Wood v Inglis

Equiticorp Finance Ltd v Bank of New Zealand (1993) 32 NSWLR 50 Permanent Trustee Co Ltd v Bernera Holdings Pty Ltd [2004] NSWSC 56 CASES CITED : QBE Insurance Group v ASIC (1992) 38 FCR 270 Re Spanish Prospecting Co Limited [1911] 1 Ch 92 Wood v Inglis [2008] NSWSC 1147; (2003) 68 ACSR 420

First Cross Claim: Helen Margaret Inglis (cross-claimant) Inglis Research Trust P/L (first cross-defendant) PARTIES : Kathryn Margaret Clark (second cross-defendant) Michael William Inglis (third cross-defendant) Pamela Ruth Wood (fourth cross-defendant) Fiona Jane Narlini Inglis (fifth cross-defendant) William Keith Inglis (sixth cross-defendant)

Mr J E Thomson w Mr H N Newton (cross-claimant) COUNSEL : Mr B J Burke (second cross-defendant) Mr M B Evans w Mr C A Lambert (third cross-defendant) Ms J A Needham SC w Mr R M Higgins (fourth cross-defendant)

Michael C Smith (cross-claimant) SOLICITORS : Courtenay & Co (second cross-defendant) Molloy & Schrader (third cross-defendant) DSC Law (fourth cross-defendant)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

1595/08 Pamela Ruth Wood v Helen Margaret Inglis JUDGMENT 1 HIS HONOUR: The late Dr William Inglis died on 11 October 2007, survived by his second wife the cross-claimant Helen Margaret Inglis, four children of his first marriage - the second cross-defendant Kathryn Margaret Inglis-Clark, the third cross-defendant Michael William Inglis, the fourth cross-defendant Pamela Ruth Wood, and Fiona Jane Inglis - and the child of his second marriage William Keith Inglis. (For convenience, and without intending any disrespect, I shall refer to the members of the family by their first names). During his lifetime - on 22 September 1982 - Dr Inglis established a discretionary family trust, called the Inglis Research Trust ("the Trust") - of which the first defendant Inglis Research Pty Ltd ("the Company") was the trustee - the class of potential beneficiaries of which included himself, his wife, and his children. In practice, income was distributed to Dr Inglis and Helen, and occasionally to William, and credited to their beneficiary loan accounts, on which they drew for expenditure. Dr Inglis held eight shares, and Helen and Michael held one share each, in the Company. Originally, the directors were Dr Inglis, Helen and Michael; in 2003 Kate replaced Michael.

2 The Trust funds were invested in shares; by Dr Inglis' death the share portfolio that formed the corpus of the trust was worth over $2 million. Between 1982 and 1998, the Trust accounts were prepared (by Mr Wilhelm Jansen, of Ernst & Young) on the basis that the share portfolio was valued at lower of cost and net realisable value. Following a change of accountants in late 1999 (to Mr Brian Tierney, of Manser Tierney and Johnston), the Trust accounts for the years 1998 to 2006 were prepared on the basis that the share portfolio was revalued each year to market value, and the net movement in the value of investments was treated as income (or expenditure) and distributed as such to Dr Inglis and credited to his beneficiary loan account. In each of these years except 2003 there was a positive movement in the value of investments; in 2003 there was a diminution of about $13,000. The total amount distributed to Dr Inglis' beneficiary loan account in this way from the increase in value of investments was $1.18 million, which had the result that, as at 30 June 2006, his loan account stood at $1,357,580.

3 Dr Inglis made his last will on 7 December 2005. He appointed Helen and Pam to be his executors; bequeathed four of his eight shares in the Company to Pam and four to Kate, and the rest and residue of his estate (which included the debt due to him from the Trust on his loan account, as well as his Pymble home and a personal share portfolio) to Helen. In a Memorandum of Wishes in respect of the Trust, he expressed the wish that the net assets of the Trust be distributed equally among his five children.

4 Following Dr Inglis' death, the children of his first marriage formed the view that Mr Tierney's accounting treatment was mistaken and inappropriate, and should be reversed. Helen, initially, assented to this, and as a result, she and Kate, as the directors of the Company, signed a resolution on 19 November 2007 to the effect that the Company as trustee of the Trust direct the accountants to prepare the accounts for 2006/7 on the basis that non-current investments were shown as the lower of cost and recoverable amount, and to prepare a reconciliation of the resultant difference in the beneficiary loan accounts. On 20 November, they signed a further resolution, confirming the reduction of the deceased's loan account to $46,576 as at 30 June 2007, and $61,900 as the date of his death, as a result of the removal of the "unrealised capital gain" so as to reduce the loan account by $1,179,739.61, and the reallocation of a deposit paid to secure nursing home accommodation for Dr Inglis from a capital reduction to a drawing against his loan account.

5 Shortly thereafter, Helen declined to co-operate further, in particular by signing cheques for payment of eleven specific legacies; she said that she now wanted an "independent audit". Following the purported registration of transfers to Pam and Kate of the deceased's eight shares in the Company, which were not executed by the executors, on 17 December 2007, Pam gave Helen notice of a shareholders meeting to be held on 31 December 2007, the business of which was to include the removal of Helen and the appointment of Pam as a director. Helen, who was holidaying in Tasmania, did not attend the meeting, at which it was purportedly resolved to remove her and appoint Pam. On 10 January 2008, the new directors purported to resolve to distribute the bulk of the assets of the Trust, as to $500,000 each to the four children of the first marriage; Dr Inglis' wish that the child of his second marriage participate equally was ignored. On 6 November 2008, Barrett J held that there was no valid transfer of the shares, and thus no valid removal of Helen or appointment of Pam [Wood v Inglis [2008] NSWSC 1147; (2003) 68 ACSR 420]; it would seem to follow that there was no valid distribution to the four children.

