Australian Incentive Plan Pty Ltd (in its capacity as Trustee of the Australian Incentive Trust) v Attorney-General for Victoria
[2012] VSCA 236
•28 September 2012
SUPREME COURT OF VICTORIA
COURT OF APPEAL
| S APCI 2011 0036 | |
| AUSTRALIAN INCENTIVE PLAN PTY LTD (ACN 119 391 936) (in its capacity as Trustee of the Australian Incentive Trust) | Appellant |
| v | |
| ATTORNEY-GENERAL FOR VICTORIA | Respondent |
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| JUDGES | NETTLE, TATE JJA and DAVIES AJA |
| WHERE HELD | MELBOURNE |
| DATE OF HEARING | 20 August 2012 |
| DATE OF JUDGMENT | 28 September 2012 |
| MEDIUM NEUTRAL CITATION | [2012] VSCA 236 |
| JUDGMENT APPEALED FROM | [2010] VSC 564 (Croft J) |
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TRUSTS AND TRUSTEES – Variation of trust – Advancement of vesting date – Provision for dissolution of Employee Incentive Scheme upon failure of principal – Commercial purpose of trust – Amendment of Trust Deed – Exercise of discretion – Construction of trust instrument – Intention of Settlor as to residual beneficiaries.
CHARITABLE TRUSTS – Nomination of charities as residual beneficiaries – Re Baden’s Deed Trusts (No 1) [1971] AC 424, Mettoy Pension Trustee v Evans [1990] 1 WLR 1587 referred to.
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| Appearances: | Counsel | Solicitors |
| For the Appellant | Mr J D Merralls QC with Mr C P Young | Freehills |
| For the Respondent | Mr R T A Waddell | Victorian Government Solicitor |
NETTLE JA:
This is an appeal from orders made by a judge in the Commercial and Equity Division for the termination of the Babcock & Brown Incentive Trust (‘the Trust’) and the distribution of the trust fund to a number of designated charities.
The facts
The Trust was constituted by the Australian Incentive Trust Deed made in 2004 between Babcock & Brown International Pty Ltd (‘the Settlor’), Babcock & Brown Australian Incentive Plan Pty Ltd (‘the Trustee’) and Babcock & Brown Ltd (‘Listco’).
The Deed recited inter alia that, as part of the overall employee remuneration and incentive plan for Employees:
· the Settlor wished to establish a trust fund comprised of Shares and Options in Listco for Listco’s benefit in satisfying its obligations to Employees;
· Listco would initially issue Shares and Options to the Trust for the purposes of an employee share plan;
· The Settlor had paid or would pay $17,667,915 so that the Trustee could purchase 3,533,583 Shares and $9,856,339 so that the Trustee could purchase 7,850,544 Options as an incentive for eligible Employees to remain in the employment of the Babcock & Brown Group.
Clause 1.1 of the Deed defined a number of terms, amongst others, as follows:
‘Australian Employee’ means an individual who receives salary or wages within the meaning of section 136 of the Fringe Benefits Tax Assessment Act 1986;
‘Employee’ means an employee or officer (including a director) of Babcock & Brown Group who is determined by the Remuneration Committee to be an Employee for the purposes of a Plan and who is an Australian Employee;
‘Participants’ means the Employees nominated to be Participants by the Remuneration Committee from time to time;
‘Plan’ means Listco’s Equity Incentive Plan or any equity incentive plan that is operated by Listco for the benefit of employees or officers (including directors) of Babcock & Brown Group;
‘Remuneration Committee’ means the sub-committee by that name of the Board of Listco as constituted from time to time and if there is no such sub-committee, then the Board of Listco;
‘Residual Beneficiaries’ means Employees and/or charities nominated by the Remuneration Committee from time to time;
‘Share’ means a fully paid ordinary share in Listco;
‘Share Award’ means an option offered or granted by Listco to an Employee to have a Trust Share transferred from the Trust for nil cash cost to the Employee and in accordance with the terms of the offer or terms of grant;
‘Vesting Date’ in respect of a Participant Award[1] is exercisable following satisfaction of any Vesting Conditions for that Award, subject to clause 6(c).
[1]See below, [6].
Clause 2.3 of the Deed provided that the purpose of the Trust was to administer employee share-plan activities including providing the shares, options and securities to Employees and, in furtherance of that purpose, to apply the Share Subscription Fund in subscribing for or acquiring Shares and holding them as Trust Shares pending their transfer or other application in accordance with clause 6 of the Deed.
Clause 2.4 provided that Listco would offer the Participants an opportunity to acquire, or would grant, individual allocations of Share Awards on terms determined by the Remuneration Committee within 10 Business Days (or longer period determined by the Remuneration Committee) of the date of issue of the relevant Trust Shares
Clause 6 of the Trust Deed provided inter alia that, as soon as practicable after the Vesting Date for a particular Participant Award, the Trustee must transfer to the Participant the requisite number of Trust Shares but that, prior to the Vesting Date for a particular Participant Award, the relevant Participant had no beneficial or other proprietary interest in the Trust Shares or any other Assets comprising the Trust Fund.
The Equity Incentive Plan Rules were adopted by a resolution of the board of directors of Listco on 6 September 2004. They provided for several kinds of Awards, including a ‘Performance Share’ award, and defined a ‘Performance Share’ as a fully paid share in Listco subject to any Vesting Conditions which had to be satisfied before the award could be vested or exercised.
Clause 2 of the Plan stated that its purpose was to encourage participation by Employees in the Group’s goals and to align the Employees’ interests with those of the Company’s shareholders through the opportunity for share ownership and through the offer of other incentives.
Clause 5 of the Plan provided for Listco to make offers of Awards in writing and Clause 6 of the Plan specified that Awards had to be accepted within 10 Business Days after receipt of the offer.
Clause 7 provided that the Awards held by a participant would vest and become exercisable upon satisfaction of any Vesting Conditions but that, subject to express contrary provision, the vesting of an Award would not automatically trigger its exercise.
Clause 8 provided that an Award could be exercised on or after the Vesting Date for the Award, by the Participant delivering written notice of acceptance.
Clause 14.1 provided that, unless exercised, an Award would lapse on the Expiry Date for the Award (as set in the Award offer) or on the date the Participant ceased to be an Employee.
Clause 14.2 provided that all unexercised Awards would lapse on the liquidation of Listco.
After the establishment of the Plan, Performance Share Awards were made in favour of Participants and accepted, typically on terms that the Award would not vest for four years. In order to give effect to those arrangements, between 2006 and 2009, the Trustee subscribed for a significant number of Shares with the intention that, in due course, it would transfer those Shares to Participants upon their Awards vesting and being exercised.
On 24 August 2009 it was ordered that Listco be wound up in insolvency and, as at the commencement of the winding up, there were 57 Participants[2] who had accepted Performance Share Awards which had not by then vested. In accordance with clause 14.2 of the Plan, those Awards thereupon lapsed.
[2]Although it is stated in the affidavit of Margaret Cole sworn 23 August 2010 at AB B218 that there were 56.
Although the shares in Listco held by the Trustee are no longer of any value, when they were still valuable, the Trustee as a shareholder in Listco received dividends on Shares and also interest on funds deposited and, as a result, as at the date of the commencement of the winding up the Trustee had in hand some $1,699,961 cash comprising the net assets of the Trust.
As drafted, Clause 2.5 of the Trust Deed provided for the Termination of the Trust as follows:
(a)The Trust must wind-up and terminate on the first to occur of the following dates (‘Termination Date’):
(i)if the Trustee holds no Assets and the Remuneration Committee directs that the Trust should terminate;
(ii) 80 years from the date of this deed.
(b) The Trustee must on the Termination Date:
(i)as soon as practicable sell, call in and convert into money the Assets;
(ii) pay out all liabilities of the Trust; and
(iii)pay the remainder, less all proper costs, disbursements, fees and other outgoings and less all proper provisions for future liability, to the Residual Beneficiaries.
(c)In winding up the Trust the Trustee may make any provision it considers necessary to provide for any outgoings or liabilities (actual or contingent) of the Trust or any of the Assets before making any distribution to the Residual Beneficiaries, and subject to this, must hold the part of the Assets retained in trust for the Residual Beneficiaries.
The Deed did not provide, however, for termination of the Trust in the event that Listco were terminated before 80 years from the date of the Deed while the Trustee was still holding Assets.
The proceeding below
In the proceeding below, the Trustee sought an order varying the Deed, pursuant to s 63A of the Trustee Act 1958, to provide that the Trust terminate on the commencement of the winding up of Listco. The Trustee also sought a direction from the court that the Assets of the Trust be distributed among the 57 Participants who had accepted Performance Share Awards which had not vested by the date of commencement of the winding up. The Trustee proposed that the Fund be prorated amongst those Participants according to the market value as at the date of their Awards of the Plan Shares comprising their Awards.
Subsequently, the Settlor and Listco were joined as parties to the proceeding and sought a declaration that the Trust had failed upon the commencement of the winding up of Listco and, consequently, that the Trustee held the Assets of the Trust Fund on resulting trust for the Settlor.
The judge held that the Trust had not failed and he made an order pursuant to s 63A of the Trustee Act 1958 that the Trust terminate upon the commencement of the winding up of Listco.
His Honour, however, rejected the Trustee’s proposal for distribution of the fund amongst the 57 Participants who had accepted Performance Share Awards which had not vested by the date of commencement of the winding up. His Honour directed instead that the Assets be distributed to four designated charities, as Residual Beneficiaries of the Trust, in accordance with clause 2.5(b)(iii) of the Deed.
His Honour’s reasoning was as follows:
The plaintiff, in its submissions, readily acknowledged that charities are within the class of potential appointees as Residual Beneficiaries. In my view, so much is clear from the definition of ‘Residual Beneficiaries’ in clause 1.1 of the Trust Deed. The plaintiff submitted that no charity should be nominated as a Residual Beneficiary because the purpose of the Trust was to provide benefits to employees and it can properly be assumed that the inclusion of charities as objects of the power was simply to ensure that the Trust would not fail for want of a beneficiary.[3] As indicated previously, I accept the view submitted on all sides that the purpose of the Trust as a vehicle for the provision of an employee incentive scheme has failed. The Babcock & Brown group enterprise has ended and there is clearly no purpose in a fund operating to provide incentives to employees in these circumstances. For such of the Employees who may still be employed during the process of liquidation, incentives are meaningless because their employment will end with the finalisation of the winding-up in any event. For former Employees, incentives are clearly pointless because their employment has ended and the enterprise has gone. The incentive scheme established under the Equity Incentive Plan was an incentive plan provided by or on behalf of the Babcock & Brown group for the benefit of its employees. This is not an employee superannuation scheme in the more usual form which involves contributions from both the employer and also the employee.[4] In those circumstances, the situation would be somewhat different. The present circumstances, on the
other hand, is made clear by various express provisions of the Trust Deed, particularly Recital F, clause 2.3(b) and (e), and also clause 6(a).
