the assets or interest were received in good faith and the person has so altered his position in reliance on his having an indefeasible interest in the assets that it would, in the opinion of the Court, be inequitable to grant relief or to grant relief in full: see also s 125(1) of the Property Law Act 1969. Section 65(9) further provides that an order under s 64 may provide that any payment directed to be made shall be made by periodic payments or by instalments.
218 It is the case, as the second defendant submits, that an order for repayment under s 65 is discretionary. However, the discretion is not at large. Section 65(8) contains specific criteria to be met before a beneficiary may be excused from repayment. The mere fact that a beneficiary may have bona fide received moneys paid in breach of trust is not, of itself, enough to preclude the Court from making an order for the beneficiary to repay them. A change of position in reliance on the moneys making it inequitable to grant relief must also be established. In my view, the terms of s 65, and in particular s 65(8), fetter the generality of the discretion under s 94 when the Court is dealing with an invalid distribution of funds to a beneficiary.
219 Indeed, counsel for the second defendant put the case for relief from repayment on the basis that the second defendant had both received the moneys in good faith and had altered her position in reliance on the belief that there existed an entitlement to those moneys such that it is inequitable to grant relief. Counsel further submitted that s 65(8) would apply to a decision, based on receipt of the moneys, not to make a claim against the estate pursuant to the Inheritance (Family and Dependants Provisions) Act 1972 ("the Inheritance Act") as well as a decision not to make an application for payment of capital pursuant to cl 4.1.4.1 of the Will. I accept that both these matters could constitute an alteration in position for the purposes of considering whether it is inequitable to order repayment of the moneys pursuant to s 65(8) of the Trustees Act.
220 I have greater difficulty with the submission on behalf of Mrs Wendt that the Court is entitled to take into account other factors in the exercise of the discretion to order repayment. Counsel submitted that Mrs Wendt's advanced age and increasingly poor state of health should be taken into account, as well as the fact that it will be far more difficult emotionally for her to make any necessary application under cl 4.1.4.1 or to otherwise assert her rights or meet her needs. It is said that, having regard to these circumstances, it is inequitable to grant the relief sought. In my view, when one considers the terms of s 94 and s 65, in particular s 65(8) and s 65(9), I do not accept that the Court can or should refuse to order repayment of funds distributed in breach of trust based on personal circumstances other than an alteration of position in reliance on a belief in an indefeasible title to the funds. Other matters personal to a beneficiary, including lack of means, should only be taken into account under subs (9) in determining the manner of repayment. Of course, the circumstances may be such that repayment, even by instalments, is not appropriate or achievable. However, in my view, the evidence in this case does not reach that level.
221 As to the making of a claim under the Inheritance Act, the deceased and Mrs Wendt had been married for approximately 24 years at the time of the deceased's death. The extent of the provision made for her under the Will is that she has a life interest in the income of the estate and a right to apply for capital under cl 4.1.4.1. Mrs Wendt was clearly entitled to make a claim under the Inheritance Act for her proper advancement. It was submitted on behalf of Mrs Wendt that, in making an evaluation of detriment, the Court is not required to adjudicate upon the prospects of success of such an application, simply to take into account her evidence that she would have made such an application but did not do so because she received the profits on the share sales. However, it was further submitted that, if the Court is to have regard to the prospects of success, a claim under the Inheritance Act by Mrs Wendt would not be unreasonably brought and would have reasonable prospects of success. At the very least it is a claim which cannot be said to be destined to failure.
222 Counsel for the plaintiffs submits that the Court is entitled to take into account the prospects of success of an application under the Inheritance Act and further submits that Mrs Wendt has failed to adduce sufficient evidence to establish that she has a claim. In fact, it is said, the evidence is to the contrary. The deceased's Will provided Mrs Wendt with an income and also gave her an entitlement to apply for capital in times of hardship. She also had substantial assets at the time of his death.
223 In determining the equitable implications under s 65(8) of a beneficiary failing to make a claim under the Inheritance Act, I do not consider that it is useful or appropriate to engage in the exercise of attempting to determine the likely outcome of such a claim. Whilst there may be cases where the probable outcome is so obvious that it can properly be taken into account, the Court should not, in my view, conduct the exercise of determining a hypothetical Inheritance Act claim.
224 However, in this case it is unnecessary for me to decide whether the outcome of a potential claim is so clear as to be a relevant consideration. As I have already indicated, I do not accept that Mrs Wendt decided against making an Inheritance Act claim because of a belief in an indefeasible interest in the profits on share sales. In that regard, Mrs Wendt has not acted to her detriment as a result of receiving the profits on the share sales.
225 The other factor on which Mrs Wendt relies is that the receipt of the share sale profits made it unnecessary to make the application under cl 4.1.4.1 which she otherwise intended to make. She was firm in her evidence that she would have made such an application if not for the additional income provided by the distribution of the profits on the share sales.
226 Counsel for the plaintiffs submits that it is not necessarily the case that an application under cl 4.1.4.1 would or should have been successful. Mrs Wendt's counsel submitted that if she had not received the distributions of profit, Mrs Wendt would have been making regular applications under cl 4.1.4.1 and thereby dissipating the capital of the estate if she were successful. As with the Inheritance Act claim, I do not believe it is appropriate to engage in the exercise of determining a hypothetical application for a distribution of capital. Whilst there may be cases where the likely outcome of such an application is obvious, this is not such a case. Although the Court has heard some evidence of Mrs Wendt's financial circumstances and has been provided with certain documentation, the application before the Court was not brought for the purpose of determining whether her income "is insufficient for her reasonable needs". I am not satisfied that the Court is sufficiently informed of all matters relevant to the exercise of the power under cl 4.1.4.1 of the Will. It must be kept in mind that the right to apply under cl 4.1.4.1 remains open to Mrs Wendt. In my view, the preferable course is for her to consider her position once this action is finally concluded. It is submitted on behalf of Mrs Wendt that she is elderly and unwell and there is likely to be substantial legal costs associated with any such application. There are few legal costs associated with an application, only with a dispute as to the outcome of the application. In any event, that is the procedure provided for under the Will and the fact that it might be difficult for an elderly beneficiary is not, in my view, a relevant consideration. It should also be noted that, on the evidence, the distributions which are said to have deterred Mrs Wendt from making an application under cl 4.1.4.1 occurred at a time when Mrs Wendt was already elderly and relatively infirm.