6 On 22 February 2008, Pam commenced these proceedings seeking orders, in effect, that Helen do certain things for the purposes of the administration of the Estate. By her summons she also sought advice pursuant to Trustee Act, s 63, as to whether she, as executor appointed under the Will of the late Dr Inglis should prosecute or defend any actions against or brought by Helen in relation to the amount of Dr Inglis' loan account in the Trust. In the present cross-claim, parts of which are to be determined separately and before the other issues in the proceedings, Helen claims declarations that the resolutions of 19 and 20 November 2007 are void, and orders that the company pay the executors the sum of $1,242,640.20 said to be due on the deceased's loan account, and pay herself $215,327.72 said to be due on her own loan account. 7 No defence to Helen's claim in respect of her own loan account has been articulated. The real dispute concerns the deceased's loan account, and its practical impact is that, depending on the outcome, the sum of about $1.2 million may be an asset of the residuary estate - to which Helen alone is entitled - or it may be an asset of the Trust, to be shared amongst the children. Although they were presented in a rather more complex manner, the main issues may be summarised as follows:

· Was there an enforceable obligation owed by the company to the deceased in the amount in question as at the date of his death? · If so, has that obligation been subsequently released or otherwise extinguished or modified?

Was there an enforceable obligation as at date of death? 8 On the pleadings, the cross-claimant contends (1) that, for each of the years 1999 to 2006, the Company as Trustee determined that movements in the net market value of investments would be taken into account in calculating income, and resolved to distribute the income so ascertained to identified eligible beneficiaries including Dr Inglis and Helen; that this was reflected in the annual accounts of the Trust; (2) that upon each such distribution the relevant beneficiary became absolutely entitled to an interest in that part of the Trust fund so distributed; and (3) that Dr Inglis and Helen allowed the Company to retain some of the distributions on loan payable on demand. The defences of the active cross-defendants (the Company did not participate following Barrett J's decision that it had not validly retained the lawyers who purported to act for it) (1) contend that the Trustee was not entitled under the Trust Deed to make distributions of "unrealised capital gains" in each of the years 1999 to 2006 - on the basis that absent realisation of the investments, an increase in their value could not constitute income of the Trust available for distribution; and (2) either deny, or do not admit, that the Trustee determined to include movements in net market value of investments in income, or to distribute the income so ascertained to eligible beneficiaries including Dr Inglis and Helen.

9 There are, therefore, essentially three questions: · whether the Trustee could, consistently with the Trust Deed, lawfully treat movements in the value of investments as income and distribute it to beneficiaries; · whether the Trustee in fact determined to include movements in net market value of investments in income; and

· whether the Trustee in fact made the disputed distributions. 10 Could the Trustee, consistently with the Trust Deed, lawfully treat movements in the value of investments as income, and distribute it to beneficiaries? The cross-defendants argued that movements in the value of investments - which they characterised as "unrealised capital gains" - were not income, and could therefore not be distributed as income. They submitted that "unrealised capital gains" were not "income" in the ordinary sense.

11 As to income, the Trust Deed provided that the Trustee stood possessed of the Trust Fund upon trust until the Perpetuity Date to apply so much of the income (if any) in any year as it thought fit for the maintenance, education, benefit or advancement in life of all or such one or more of the Eligible Beneficiaries in such shares and manner as it should at any time before the end of that year determine (clause 3(a)(i)); to pay so much of the income then remaining as it shall think fit to all or such one or more of the Eligible Beneficiaries in such shares and manner as it should at any time before the end of that year determine (clause 3(a)(ii)); subject thereto to accumulate and invest so much of the income as it thought fit (clause 3(b)); and in default of any exercise of those discretions in respect of any year, for Dr Inglis absolutely so long as he was alive at the distribution date (clause 3(d) and 14th Schedule). Any determination under clause 3(a) or (b) was irrevocable (clause 3(c)).

12 The Trust Deed contained no definition of "income". However, clause 6(f) empowered the Trustee: to determine whether any property or moneys held by the Trustee constitutes capital or income and the trustee's decision in this respect shall be binding on all persons provided that any distribution of assets to the Trustee and any receipt or profit which is received or made by the Trustee which distribution receipt or profit is included in the income of the Trust Fund in accordance with any relevant income tax legislation shall be deemed to be income of the Trust Fund notwithstanding that at law it may be capital of the Trust Fund unless the Trustee shall on or before the last day of the year after such profit is made or receipt or distribution received declare in writing that the provisions of this sub-clause shall not operate in relation thereto. In the event of any such declaration being made then the distribution, receipt or profit in question shall be capital of the Trust Fund; …

13 While I accept that authorities from the field of income tax law are not irrelevant on this question, they are also not decisive; moreover, the proviso contained in clause 6(f), set out above, demonstrates that the Trustee's treatment of income and capital in the Trust accounts did not have to accord with its treatment for income tax purposes.

14 I do not accept that it cannot be said that a profit has been made (or "incurred", for the purposes of clause 10 of the Trust Deed), just because it has not been realised. Comparison of the value of the assets of an entity at the end of the relevant period with their value at the beginning of that period is one well-recognised means of ascertaining profit [Re Spanish Prospecting Co Limited [1911] 1 Ch 92, 98; QBE Insurance Group v ASIC (1992) 38 FCR 270, 284-5 [53] - [57]].

15 Two independent expert accountants - Mr Shields and Professor Walker - as well as Mr Jansen, gave evidence. The cross-defendants submitted that the evidence of Mr Shields and Mr Jansen should be preferred; to the extent of any relevant difference, I disagree, as I found Professor Walker eminently qualified, and his opinion thorough, logical and well-supported by reference to authoritative professional publications and standards; although it was said that there were significant differences between the accounting needs of superannuation and insurance trusts on the one hand - practice in connection with which formed part of the basis of his opinion - and discretionary family trusts on the other, these differences were not elaborated and are not obvious, at least to the extent of why market value accounting would be inappropriate in the latter but not the former context. But it matters little, as all three accountants agreed that the market value accounting methodology adopted by Mr Tierney was permissible, albeit that Mr Shields and Mr Jansen thought it imprudent. Even if it were imprudent - a proposition that must be doubted, given its widespread use in connection with superannuation trusts - that would provide no basis for concluding that it was unauthorised by the trust deed. Nothing in the Trust Deed, nor any relevant accounting rule or regulation, precluded the Trustee from adopting it. Moreover, consistent with Professor Walker's evidence, if the market revaluation method of accounting were adopted, then it would be inappropriate to treat increases in the value of investments other than as income. Accordingly, even without recourse to clause 6(f), the Trustee was entitled to treat movements in the market value of investments as income for the purpose of the trust's accounts.