On the basis that the Trust Deed was established with the express purpose of providing benefits to both ‘Employees and/or charities’ and that its purpose has failed with respect to the provision of benefits to ‘Employees’, I am of the opinion that the power of the Court to nominate Residual Beneficiaries should be exercised in favour of a nomination of charities solely, as this is now the only intended beneficiary or group of beneficiaries within the contemplation or intention of the settlor as evidenced by the provisions of the Trust Deed, properly construed. It is true that the stated purpose of the Trust in clause 2.3 does not refer to charities, but, for the reasons indicated, construing the document as a whole, I am of the opinion that though its principal or dominant purpose may have been to provide an incentive scheme for employees, a trust for the benefit of charities is also part of the purposes of the Trust.[5]
[3]And see affidavit of Margaret Cole, sworn 23 August 2010 (paragraph 86).
[4]Cf Air Jamaica Ltd v Charlton [1999] 1 WLR 1399 (PC), 1407; referred to in Finch v Telstra Super Pty Ltd (2010) 242 CLR 254, 271 [33] (French CJ, Gummow, Heydon, Crennan and Bell JJ).
[5]Reasons, [50]–[51] (emphasis added).
The issues for the purposes of the appeal
There is no appeal against the judge’s determination that the Trust did not fail and that the Trust Fund was not held on resulting trust for the Settlor; or against his Honour’s order to vary the Deed so as to provide for the Trust to terminate upon the commencement of the winding-up of Listco.
The two issues which do arise for determination in this appeal are whether the judge was wrong in rejecting the Trustee’s suggestion that the fund be distributed to the 57 Participants whose entitlements had not vested at the commencement of the winding up of Listco; and in directing the Trustee to distribute the Trust Fund to designated charities.
The appellant’s contentions
The Trustee contends that the judge erred in his construction of the class of ‘Residual Beneficiaries’ and thereby in failing to give proper consideration to the exercise of the power of distribution.
In particular, the Trustee says, the judge was wrong in law in holding that, because it is no longer possible to provide incentives to Employees, the charities can be the only intended beneficiary or group of beneficiaries within the contemplation or intention of the settlor as evidenced by the provisions of the Trust Deed. In the Trustee’s submission, it is plain from clause 2.5 of the Deed that the Settlor had in mind the possibility of a situation in which there might no longer be a need or capacity to provide incentives to Employees and yet that the Residual Beneficiaries still be ‘Employees and/or charities’.
Counsel for the Trustee argued that the judge’s approach elided a necessary distinction between, on the one hand, a purpose of the Trust being to ‘administer employee share plan activities’ and thus to provide an ‘incentive for eligible Employees to remain in the employment of the Babcock & Brown Group’ and, on the other hand, the further purpose of the Trust to provide for distribution of the Fund to ‘Employees and/or charities’ on termination of the Trust.
The correct approach, counsel submitted, was to recognise that Awards were made to Participants as part of their remuneration to induce them to remain with BBL and that, although the 57 Participants had remained with BBL to the end, the eventual vesting of their Awards had been frustrated by the winding up of Listco.
In those circumstances, counsel submitted, a distribution of the Fund amongst those Participants would clearly accord to the general plan of the Settlor.
The respondent’s contentions
Counsel for the respondent argued that there was no error in the judge’s reasoning. In his submission, the judge was right to hold that, because the Trust was no longer capable of providing an ‘incentive for eligible Employees to remain in the employment of Babcock & Brown Group’, the sole purpose of the Trust had failed and hence that, as a matter of correct construction, the charities were now the only intended beneficiary or group of beneficiaries within the definition of Residuary Beneficiary.
Alternatively, counsel argued, even if one were not driven to that conclusion as a matter of construction of the Deed, the fact remained that the judge had been called upon to exercise a power of distribution and had exercised it in a manner which, having regard to the provisions of the Deed as a whole, most closely accorded to the Settlor’s apparent intentions. In counsel’s submission, there was no error in that.
The judge did not err
I do not consider that the judge erred as a matter of construction of the Deed or in the determination of the distribution of the Fund which most closely accorded to the Settlor’s intention as discerned from the Deed and the Plan.
Beginning with the question of construction, it is clear that the judge was aware that ‘Residuary Beneficiary’ was defined to mean ‘Employees and/or charities’. His Honour set out the definition in his reasons. Nor did his Honour otherwise gainsay the definition. Read in the context in which it appears, his Honour’s observation, that the ‘charities solely [are] now … the only intended beneficiary or group of beneficiaries within the contemplation or intention of the settlor as evidenced by the provisions of the Trust Deed’, does not deny the meaning of ‘Residuary Beneficiary’. It is rather a compendious statement of conclusion that, although ‘Residuary Benerficiary’ is defined as ‘Employees and/or charities’, the Settlor could not reasonably be supposed to have contemplated that, in the events which occurred, the Trust Fund would be distributed to anyone other than charities.
Turning then to the question of the Settlor’s supposed intention, it is not disputed that the power which the judge was called upon to exercise in relation to the distribution of the Fund was a trust power of selecting donees from among the class of Residuary Beneficiaries specified by the Settlor. As Lord Wilberforce explained in Re Baden’s Deed Trusts(No 1),[6] such a power is to be exercised in the manner best calculated to give effect to the settlor’s or testator’s intentions:
I would venture to amplify this by saying that the court, if called upon to execute the trust power, will do so in the manner best calculated to give effect to the settlor’s or testator’s intentions. It may do so by appointing new trustees, or by authorising or directing representative persons of the classes of beneficiaries to prepare a scheme of distribution, or even, should the proper basis for distribution appear by itself directing the trustees so to distribute. The books give may instance where this has been done ... Then as to the trustees’ duty of inquiry or ascertainment, in each the case the trustees ought to make such a survey of the range of objects of possible beneficiaries as will enable them to carry out their fiduciary objects of possible beneficiaries as will enable them to carry out their fiduciary duty. A wider a more comprehensive range of inquiry is called for in the case of trust powers that in the case of powers.[7]
[6][1971] AC 424.
[7]Ibid 457, A–C (citation omitted). See also In re Hay’s Settlement Trusts [1982] 1 WLR 202, 209 C-G (Megarray VC); Mettoy Pension Trustees v Evans [1990] 1 WLR 1587, 1617B-E (Warner J); The Registrar of the Accident Compensation Tribunal v Federal Commissioner of Taxation (1993) 178 CLR 145, 183.
Contrary to the Trustee’s submissions, the judge’s reasoning did not overlook that the principal purpose of the Trust was to encourage participation by Employees in the Group’s goals and to align their interests with those of the Company’s shareholders through the opportunity for share ownership and through the offer of other incentives. His Honour expressly mentioned that consideration in the passage of his reasoning which is set out above.
Contrary, too, to the Trustee’s submissions, the judge was not insensitive to the commercial reality that charities are sometimes included as residuary beneficiaries of commercial trusts for no more reason than to ensure that those trusts do not fail for want of a beneficiary. His Honour also expressly referred to that consideration in the passage of his reasoning which is set out above.
Ultimately, however, a Settlor’s intention is to be derived from the words of the settlement, albeit with an eye to the surrounding circumstances, and, if as a matter of language a settlement makes the intention clear, it is up to the court to give effect to it despite surrounding circumstances. To that end, although the judge did not articulate them as such, it appears to me that the following features of the terms of the Deed and Plan, when read in the context of the surrounding circumstances, are ultimately determinative.
1) First, it is not suggested and logically it could not be, that Employees other than Participants have any claim on the Fund or, given that the Fund was to encourage Participants, that Employees other than Participants should receive any share of the Fund in the circumstances which obtain.
2) Secondly, it is not suggested and it could not logically be, that Participants whose Awards vested and were exercised before the winding up of Listco have any more claim on the Fund or reason to be accorded a share of it, in the circumstances which obtain, than Employees who are not Participants.
3) Thirdly, the Awards of the 57 Participants to whom the Trustee proposes that the Fund be distributed had not vested and thus, by reason of Clause 8 of the Deed, could not be exercised as at the commencement of the winding up.
4) Fourthly, in any event, those 57 Participants’ Awards were worthless because, by the time of commencement of the winding up, all Plan Shares were worthless.
5) Fifthly, clause 6 of the Deed expressly provided that, prior to the Vesting Date, the 57 Participants had no beneficial or other proprietary interest in the Trust Shares or any other Assets comprising the Fund.
6) Sixthly, clause 14.2 of the Plan expressly provided that, in the event of Listco being wound up, all unexercised awards would lapse.
7) Seventhly, clause 14.2 of the Plan stands in stark contrast to other provisions such as clause 5.3 of the Deed, which provided that, if there were a change in control of Listco by reason of a takeover bid, the Participants would be entitled to exercise their Awards even though not then vested and, if a Participant ceased to be an Employee, the Board could bring forward the vesting date for the Participant’s award; and clause 12 of the Plan, which provided that in other circumstances where a Participant was made redundant, the Board had a discretion to determine that some or all of the Award should vest.
Quite apart from clause 14.2 of the Plan, it would be difficult to accept that, because the 57 Participants in question were deprived of their Awards by reason of the liquidation of Listco, the values of their Awards, calculated in accordance with Plan Share values as at the dates on which the Awards were issued, should form the basis of a distribution of the Fund in the manner which the Trustee proposes. It is plain that the stated object of the Plan was to equate the Participants with shareholders, and it would hardly equate their position with the shareholders, whose shares are now worth nought, to give them significant sums of money[8] while the shareholders go without.
[8]Which ultimately came from the Babcock & Brown companies.
When, however, clause 14.2 is taken into account, there is no room for doubt about it. Given the contrast between clause 14.2 and provisions like clause 5.3 of the Deed, and clause 12 of the Plan, it is surely beyond argument that the Settlor did not intend to benefit a Participant whose Award failed to vest before liquidation, any more than the Settlor intended to benefit an Employee who was not a Participant at all.
In those circumstances, it being agreed on all hands that an Employee who is not a Participant has no claim on the Fund, or any expectation of receiving a distribution from the Fund in the circumstances which obtain, I concur with the judge that a distribution of the Fund to the 57 Participants would not accord to the Settlor’s intentions as expressed in the Deed. It would be tantamount to acting directly contrary to those intentions.
Conclusion
For those reasons, I would dismiss the appeal.
TATE JA:
I have had the great benefit of reading the draft reasons for judgment of Nettle JA and those of Davies AJA and I adopt their summaries of the facts that form the background to this proceeding.[9] However, I would allow the appeal.