227 In the event that I am wrong in the conclusion that it is inappropriate in this action to seek to determine the likely outcome of an application under cl 4.1.4.1, I propose to make a provisional determination based on the available material. At the relevant time Mrs Wendt held at least $100,000 in savings bonds, $78,000 in cash and owned a demountable house and her own home. Counsel for the plaintiffs also emphasises that this Court cannot be certain that the full extent of Mrs Wendt's financial circumstances have been revealed to the Court in view of Mrs Wendt's inability to account for the $50,000 paid to her on the maturity of one of her government bonds and a substantial, but unexplained, deposit in to her Challenge Bank account.
228 According to her tax return for the 1998-1999 financial year, Mrs Wendt's income was $61,512, inclusive of the profit distribution. Deducting the amount of the profit distributed to her brings the figure to $19,766.75. Based on the 1999-2000 taxation return her income was $74,086, again inclusive of the profit distribution. Deducting the amount of the profit distributed to her brings the figure to $26,649.78. Mrs Wendt's total income for the 2000-2001 financial year was $58,015 and $28,609 for the 2001-2002 financial year.
229 Mrs Wendt's expenditure between 1 July 1998 to 27 June 2002 was $99,093.50. However it is the case that a considerable amount of that money was spent on home improvements rather than living expenses. At the time these improvements were carried out Mrs Wendt held assets of $174,000 in bonds and cash. The relevant financial information would seem to indicate that Mrs Wendt's annual living expenses are approximately $25,000. There was no evidence put before the Court, other than that to which I have already referred, to indicate that Mrs Wendt's income without the profit distributions was insufficient to allow her to meet her needs, as opposed to the expenses she wished to incur. It should also be kept in mind that the capital improvements made to her home would not be required on an annual basis.
230 In my view, the evidence which has been adduced in the course of this action does not support the assertion that Mrs Wendt's financial circumstances would entitle her to a capital distribution under cl 4.1.4.1 if such application were being considered on its merits. While Mrs Wendt's income stream may not have been as high as she would have liked, it was not contemplated by the Will that she should have the choice of using the capital of the estate rather than her own. Counsel for the plaintiffs submits, and I concur with the view, that the Will clearly contemplated at cl 4.3 that Mrs Wendt should use her own assets for her own support.
231 However, the primary impediment to making a funding under s 65(8) of the Trustees Act is Mrs Wendt's own evidence that most of her expenses would have been incurred in any event. It is the case that Mrs Wendt conceded that she made almost no payment in reliance upon good title to the moneys received. For these reasons, I find that Mrs Wendt did not alter her position in reliance on having an indefeasible title to the profits distributed to her by deciding not to make applications under the Inheritance Act or cl 4.1.4.1 of the Will or by incurring the expenditure set out in her affidavit and oral evidence.
232 The other relevant factor under s 65(8) is that the funds were received in good faith. Counsel for the plaintiffs relies on authority which confirms that there cannot be good faith reliance on the indefeasibility of an interest when there is notice of challenge to the validity of the payment: Mercedes Benz v ANZ & Anor, unreported; CCA NSW (Palmer J); 50549 of 1990; 5 May 1992 at 37; "Restitution Law in Australia", K Mason and J M Carter (1995), at [2418]. The evidence reveals that each distribution of share sale profit was before the originating summons was served on Mrs Wendt on 5 July 2000. Although the solicitors for the plaintiffs wrote to the executor's solicitor on 22 May 1998 putting him on notice of an objection of the distribution of capital to the income beneficiary, there is no evidence that this information was brought to the attention of Mrs Wendt.
233 Irrespective of whether Mrs Wendt was notified of the plaintiffs' attitude at that time, the reference to good faith under s 85(8) is to the receipt of the moneys rather than the expenditure of the moneys. However, the requirement that the alteration of position be "in reliance" on an indefeasible title necessarily involves a belief in the indefeasibility of the title which is inconsistent with notice that the title to the moneys are in dispute.
234 Relief against Mrs Wendt was not sought by the plaintiffs until the originating summons was amended on 27 May 2002. However, from the outset the plaintiffs sought a review of the first defendant's decision to treat the capital gain on the sale of the shares as income of the estate for distribution to the life tenant. It must have been apparent to Mrs Wendt, as life tenant, that her entitlement to the moneys distributed to her was being questioned and was to be reviewed. Most of the expenditure on which Mrs Wendt relies as altering her position was incurred after she was put on notice that the distribution of profits to her was in dispute. Even Mrs Wendt agreed that this was the case. In my view, in the circumstances, any person acting reasonably would know that they might be required to repay the moneys and adjust their expenditure accordingly.
235 In terms of the repayment of moneys that are being sought from Mrs Wendt, the plaintiffs' submission is that there is no reason why Mrs Wendt should not be ordered to repay the moneys, particularly in view of the fact that she has assets from which it could be paid. However, the plaintiffs do not question the Court's power to structure repayment in a way which takes into account Mrs Wendt's personal circumstances. In that regard, the plaintiffs' position is in conformity with the provisions of s 65(9) and I do propose to take into account in structuring an order of repayment the effect on Mrs Wendt of immediately repaying the amount in full.
236 Section 65(7) of the Trustees Act directs that a person seeking to recover where trust assets have been wrongly distributed by a trustee must first exhaust other remedies available to him before he can exercise a remedy against the trustee. In view of my finding that Mrs Wendt was not complicit in any breach of trust, it would be unfair to require her to repay any more than the benefit derived by her from the disputed distributions. However, as repayment of the amount which constituted a benefit to Mrs Wendt will not restore the whole of the capital to the estate, the capital beneficiaries are entitled to look to the trustee for reimbursement of the balance of the loss to the estate: Re Mulligan at 507 - 509. There are, however, some restraints which require consideration before an order for Mr Orr to reimburse the estate can be made.
237 Section 19(2) of the Trustees Act provides:
"Any rules and principles of law or equity that relate to a provision in an instrument creating a trust that purports to exempt, limit the liability of, or indemnify a trustee in respect of a breach of trust, continue to apply."