16 That conclusion is only reinforced by clause 6(f). I do not accept that the reference in clause 6(f) to "property or moneys held by the Trustee", coupled with the definition of "property", means that the reach of the clause does not extend to "unrealised capital gains"; the purpose of the clause is plainly to avoid disputation as to whether receipts, profits and distributions received by the trust are capital or income by empowering the Trustee to make that determination. The effect of treating "unrealised capital gains" as income is that so much of the value of a share (which is expressly within the definition of "property") as reflects that gain is treated as income. As has already been observed, the proviso contained in clause 6(f) demonstrates that the Trustee may chose to treat as capital in the Trust accounts what is income for income tax purposes (although a specific declaration to that effect is required); likewise it may (and without any such specific declaration) chose to treat as income in the Trust accounts what is capital for income tax purposes. In that context, submissions that "unrealised capital gains" are not income in the ordinary sense of the word are beside the point.

17 Accordingly, the Trustee was entitled to treat the movements in the net value of investments as income. Accounts prepared on that basis were nonetheless "proper accounts". Moreover, even if the "unrealised capital gains" were not income, they could be distributed as capital under clause 5(a), which gave the Trustee a discretion to apply capital in favour of any eligible beneficiary at any time before the Perpetuity Date.

18 The next question is whether the Trustee in fact determined to treat movements in market value of investments as income. The cross-defendants submit that Mr Tierney's treatment of "unrealised capital gain" as income, and its "notional" distribution to Dr Inglis' loan account, resulted from an erroneous assumption on his part that Ernst & Young had re-valued investments to market; that neither the revaluation, nor its treatment as income, was justified on the basis of the prior accounting practices of the Company or the Trust; that at no time did Dr or Mrs Inglis, or the Company, instruct Mr Tierney to take the steps he did or to change the accounting policy of the Company or the Trust; that at no time did the Company or the Trust formally adopt the change of accounting policy, nor the allocation of net movement in market value to Dr Inglis' loan account; that at no time did the Company make a determination under clause 3(a) or (b) of the Trust Deed, either in terms or impliedly, that the sum allocated to the deceased's loan account on account of unrealised capital gains was an application or payment of income, or an accumulation of income, within the meaning of those clauses; and that at no time did the Company make a determination or a decision under clause 6(f) of the Trust Deed, to include the unrealised capital gains as "income" of the Trust. 19 As has been observed, between 1982 and 1998, when Mr Jansen was the accountant for the Company and the Trust, and prepared the annual accounts, investments were reported at the lower of cost and realisable value; where the recoverable value was less than cost, a provision for diminution in value was raised; where the investments subsequently recovered value, the movement was shown up to, but not above, their historical cost, and no revaluation to market over and above historical cost was recorded. The Ernst & Young accounts included a note to the following effect: Investments Long-term investments: Long-term investments are stated at cost. Where the cost exceeds the recoverable amount, the investment has been written down to this recoverable amount.

20 Following his appointment to act as accountant for Dr Inglis, Helen, the Company, and the Trust, Mr Tierney in March 2000 prepared accounts and tax returns for the Trust and for the Company for the 1998/9 financial year. Mr Tierney says that in the course of preparing the 1998/9 Trust accounts, he observed that the value of the shares in 1997/8 had diminished by $79,289 from the 1996/7 Trust accounts, and the accounts included an item "provision for diminution in value" of "Shares in Listed Companies" of $60,202. Mr Tierney says that he assumed, on the basis of those entries, that the previous accounting policy of the Trust had been that the value of the shares had been adjusted to market value, and he prepared the 1999 accounts on that basis. As a result, he prepared the 1998/9 accounts, showing "movement in net market value of investments" of about $343,000, which he treated as income on the profit and loss account, and as distributed to Dr Inglis and credited to his beneficiary loan account. Mr Tierney maintained this accounting method, treating movements in the value of investments on income account and as distributed to Dr Inglis and credited to the his beneficiary loan account, until after Dr Inglis' death. He says he did so, mistakenly believing that he was merely following the policy previously adopted by Ernst & Young.