[9]I also generally adopt the abbreviations used by Nettle JA.
There are two issues arising on the appeal:[10]
[10]See the judgment of Nettle JA, [26].
(1) Was the trial judge wrong to reject the Trustee’s proposal[11] that the remainder of the Trust Fund be distributed, on the termination of the Trust, to a class of Employees made up of persons:
[11]As described in the affidavit of Margaret Cole (a director and shareholder of the Trustee), sworn 23 August 2010, [90].
(a) who accepted an offer of an opportunity to acquire, or who received a confirmation of, individual allocations of share awards and/or options awards under clause 2.4 of the Trust Deed in the period from 24 September 2004 to 24 August 2009; and
(b) who were, as at the date of liquidation of Listco,[12] then receiving salary or wages within the meaning of s 136 of the Fringe Benefits Tax Assessment Act 1986 (Cth) from an entity within the Babcock Group?
(2) Was the trial judge wrong to direct the Trustee to distribute the remainder of the Trust Fund, in equal shares and proportions, to designated charities?
[12]Babcock and Brown Limited, a publicly listed company, was referred to as ‘Listco’ in the Trust Deed.
In my opinion, the answer to both questions is ‘Yes’ and the specific error of the judge was, as the Trustee submitted, to exclude Employees from the class of ‘Residual Beneficiaries’ when determining what appropriate distribution of the remainder to make, in circumstances in which:
(1) ‘Residual Beneficiaries’ was defined under the Trust Deed to include both ‘Employees and/or charities’, and
(2) there were Employees in existence as at the date of the liquidation of Listco.
To state my conclusions in summary form, I consider that the judge misconstrued the class of ‘Residual Beneficiaries’ as defined in the Trust Deed and thus failed to give proper consideration to the exercise of the power of nomination. The power to nominate Residual Beneficiaries must be properly construed before the donee of the power can undertake a survey of the range of objects to whom the remainder of the assets of a trust can be distributed on the termination of the trust. It is impermissible for the donee of a power of nomination to exclude from consideration a person who is an object of the power. I consider that the statement by the judge that charities were ‘now the only intended beneficiary or group of beneficiaries within the contemplation or intention of the settlor’,[13] excluded from the class of beneficiaries to whom a distribution could be made Employees who were objects of the power.
[13]Australian Incentive Plan Pty Ltd v Babcock & Brown International Pty Ltd (2010) 81 ATR 290 (‘Reasons’), 308 [48], 309 [51].
I also consider that the judge was mistaken in concluding that a purpose of the Trust was to benefit charities when he ought to have held that the inclusion of charities within the definition of ‘Residual Beneficiaries’ was to ensure that the Trust would not fail for want of a beneficiary. There was nothing in the Trust Deed, or the Plan that it was designed to facilitate,[14] that manifested an intention by the Settlor to benefit charities, save for the inclusion of charities within the definition of ‘Residual Beneficiaries’, a definition which was only relevant in the event of the termination of the Trust. Given the limited reference to charities in the Trust Deed, the judge ought to have held that charities were included within the definition of ‘Residual Beneficiaries’ by way of something in the nature of a gift over, for the purpose of preventing the possibility of a resulting trust in favour of the Settlor in the event that the Trust otherwise failed.
[14]The linkage between the Trust and the Plan was evident in Recital A of the Trust Deed and Rule 9 of the Plan. See below [61] and [105].
The power to nominate Residual Beneficiaries
There was no appeal from the conclusion of the judge that it was appropriate for the Supreme Court to exercise the power to nominate the Residual Beneficiaries of the Trust in the circumstances where the power was otherwise incapable of exercise.
‘Residual Beneficiaries’ was defined in the Trust Deed as meaning:[15]
Employees and/or charities nominated by the Remuneration Committee from time to time.
[15]Clause 1.1 of the Trust Deed.
‘Employee’ was a term defined in the Trust Deed to mean ‘an employee or officer (including a director) of Babcock & Brown Group who is determined by the Remuneration Committee to be an Employee for the purposes of a Plan and who is an Australian Employee’.[16] The class of Employees favoured by the Trustee’s proposal were all ‘Employees’ within the definition of the Trust Deed, all being either employees or officers of the Group at the time of the liquidation of Listco who had received unsatisfied awards under the Plan. They also met the criteria of being ‘Australian Employees’ by reason of receiving salary or wages within the meaning of s 136 of the Fringe Benefits Tax Assessment Act from an entity within the Group.
[16]Clause 1.1 of the Trust Deed. See also Rule 1.1 of the Plan which defined an ‘Employee’ as a person ‘who is a full-time or permanent part-time employee or officer or director of a member of the Group [Babcock & Brown Limited and its controlled entities] or such other person as the Board determines’.
The Remuneration Committee had been a sub-committee of the Board of Listco. It had not nominated Residual Beneficiaries. All of its members had resigned (as had all the members of the Board) when Listco went into liquidation. The power to nominate Residual Beneficiaries had been conferred upon members of the Remuneration Committee as personae designatae. In those circumstances, it was impossible for the power to be exercised and it was appropriate for the Court to exercise the power, the power not having been conferred on the Trustee and it being doubtful whether, in the circumstances, the power was one that could be exercised by the liquidator.[17] Nothing in the Trust Deed either expressly or impliedly supported the proposition that in the event of Listco’s winding up the power of nomination was to be exercisable by the liquidator.[18] Nor was the power an asset of Listco which would make it necessary for the liquidator to exercise in winding up the affairs of Listco and distributing its property.[19]
[17]Mettoy Pension Trusts v Evans [1990] 1 WLR 1587, 1616, 1618.
[18]See Butterell v Docker Smith Pty Ltd (1997) 41 NSWLR 129, 136.
[19]Corporations Act 2001 (Cth), ss 477(2)(m), 506(1)(b); Mettoy Pension Trustees v Evans [1990] 1 WLR 1587, 1616; Re William Makin & Sons Ltd [1993] BCC 453, 458-60.
The power to nominate the Residual Beneficiaries and determine the proportions in which they were to receive distributions is a ‘power in the nature of a trust’ or a ‘trust power’.[20] So much was recognised by the judge.[21] The donee of such a power must give proper consideration to the class of objects of the power. A survey of the range of possible beneficiaries must be faithfully undertaken to ensure that the power is exercised to give effect to the settlor’s intentions. As Lord Wilberforce said in In re Baden’s Deed Trusts:[22]
[T]he court, if called upon to execute the trust power, will do so in the manner best calculated to give effect to the settlor’s or testator’s intentions. It may do so by appointing new trustees, or by authorising or directing representative persons of the classes of beneficiaries to prepare a scheme of distribution, or even, should the proper basis for distribution appear by itself directing the trustees so to distribute … Then, as to the trustees’ duty of inquiry or ascertainment, in each case the trustees ought to make such a survey of the range of objects or possible beneficiaries as will enable them to carry out their fiduciary duty … A wider and more comprehensive range of inquiry is called for in the case of trust powers than in the case of powers.
[20]Mettoy Pension Trustees v Evans [1990] 1 WLR 1587, 1614-5; Thomas on Powers (Oxford University Press, 2nd ed, 2012) [3.74] ff, citing Brown v Higgs (1803) 8 Ves Jr 561, 570-1; 32 ER 473, 476.
[21]Reasons, 300 [21].
[22][1971] AC 424, 457 (emphasis added).
This is not to say that the Court would require the preparation of a list of names of possible beneficiaries; rather, it is a matter of examining the range of possible beneficiaries by class and categories.[23] How that examination is to be carried out was considered by Sir Robert Megarry V-C in In re Hay’s Settlement Trusts:[24]
How is the duty of making a responsible survey and selection to be carried out in the absence of any complete list of objects? … The trustee must not simply proceed to exercise the power in favour of such of the objects as happen to be at hand or claim his attention. He must first consider what persons or classes of persons are objects of the power within the definition in the settlement or will. In doing this, there is no need to compile a complete list of the objects, or even to make an accurate assessment of the number of them: what is needed is an appreciation of the field … Only when the trustee has applied his mind to ‘the size of the problem’ should he then consider in individual cases whether, in relation to other particular claimants, a particular grant is appropriate.
[23]Ibid 449. See also In re Hay’s Settlement Trusts [1982] 1 WLR 202, 209.
[24][1982] 1 WLR 202, 209–10 (emphasis added).
The power to nominate beneficiaries thus includes a duty to ‘consider the range of objects of the power’.[25] A failure to take into account one class of possible beneficiaries, in considering what distribution is appropriate, is a failure to appreciate the field. If the donee, in exercising the power, excludes one class of possible beneficiaries from the range of objects of the power, the donee has failed to direct itself correctly at law.
[25]Ibid 210.
The finding that the Trust had not failed
There was no appeal from the order of the judge amending the Trust Deed to provide for the termination of the Trust upon the commencement of the winding up of Listco.[26] As the winding up of Listco commenced on 24 August 2009, the amendment had the effect that the Trust terminated on that date. The amendment was necessary because clause 2.5 of the Trust Deed, which governed the circumstances under which the Trust would terminate, provided only that termination would occur if the Trustee held no assets,[27] or in 80 years from the date of the Deed, 8 September 2084, the Trust having been established on 8 September 2004. More specifically, clause 2.5 relevantly provided:
[26]The Trustee applied for the amendment pursuant to s 63A of the Trustee Act 1958 (Vic). The amendment made was to add after clause 2.5(a)(ii) of the Trust Deed: ‘(iii) upon the commencement of the winding up of Listco under the Corporations Act 2001 (Cth)’, plus a minor consequential amendment.
[27]In addition it was necessary for the Remuneration Committee to direct that the Trust should terminate.
Termination of Trust
(a) The Trust must wind-up and terminate on the first to occur of the following dates (‘Termination Date’):
(i) if the Trustee holds no Assets and the Remuneration Committee directs that the Trust should terminate; or
(ii) 80 years from the date of this deed.
(b) The Trustee must on the Termination Date:
(i) as soon as practicable sell, call in and convert into money the Assets;
(ii) pay out all the liabilities of the Trust; and
(iii) pay the remainder, less all proper costs, disbursements, fees and other outgoings and less all proper provisions for future liability, to the Residual Beneficiaries.
The judge determined that an amendment was appropriate because it was not in the interests of any of the potential Residual Beneficiaries to see the assets of the Trust diminish over time, or be extinguished, by payments made to external managers at considerable expense until 2084.[28]
[28]Reasons, 307–8 [46].
There was also no appeal from the finding of the judge that the Trust had not failed.[29]
[29]Reasons, 302 [27], [28].