238 In Re Mulligan (decd) Pankhurst J stated, with respect to the equivalent New Zealand provision, (at 506) that the onus is upon the trustee who seeks relief to establish that he or she has acted honestly and reasonably. The obligation is to show that not only should the trustee fairly be excused for the breach, but also for omitting to obtain the directions of the Court: Standard Insurance Co Ltd (In Liq) v Sidey [1967] NZLR 86. Even when the statutory preconditions are met, the Court must decide as a matter of discretion whether it is a case for relief. In Re Mulligan (decd) the trustees allowed the income beneficiary who was also a trustee to invest in fixed-interest securities despite their belief that to do so was not in the best interests of the estate. The result was a substantial depletion of capital for distribution to the income beneficiaries upon the income beneficiary's death. The Court, in those circumstances, considered that there was no scope for the application of s 73 because the trustee company did not act reasonably in failing to take action.
239 The Will also contains a clause which provides the executor with some limited protection from the consequences of his actions. Clause D of the Schedule to the Will is in the following terms:
"I declare my Executor will not be liable for any loss not attributable to:
1. his dishonesty; or
2. the wilful commission by him of any act known by him to be a breach of trust."
240 The term "dishonesty" applies if a trustee commits an act either knowing that it is contrary to the interests of the beneficiaries or being recklessly indifferent whether it is contrary to their interests or not: Walker v Stones (2000) 4 All ER 412, 443. The trustee is also dishonest even if he genuinely believes he is acting in the interests of the beneficiaries if, according to an objective standard, the belief held by the trustee was so unreasonable that no trustee could have held it: Walker v Stones at 446. In my view, either approach would lead to a conclusion that Mr Orr acted dishonestly in determining to administer the estate to maximise the benefit to the income beneficiary and in making each distribution of the profit on the sale of shares to the income beneficiary. Contrary to the submissions made by the defendants, the real value of the estate has and will inevitably depreciate if capital gain is given to the life tenant. In my view, the failure to obtain legal advice to support his approach to distribution evidences dishonesty on Mr Orr's part. At the very least, Mr Orr was completely indifferent to the interests of the capital beneficiaries. For these reasons, I consider that Mr Orr cannot rely on the exculpatory effect of cl D of the Schedule to the Will.
241 Section 75 of the Trustees Act excuses trustees for breaches of trust if the trustees have acted honestly and reasonably and ought to be fairly excused. A trustee does not entitle himself to relief by proving only that he acted honestly and reasonably. He must show that under all the circumstances he ought fairly to be excused for his breach of trust: National Trustees Executors & Agency Co of Australasia Ltd v General Finance Co of Australasia Ltd [1905] AC 373 at 381. The onus is on the trustee to satisfy the Court by sufficient evidence that the trustee acted reasonably and honestly: In re Stuart; Smith v Stuart [1897] 2 Ch 583 at 590; Re Turner [1897] 1 Ch 536 at 542. The test of reasonableness is an objective one: Walker v Stones at 445 - 446. An honest trustee will not be obliged to make good loss sustained by the estate through his actions unless those actions arise from a want of ordinary prudence on his part: In re Chapman; Cocks v Chapman [1896] 2 Ch 763 at 776. It is well established that there can be a failure to act honestly or reasonably if a trustee fails to obtain legal advice or seek directions from a court: Chapman v Browne [1902] 1 Ch 785 at 805 - 806; Partridge v Equity Trustees Executors and Agency [1947] HCA 42; (1947) 75 CLR 149 at 165. In Re Burbidge Young J held (at 1 - 2) that a prudent trustee would have taken advice on a proposed course of action prior to any application to the Court for directions.
242 It is not sufficient for a trustee who has failed to take these steps to suggest that, if he had taken such advice or sought directions, he would have been advised or authorised to act as he did. Romer LJ observed in Partridge v Equity Trustees Executors and Agency (at 806):
"But it is difficult to determine what might have happened in the hypothetical case of the defendant's having taken steps which he never did take; and I cannot assume that, if those steps had been taken and the facts as to the security had been properly stated to counsel or to the Court, the trustees would have been advised or authorized to make the advance."
243 In Partridge v Equity Trustees Executors and Agency at 165 the Court referred with approval to a line of authority which held that:
"In considering whether a trustee has acted reasonably within the meaning of the section the terms of the instrument creating the trust ought to be taken into consideration. If an ordinary business man might reasonably entertain a particular view of the construction of the instrument, and the action of the trustee would have been justified if that view had been the true one, the trustee cannot be said to have acted unreasonably merely because his view of the construction of the instrument is wrong."
244 In the instant case, I do not consider that a person of the background of Mr Orr, having read the Will as a whole, could have fairly come to a conclusion that he was entitled to notionally divide the estate, as he did, and invest one portion of it with a view to maximising the benefit to one class of beneficiary and leave the other portion in existing investments without further consideration to the growth of that portion and the interests of the capital beneficiaries.
245 It was submitted on behalf of the first defendant that his conduct was neither dishonest nor unreasonable because he considered the provisions of the Will entitling him to distribute capital to the income beneficiary to be clear-cut in view of his conversations with the deceased and also because there would be no loss to the estate because the sum representing the initial value of the asset was to be returned to the estate. I have already rejected both these propositions.
246 In my view, the actions of the first defendant should not be excused. His decision to divide the estate into existing and after-acquired assets and to distribute any profits on trading in after-acquired shares to the income beneficiary was inconsistent with the terms of the Will and had no justification other than a deliberate intention to maximise the benefits to the income beneficiary. That decision was made with a cavalier disregard for the interests of the capital beneficiaries who have suffered significant loss. The first defendant deliberately, and without notice to the capital beneficiaries, even when put on notice that they would dispute any payment of capital to the income beneficiary, made three separate and substantial payments of capital to the income beneficiary. Prior to doing so he took no legal advice on the propriety of his approach to the distribution of the estate and made no application to the Court for directions. Indeed, had he taken legal advice, it is unlikely that he would have followed it unless it accorded with his pre-determined view, as evidenced by his failure to act upon the advice of counsel that legal fees relating to the dispute as to the distribution of the profits of the share sales should be paid from those profits and not from the corpus of the estate.