21 Mr Thomson, for Helen, made powerful submissions to the effect that it should not be accepted that Mr Tierney's adoption of market value accounting was a result of a mistake or misapprehension on his part, and that it should be found that there was a deliberate change in accounting policy, authorised by the Company through Dr Inglis - Mr Tierney's belief that he had made a mistake having been inculcated by the events after Dr Inglis' death in which the children had confronted him with the suggestion that he had wrongly adopted a wholly inappropriate accounting methodology. Given the number of indicia in the Ernst & Young accounts for 1998 that the historical cost policy was employed, it is indeed astonishing that Mr Tierney could have formed the misapprehension he professes to have entertained - indeed, he accepted that it was implausible. However, notwithstanding that concession, and that it was not in his interests to concede any such mistake or misapprehension, nonetheless under rigorous and searching cross-examination in which he was afforded every opportunity to accept that he probably discussed the accounting policy with Dr Inglis and was expressly instructed to adopt it, he declined to do so. I perceive no good reason to disbelieve Mr Tierney, all the more so given that his concession of mistake or misapprehension was apparently adverse to his own interests. There is no minute, letter, note in the accounts, or other evidence of any express instruction to adopt a new accounting policy. In those circumstances, despite the apparent implausibility of his having made such a mistake, I am unpersuaded that there was an express resolution of the Trustee, or an express direction by Dr Inglis to Mr Tierney, to change the methodology from historical cost to market value accounting. 22 However, that is not the end of the matter. 23 The Trustee was obliged, by clause 10 of the Trust Deed, at the end of each year to cause to be prepared a balance sheet showing the assets and liabilities of the Trust fund as at the end of the year, and a profit and loss account showing the profit and loss incurred during the year; the Trustee was permitted but not required to have those accounts audited by a registered public accountant. 24 Each financial year from 1998/9 until 2005/6, Dr Inglis (or sometimes Helen) provided to Mr Tierney the requisite primary records to produce the annual accounts of the Trust. For each of those years, Mr Tierney prepared a balance sheet and profit and loss statement for the Trust - using the "market value" methodology, bringing to account unrealised capital gains as income, and reflecting a distribution of those gains to Dr Inglis, and the crediting of those distributions to his beneficiary loan account. For each of those years, Mr Tierney also prepared accounts for the Company, which referred to the liabilities the Company had incurred as trustee and its corresponding right of indemnity against trust assets; the amount of the liabilities invariably accorded with the total liabilities of the trust as shown in the accounts of the Trust - including the beneficiary loan accounts. Note 2 to the Company accounts was invariably to the following effect: The Company acts as trustee for The Inglis Research Trust. Although the Company incurred liabilities amounting to $1,575,653 at 30 June 2006 as trustee of this trust, the Company has a corresponding asset in the form of a right of indemnity from the assets of the Trust. At 30th June 2006 according to its unaudited Balance Sheet at that date, the assets of the Trust were sufficient to satisfy the liabilities incurred by the Company as Trustee.

25 Each year from 1999, the amount of the liabilities referred to in that note corresponded exactly with the total amount of the beneficiary loan accounts in the Trust accounts for that year. Moreover, the Trust tax return for 2005/6 also contains reference to liabilities of $1,575,653.