The Settlor of the Trust, Babcock and Brown International Pty Ltd (‘BBIPL’),[30] had argued before the judge that as the purpose of the Trust could no longer be performed, the surplus assets of the Trust were now held on a resulting trust for it by operation of law. BIBPL submitted that:[31]
[T]he trust was established for the purposes set out in cl 2.3 of the trust deed concerning the equity incentive plan but that, as a result of the liquidation of Babcock & Brown Ltd, that plan is no longer in operation and the commercial purpose of the trust has, consequently, disappeared.
[30]BBIPL was the first defendant in the proceeding below. It was not a party to the appeal.
[31]Reasons, 299 [17].
The purpose of the Trust was made plain by clause 2.3 which relevantly provided:
2.3 Purpose of Trust
(a)The purpose of the Trust is to administer employee share-plan activities, including (without limitation):
(i) acquiring shares, options and other securities of Listco; and
(ii) providing those shares, options and securities to Employees.
The first three Recitals to the Trust Deed also made clear that the Trust was established to facilitate the intended operation of the Plan involving the transfer of shares and options to Employees:
A. As part of the overall employee remuneration and incentive plan for Employees Settlor wishes to establish a trust fund comprised of Shares and options in Listco for Listco’s benefit in satisfying its obligations to Employees.
B. Listco will initially issue shares and options to the Trust for the purpose of the employee share plan, provided the Settlor contributes to the trust the funds necessary for this purpose.
C. The Settlor has settled the trust with payment of $10, and has then paid or will pay the following amounts to Trustee: $17,667,915 so that the Trustee can purchase 3,533,583 Shares and $9,856,339 so that the Trustee can purchase 7,850,544 Options, and so that the Trustee will transfer Shares to Employees on exercise of options and rights offered by Listco as an incentive for eligible Employees to remain in the employment of Babcock & Brown group for the purposes mentioned in this deed.
The judge rejected the Settlor’s submission. He accepted the general principle that where a trust fails for any reason,[32]
the equitable interests purportedly allocated by the failed trust must pass to someone as equity abhors, and will not tolerate, a vacuum in the equitable ownership.
[32]Reasons, 299 [18], citing Thomas and Hudson, The Law of Trusts (Oxford University Press, 2nd ed, 2010) [26.27]; see also JD Heydon and MJ Leeming, Jacob’s Law of Trusts in Australia (LexisNexis Butterworths, 7th ed, 2006) 236 [1205]; James Miller Holdings Ltd v Graham (1978) 3 ACLR 604, 613–4.
The effect of the general principle is that if a trust fails, the trust fund will usually be held on a resulting trust for the settlor. However, the judge held that in this case the Trust did not fail because, although the primary purpose of the Trust could no longer be achieved, the Trust had a secondary purpose, namely, the benefit of charities and that purpose remained capable of fulfilment. In his reasoning for upholding the Trust on this basis, he foreshadowed the conclusion he later reached, in the critical paragraphs [50]–[51], that if the primary purpose of facilitating the Plan was no longer achievable, the failure of that purpose meant that there was no longer a class of Employees who might be nominated as Residual Beneficiaries.
He said, at paragraph [32]:[33]
In my opinion, the purpose of the trust as stated in cl. 2.3 is certainly to be regarded as its principal or dominant purpose. Nevertheless, having regard to the provisions of the trust deed as a whole, I am not satisfied that this can be regarded as the whole purpose of the trust; because this would be to disregard the provision for charity made through the definition of residual beneficiaries. It also follows, in my view, that on the basis of this construction of the purpose and operation of the trust deed, it cannot be said that there has been an incomplete disposal of the beneficial interest behind the trust in the sense that that there is no longer any class of potential beneficiary within the scope of the definition of residual beneficiaries which could now benefit consistently with the presumed intention of the settlor. In other words, there was, on this basis, an intention to benefit employees through the incentive scheme established by the equity incentive plan and the trust deed, but also an intention to benefit charity in the event that there was a surplus with respect to the purpose and entitlements under that plan for the benefit of participants, as defined.
[33]Reasons, 303 (emphasis added).
Having determined that the advancement of charities was a secondary purpose of the Trust, the judge concluded that the Trust would only fail if neither the donee nor the Court exercised the power to nominate Residual Beneficiaries. The obstacle was only a matter of machinery that was appropriately remedied by the Court.[34]
[34]Reasons, 303 [33].
Thus, the judge sought to save the Trust from failure by elevating the status of charities within the Trust Deed as though the Trust contained multiple purposes. With great respect to the judge, I consider that this approach was both unnecessary and wrong. Most importantly, this approach led to the critical finding that there was no longer any class of Employees who could be nominated as Residual Beneficiaries consistently with the presumed intention of the Settlor.
No need to find that the Trust had a secondary charitable purpose
Before the judge, the Trustee submitted that there had not been a total failure of the Trust because, although it might be held that it is a condition subsequent of the Trust that the purpose set out in clause 2.3 should subsist and that purpose had failed with the liquidation of Listco, the direction in clause 2.5(b)(iii) to distribute the surplus to Residual Beneficiaries on termination of the Trust nevertheless remained capable of fulfilment, in the circumstances which prevailed, by the Court. The provision made by the Settlor in clause 2.5 of the Trust Deed was in itself sufficient to ensure that the Trust had not failed although the purpose of the Trust could no longer be achieved.
I agree.
The submissions of the Trustee are supported by an examination of the principles governing the distribution of surplus property on completion of a trust’s purpose.[35] To the question, ‘what happens once the purpose of the trust has been performed and there is still property left over?’[36] the general rule is the property left over will be held on resulting trust for the settlor subject to a variety of exceptions. The same response is appropriate when the purpose of a trust can no longer be
performed.[37] The exceptions include where the possibility of any resulting trust passing property back to the settlor has been expressly excluded by the settlement itself,[38] or where the courts can interpret the terms of the settlement so as to infer that the surplus should be applied for another purpose.[39] Most significantly, where a trust deed has made provision for the manner in which a surplus is to be distributed, no resulting trust will arise because the distribution of the trust fund has been expressly provided for:[40]
[I]f the trust instrument provided expressly who should take any surplus or gave some indication as to the manner in which such a surplus should be disposed of, then that would be a principled basis on which to avoid a resulting trust precisely because the trust would not be incomplete as to that portion of the fund.
[35]See Thomas and Hudson (2nd ed).
[36]Ibid [26.39].
[37]See Re Trusts of the Abbott Fund [1900] 2 Ch 326 where a trust fund was established in favour of two elderly ladies based on subscriptions from the public. The two ladies died before the trust was fully performed and it was held that the undistributed trust property was held on a resulting trust for the subscribers to the fund.
[38]Thomas and Hudson (2nd ed). [26.42], citing Croome v Croome (1889) 61 LT 814; Smith v Cooke [1891] AC 297. A resulting trust is sometimes excluded to avoid the settlor becoming the beneficial owner for tax purposes.
[39]Thomas and Hudson (2nd ed) [26.42], citing Re Akeroyd’s Settlement [1893] 3 Ch 363; Re Cochrane [1955] Ch 309.
[40]Thomas and Hudson (2nd ed) [26.51] (emphasis added), citing King v Denison (1813) 1 Ves & B 260; 35 ER 102; Wood v Cox (1837) 2 My & Cr 684; 40 ER 801; Croome v Croome (1889) 61 LT 814; In re West [1900] 1 Ch 84.
A trust will not fail so as to give rise to a resulting trust where a manner of distribution of the surplus has been expressly provided for in a trust deed. This is because, if the direction for the distribution of the remainder is capable of fulfilment, the intention of the settlor remains to be satisfied. In other words, where ‘there is some specific provision in the trust instrument … to suggest that any surplus should be held in some other manner’[41] rather than returning to the settlor, there will not have been a total failure of the trust and no resulting trust will arise.
[41]Thomas and Hudson (2nd ed) [26.37].
To conclude otherwise is to give the purpose for which a trust was created too large a significance. It is to treat the purpose of a trust as exhaustive of its operation, as though the fulfilment of its purpose was the sole basis on which it could continue to exist instead of treating the method for distributing the remainder as an important part of the manner in which the trust was intended to operate.[42]
[42]See, somewhat analogously, the principle laid down by Lord Eldon in King v Denison (1813) 1 Ves & B 260, 279; 35 ER 102, 109 (emphasis added): ‘If this is a Devise for a particular Purpose only, and the Application does not exhaust the Whole, there is a Trust for the Heir, and whether the Testatrix has said so, or not: the Heir standing in this Situation; that he is entitled to what is not in Law or Equity given to another. On the other Hand, this being a Devise of the real Estate, subject to and chargeable with the Annuities, and the Interest for Life in the Rents and Profits in Anthony and Sarah Isaacson and their Child and Children, and taking it to be a Devise, not for those particular Purposes only, but of the beneficial Interest, subject to a Devise, legal or equitable, with reference to those Annuities, this is not a Case of resulting Trust for the Heir; and upon the whole the Testatrix did not mean to give these Estates for these Purposes only; but did mean to give them, deducting all the Value of the Annuities, expressly given, and the surplus Rents and Profits for the Life or Lives, for which they are given’. See also the application of this principle by Cotton LJ in the Court of Appeal in Croome v Croome (1888) 59 LT 582, 584, referring to Lord Eldon, ‘What he says is this: “If I give to A. and his heirs all my real estate, charged with my debts, that is a devise to him for a particular purpose, but not for that purpose only. If the devise is upon trust to pay my debts, that is a devise for a particular purpose, and nothing more” – that is to say, exclusively for that purpose – “and the effect of those two modes admits just this difference. The former is a devise of an estate of inheritance for the purpose of giving the devisee the beneficial interest subject to a particular purpose; the latter is a devise for a particular purpose, with no intention to give him any beneficial interest. Where, therefore, the whole legal interest is given for the purpose of satisfying trusts expressed, and those trusts do not in their execution exhaust the whole, so much of the beneficial interest as is not exhausted belongs to the heir.”’ See also Kekewich J in In re West [1900] 1 Ch 84.
Once it is recognised that a resulting trust can be avoided when the manner of distribution of the surplus has been provided for in a trust deed, as here, it is apparent that there was no need for the judge to look for a secondary purpose of the Trust to save the Trust from failure when the purpose of the facilitation of the Plan could no longer be fulfilled. He ought to have found that the Trust did not fail, and there was no resulting trust in favour of BBIPL, because the Trust Deed made provision in clause 2.5 for the distribution of the remainder upon the termination of the Trust. It is almost as though the judge mistakenly treated the Trust, a discretionary trust for the distribution of property amongst a class of persons as beneficiaries, that is, a trust for persons, as though it were a trust for private ‘purposes’,[43] the lack of fulfilment of which brings with it a total failure of the trust. The inability to further advance the purpose of facilitating the Plan appears to have led the judge to search for a secondary purpose to avoid a resulting trust as though the Trust was a purpose trust rather than a trust for persons.