247 Further, the first defendant made no attempt to recover moneys wrongly distributed and, instead, continued to pay Mrs Wendt income that was greater than that of the estate. As the Court observed in National Trustees Executors & Agency Co of Australasia Ltd v General Finance Co of Australasia Ltd [1905] AC 373 at 381 - 382:
"If trustees do unfortunately lose part of a trust fund by a breach of trust, the least that can be expected of them is that they should use their best endeavours to recover the fund, or so much as is practicable for their cestui que trust."
248 Mr Orr has acted in breach of his duty to be impartial and even-handed. In view of the findings that I have made, his conduct was neither reasonable nor honest and he is liable to compensate the plaintiffs for the loss to the estate if the whole of the loss is not recovered from the income beneficiary. That loss includes any shortfall in repayment by Mrs Wendt of the legal fees paid to her.
(xi) Removal of the executor or the appointment of a co-executor
249 The Court has an inherent jurisdiction to appoint new trustees of a trust: Sinnott v Hockin (1882) 8 VLR 205 at 210; Porteous v Rinehart (1998) 19 WAR 495 per White J at 507. There is also a statutory power to appoint a new trustee, either in substitution for or in addition to any existing trustee, whenever it is expedient to do so: s 77 of the Trustees Act. By s 77(2) of the Trustees Act the Court may make such an order in a number of circumstances, including where a trustee has been held by the Court to have misconducted himself in the administration of the trust.
250 In McLaughlan & Anor v Prince & Anor [2002] WASC 274 Hasluck J set out (at page 5) the legal principles which apply in removing and replacing a trustee. They can be summarised as follows:
1. 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: Miller v Cameron [1936] HCA 13; (1936) 54 CLR 572, per Dixon J, at 580.
2. The dominant consideration is the welfare of the beneficiaries, in particular, whether the trust property will be safe or the trust properly executed in the interests of the beneficiaries: Letterstedt v Broers (1884) 9 App Cas 371; Miller v Cameron, per Starke J, at 579; Gava v Grljusich, unreported; SCt of WA; Library No 960010; 11 January 1996, per Kennedy J; Re Wrightson (1908) 1 Ch 789, per Warrington J, at 803.
3. There must exist circumstances upon which to ground a judgment that the welfare of the beneficiaries is opposed to the trustee's continued occupation of the office: Miller v Cameron at 580.
4. Even where such circumstances exist, there remains a discretion as to whether the jurisdiction to remove a trustee should be exercised: Miller v Cameron at 580 - 581.
5. The requirement that it be "expedient" to remove and/or appoint a trustee means:
(a) conducive to, or fit or proper or suitable having regard to the interests of the beneficiaries, the security of the trust property, the efficient and satisfactory execution of the trust and a faithful and sound exercise of the powers conferred upon the trustee: Re Roberts (1983) 70 FLR 158 at 16, per O'Leary J; Miller v Cameron 580 - 581; Porteous v Rinehart, per White J, at 507.
(b) advantageous or merely appropriate or suitable to the circumstances of the case: Pope v DRP Nominees Pty Ltd [1999] SASC 337; (1999) 74 SASR 78, per Bleby J, at 86.
251 In the initiating process the plaintiffs seek an order that the first-named plaintiff be appointed as co-trustee of the estate. However, on the evidence available to me, I am concerned that the appointment of one of the residuary beneficiaries as co-trustee will do no more than create a stalemate, as Mr Orr has at all times attempted to justify his approach to the management of the estate and appears fixed in his determination to benefit the income beneficiary.
252 Counsel for the plaintiffs has advised that it remains their preference that a co-trustee be appointed. It would seem that the preference is based, at least in part, on a concern about the cost of a commercial trustee. However, rather than have Mr Orr manage the estate on his own, the plaintiffs would be prepared to accept a trustee organisation as an alternative.
253 On behalf of the first defendant it is said that, even if the Court finds that he has failed to administer the estate in an even-handed fashion which maximises the benefit to all classes of beneficiaries, he has not acted with any intention to harm the interests of the plaintiffs and should not be directed to relinquish his position as a trustee. However, the Court was advised that Mr Orr was willing to relinquish the position of executor and trustee under the Will under certain conditions. In my view, Mr Orr is in no position to set conditions.
254 In Fysh v Coote [2000] VSCA 150 Ormiston JA noted at [25]:
"It is the inability to act independently and deal adequately with conflicts and potential conflicts which leads to the need to remove an executor. Where through incompetence or stubbornness an executor cannot cope, then it is proper, as often occurs, for an executor to hand over his or her duties or, if unwilling, for an order for removal to be sought and made against the executor."
255 Mr Orr, in his approach to managing the estate, has, in effect, created the dispute which this action is intended to resolve. It is apparent from his evidence that he is wholly unable to see the conflict between his role as executor, involving, as it does, a duty of impartiality, and his desire to maximise the benefit to the income beneficiary. In view of the findings that I have made concerning Mr Orr's conduct, I consider that it would not be appropriate for him to remain in the position as executor and trustee of the estate. It is essential that an independent trustee be appointed.
256 However, I would prefer to give the parties an opportunity to agree on the appointment of a trustee and for the matter to be further heard should an agreement not be reached.
257 For the reasons to which I have referred, the benefit to Mrs Wendt which amounts to the funds distributed to her, less tax, is to be returned by her to the estate. Half of the sum is to be paid as soon as possible. I will hear counsel for Mrs Wendt as to an appropriate time period for compliance with that order. The balance of the sums distributed to her, less tax, is to be the subject of a charge over her residential property in Bunbury and repaid on the sale of the property or the grant of any legal or equitable interest in the property to a third party. Mrs Wendt is to take all reasonable steps to obtain from the Australian Taxation Office that portion of the funds distributed which were paid in tax.
258 Mr Orr is to pay the tax and interest component of the loss to the estate, including interest on the funds distributed as legal fees. If the tax paid on the funds distributed is refunded by the ATO before the estate is reimbursed by Mr Orr, the amount representing the tax refund is to be paid by Mrs Wendt to the estate. If the tax paid on the funds distributed is not refunded by the ATO before the fund is reimbursed by Mr Orr, the amount representing the tax component is to be paid by Mrs Wendt to Mr Orr. If a refund is not forthcoming, the shortfall is to be paid by Mr Orr to the estate.