26 For each year, typically in about March or April of the following calendar year, Mr Tierney forwarded to Dr Inglis and Mrs Inglis "one bound set of Financial Accounts each of Inglis Research Pty Ltd and The Inglis Research Trust for your signature and records". The Company accounts, but not the Trust accounts, made provision for signature by a Director of a Director's declaration, that "the financial statements and notes present fairly the Company's financial position as at 30 June …". The evidence establishes that Dr Inglis signed the Director's Declaration in the Company accounts for at least 1998/9, 1999/2000, 2000/1, and 2001/2. There are also minutes of meetings of the Company, for 1998/9, 2000/1, 2001/2, 2002/3 and 2003/4, containing resolutions adopting the annual accounts in the following form: The Financial Statements of the Company for the year ending 30 June 2004, as compiled by Manser Tierney & Johnston, together with the Director's report and Director's declaration thereon were presented and it was resolved that they be approved and adopted. 27 It is highly probable that similar documents existed for 1999/2000, 2004/5 and 2005/6, even if they cannot now be found - having regard to the practice of Manser Tierney & Johnston of providing such documents in conjunction with the annual accounts, and that those that can be located were signed. Moreover, Dr Inglis signed solvency resolutions for the Company dated 9 July 2004, 27 June 2005, 28 June 2006 and 26 June 2007; the only basis on which they could have been signed was knowledge of Note 2 to the Company accounts, set out above. 28 Mr Tierney's evidence establishes that Dr Inglis took an interest in the financial affairs of the trust. He retained the annual accounts, paid Manser Tierney & Johnston's invoices for preparing them, and expressed no disapproval of them. Moreover, he knew the quantum, from year to year, of his loan account as reflected in those accounts. Mr Tierney made a file note of a meeting with Dr Inglis on 19 November 2003, which records that Dr Inglis' loan account then stood at $615,000; Mr Tierney agreed that one of the matters discussed with Dr Inglis at that meeting was the amount and scope of the loan account, and that it was quite possible that they also discussed the composition of the loan account. While it is true that Dr Inglis then signed a document giving instructions to forgive that loan to the extent of $600,000, this was not implemented - probably because of changes in the financial position of the trust prior to the next annual accounts - so that he remained entitled to a substantial loan account. That Dr Inglis knew this to be so appears from circumstance that in October 2005, he discussed his assets and liabilities with Pamela, in connection with the preparation of a new will. Pam created a typed note, which demonstrates that Dr Inglis considered that the shares in the trust had trebled in value from $700,000 to $1,800,000; that he thought his loan account was then about $600,000 and Helen's about $200,000; that his loan account would be an asset of his estate; that the Trust would be liable for capital gains tax when the shares were sold; and that his loan account was not subject to tax. It is true that by 30 June 2005, his loan account had increased to $1,088,402, but the latest accounts available in October 2005 would have been those for June 2004, which showed his loan account at $724,334; $600,000 is a not unreasonable approximation, but in any event demonstrates knowledge and approval of an amount that could stand to the credit of his loan account only if the market value accounting methodology had been adopted, and only if the forgiveness proposed in 2003 had not proceeded. Indeed, Pam acknowledged that it would be reasonable to conclude that Dr Inglis had made his will on the basis that a substantial loan account in the trust formed an asset of his estate - a state of affairs which was possible only if the accounts prepared using the market value methodology were adopted. From his apparent knowledge of the state of his loan account in 2003 and 2005, and the practice by which he received and retained the annual accounts, I infer that Dr Inglis was aware of the balance of his loan account from year to year until and including 2006. 29 At least to some extent, the annual resolutions distributing income to beneficiaries were also made on the basis that distributable income included increases in market value of investments. The 28 June 1999 minute estimates (theoretically speaking before year end, although no doubt prepared subsequently) that the distributable income for 1999 would be $34,000, whereas the income recorded in the 1999 accounts was $394,578; in that case there is no apparent relationship. However, the 26 June 2000 minute estimates the distributable income for 2000 at $70,242, which precisely accords with the net income on the profit and loss account for that year (including net movement on investments of $2,099). And the 26 June 2001 minute estimates the distributable income for 2001 at $239,500, which is immaterially different from the net income on the profit and loss account of $239,485 (including net movement on investments of $171,857). Thereafter, the estimates appear arbitrary: the 26 June 2002 minute estimates the distributable income for 2002 at $80,000, whereas the 2002 accounts record net income of $136,743; the 26 June 2003 minute estimates the distributable income for 2003 at $40,000, whereas the 2003 accounts record net income of $29,070 (including a movement in market value of $13,356); the 27 April 2005 minute also estimates the distributable income for 2004 as $40,000, whereas net income is shown as $201,925 in the 2004 accounts; the 19 June 2006 minute again estimates the distributable income for 2005 as $40,000, whereas net income of $432,669 is recorded in the accounts; and the 6 February 2007 minute yet again estimates the distributable income for 2006 at $40,000, whereas the profit and loss account shows net income of $351,953. 30 Thus in two years - 1999/2000 and 2000/1 - the distribution minutes contain an estimate of net income which corresponds identically or with differs only immaterially from that in the Trust accounts, and which could only have been correct if the "market value" accounting methodology were adopted. While this is not so in later years, it appears that in respect of those other years arbitrary estimates were adopted for the purpose of the annual distribution resolutions. In circumstances where the balance of income not specifically allocated elsewhere was invariably distributed to Dr Inglis, that is not inconsistent with adoption of the market value methodology. 31 It is true, as the cross-defendants emphasise - that the Trust's tax returns, and Dr Inglis' personal income tax returns, reflect a different approach. However, Mr Jansen as well as Mr Tierney said that treatment of income for accounting purposes may legitimately differ from its treatment for taxation purposes, and Mr Tierney explained that he prepared the tax returns on the basis that unrealised gain was not taxable to a taxpayer in Australia. Whether this be right or - as the cross-defendants contend - wrong, it explains why the taxation returns do not correspond with the accounting treatment, and it does not detract from the view that for the period from 1999 until 2006, the Trust's affairs were conducted on the basis of market value accounting. 32 At least until shortly before his death, Dr Inglis was the controlling mind of the Company, including in its capacity as trustee of the Trust. Although Helen and Kate (and previously Michael) were also directors, they left the conduct of its affairs entirely to him. He had implied actual authority to make all relevant decisions concerning the affairs of the Trust. This was authority that could be delegated to him, consistent with the Constitution of the Company: Article 37 provided for the business of the Company to be managed by the Directors, and Article 51 authorised the delegation by the directors of their powers to committees consisting of such member or members of their body as they thought fit; accordingly, Dr Inglis' implied authority was authority that he could validly be given [Equiticorp Finance Ltd v Bank of New Zealand (1993) 32 NSWLR 50, 132-4; cf Permanent Trustee Co Ltd v Bernera Holdings Pty Ltd [2004] NSWSC 56, [40]-[43]]. 33 The retention by him of the Trust accounts, year after year, without query or objection, and provision of information for preparation of the ensuing year's accounts using them as the starting point, supports an inference that the company, through Dr Inglis, approved and accepted them. So too does the signature by Dr Inglis - at least up until 2002 - of the Director's declaration in the Company accounts, which included reference to the liabilities of the trust corresponding with the beneficiary loan accounts: the Company accounts could only have "presented fairly the Company's financial position as at 30 June" of each of those years, as it declared, if the Trust accounts were prepared according to the market value methodology. 34 I accept Ms Needham SC's submission, for Pamela, that the evidence does not go higher than establishing that Dr Inglis was financially literate, paid some attention to the accounts of the trust, was aware in 2003 of the quantum of his loan account (although I would add, in 2005 also, and by inference, in every year), and had some knowledge of taxation matters; and proves no more than that he was aware of "the headline figures in the accounts" - not that he looked behind them to examine precisely how the loan accounts were composed or the distributable income derived. However, it is not necessary that Dr Inglis understood the precise accounting methodology used to produce the result, nor that he appreciated that there had been a change in accounting methodology in 1999. It is beside the point that there is "no hard evidence at all" that the Trustee expressly authorised the change in accounting policies, or that it may have arisen from a misunderstanding on the part of Mr Tierney: the point is that, year in and year out after 1999, the Trustee - by Dr Inglis - accepted accounts prepared by its accountant on a basis that treated increases in the value of investments as income (and distributed them ultimately to Dr Inglis' beneficiary loan account), as reflecting the position of the trust.