[43]See Thomas and Hudson (2nd ed) ch 6; Jacob’s Law of Trusts in Australia (7th ed) ch 11.
In my view, it was not only unnecessary and wrong for the judge to identify the advancement of charities as a secondary purpose to save the Trust from failure but also, more importantly, it was the significance which the judge attached to charities as a result of that reasoning which led him to conclude that charities remained as the only class of possible objects of the power to nominate Residual Beneficiaries.
Before considering why it was wrong for the judge to conclude that the advancement of charities was a secondary purpose of the Trust, it is important to analyse the judge’s reasoning with respect to the power of nomination and the distribution proposal made by the Trustee.
The exclusion of Employees from the class of Residual Beneficiaries
In considering the proposal made by the Trustee, the judge observed that the essence of the proposal was that the Court should appoint as Residual Beneficiaries all those persons who satisfied the definition of ‘Employee’ as at the date of the termination of the Trust (24 August 2009), that no charity should be appointed, and that the distribution should be made by reference to unsatisfied awards to Employees. There were 57 such persons.[44] The proposal was contained in an affidavit of Margaret Cole sworn 23 August 2010 in which she set out four possible alternative employee-based classes of Residual Beneficiaries. In addition to the proposal favoured by the Trustee, the other three classes were:
[44]See the judgment of Nettle JA, [16].
(1) Employees who had accepted an Offer of an opportunity to acquire, or who received a Confirmation of, individual allocations of share awards and/or option awards under clause 2.4 of the Trust Deed in the period from 24 September 2004 to 24 August 2009 and who were employed by the Group at any time in the period from 24 September 2009 to 24 August 2009, and not just those who were employed as at 24 August 2009. There were 232 such persons.
(2) All persons who were employed by the Group as at 24 August 2009 in a full-time or permanent part-time position as Australian employees, officers or directors of a member of the Group. There were 148 such persons.
(3) All persons who were a full-time or permanent part-time Australian employee or officer or director of a member of the Group at any time during the period from 24 September 2004 to 24 August 2009. There were 683 such persons.
The judge considered that a distribution to any employee-based class would make no sense when the purpose of the Trust with respect to the making of awards to Employees had failed.
The first critical paragraph of the judge’s reasons, relied on by the Trustee as revealing error, is paragraph [50], where the judge expressed the proposition that giving incentives to former employees, or to persons employed during the process of liquidation, was ‘meaningless’:[45]
The plaintiff [the Trustee], in its submissions, readily acknowledged that charities are within the class of potential appointees as residual beneficiaries. In my view, so much is clear from the definition of ‘residual beneficiaries’ in cl 1.1 of the trust deed. The plaintiff submitted that no charity should be nominated as a residual beneficiary because the purpose of the trust was to provide benefits to employees and it can properly be assumed that the inclusion of charities as objects of the power was simply to ensure that the trust would not fail for want of a beneficiary. As indicated previously, I accept that the view submitted on all sides that the purpose of the trust as a vehicle for the provision of an employee incentive scheme has failed. The Babcock & Brown group enterprise has ended and there is clearly no purpose in a fund operating to provide incentives to employees in these circumstances. For such of the employees who may still be employed during the process of liquidation, incentives are meaningless because their employment will end with the finalisation of the winding up in any event. For former employees, incentives are clearly pointless because their employment has ended and the enterprise has gone. The incentive scheme established under the equity incentive plan was an incentive plan provided by or on behalf of the Babcock & Brown group for the benefit of its employees. This is not an employee superannuation scheme in the more usual form which involves both contributions from both the employer and also the employee. In those circumstances, the situation would be somewhat different. The present circumstances, on the other hand, is made clear by various express provisions of the trust deed, particularly recital F, cl 2.3(b) and (e), and also cl 6(a).
[45]Reasons, 309 (emphasis added).
The provisions of the Trust Deed to which the judge referred provided that Employees who were Participants in the Plan and given opportunities to acquire individual allocations of shares in Listco through the offer or confirmation of awards, had no right or interest in the assets of the Trust until the awards were satisfied.
Recital F provided that:
It is not intended that Participants have any right or interest in the Trust Assets unless and until any of those assets are transferred to Participants in accordance with the terms of this Deed.
Clause 2.3(b) and (e) provided, respectively:
In furtherance of this purpose the Settlor has paid, or will pay, the Share Subscription Fund and the Option Subscription Fund to the Trustee to be held as part of the Trust Fund.
Plan Participants and their beneficiaries shall have no preferred claim on, or any beneficial interest in, any Trust Assets. Any rights created under the plan and this deed shall be mere unsecured contractual rights of Plan Participants and their beneficiaries against Listco.
Clause 6(a) provided that:
Subject to clause 6(c) the terms of offer or grant to an Employee must provide that if a Participant ceases for whatever reason to be an Employee before the Vesting Date [of the award], all rights of the Participant to exercise their Participant Awards cease from the date the Participant ceases to be an Employee.
The ‘Vesting Date’ in relation to a Participant award ‘mean[t] the earliest date on which the Award is exercisable following satisfaction of any Vesting Condition for that Award, subject to clause 6(c)’.[46]
[46]Clause 1.1 of the Trust Deed.
These provisions supported the proposition that Employees who were Participants in the Plan had no entitlement to property of the Trust until their respective awards had vested. This was not in contest. However, there were other provisions of the Trust Deed that demonstrated that the Settlor did not consider that it would be meaningless for an award to be satisfied after employment with the Group had ceased.
Clause 6(c) of the Trust Deed, to which clause 6(a) was subject, permitted the Board to bring forward the vesting date with retrospective effect if the Participant was no longer an Employee. It provided:
If provided in the Plan rules, the Board may bring forward the Vesting Date for any Participant Award, and may do so with retrospective effect if the Participant has ceased to be an Employee.
Rule 12 of the Plan governed the satisfaction of awards in circumstances where employment had ceased. Rule 12.1 provided for the exercise of awards that had vested 90 days after employment had ceased and for any longer period permitted by the Board up until the date on which the award was stipulated to lapse:
Subject to this Rule 12, if a Participant ceases to be an Employee before the Participant has exercised his or her Awards, then if the Awards have vested and are capable of being exercised, those Awards will only be capable of being exercised for a period of 90 days or such longer period determined by the Board after the cessation, but no later than the Expiry Date [the date on which the award lapses[47]].
[47]See the definition of ‘Expiry Date’ in Rule 1.1 of the Plan.
Rule 12.2 of the Plan conferred a power on the Board to determine that where a Participant ceased employment for certain reasons and his or her awards had not yet vested, the vesting date for an award could be varied, and the Participant could exercise the awards within 12 months of the Participant ceasing employment, or longer period as the Board determined:
12.2 Subject to Rule 12.4, if a Participant:
(a) dies; or
(b) leaves the Group for a Qualifying Reason (as determined by the Board in its discretion); or
(c) after attaining the age of 55 years; or
(d) is made redundant; or
(e)is employed by a Group entity and the entity terminates such employment without cause; or
(f)leaves the Group in such other circumstances as the Board in its absolute discretion determines,
before exercising Awards issued under the Plan and those Awards have not yet vested or lapsed, the Board may determine, in its discretion, that some or all of those Awards will vest and the Participant or the legal personal representative of that Participant may, within the period of twelve months of the Participant dying or so leaving or such longer period as may be approved by the Board, exercise all or part of those Awards (as determined by the Board). Any Awards not exercised within twelve months or such longer period approved by the Board will then lapse.
The remaining provisions of Rule 12 included the conferral of a power on the Board to determine that a Participant could remain a Participant after he or she had ceased employment with the Group:
12.3Subject to Rule 12.4, if a Participant ceases to be an Employee for any reason other than a reason specified in Rule 12.2 and the Participant’s Awards have not yet vested, those Awards will lapse immediately, unless the Board determines otherwise within 60 days of the Participant ceasing to be an Employee.
12.4Voluntary Bonus Deferral Rights will automatically vest, and will not lapse, if a Participant ceases to be an Employee for any reason.
12.5The Board may determine, in its absolute discretion, that a Participant who ceases employment with the Group remains a Participant and an Employee for the purposes of the Plan for such period as the Board determines.
Rule 12 of the Plan demonstrates that, contrary to the judge’s observation, the Settlor envisaged that the satisfaction of awards could be meaningful even after the cessation of a Participant’s employment. The rationale for the operation of the Plan in this manner may have rested on an understanding that the Plan had already provided the incentive to the Employee to commence and to remain in employment with the Group for the years leading up to the date on which he or she ceased employment. In any event, the judge was not correct to infer, as he did in paragraph [50] of his reasons, that the satisfaction of awards was ‘meaningless’ either to former Employees or to those persons who, having remained employed by the Group as at 24 August 2009, could no longer continue to be so employed by reason of the liquidation of Listco.
The second critical paragraph of the judge’s reasons, relied on by the Trustee as revealing error, is paragraph [51] where the judge concluded that it was inconsistent with the Settlor’s intention that any Employee be nominated as a Residual Beneficiary. He said:[48]
On the basis that the trust deed was established with the express purpose of providing benefits to both ‘employees and/or charities’ and that its purpose has failed with respect to the provision of benefits to ‘employees,’ I am of the opinion that the power of the court to nominate residual beneficiaries should be exercised in favour of a nomination of charities solely, as this is now the only intended beneficiary or group of beneficiaries within the contemplation or intention of the settlor as evidenced by the provisions of the trust deed, properly construed. It is true that the stated purpose of the trust in cl 2.3 does not refer to charities, but for the reasons indicated, construing the document as a whole, I am of the opinion that though its principal or dominant purpose may have been to provide an incentive scheme for employees, a trust for the benefit of charities is also part of the purposes of the trust.
[48]Reasons, 309 (emphasis added).
The statement that the Trust had as an ‘express purpose’ the benefit of charities was, as the judge acknowledged, not to be found in the terms of clause 2.3 which identifies the purposes of the Trust. Indeed, the benefit of charities was not to be found as a purpose of the Trust in any of the terms of the Trust.[49] Rather, as I discussed above, the benefit of charities was identified as a purpose of the Trust by the judge as the basis upon which he rejected BBIPL’s submission that a resulting trust had arisen in its favour when the commercial purpose of the Trust had ‘disappeared’. That is, the statement that a purpose of the Trust was to benefit charities had its origin in the judge’s reasoning that the Trust had not failed because it was possible to identify a secondary purpose of the Trust. I have concluded that this reasoning was both unnecessary and wrong.[50] It is apparent from paragraph [51] of the judge’s reasons that this reasoning formed a critical step in the conclusion ultimately drawn by the judge that he would nominate charities alone as Residual Beneficiaries.