259 I appreciate that the profits, when returned to the estate and reinvested, would have yielded income which would have been distributed to Mrs Wendt and of which, through the actions of Mr Orr, she has not now had the benefit. However, irrespective of the fact that the profits distributed to her have to be repaid, Mrs Wendt has had the benefit of the profits for a considerable period of time. In the circumstances, I am not persuaded that it is appropriate to make an adjustment to take into account any increase in income which Mrs Wendt might otherwise have received.
260 As to the costs of the action, the general rules as to costs is that the costs of, and incidental to, all proceedings shall be in the discretion of the Court and the Court will generally order that the successful party to any action or matter recover his costs: O 66 r 1 of the Supreme Court Rules. Order 66 r 9 provides that a trustee who is party to any proceedings in his capacity as trustee shall, unless the Court otherwise orders, be entitled to the costs of proceedings. However, the entitlement to legal costs is qualified. Rule 9 further states that the Court may otherwise order only on the ground that the trustee has acted unreasonably or for his own benefit rather than for the benefit of the fund.
261 At common law the usual practice has been, if trustees think it necessary to appear in an action, to allow them their costs, leaving it to the taxing master to consider their position in fixing the amount of their costs: Gleeson v Fitzpatrick at 38, per Rich J. However, even at common law it is recognised that the right of a trustee to indemnification is not absolute. A recognised exception is where there has been impropriety which has been held to include an executor taking or defending proceedings in breach of trust, or conducting the proceedings in such a way that the Court, on a general view of the case, regards the executor's conduct as not honestly brought forward: Drummond v Drummond [1999] NSWSC 923, per Austin J, at par 45. While mistakes or errors in judgment would not disentitle a trustee to an indemnity, the beneficiaries are entitled to expect reasonable prudence on the part of the trustee, and failure to do so may result in a trustee being liable for his own legal fees: In re Weall; Andrews v Weall (1889) 42 Ch D 674 at 681. Because of the ease and comparatively small expense involved in obtaining directions of the Court, a trustee bears the onus of establishing an entitlement to costs where the trustee brings or defends an action unsuccessfully: In re Beddoe, per Bowen J, at 562. As Maughan AJ noted in Alcock v The Public Trustee at 193, having reviewed the possible courses open to an executor or trustee faced with uncertainty or dispute, "in every event there is some safety valve open to him".
262 In my view, the correspondence from the plaintiffs was sufficient to put the first defendant on notice that the plaintiffs objected to any distribution of capital to the income beneficiary. Any trustee, acting reasonably, would conclude that the plaintiffs would dispute the propriety of distributing the share sale profits to the income beneficiary if they were aware that the trustee was so doing. From that time, at the latest, it was incumbent on the executor to take some appropriate action to identify the true nature of his obligations and protect the interests of all beneficiaries. Yet, despite being put on notice and giving an undertaking that he would notify the plaintiffs if such were his intention, Mr Orr continued to distribute capital to Mrs Wendt. He declined to avail himself of any of the "safety valves" open to him. Indeed, he defended with considerable vigour the action brought by the plaintiffs which called his conduct into question.
263 There is no allegation or evidence that the first defendant acted for his own benefit. However, he deliberately acted to the benefit of one of the beneficiaries, a relative by marriage, and to the detriment of the other beneficiaries, as a result of which legal costs were incurred in bringing an action to remedy that injustice. To allow the first defendant to recover his costs from the estate would mean that the income beneficiary and the capital beneficiaries are deprived, respectively, of the income generated by capital used to pay the expenses and of the capital itself, thereby suffering additional loss. Further, if the capital beneficiaries are to meet their own costs or recover their costs from the estate, the plaintiffs will effectively be paying for the action they took to redress the wrong done to them. Given his conduct, I consider that the first defendant has no basis for resisting the application of the normal rule that costs should follow the event. The costs of the plaintiffs are to be paid by the first defendant without indemnity from the estate.
264 As I have previously indicated, I am not persuaded that the second defendant was in any way involved in Mr Orr's activities, although she did benefit from them. For that reason, I do not consider it appropriate for her to contribute to the costs awarded to the plaintiffs. Further, as that benefit will be removed as a result of this action, I do not consider it appropriate that she meet her costs. The first defendant should also pay the second defendants costs.
265 I will hear the parties on the appropriate orders to reflect the decision of the Court.
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
CITATION : WENDT & ORS -v- ORR & ANOR [2004] WASC 28 (S)
Costs - Executor's right to indemnity from the estate for costs of litigation commenced by beneficiary
Order that the costs of the litigation be paid to the plaintiffs and the second defendant by the first defendant without indemnity from the estate
1 JOHNSON J: When my reasons for decision in this action were handed down, I addressed the issue of the costs of the action and concluded that the first defendant should meet his own costs of the action and pay the costs of the plaintiffs and the second defendant, without indemnity from the estate. This conclusion was reached in the context of a claim by the plaintiffs for reimbursement of legal costs paid by the first defendant from the estate, an issue on which submissions were made by all parties. In the course of making my findings on this issue I drew a distinction between costs of the action and other legal costs incurred in the management of the estate. Having drawn that distinction, I proceeded to state my conclusions in relation to payment of both categories of costs. However, having delivered my reasons, it occurred to me that such a distinction was not drawn by the parties in their submissions and, accordingly, the first defendant was entitled to be further heard on whether he is entitled to an indemnity from the estate for the costs of the action.
2 Accordingly, on 29 April 2004 a further hearing was held in which all parties were given an opportunity to make oral submissions. Counsel for the plaintiffs and the first defendant had each filed written submissions. Counsel for the second defendant had advised that his client would abide the decision of the Court. However, as the written submissions filed by the first defendant included a submission that he should not meet the legal fees of the second defendant, counsel for the second defendant was given the opportunity to make oral submissions and invited to file written submissions if he considered it would be in the interests of his client to do so.
3 The facts relevant to the resolution of this issue include the following:
• The assets of the estate at the time the first defendant became the executor included cash, shares, a boat and trailer, a demountable home and WA Government Bonds to a total value of $166,000 with bonds to the value of $114,000 due to mature on 1 December 1998.