35 To my mind, it is of great significance that, as Pamela accepted, Dr Inglis made his last will on the footing that a substantial loan account in the Trust - in October 2005, he thought about $600,000 - would form an asset of his estate. There was a single relevant mind - that of Dr Inglis - albeit in the dual capacities, personal as creditor and corporate as debtor. The matters to which I have referred establish that in both capacities he understood and intended that the trust was indebted to him in a substantial amount, as reflected in the annual accounts of the Trust. That was a result that was consistent only with adoption of the market value methodology in the accounts. Thus, as between the Trust on the one hand and Dr Inglis on the other, there was a common intention and understanding that the Trust was indebted to him - and on his death his estate - on his loan account as reflected in the Trust's annual accounts, which adopted the market value methodology. Plainly, Dr Inglis - on behalf of the Trustee - treated and considered the accounts as prepared by Mr Tierney for the years 1999 to 2006 as the accounts referred to in clause 10 of the Trust Deed. 36 The power under clause 6(f) was sufficiently exercised when the Trustee accepted the annual accounts prepared on the basis that unrealised capital gains were income, each year. There was no requirement for that decision to be made by instrument in writing: the proviso to clause 6(f) makes clear that a formal written declaration is required only where a receipt which would be income under relevant income tax legislation was to be treated as profit, and not vice versa. The cross-defendants invoke clause 8(d), which provides as follows: (i) Every trustee (including an agent or delegate of a trustee) and Custodian, being a company, may exercise by resolution of its Board of Directors, any discretion, power or right expressly or impliedly conferred on it whether pursuant to these presents or at law (including the power to appoint or exclude any person as an Eligible Beneficiary) and which is not required to exercised by an instrument in writing; (ii) every trustee (including an agent or delegate of a Trustee) and Custodian, being a natural person, may exercise by resolution or other oral declaration any discretion, power or right as aforesaid and which is not required to be exercised by an instrument in writing; and (iii) in all cases any resolution or other oral declaration of the trustee pursuant to the exercise of any such discretion, power or right as aforesaid shall be manifested by a Board or other minute or other form of writing. 37 However, clause 8(d) is primarily concerned with permitting the exercise of discretions, powers or rights conferred on the Trustee other than by instrument in writing, except where the law (or the Trust deed) specifically requires a written instrument; it has as an incidental aspect the requirement, imposed by subclause (d)(iii), for a record to be kept of such decisions. The purpose of 5(d)(iii) is to facilitate proof of determinations not made in writing, as distinct from invalidating resolutions not formally admitted. Clause 6, for example, confers on the Trustee extensive and wide-ranging powers. It cannot have been intended that a written record such as is contemplated by sub-clause (iii) be a condition of validity of the exercise of every one of the Trustee's extensive and wide-ranging powers under clause 6. Clause 8(d)(iii) is directory or procedural, for good management of the trust; it does not make a written record a condition of validity of the exercise of any discretion or power, except where an instrument in writing is required by law (including by the trust deed). In any event, the annual accounts of the Trust themselves constitute a "form of writing" which manifest a decision to treat movements in value of investments as income. 38 Accordingly, even though Mr Tierney's initial adoption of the "market value" methodology derived from a misapprehension, nonetheless the Company, as trustee of the Trust, by its agent Dr Inglis, accepted the accounts so prepared by Mr Tierney for the purpose of clause 10 of the Trust Deed, and thereby validly determined to treat the increase in market value of investments as income for each of the financial years 1998/9 to 2005/6. 39 The final question on the first issue, then, is whether the Trustee in fact made the relevant distributions to Dr Inglis. Ultimately, little turns on this, because if it did not validly exercise its discretion to distribute income in respect of each relevant year, then by default the income was distributed to Dr Inglis, by operation of clause 3(d) and the 14th Schedule of the Trust Deed. 40 Nonetheless, as has been seen, there are minutes of resolutions of the Company in its capacity as Trustee of the Trust, for each of the years in question, resolving to distribute the distributable amount to named eligible beneficiaries - sometimes William as to a specified amount, usually Helen as to a specified amount, and invariably Dr Inglis, as to the balance. To the extent that clause 8(d)(iii) requires the relevant decision to be manifested by a written Minute, those minutes comply. Unless for some reason the resolutions were invalid, they had the effect of irrevocably exercising the Trustee's discretion to distribute its income for the year in question. 41 The cross-defendants submit that, as the evidence of Mr Tierney establishes that there was no such meeting as the Minutes purport to record, and that they were created essentially for taxation purposes - which I take to mean to ensure that there was a record of a decision to distribute income apparently made before the end of each income year - there was no valid exercise of the discretion. However, for reasons already advanced, the deceased had authority to act on behalf of the Company in respect of the affairs of the Trust, and in those circumstances the resolution of a duly convened meeting of the Company was not essential to the exercise of the relevant discretion. 42 But in any event, to the extent that any of the distribution resolutions was ineffective, there was a default distribution of income for the relevant year to Dr Inglis absolutely. This could only have increased the amount of his loan account, to the detriment of William and Helen who received distributions only to the extent that there was a positive exercise of discretion in their favour. No party contended for that result. At the least, Dr Inglis and his estate would not have been worse off, had the distribution resolutions been ineffective. 43 Accordingly, I conclude that, pursuant to clause 3(a) and/or 3(d) of the Trust Deed, there was a valid and effective distribution of the whole of the income shown as such in the annual accounts for each year in question to Dr Inglis, to the extent that it was not validly distributed to William or Mrs Inglis, so that his loan account stood at $1,357,580 as at 30 June 2006. Apparently uncontroversial adjustments to the loan account for drawings during 2006/7, and distributions for 2006/7 and up to the date of death, produce the result that the trust was indebted to Dr Inglis on his loan account at the date of his death for $1,242,640.20.

Has that obligation been subsequently released or otherwise extinguished? 44 Unilateral resolutions of the Trustee to change the amounts of liabilities recorded in its accounts cannot affect the rights of its creditors. Obligations owed to Dr Inglis in respect of his beneficiary loan account, could only be reversed with the concurrence of his estate. In that light, the essential question is whether the estate has released the debt owed in on Dr Inglis' loan account as at his death. Although much attention was given in the evidence and submissions to factual controversies surrounding the events which ensued after Dr Inglis' death, and the alleged conduct, motives and purposes of the protagonists, little turns on them. 45 Following Dr Inglis' death on 11 October 2007, Pam and her husband Paul Wood attended at Helen's home on 12 October 2007, to discuss the probate application, and made arrangements to meet Mr Tierney on 15 October 2007. On 15 October 2007, Pam and Paul Wood and Helen attended at Mr Tierney's Wahroonga office. Mr Tierney said that he had looked at the accounts of the Trust, and that as all unrealised capital gains had been allocated to Dr Inglis' loan account there would remain about $120,000 in the Trust after payment of capital gains tax.

46 The children of Dr Inglis' first marriage formed a view that the treatment of unrealised capital gains by Mr Tierney may have been irregular, and commenced to investigate the matter: if it were established that the treatment was irregular, and the distributions could be reversed, then the trust capital available for distribution between the children could be increased by the $1.18 million that had been distributed - at the expense of the residuary estate available to Helen. On 19 October 2007, Pam told Helen that Michael - who is a barrister with expertise in taxation law - had expressed surprise that unrealised capital gains had been treated as income, and asked whether Helen had any objection to her making inquiries of the accountant about how he prepared the accounts; Helen did not object. Pam or Paul suggested a meeting of family members with Mr Tierney, to attempt to understand what he had done, and Helen agreed. 47 On 23 October, Kate met with Mr Tierney, alone, at 1.00 pm. Later, after she had left, Helen, Michael, Fiona, Pam, Paul Wood and Mr Tierney met at his office at 3.00 pm. In the course of this meeting, Michael expressed a view to the effect that the treatment of unrealised capital gains as income appeared irregular. Mr Tierney said that he was only following the practice that he understood had previously been applied by Ernst & Young.