[49]No other clause of the Trust Deed identifies further purposes of the Trust.
[50]See above [73]. See further below.
In my opinion, in paragraphs [50] and [51] the judge erred because he elided the necessary difference between, on the one hand, the purpose of the Trust which was to ‘administer employee share plan activities’ and, on the other hand, the provisions made for distribution of the fund on termination of the Trust. The Trust Deed does not indicate that distribution to Employees on the termination of the Trust should occur only in circumstances where those aspects of the Trust concerned with employee share plan activities can be furthered. A person could be an ‘Employee’ under the Trust Deed but not a ‘Participant’ under the Plan because a ‘Participant’ under the Plan is an Employee ‘to whom Awards have been granted under the Plan’.[51] The definition of ‘Residual Beneficiaries’ does not refer to ‘Participants’ but instead to ‘Employees’. This indicates that the Settlor’s intention included the possibility that, on termination of the Trust, distributions might be made to Employees although no future employment incentives could be provided by the Plan.
[51]Rule 1.1 of the Plan. Compare the definition of ‘Employee’ under the Trust Deed set out in [51] above.
In other words, the mistake made by the judge was to consider that Employees could be nominated as Residual Beneficiaries if and only if, by doing so, the purpose of the Trust in facilitating the Plan was advanced. He erroneously concluded, on the basis that the primary purpose was not capable of fulfilment, that all those persons who were connected to that purpose were ineligible to be nominated as Residual Beneficiaries. I consider that the statement that charities were ‘now the only intended beneficiary or group of beneficiaries within the contemplation or intention of the Settlor’[52] was an assertion that the only class of potential beneficiaries who could benefit consistently with the presumed intention of the Settlor, in the circumstances of the winding up of Listco, were charities; that is, that Employees were to be excluded from consideration as an object of the power.
[52]Reasons, 309 [51].
I do not read this statement as an expression of a conclusion that, taking all relevant considerations into account, the most appropriate distribution, consistent with the Settlor’s intention, was a distribution to charities or that a distribution to charities was the only outcome consistent with the Settlor’s intention, in the circumstances. The statement does not use the word ‘appropriate beneficiaries’ but more baldly speaks of ‘intended beneficiaries’. Moreover, the statement must be read in the light of paragraph [32] of the judge’s reasons[53] where he said that, because the benefit of charities could be identified as a secondary purpose of the Trust:[54]
It also follows, in my view, that … it cannot be said that there had been an incomplete disposal of the beneficial interest behind the trust in the sense that there is no longer any class of potential beneficiary within the scope of the definition of residual beneficiaries which could now benefit consistently with the presumed intention of the settlor.
[53]Set out in [64] above.
[54]Reasons, 303 (emphasis added). Indeed, the judge supported the statement he made in paragraph [50] with a reference to his earlier paragraphs [30]–[32]: Reasons, fn 63.
The converse proposition is that without identifying the benefit of charities as a secondary purpose of the Trust there would have been an incomplete disposal of the beneficial interest of the Trust because there would no longer have been any class of potential beneficiaries within the scope of the definition of ‘Residual Beneficiaries’ that could have benefited consistently with the presumed intention of the Settlor. In other words, as the Trustee submitted, the proper construction of his Honour’s reasons in paragraph [51] is that the class of Employees were to be excluded from consideration as an object of the power of nomination.
The point is reinforced by the consideration that the judge rejected all four options presented by the Trustee reflecting employee-based classes.
The Attorney-General supported the Trustee’s construction of his Honour’s reasons in paragraph [51]; indeed, in his written submissions, he appeared to go further to suggest that Listco had no Employees as at the date of liquidation on the basis that ‘where the company has itself been liquidated, there is clearly no class of Employees in existence as defined by the Deed’.[55] At the hearing of the appeal, the Attorney-General’s position was clarified as not involving a denial that people remained employed by Listco up until the date of liquidation but rather as a submission that, because the Plan could no longer be carried out following the liquidation of Listco, and because persons only became ‘Employees’ under the Trust Deed if they were ‘determined by the Remuneration Committee to be an Employee for the purposes of a Plan’,[56] there was no longer any class of Employees in existence under any Plan as at the date of Listco’s liquidation. The flaw in the submission is that each member of the class of 57 persons the subject of the Trustee’s proposal had been determined to be Employees for the purposes of a Plan and had not lost that status of having been so determined.[57] It was not suggested that it was necessary for that status to be renewed on an ever-present basis.
[55]Respondent’s Outline of Submissions, dated 20 September 2011, [15].
[56]The definition of ‘Employee’ under clause 1.1 of the Trust Deed (emphasis added); see [51] above.
[57]By contrast, other persons had lost the status of being Employees because they were no longer employed by Listco as at the date of liquidation.
In my view, the judge’s exclusion of Employees from the range of objects of the power was impermissible. There was no reason to conclude that Employees were intended to be Residual Beneficiaries only to the extent a distribution to them would provide an ‘incentive’ to that person. That there were no Employees who would also in the future be Participants does not mean that Employees were only to be considered as Residual Beneficiaries on that basis. Employees remained potential objects of the power of nomination, notwithstanding the liquidation of Listco, and the judge erred, in my view, in excluding them.
The approach adopted by the judge in disregarding Employees as an object of the power was similar to his approach, discussed above, where he erroneously considered that the interests of Employees were limited to situations in which incentives might be provided to them in respect of their ongoing employment with companies in the Group. The terms of the Trust Deed and the Plan made it plain that ongoing employment was not a necessary condition for the exercise of awards; that, in some circumstances, it remained meaningful for former Employees to exercise awards.
In any event, Employees who were nominated to be Participants and who accepted offers of awards would, in the circumstances, have already been provided with incentives. Indeed, a feature common to all members of the class of Employees to whom a distribution would be made under the proposal favoured by the Trustee is that awards had been granted to all such persons, although the awards had not yet vested and/or were unexercised. Those awards were intended to provide an incentive for those Employees to remain employed by the Group, with the incentive being realised upon the vesting and exercise of the award. From the date on which they were granted, time was running on those awards. That is, for those persons in the class favoured by the Trustee, the capacity of the awards they received to provide an incentive had already taken effect as those persons had continued in employment up until the date on which the winding up of Listco commenced. A distribution of the remainder of the Trust to those Employees, in the proportions reflected in the awards, far from being meaningless, would be consistent with the purpose for which the awards were granted.[58]
[58]Whether the distribution proposed by the Trustee is appropriate is considered further below.
The Attorney-General placed great weight on the force of Rule 14.2 of the Plan. It provided:
All unexercised Awards will lapse on the liquidation of the Company.
The Attorney-General correctly submitted that it was not contemplated that the Trust would terminate on the winding-up of Listco as clause 2.5 of the Trust Deed made no mention of such circumstances. The Trust was only intended to terminate in 2084 unless, before that date, the Trust held no assets and the Remuneration Committee directed that the Trust should terminate. Thus, it was consistent with the operation of the Trust that it might have terminated in 2084 and yet Listco continue in operation. The only provision relevant to the consequence for the Trust of the winding up of Listco was Rule 14.2 of the Plan which, the Attorney-General submitted, was unequivocal in its stipulation that on the liquidation of Listco all unexercised awards were to lapse.
Indeed, Rule 14.2 is unequivocal in its terms. However, it addresses only the lapsing of awards. It does not address, and does not purport to address, the power of nomination of Residual Beneficiaries under the Trust nor the distribution of the surplus assets of the Trust. The question of the lapsing of awards, on the one hand, is quite distinct from the question of the objects of the power of nomination and the appropriate distribution of the remainder to those objects, on the other hand. This must be so because, as noted, the Settlor did not contemplate that the Trust would terminate on the winding-up of Listco. No provision was made by the Settlor for the distribution of the remainder of the Trust in the circumstances of the liquidation of Listco. In particular, there is nothing to suggest that Rule 14.2 was intended by the Settlor to operate as an express or implied direction to the Remuneration Committee that no distribution of the remainder was to be made which reflected, proportionately, the satisfaction of unexercised awards. In my view, Rule 14.2 should not be construed as a restriction on the power, now exercised by the Court, to nominate Residual Beneficiaries or make a distribution.
I turn now to explain why I consider that the judge was wrong to conclude that one of the purposes of the Trust was to benefit charities.
The judge was wrong to find that the Trust had a secondary charitable purpose
As mentioned above, neither the purposes of the Trust as specified in clause 2.3 of the Trust Deed, nor any of the Recitals of the Trust Deed, evidence any intention to benefit charities. The purpose of the Plan[59] reflected the tenor of the purposes of the Trust, viz, to:
[59]As set out in Rule 2 of the Plan.
(a) encourage participation by Employees in the group’s goals and to align their interests with those of the Company’s shareholders through the opportunity for share ownership and through the offer of other incentives; and
(b) attract, motivate and retain Employees.
The Plan made no mention of charities. Rule 9 of the Plan provided for a trust to be established for the purpose of acquiring or holding shares in Listco, or other securities. It provided:
9. Trustee
9.1The Company may appoint a trustee on such terms and conditions as the Company determines for the purpose of acquiring or holding any Shares, options or other securities on behalf of Participants, or for the purposes of this Plan in accordance with the terms set out in an Offer or Confirmation [of an award].
9.2The Company and any other member of the Group may be required to provide money or other property to the trustee for the purpose of enabling Employees to acquire Shares or rights under the Plan. In addition, the Company may require as a precondition to the grant of Awards under the Plan to any Employee of any member of the Group (the ‘Entity’), that the Entity enter into an agreement or arrangement as the Company considers necessary to oblige the Entity to reimburse the Company (or other member of the group) for any money or property provided by the Company (or other member of the group) in connection with the Plan, directly or indirectly, in relation to any employee or director of the Entity.
The Trust was clearly a commercial trust. The only reference to charities in either the Plan or the Trust was their inclusion within the definition of ‘Residual Beneficiaries’ in clause 1.1 of the Trust Deed. There is a paucity of evidence in the Trust Deed, and no evidence in the Plan, to suggest that the benefit of charities was a secondary purpose of the Trust. In those circumstances one must look for any other rational explanation for the inclusion of charities within the definition of ‘Residual Beneficiaries’. In my view, in this context, the inclusion of charities within the definition of ‘Residual Beneficiaries’ is more readily, and wholly, explicable as a means of ensuring that the Trust would not fail for want of a beneficiary, if, for example, there were no Employees at the date of the termination of the Trust. In those circumstances I do not consider that the inference can fairly be drawn that the Trust had as a secondary purpose the benefit of charities and I consider that the judge was wrong to so infer.