• By letter dated 22 May 1998 the plaintiffs' solicitors advised the first defendant's solicitors of their concern about the possibility that the first defendant would distribute capital to the second defendant.
• By letter dated 9 June the first defendant's solicitors offered a compromise whereby the first defendant give an undertaking that he would give 21 days' notice to the plaintiffs of any intention on his part to pay capital to the second defendant.
• By letter dated 12 June 1998, the plaintiffs repeated their concerns about the possibility of a distribution of capital to the second defendant and put the first defendant on notice that should any amount of capital be paid to the second defendant, then the plaintiffs would look to recover any consequential loss.
• On 20 January 1999 the first defendant paid to the second defendant the net proceeds of sale of Optus shares.
• On 9 April 1999 the first defendant paid to the second defendant the net proceeds of sale of CBA shares.
• On 12 December 1999 the first defendant paid to the second defendant the net proceeds of sale of a further sale of Optus shares.
• All three payments were made without prior notice to the plaintiffs.
• On 8 March 2000 the plaintiffs' solicitors wrote to the first defendant's solicitors advising that they were preparing an application to this Court to review the distribution of capital to the second defendant. The plaintiffs' solicitors invited the first defendant to consider his position, before the filing of the application, and propose an appropriate alternative to Court proceedings.
• By letter dated 4 April 2000 the solicitors for the first defendant briefed counsel seeking advice, inter alia, on whether the proceeds of the share sales was income or capital and whether the legal fees in relation to this and related issues should be paid from the estate or the profits on the share sales.
• The first defendant claimed privilege over counsel's opinion other than that part which advised that the costs of the advice on this issue should come from the proceeds of the share sales.
• Despite this advice, on 9 May 2000 and 30 May 2000 the first defendant paid from the estate the fees of counsel and his solicitors respectively.
• On 8 May 2000 the first defendant's solicitors advised that they should prepare an application to the Court seeking directions of the Court regarding whether the money made by share trading is income or capital.
• There is no evidence before the Court that instructions were given by the first defendant to make the application, but it remains a fact that no such application was made.
• On 6 July 2000, the plaintiffs commenced these proceedings.
• On 27 May 2002 the originating summons was amended to request an order for repayment of the capital and legal fees dispersed.
4 It was submitted on behalf of the first defendant that the costs incurred prior to the issue of the proceedings and paid from the estate related to matters that were properly within the usual duties of the executor. Counsel for the plaintiffs have provided the Court with a schedule of costs paid by the first defendant from the estate ("the Schedule"), a copy of which is attached to these reasons. It is conceded by the plaintiffs that items 1 to 5 were costs properly incurred and payable from the estate.
5 However, the plaintiffs dispute that items 6 and 7, the costs of obtaining counsel's advice, should be paid from the estate. The first defendant argues that the costs incurred in obtaining counsel's opinion and the costs of the solicitors' advice that the first defendant should seek the Court's directions are reasonable costs incurred in the exercise of the trusteeship.
6 The plaintiffs rely on two main points to rebut the proposition that the first defendant should be indemnified by the estate in relation to these costs. The plaintiffs' first point is that the first defendant claimed privilege over the documentation relating to counsel's advice and over the advice itself. Privilege was voluntarily waived in relation to a part of counsel's advice during the course of the hearing, but the privilege was maintained in relation to the balance of the document. The plaintiffs' submission is that the claim of privilege is inconsistent with the advice being obtained for the benefit of the estate and, hence, should not be paid for by the estate. The plaintiff further submits that if the advice had been obtained for the benefit of the estate, it would be the property of the estate and the beneficiaries would be entitled to access to the advice. It is said that a claim of privilege in an action involving only the executor and the beneficiaries of the estate is so inconsistent with the advice being obtained "for the benefit of the estate" that the only reasonable conclusion is that it was obtained and used for the benefit of the executor and, hence, should be paid for by him.
7 I consider there to be considerable merit in this submission. As Bowen J observed in In Re Beddoe; Downes v Cottam [1893] 1 Ch 547 at 562:
"A trustee can only be indemnified out of the pockets of his cestui qui trust against costs, charges, and expenses properly incurred for the benefit of the trust."
8 In my view, a claim of privilege over a document, such claim being made by an executor in the course of an action involving only beneficiaries, is entirely inconsistent with the documentation being obtained for the benefit of the estate. In my view, this factor alone disentitles the first defendant to an indemnity from the estate for the costs set out in items 6 and 7 of the Schedule.
9 The plaintiffs' second point is that the evidence establishes that the first defendant did not act on the advice received in a timely fashion or at all. Indeed, with respect to one aspect of the advice the first defendant acted contrary to counsel's advice by paying the costs of obtaining the advice from the estate rather from the proceeds of the share sales. Although privilege was claimed over counsel's advice at the hearing, the written submissions filed on behalf of the first defendant state that counsel's opinion included the advice "that the trustee should use the provisions available under section 92 of the Trustee's Act seeking the Court's directions". Annexed to an affidavit filed after the hearing on behalf of the first defendant is a letter dated 8 May 2000 sent to the first defendant by his solicitors. Contained in that letter is advice that an application should be made to the Court seeking directions regarding whether the money made by the share trading is income or a capital gain. The first defendant had already been warned by the plaintiffs' solicitors on 8 March 2000 that they were preparing an application to the Court specifically in relation to the distributions made to the second defendant. Nevertheless, no application to the Court for directions was made by the first defendant as executor in the two-month period between the advice and the commencement of proceedings by the plaintiffs.
10 In the first defendant's written submissions it is said that the solicitor representing the first defendant moved from P J Griffin & Co to Lewis Blyth & Hooper shortly after 8 May 2000. It is further stated in the written submissions that Lewis Blythe & Hooper did not receive instructions to act in this matter for the first defendant until 12 July 2000, after the originating summons had been filed. There is a further assertion that prior to the commencement of the action by the plaintiffs, the solicitors for the first defendant were instructed to prepare an application under the Trustees Act seeking the directions of the Court regarding whether money made by share trading was capital or income. There is no evidence before the Court which would allow the Court to conclude that the first defendant ever instructed his solicitors to prepare an application under the Trustees Act seeking directions. It seems to me that, if indeed such instructions had been given, it would be a simple matter to provide a copy of any letter giving or confirming the instructions or a file note recording the instructions. In view of my findings on the first defendant's credibility, in the absence of supporting evidence, I am not prepared to conclude that he gave such instructions.