48 On 25 October, Paul Wood prepared a document entitled "Inglis Trust possible resolutions", which Pam forwarded to Michael, as "a possible chain of actions for us to think about and assign or action at tomorrow's meeting". It included: Accounting principles for financial reporting · Financial statements for 2006/2007 (including 2005/2006 comparisons) to be prepared using only realised income. · Unrealised capital gains to be shown as a reserve item under Trust Funds · Beneficiary current account for Bill Inglis to be shown without any precatory unrealised capital gains. Allocation for 2006/7 · $30K Income to be allocated to Helen Inglis, remainder to Doctor Inglis. This is same as previous years, except that only realised income is distributed. · Drawings allocation o Ku-ring-gai Gardens accommodation bond (if any) from Bill Inglis's beneficiary account. …

Release from Helen and Estate that agree with these amounts · Obtain release that the current account balances represent the complete and final amounts owing to Helen and to Bill Inglis's Estate …

49 On 28 October, Pam Wood distributed to Michael, Fiona and Kate an email entitled "Paul's forensic accounting - Tierney is wrong", in which she observed: I believe the Ernst & Young accounts have been properly prepared in accordance with the trust Deed and normal policies. Both Dad and Helen have approved this accou8nting policy. Tierney has NOT followed the Ernst & Young accounting practices as he has claimed. He has, in fact, invented his own accounting procedure of distributing unrealised capital gains. He has done this without reading the Trust Deed and without obtaining the approval of the directors. Tierney should be instructed to restate the accounts in accordance with the directors policies and instructions last enunciated in 1998, and received by Tierney as part of the handover.

50 On 29 or 30 October, Pam told Helen that the pre-1999 accounts showed that Mr Tierney had not prepared the accounts in the same way as Ernst & Young. Pam suggested a meeting with Mr Tierney to discuss the matter, and Helen agreed. On 30 October 2007, Paul Wood prepared a document entitled "Inglis Research Trust - Accounting Assessment", illustrating the differences in the methodology adopted by Mr Tierney and Ernst & Young, and contending that: The financial statements from 1999 and onwards should be restated to continue the previous costs based accounting policies. The effect of this is to reduce the total of the beneficiaries' current accounts by the amount of unrealised capital gains, in the amount of $1,194,766 as at 30 June 2006.

51 On 1 November 2007, there was a meeting between Pam, Paul Wood, Helen, and Mr Tierney, in the course of which Mr Tierney said that he had never read the Trust Deed and had not consulted it prior to preparing accounts, that he did not know why the prior Ernst & Young accounting practice had been changed; that these were the only trust accounts he had prepared in which the unrealised capital gains were distributed to beneficiaries' loan accounts; that he never discussed with Dr Inglis distribution of unrealised capital gains into his loan account, nor had he received instructions to that effect; that he had thought in preparing accounts between 1999 and 2006 that he was doing so in the same way as Ernst & Young had prepared the accounts before him, but in that he was mistaken. He was instructed to prepare accounts on the basis of historical cost, and to adjust Dr Inglis' loan account by extracting the previously credited unrealised capital gains. He said that he would need a minute from the Directors directing him to change the accounts; and he agreed to prepare the requisite minutes. Helen, accepting that it was necessary to correct errors in the accounts, assented to this course.

52 On 14 November 2007, Mr Tierney provided 2007 accounts, restating the assets at cost and extracting the unrealised capital gains, the effect of which was to reduce Dr Inglis' loan account to $291,000; he also produced a minute, backdated to 23 October, purporting to record the directors' decision to adjust the loan account, extract the unrealised capital gain, and report assets at historical cost. The draft Minute would also have confirmed that a deposit paid by the Trust for the acquisition of nursing home accommodation for Dr Inglis was to be treated as a distribution of capital to Dr Inglis of $245,000; in this respect it does not appear to reflect any discussion that took place on 23 October, but an earlier discussion at Dr Inglis' bedside in June, between Helen and Kate, when the question of how to raise that deposit was discussed, and Mr Tierney understood a decision was made to raise it from the Trust and treat it as a distribution of capital to Dr Inglis. This treatment was also reflected in the version of the accounts produced by Mr Tierney on 14 November, in a corresponding reduction in the Trust capital.

53 Helen signed this minute and returned it to Mr Tierney. However, Kate was not prepared to do so: because of the treatment of the nursing home deposit, which did not accord with her understanding - she did not accept that the deposit should be treated as a distribution of capital - and also because she also did not accept (correctly) that she had participated in any meeting on 23 October. She prepared another version of the resolution, dated 19 November, which did not include the provision for charging the deposit against capital, and would thus transfer the burden of the deposit from trust capital (divisible amongst the children) to Dr Inglis' loan account (to which Helen alone was entitled), thereby reducing the loan account still further, to $46,576.

54 On 19 November, Pam met with Helen to settle the inventory of property and to determine the amount owed by the trust to the estate as at the date of Dr Inglis' death. Documents referred to for this purpose included a draft set of accounts prepared by Mr Tierney for the Trust with distributions of unrealised capital gains removed from the beneficiary loan accounts, together with current year income and drawings records for the trust. Kate arrived and presented her version of the Minute, and after some discussion between Kate and Helen, both signed the minute as directors of the Company.

55 On 20 November, Pam and Paul Wood prepared a further minute, confirming the loan account balance as at 11 October 2007 as $61,900, after removing the unrealised capital gain of $1,179,739.61, reallocating the capital reduction for the nursing home deposit against the loan account, adding the income distribution for the period to date of death, and deducting drawings for that period. Kate and Helen both also signed this minute.