The Trustee’s proposal should be approved by the Court
Given my conclusion that Employees were objects of the power of nomination that were impermissibly excluded by the judge from his consideration, the question arises, what distribution of the remainder would most faithfully reflect the Settlor’s intention?
The Attorney-General submitted that if Employees were included within the range of objects of the power, the distribution should nevertheless be made solely to charities on the ground that there was no proper basis for distinguishing amongst the Employees.
Construing the Trust Deed as a whole, I do not consider that it would be faithful to the Settlor’s intention for the remainder of the Trust Fund to be distributed to charities when there were persons who were Employees of Listco as at the date of its liquidation. All the evidence suggests that had the Settlor been asked, as at the date the Trust was established, whether it intended that the surplus assets of the Trust should be distributed to charities when there were Employees of Listco who could benefit from the distribution, the Settlor’s answer would have been, ‘No’.
As mentioned above, the 57 persons who fell within the class of Employees favoured by the Trustee had all been granted awards under the Plan and were all employed by the Group as ‘Australian Employees’ as at the date Listco was placed into liquidation. The judge noted that there were two directors of the Trustee included within those Employees but that this involved no impropriety or conflict of interest.[60]
[60]Reasons, 308 [49], referring to clause 14(f) of the Trust Deed which provides, inter alia, that a Trustee is not disqualified from being a Trustee or exercising any power because its directors have a personal interest in the exercise of the power.
The Trustee’s proposed method of distribution was made by reference to the unsatisfied awards of each of the 57 Employees, the Trustee considering that it would not be appropriate to make a distribution of the remainder to satisfied awards.[61] The value of each of the awards had been determined not by the Trustee but by an independent third party, the Remuneration Committee when it existed. For each of the 57 Employees, the Trustee has calculated the approximate value of that individual’s share and option awards as at the date of the offer of the award, Listco’s shares and options now having no value given the liquidation of Listco. The proposed distribution, while to be made proportionately by reference to the value of awards in comparison with the pool of assets available, has a value with respect to each individual Employee that is considerably less than the value of Listco’s shares at the time the awards were made.[62]
[61]Reasons, 308 [48].
[62]See affidavit of Margaret Cole, [95], Exhibit MC-1 (Spreadsheet).
The distribution proposed by the Trustee is not intended to operate as a satisfaction of the awards, and nor could it be, all the awards having lapsed upon the liquidation of Listco. There was no entitlement by the Employees to a distribution, not even of an unsecured contractual kind.[63] Rather, the distribution was to be made by the Court in the exercise of a discretionary power with respect to the allocation of the residual assets of the Trust.
[63]Under clause 2.3(e) of the Trust Deed.
It is my view that the Trustee’s proposal is best calculated to give effect to the Settlor’s intentions,[64] analogously to an application of the cy-pres doctrine with respect to charitable trusts.[65] The three alternative classes proposed each have their deficiencies and were not advanced by the Trustee on the appeal.[66] Classes (2) and (3) ignore the fact that the Plan and the Trust Deed are in place for persons who were not only employed by the Group but were also made an offer or received a confirmation of an award. Classes (1) and (3) also suffer from the defect that the definition of ‘Employees’ in the Trust Deed is in the present tense and thus require,
in the circumstances of the case, that the persons still be employed by Listco as at the date of the termination of the Trust.[67]
[64]In re Baden’s Deed Trusts [1971] AC 424, 457.
[65]Parker v Mosley [1965] VR 580; Re Ulverston and District New Hospital Building Trusts [1956] Ch 622.
[66]See above, [75].
[67]See the definition above, [51].
The purposes for which a trust is established are not to be ignored in determining how to exercise the power of distribution of the remainder, even if the purposes can no longer be fulfilled in the future. For the reasons described above, as the purpose of the Trust was the facilitation of the offering and granting of awards to Employees in an equity incentive plan, in my view those purposes provide an intelligible and meaningful ‘proper basis for distribution’[68] to those Employees who remained employed by the Group as at the date of liquidation of Listco and who had been the recipient of an offer or confirmation of an award which was as yet unvested or unexercised.
[68]In re Baden’s Deed Trusts [1971] AC 424, 457.
Conclusion
In my opinion, the appeal should be allowed, the orders of the trial judge should be set aside, and in substitution thereof this Court should direct the Trustee, for the purposes of clause 2.5(b)(iii) of the Australian Incentive Trust Deed, to distribute to those persons named in the first column of the spreadsheet that is at page 213 of MC-1 to the affidavit of Margaret Cole sworn 23 August 2010, as Residual Beneficiaries, an amount calculated in accordance with the methodology set out in paragraphs [95] and [96] of that affidavit.
DAVIES AJA:
The appellant (‘the Trustee’) is the trustee of the Australian Incentive Trust (‘the Trust’), established in 2004 as part of the employee incentive arrangements for eligible Australian employees of the Babcock & Brown group of companies. The Trust was established to acquire and hold shares in Babcock & Brown Ltd (‘BBL’) for transfer to employees who were awarded shares under the Babcock & Brown Equity
Incentive Plan (‘the Incentive Plan’). BBL went into liquidation on 24 August 2009. On 26 July 2011, the Trustee obtained approval from the Court to amend the Trust Deed to provide for the termination of the Trust on the commencement of the winding up of BBL because the Trustee believed that there was no longer any commercial purpose for the continued existence of the Trust. The liquidation of BBL had brought about the collapse of the Babcock & Brown group and the shares in BBL had become worthless. As the Trustee then held around $1.7m in cash from dividends and interest (‘the cash surplus’) apart from the worthless shares in BBL, the Trustee also sought an order from the Court directing it, in the exercise of its power under clause 2.5(b)(iii) of the Trust Deed, to distribute the cash surplus to fifty-seven identified employees who had been awarded shares in BBL under the Incentive Plan but whose rights to those shares had not yet vested, or if vested were unexercised, at the time of termination (‘Participants’). Typically, awards did not vest until four years after the grant of the award. The Court declined to make that direction and instead directed the Trustee to distribute the cash to specified charities in equal shares and proportions. The Trustee has appealed that direction from the Court.
The issues raised by the appeal against the Court’s direction concern both the proper construction of the Trust Deed and the appropriate exercise of the power contained in clause 2.5(b)(iii). Clause 2.5 relevantly provided as follows:
(a)The Trust must wind-up and terminate on the first to occur of the following dates (‘Termination Date’):
(i)if the Trustee holds no Assets and the Remuneration Committee directs that the Trust should terminate; or
(ii) 80 years from the date of this deed.
(b) The Trustee must on the Termination Date:
(i)as soon as practicable sell, call in and convert into money the Assets;
(ii) pay out all liabilities of the Trust; and
(iii)pay the remainder, less all proper costs, disbursements, fees and other outgoings and less all proper provisions for future liability, to the Residual Beneficiaries.
(c)In winding up the Trust the Trustee may make any provision it considers necessary to provide for any outgoings or liabilities (actual or contingent) of the Trust or any of the Assets before making any distribution to the Residual Beneficiaries, and subject to this, must hold the part of the Assets retained in trust for the Residual Beneficiaries.
The expression ‘Residual Beneficiaries’, which appears in clause 2.5(b)(iii), is a defined term in the Trust Deed and means:
Employees and/or charities nominated by the Remuneration Committee from time to time.[69]
[69]Australian Incentive Trust Deed, clause 1.1.
The expression ‘Employees’ is also a defined term and means:
An employee or officer (including a director) of Babcock & Brown Group who is determined by the Remuneration Committee to be an Employee for the purposes of a Plan and who is an Australian Employee.[70]
[70]Ibid.
The Trustee contended that the Court misconstrued the class of ‘Residual Beneficiaries’ by excluding ‘Employees’ from consideration and that this led the Court to fail to consider the class of objects properly. The Trustee further contended that the purposes of the Trust are best fulfilled by making distributions only to ‘Employees’ and that the class of ‘Employees’ should be made up of the fifty-seven ‘Participants’, being those persons to whom the Trustee would have transferred shares in BBL had the events that triggered the application to the Court not occurred.
The Attorney-General was represented on appeal, although he had elected not to appear at the hearing below. Regrettably that meant that the trial judge did not have the benefit of the arguments advanced for the Attorney-General in support of the appointment to the charities. That said, the trial judge was correct, in my view, to direct the power of appointment under clause 2.5(b)(iii) in favour of the charities.
The trial judge’s reasons appear at paragraphs [50] and [51] of his judgment but before turning to those reasons, there should be some elaboration on the issues raised by the application that was made.[71] There were a number of issues raised by the application that required the Court’s determination, including whether there was a resulting trust in respect of the cash surplus for the first defendant, as the settlor, and contributor to the Trust, by operation of law. That issue arose in the context of the settlor’s claim on the surplus assets of the Trust. The trial judge accepted that there was no ongoing purpose that the Trust, as the vehicle for the provision of the employee incentive scheme, could now serve.[72] But his Honour held that a resulting trust in favour of the settlor had not arisen, because the intention of the settlor, on the proper construction of the Trust Deed, was also to benefit charity in the event that there was a surplus of assets to the purpose and entitlements under the Incentive Plan. The trial judge reasoned that the purpose of the Trust to administer the Incentive Plan could not be regarded as the whole purpose of the Trust because that would be to disregard the provision made through the definition of ‘Residual Beneficiaries’. His Honour reasoned:
32.… It also follows, in my view, that on the basis of this construction of the purpose and operation of the Trust Deed, it cannot be said that there has been an incomplete disposal of the beneficial interest behind the Trust in the sense that there is no longer any class of potential beneficiary within the scope of the definition of Residual Beneficiaries which could now benefit consistently with the presumed intention of the settlor. In other words, there was, on this basis, an intention to benefit Employees through the incentive scheme established by the Equity Incentive Plan and the Trust Deed, but also an intention to benefit charity in the event that there was a surplus with respect to the purpose and entitlements under that Plan for the benefit or Participants, as defined.
[71]Australian Incentive Plan Pty Ltd v Babcock & Brown International Pty Ltd& Anor [2010] VSC 564.
[72]Ibid [28].
Upon that finding, his Honour went onto consider how the power to nominate ‘Residual Beneficiaries’ should be exercised and reasoned as follows:
50.… I accept the view submitted on all sides that the purpose of the Trust as a vehicle for the provision of an employee incentive scheme has failed. The Babcock & Brown group enterprise has ended and there is clearly no purpose in a fund operating to provide incentives to employees in these circumstances. For such of the Employees who may still be employed during the process of liquidation, incentives are meaningless because their employment will end with the finalisation of the winding up in any event. For former Employees, incentives are clearly pointless because their employment has ended and the enterprise has gone. The incentive scheme established under the Equity Incentive Plan was an incentive plan provided by or on behalf of the Babcock & Brown group for the benefit of its employees. This is not an employee superannuation scheme in the more usual form which involves contributions from both the employer and also the employee. In those circumstances, the situation would be somewhat different. The present circumstances, on the other hand, is made clear by various express provisions of the Trust Deed, particularly Recital F, clause 2.3(b) and (e), and also clause 6(a).