11 In some circumstances two months would not be an excessively long period before acting on the advice of counsel and would not necessarily preclude an executor from being indemnified from the estate for the costs of the advice. However, in this case the first defendant had known since May 1998 that the plaintiffs took issue with the payment of any capital to the second defendant. He had known since June 1988 that, if he were to do so, the plaintiffs would seek to recover any consequential loss. He had known since 8 March 2000 that the plaintiffs would initiate court action if the first defendant did not propose an appropriate alternative. It was, in my view, clearly the case that the first defendant was well aware that time was of the essence if he wished any request for directions of the Court to be initiated by him as executor.
12 I consider that the evidence adduced at trial, in particular the first defendant's explanations for his actions, belie any intention on the first defendant's part to do other than act in accordance with his initial decision to administer the estate to the benefit of the second defendant. I gained from the evidence and the chronology of events a clear understanding that the first defendant would continue to administer the estate to the benefit of the second defendant unless forced to do otherwise. In my view, the first defendant did not intend to act on counsel's advice unless it accorded with his intentions with respect to the estate. His decision to pay from the estate the legal costs of obtaining counsel's advice, contrary to that advice, reinforces that conclusion. For these reasons I accept the plaintiffs' submission that the first defendant should not be entitled to be indemnified by the estate for the costs of advice he did not follow and had no intention of following.
13 Items 8 to 21 represent costs of the litigation which have been dispersed by the first defendant from the funds of the estate and, according to the plaintiffs, should be repaid to the estate.
14 On behalf of the first defendant, it was submitted that he made a mistake of judgment and should not be disentitled to an indemnity from the estate as he has acted with reasonable prudence, but has been pre-empted by the plaintiffs commencing proceedings before his solicitors could do so. That submission is in conflict with the findings of fact made by me. I did not conclude that he made a mistake of judgment but, rather, he deliberately decided, from the outset, to administer the estate in a manner which benefited one class of beneficiary over another and thereby acted in breach of trust. I further found that he acted unreasonably and dishonestly and in breach of trust in administering the estate in that manner and in distributing capital to the income beneficiary. Consequently, if the first defendant submits that the costs of the litigation should be met by the estate rather than by him, that submission will need to be on some basis other than the fact that he simply made an error of judgment whilst acting with reasonable prudence.
15 Counsel for the first defendant identifies two bases for the submission that the costs, or part of the costs, of the litigation should be paid from the funds of the estate. The first basis is that the central question of whether or not the profit from share trading should be defined as capital or income would. It is submitted that the originating summons in its initial form was of the same character as would have been brought by an executor under s 94 of the Trustees Act, the costs of which, in the normal course of events, would be met by the estate. In addition, it is suggested that the same, quite complex, arguments would have been raised by counsel for the first defendant, and properly put before the Court, if the executor had initiated the action. As much of the costs would have been incurred in any event, the first defendant should not have to bear all of the costs. This submission was supported by counsel for the second defendant.
16 In his oral submissions, Counsel for the first defendant also raised the possibility that the first defendant was not advised at an early stage that he was entitled to bring an application for directions. Counsel noted that it was nearly three years before the solicitors sought counsel's advice. I have some difficulty with this submission which is speculative and not based on any evidence before the Court. The fact is that the first defendant was represented and if his legal representatives did not properly advise him, then his remedy lies in an action against them. In any event, there is no evidence from which a conclusion can be drawn that, prior to seeking counsel's advice in 2000, the first defendant was never told that he could seek the Court's assistance in resolving the dispute with the plaintiffs.
17 Counsel for the plaintiffs submits that where, as in this case, there is a dispute over the proper interpretation of the Will and the distribution of funds under the Will, a prudent trustee would have sought legal advice and/or directions from the Court prior to making the distribution about which there is a dispute. This submission is in accordance with the findings that I have already made. I see no reason to resile from those findings. It is also submitted that it is clear from the evidence that the first defendant was never going to make that application to the Court. I accept that submission.
18 The plaintiffs also submit that if the application is brought by a beneficiary, then a prudent trustee would not oppose the order that his decision be reviewed. For example, in his affidavit evidence of 4 September 2000 the first defendant made it clear that he did not support the application to review his distribution of the share sale profits to the second defendant. Nor would a prudent trustee oppose an amendment which would allow the estate to recover moneys improperly disbursed. Further, the amendment was opposed despite the fact that an order for repayment of the moneys was always implicit in a claim alleging that the moneys were improperly disbursed.
19 It was further submitted on behalf of the plaintiffs that the first defendant's conduct in defending the action was for the purpose of protecting his own interests in the litigation rather than protecting the interests of the trust. As he was not acting for the benefit of the trust, the costs were not incurred for the benefit of the trust. I accept that submission as it is entirely consistent with my impression of the first defendant as he was giving evidence. He presented as an adversary to those bringing the action, aggressively defending his actions and resentful of his actions being questioned.
20 While the plaintiffs conceded that some of the same legal issues might have been canvassed had the first defendant made the application, the length, nature and cost of the application was said to be very different.
21 There was some debate about the proportion of the costs which would be equivalent to the cost of a s 94 application brought by the first defendant. In the end result, it is unnecessary to resolve this issue. In my view, the argument that the first defendant is entitled to a reduction in the amount of costs to be paid by him without indemnity from the estate equivalent to the costs of an inevitable s 94 application has no merit. It is correct to say that, if the application had been brought by the first defendant when first advised of the dispute and before distribution of the moneys, he would be entitled to an indemnity for his reasonable costs of the action. However, the first defendant declined to do so and even failed to bring an application when so advised by his legal representatives. I do not consider it to be particularly useful to say that the central issue would be the same, because the circumstances surrounding the application were not the same. Neither do I accept that a s 94 application was inevitable. Counsel for both the first and second defendants maintain that the main issue in dispute was complex, without authority directly on point, as a result of which it would be unlikely that counsel would take a position without also recommending recourse to the Court. However, all interested parties could have obtained legal advice and, if all beneficiaries are unanimous as to the proper course to take, appropriate indemnities could be obtained by the trustee, overcoming the need to apply to the Court. As a result of the first defendant's actions, the beneficiaries were simply not given the opportunity to avoid litigation because they were not consulted. Such an outcome resulting from the sharing of advice and meaningful dialogue between the beneficiaries and the executor may be said to be unlikely in view of the attitudes apparent at trial. However, there is no way of knowing whether the attitudes displayed would have been the same if appropriate action had been taken at an early stage.