56 On 23 November, Pam and Paul Wood went to Helen's home with the probate application documents. The figures in the application reflected the adjustments to the loan account. The affidavit was sworn by Pam and Helen before a Justice of the Peace. Pam and Paul Wood lodged the probate application at the Supreme Court. On 27 November, probate of Dr Inglis' will was granted to Helen and Pamela.

57 On 4 December, Pam delivered the probate document to Helen at her home. Helen asked if the house and the shares (left to her in the will) could be transferred that week. Pam and Helen discussed a timetable for paying eleven legacies Dr Inglis had left to his grandchildren, using the $61,000 from Dr Inglis' loan account and moneys to be reimbursed by the nursing home. On 4 December 2007, Mr Tierney produced a further set of accounts for 2007, reflecting the directed adjustments, and showing Dr Inglis' loan account at $46,576. On 5 December, Pam and Helen effected the transfer of title to the house at Pymble and the deceased's share portfolio into Helen's name.

58 On 17 December 2007, Helen declined to co-sign cheques to pay legacies to the eleven legatees, at least until she returned from a vacation she was about to take to Tasmania; she had formed the view that she wanted an "independent audit". It was then that Pam gave Helen notice of the shareholders meeting to be held on 31 December 2007, to replace her as a director. 59 Following the resolutions of 19 and 20 November, Paul Wood instructed solicitors to draft deeds of release and indemnity, as had previously been contemplated. A draft deed of release was provided to Paul Wood by his solicitors on 22 December 2007, but by then Helen had ceased to co-operate, and there was no further discussion of the proposed release. 60 While it is true that Helen, one of the executors of his estate, was a party to the resolutions of 19 and 20 November in question, she was so only in her capacity as a director of the trustee company, and not in her capacity as executrix. From at least as early as 25 October 2007, the children - specifically, Pamela - recognised that a release would be required. As Mr Wood acknowledged, the reason why a release was required was to ensure that there was agreement on behalf of the estate to the readjusted loan account. There is no evidence that any such release was ever discussed with Helen. None has ever been given. The estate has never released the debt on its loan account with the Trust.

61 Insofar as Helen had, at least until shortly before 17 December, acquiesced and co-operated without demur in a course of action that was intended to lead to reconstruction of the Trust accounts and reduction of the deceased's loan account by extracting the "unrealised capital gain", it is to be born in mind that this all took place in the space of two months following the catastrophic event of loss of a husband, in response to a view urged by the children that errors in the accounts had to be corrected, in respect of which she was not independently advised. True it is she spoke to two solicitors - Mr Menzies, and her friend Ms Keith - but she received no substantive advice from them at that stage. In any event, in her capacity as an executrix, she committed herself in a binding way to nothing, as the outstanding requirement for a release manifests.

62 To the extent that any distribution to Dr Inglis was pursuant to clause 3(a) of the Trust Deed, it was "irrevocable". To the extent that it was pursuant to clause 3(d), it was "absolute". Upon such distributions, he had became absolutely entitled to an interest in the Trust Fund representing that distribution, which was satisfied by crediting his beneficiary loan account to that extent. The cross-defendants' submissions that the Trustee was entitled to investigate the loan account, and then to instruct Mr Tierney to reconstruct the accounts on an historical cost basis and extract "unrealised capital gain" from Dr Inglis' loan account, assume that the distribution of income represented by increased value of investments was unauthorised and invalid - a contention that I have rejected.

63 The Trustee was entitled to change its accounting policy, if so minded, in November 2007, and to revert to historical cost accounting thereafter. However, it was not entitled retrospectively to revoke the irrevocable and absolute distributions previously made. To the extent that the reconstruction of the Trust accounts pursuant to the resolutions of 19 and 20 November had that effect, they were beyond the Trustee's power. Regardless of the validity of the resolutions as internal acts of the company to adopt a different accounting policy, they were quite ineffectual to disturb distributions already made, or to deprive the estate as a creditor of its existing rights in respect of Dr Inglis' loan account, in respect of which the contemplated release was never sought, let alone given.

Conclusion 64 My conclusions may be summarised as follows.

65 The Trustee was entitled to treat movements in the net value of investments on income account. Accounts prepared on that basis were nonetheless "proper accounts". Moreover, even if the "unrealised capital gains" were not income, they could be distributed as capital under clause 5(a).

66 Even though Mr Tierney's initial adoption of the "market value" methodology derived from a misapprehension, nonetheless the Company, as trustee of the Trust, by its agent Dr Inglis who had implied actual authority in respect of all affairs of the Trust, accepted the accounts so prepared by Mr Tierney for the purpose of clause 10 of the Trust Deed, and thereby validly determined to treat the increase in market value of investments as income for each of the financial years 1998/9 to 2005/6.

67 There was a valid and effective irrevocable and absolute distribution of the whole of the income shown as such in the annual accounts for each year in question to Dr Inglis, to the extent that it was not validly distributed to William or Mrs Inglis, by default under clause 3(d) if not expressly under clause 3(a).

68 Accordingly, the trust was indebted to Dr Inglis on his loan account at the date of his death for $1,242,640.20.

69 The estate has never released the debt on its loan account with the Trust.

70 The Trustee was not entitled retrospectively to revoke the irrevocable and absolute distributions previously made. To the extent that the reconstruction of the Trust accounts pursuant to the resolutions of 19 and 20 November had that effect, they were beyond the Trustee's power, and void.

71 The cross-claimant is entitled to judgment against the first cross-defendant for payment to the executors of the estate of the sum of $1,242,640.20, and interest. The cross-claimant is entitled to judgment against the first cross-defendant for payment to herself of the sum of $215,327.72, and interest.

72 I direct that the cross-claimant bring in short minutes to give effect to this judgment. I will appoint a date for short minutes, any argument as to costs, and further directions in respect of the balance of the proceedings.

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