51.On the basis that the Trust Deed was established with the express purpose of providing benefits to both ‘Employees and/or charities’ and that its purpose has failed with respect to the provision of benefits to ‘Employees,’ I am of the opinion that the power of the Court to nominate Residual Beneficiaries should be exercised in favour of a nomination of charities solely, as this is now the only intended beneficiary or group of beneficiaries within the contemplation or intention of the settlor as evidenced by the provisions of the Trust Deed, properly construed. It is true that the stated purpose of the Trust in clause 2.3 does not refer to charities, but, for the reasons indicated, construing the document as a whole, I am of the opinion that though its principal or dominant purpose may have been to provide an incentive scheme for employees, a trust for the benefit of charities is also part of the purposes of the Trust.
The grounds of appeal recite that:
(1)The judge erred in holding that, because ‘incentives [were] meaningless’ to Employees who remained employed as at the date of liquidation of Babcock & Brown Ltd, charities were the only beneficiary or group or beneficiaries within the contemplation or intention of the settlor as ‘Residual Beneficiaries’;
(2) The judge should have held that:
(a)properly construed, the circumstances in which Employees might be appointed as Residual Beneficiaries were not limited to those in which a distribution on termination of the Trust would provide ‘an incentive’ to the Employee or Employees;
(b)‘Employees’ remained potential objects of the power of appointment, notwithstanding the liquidation of Babcock & Brown Ltd; and
(c)the inclusion of charities within the definition of ‘Residual Beneficiaries’ was to ensure that the Trust would not fail for want of a beneficiary.
Decision
It was submitted for the Trustee that the trial judge’s approach unduly read down the reference to ‘Employees’ in the definition of ‘Residual Beneficiary’ and elided the necessary difference between, on the one hand, the purpose of the Trust which was ‘to administer employee shared plan activities’[73] and, on the other hand, the provisions for the distribution of the fund on termination of the Trust. It was contended that the Trust Deed did not indicate that the distributions to ‘Employees’ on termination should occur only in circumstances where the purpose of administering the Incentive Plan could be furthered. Reliance was placed on the definition of ‘Residual Beneficiaries’ which did not refer to ‘Participants’ but instead to ‘Employees’, as evincing an intention on the part of the settlor that, on termination, distributions might be made to ‘Employees’, even though no future employment incentives could be provided. Thus, it was reasoned, it should not be concluded that ‘Employees’ were intended to be ‘Residual Beneficiaries’ only to the extent that a distribution to them would provide ‘an incentive’ to that person. It was argued that Participants remained potential objects of the power of appointment, notwithstanding the liquidation of BBL and that the power of appointment was appropriately exercised in their favour. It was further argued that the inclusion of charities within the class of ‘Residual Beneficiaries’ should be seen in the context of a commercial trust of this kind ‘as a way of ensuring that the Trust would not fail for want of a beneficiary.’[74]
[73]Australian Incentive Trust Deed, clause 2.3.
[74]Appellant’s Submissions, [18].
In my opinion, the contention that the inclusion of charities as objects of the power was simply to ensure that the Trust would not fail for a want of a beneficiary conflates motive and purpose. The settlor’s motive for including charities as potential objects of power may well have been to avoid the implication of a resulting trust, should the purpose of the Trust fail, but this was to be achieved by the inclusion of charities as objects of the power under the class of ‘Residual Beneficiaries’ or, to put it another way, the settlor’s purpose was to benefit charities as objects falling within the class of ‘Residual Beneficiaries’. That purpose is not gainsaid by the presumed intention of the settlor that the Trust should not fail for want of an ‘Employee’, or for that part, a Participant, capable of taking as a beneficiary under the Trust. To the contrary, the contention that the presumed intention of the settlor that the Trust should not fail for want of an ‘Employee’ underscores the trial judge’s finding that the settlor intended charities to benefit as objects of the power. The trial judge was correct to hold that a trust for the benefit of charities was also part of the purposes of the Trust.[75]
[75]Australian Incentive Plan Pty Ltd v Babcock & Brown International Pty Ltd& Anor [2010] VSC 564, [51].
The Trustee argued that the trial judge wrongly excised ‘Employees’ entirely from the class of ‘Residual Beneficiaries’ capable of taking the surplus assets on the basis that ‘the incentives [were] meaningless’. Particular attention was focussed on the trial judge’s statement that charities were ‘the only intended … beneficiaries within the contemplation or intention of the settlor as evidenced by the provisions of the Trust Deed, properly construed’.[76] Senior counsel for the Trustee argued that his Honour was there finding that ‘Employees’ had no entitlement, as distinct from a finding about the appropriateness of exercising the power of appointment in favour of the charities. In my opinion, that is not a fair reading of paragraph [51]. No argument was put to the trial judge that ‘Employees’ must be excluded from consideration because there were now no persons within the description of ‘Employees’ and the trial judge’s reasons do not go so far. The trial judge plainly was of the view that charities should benefit because the primary purpose of the Trust had failed and that a trust for the benefit of charities was also a purpose of the Trust. The trial judge explicitly stated that the ‘incentives [were] meaningless’ because ‘for such of the Employees who may still be employed during the process of liquidation … their employment will end with the finalisation of the winding-up in any event’ (italics added for emphasis).[77] The trial judge plainly recognised that there may still be persons within the class of ‘Employees’ for the purposes of the definition of ‘Residual Beneficiary’ but, on the trial judge’s reasoning, the power of appointment ‘should be exercised in favour of a nomination of charities solely’[78] because the stated purpose of the Trust in clause 2.3, germane to the exercise of the power of appointment in favour of ‘Employees’, had failed.
[76]Ibid.
[77]Ibid [50].
[78]Ibid [51].
The contention that there were no persons now within the description of ‘Employees’ to whom a distribution can be made under clause 2.5(b)(iii) was nonetheless put by Attorney-General in this appeal. It was argued that the definition of ‘Employee’ denoted an employee ‘for the purposes of a Plan’ – in other words, that the assumption underpinning the definition of ‘Employee’ was an extant incentive plan and as no further incentives would, or could be, provided by the Babcock & Brown group, there were then no ‘Employees’. This submission ignores the fact that each of the Participants is as an employee to whom an award was given under the Incentive Plan. That status has not altered. Those Participants are still ‘Employees’ as defined, although they will not get the benefit of their awards, and therefore there is a class of ‘Employees’ capable of taking the cash surplus.
The rejection of the Attorney-General’s construction is not decisive of the appeal against the Attorney-General as there remains the question whether the power of appointment in favour of charities was appropriate.[79] In this case the Court was asked to nominate the residuary beneficiaries to take the surplus because there is no longer a Remuneration Committee, following the liquidation of BBL. In that circumstance, it was appropriate for the Court to exercise the power and, in exercising the power, the Court had to ensure that it was properly informed of all matters relevant to its exercise and had to exercise the power in the manner best calculated to give effect to the settlor’s intentions.[80]
[79]In reBaden’s Deed Trusts [1971] AC 424, 449, 457 (Lord Wilberforce).
[80]Ibid; Mettoy Pension Trustees v Evans [1990] 1 WLR 1587, 1617–18 (Warner J).
Typically, an employee could not take up the award of shares until a date four years after the shares were granted to that employee[81] and under the terms of the Trust Deed, Participants had no preferred claim on, or any beneficial ownership in, any trust assets.[82] The Trust was a mechanism to allow the shares that would ultimately be transferred to Participants to be issued at the time of award, thus hedging Babcock & Brown’s exposure to changes in the market price of those shares. A Participant could lose their right to take a transfer of the shares granted to him or her. Specifically and relevantly, clause 14.2 of the Incentive Plan provided that:
All unexercised Awards will lapse on the liquidation of [BBL].
In consequence, the awards of shares to the fifty-seven Participants which had not vested, or at least not been exercised, when BBL went into liquidation, have lapsed. Those fifty-seven Participants not only never had any claim to, or interest in, the cash surplus (except if there were a distribution to them under clause 2.5(b)(iii)), they have no remaining rights as Participants, their awards having lapsed.
[81]Babcock and Brown Equity Incentive Plan Rules, clause 7.
[82]Australian Incentive Trust Deed, clause 2.3(e).
The Trustee argued that because the definition of ‘Residual Beneficiaries’ does not refer to ‘Participants’ but instead to ‘Employees’, the Trust Deed evinced an intention on the part of the settlor that, on termination, distributions might be made to ‘Employees’, even though no future employment incentives could be provided and thus there was no reason to conclude that Employees were intended to be ‘Residual Beneficiaries’ only in circumstances where the employee share plan activities aspect of the purposes of the Trust could be furthered. It was argued that the trial judge’s approach erroneously considered that the interests of ‘Employees’ were limited to situations in which incentives might be provided to them in respect of their ongoing employment with companies in the Babcock & Brown group of companies and that the trial judge’s approach elided the necessary difference between, on the one hand, the purpose of the Trust which was to ‘administer employee share plan activities’ and, on the other hand, the provisions made for distribution of the fund on termination of the Trust.
Whilst I accept the Trustee’s submission that the fifty-seven Participants remained potential objects of the power of appointment within the class of ‘Employees’ notwithstanding the liquidation of BBL, I reject the submission that this makes it ‘appropriate’ for the exercise of power in favour of them. The Trust was created for the purposes of facilitating and effecting the Incentive Plan activities of the Babcock & Brown group of companies. Awards were made, and employees became ‘Participants’ under the Trust Deed, on the basis that their entitlements would lapse on the liquidation of BBL. In the circumstances, the trial judge was correct to conclude that the nomination of charities solely was within the contemplation or intention of the settlor. The fact that the awards were provided as an inducement to employees to stay with the Babcock and Brown group of companies and that some, or indeed all, of the fifty-seven Participants may have continued in the employment of companies within the Babcock & Brown group of companies because of an expectation that their entitlements would vest, and be of value to them, does not compel any different conclusion. The question here is not the motives of the fifty-seven Participants who continued in employment but the intention of the settlor as determined by the proper construction of the Trust Deed considered in the context of which the Incentive Plan forms an integral part.
There was no error of law in the trial judge’s conclusions, and his decision was, in my view, correct. Accordingly, I would dismiss the appeal. Senior counsel for the Trustee informed the Court that the Trustee did not dispute that the costs of the Attorney-General should be paid out of the fund, as well as the costs of the Trustee and I would so order.
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