22 Essentially, the first defendant's conduct has ensured that the Court must resort to speculation as to what would have occurred if he had acted prudently. The need for a ruling on the issues raised in the plaintiffs' originating summons did not arise from the nature of the trust. It arose because of the actions of the trustee. Accordingly, I am unpersuaded that the first defendant should be indemnified for the costs equivalent to a s 94 application brought by him as trustee.
23 Counsel for the first and second defendants observed that the effect of an order that the first defendant pay all the costs of the action without indemnity is that the estate has the benefit of the ruling without the detriment of having to pay the costs of a s 92 application. The estate is said to be receiving a "slight windfall". I think this proposition needs to be considered in light of the evidence that the executor decided from the outset to separate the estate into two categories; shares forming part of the estate at the time of the deceased's death and shares acquired by the first defendant in which he was to trade for the benefit of the second defendant. Another relevant factor is that the first defendant made considerable profits in trading in the after-acquired shares. At the same time he left the previously acquired shares to languish without consideration to the potential for detriment to the interests of the capital beneficiaries. Whilst I accept that it would not be prudent for the first defendant to invest the entire estate in the share market, if he had dealt with some portion of the previously acquired shares in the same way and as successfully, a benefit would have accrued to the estate likely to exceed by the costs of the hypothetical s 94 application. For example, the defendant sold the after-acquired Qantas shares for a profit of $33,000 to the benefit of the income beneficiary, but did not consider the prospect of selling the existing Qantas shares with a view to making a profit for the benefit of the capital beneficiaries.
24 I must exercise my discretion as to costs in relation to the application that was in fact brought, not the one that should have been but was not. I am not persuaded that, in all the circumstances of this case, an award of costs to be paid by the first defendant without indemnity constitutes a "windfall" to the estate such that the amount of costs to be paid should be reduced by any amount.
25 The second basis for the submission that the costs, or part of the costs, of the litigation should be paid from the funds of the estate is that it was not until the amendment to the originating summons on 27 May 2002 that there was a specific request for an order for repayment of the legal fees paid from the estate. Having already made the payments, it is said that the first defendant did not have the power to recoup the moneys from the second defendant.
26 The first response which can be made to this proposition is that there is no evidence that the first defendant ever requested the return of the moneys. At all times prior to and during the trial the first defendant maintained the position that his actions in distributing the profits on the share sales to the second defendant were in accordance with the Will and should not be questioned. The next response is that an order for reimbursement of the moneys distributed was the obvious outcome of a successful application, even without a specific plea of such relief. Indeed, counsel for the first defendant conceded that there would be an order for repayment resulting from a ruling in the plaintiffs' favour on the originating summons in its initial form. The final response is that, if the first defendant had acted prudently and applied to the Court for directions from the outset, there would be no need to ask for the second defendant to pay the moneys back because it would not have been disbursed to her in the first place.
27 As to the costs of the second defendant, the first defendant submits that her costs incurred after the amendment of the originating summons should be paid by the estate. The plaintiffs oppose any suggestion that the second defendant be entitled to indemnity from the estate for any legal fees on the basis that, for whatever reason, the second defendant made assertions that were untrue and relied upon a defence which had no basis. She is, therefore, not entitled to be indemnified by the estate. Counsel for the plaintiffs further argue that the position of the second defendant is to some extent akin to that of the plaintiffs in that she did not create the problem, but was involved in the litigation brought to resolve it. The only differences are said to be the fact that the second defendant had the benefit of the moneys and that she did provide an active but unsuccessful defence. However, it must be kept in mind that the benefit of having access to the moneys is reduced or removed by having to repay them without an entitlement to the income on the profits to which she was entitled. It must also be kept in mind that the active defence was pursuant to s 65(8) of the Trustees Act which would not have arisen in the context of an application brought by the first defendant prior to distribution of the profits on the share sales.
28 I accept that reimbursement of her costs from the estate will have a greater financial effect on the plaintiffs than on the second defendant. However, I do not consider that an indemnity from the estate is the appropriate order to make in all the circumstances of this case. In my view, it is the first defendant's imprudent behaviour in breach of trust which has led to the second defendant incurring legal costs in this action and those costs should be met by the first defendant. For the reasons already given, I do not consider that the fact that the second defendant might have incurred costs in a hypothetical s 94 application brought by the executor in any event should operate to reduce her entitlement to have her legal costs paid in full by the first defendant without indemnity to him from the estate.
29 The plaintiffs make the very valid point that, if the Court were to order that legal costs come from the trust, it validates all of the actions of the first defendant because the consequences of his actions will be visited on the beneficiaries. If the legal costs are paid from the estate, it will mean that despite the fact that the plaintiffs' concerns were valid, their application successful, they will be in a worse position than they would have been if they had done nothing, as the costs of the parties are likely to be greater than the amounts of capital disbursed. In my view, that would not be a just outcome.
30 In view of my conclusion that the first defendant has acted in breach of trust in the approach taken to the administration of the estate, in the failure to obtain legal advice or directions from the Court at an early stage and in distributing the profits on the sale of shares to the second defendant, he should pay the costs of the litigation of all beneficiaries without indemnity from the estate.
# Wendt & Ors
Orr & Anor \[2004\] WASC 28
(1920) 27 CLR 331
(1979) 143 CLR 134
(1909) 9 CLR 773
(1973) 129 CLR 99
(1920) 29 CLR 29
(1945) 73 CLR 404
(1987) 163 CLR 199
(1907) 5 CLR 96
(1959) 101 CLR 298
(1992) 175 CLR 353
(1947) 75 CLR 149
(1998) 19 WAR 495
(1936) 54 CLR 572
(1983) 70 FLR 158
(1999) 74 SASR 78