Baba v Sheehan

[2019] NSWSC 1281

Supreme Court

New South Wales

Medium Neutral Citation:

Baba v Sheehan [2019] NSWSC 1281

Hearing dates:

14, 15 November 2018; 14, 15 March 2019

Date of orders:

26 September 2019

Decision date:

26 September 2019

Jurisdiction:

Equity - Corporations List

Before:

Parker J

Decision:

See [89]-[90].

Catchwords:

EQUITY — Trusts and trustees —Trust powers —Powers of appointment – whether trustee validly appointed – whether appointment complied with trust deed – where email gave notice of appointment and foreshadowed further formal notice – whether formal notice sent – whether appointment invalid as an abuse of power – where appointor appointed as trustee a company under his control – power to appoint trustee not fiduciary in nature nor fraud on the trust power in issue – consideration of Re Skeats’ and Montevento Holdings Pty Ltd v Scaffidi.

 

EQUITY — Trusts and trustees — Trust instruments –
breach of trust deed where transfer of units registered and notice procedure not followed – no estoppel by party’s failure to take issue with transfer at mediation – no relief sought against the transfer.

EQUITY — Trusts and trustees — Termination of trust – appointment of receiver sought to secure winding up of the Trust – form of orders inappropriate to effect relief sought – inappropriate to terminate trust where business remains profitable and no oppression made out.

  EQUITY — Trusts and trustees — Unit trusts –
Distribution of entitlements – salary sacrifice arrangement in breach of Income Tax provisions - unit holders to repay entitlements received in addition to salary.

Legislation Cited:

Uniform Civil Procedure Rules 2005 (NSW), Part 54

Cases Cited:

Australian Conservation Services Pty Ltd v Liladel Holdings Pty Ltd (2017) 319 FLR 401; [2017] ACTSC 162
Montevento Holdings Pty Ltd v Scaffidi (2012) 246 CLR 325; [2012] HCA 48
Re Gaydon [2001] NSWSC 473
Salomon v A Salomon & Co Ltd [1897] AC 22; [1895-99] All ER Rep 33
Vatcher v Paull [1915] AC 372

Texts Cited:

Geraint W Thomas, Thomas on Powers (2nd ed, 2012, Oxford University Press)
Professor P D Finn, Fiduciary Obligations (1946, The Law Book Company)

Category:

Principal judgment

Parties:

Anna Monica Baba (Plaintiff)
Paul Vincent Sheehan (First Defendant)
Sedarni Pty Limited (Second Defendant)
Rijalu Pty Limited (Third Defendant)
Smart Street Optical Pty Limited (Fourth Defendant)
Silktote Pty Limited (Fifth Defendant)

  Cross-claim
Smart Street Optical Pty Ltd (First Cross Defendant)
Mustafa Baba (Second Cross Defendant)
Anna Monica Baba (Third Cross Defendant)
Steven John Carney (Fourth Cross Defendant)
Sedarni Pty Ltd (Fifth Cross Defendant)

Representation:

Counsel:
JT Johnson (Plaintiff/Second and Third Cross Defendants)
JM Ireland QC (First, Third, Fifth Defendants/Cross Claimants)

  Solicitors:
Beazley Lawyers (Plaintiff/Second and Third Cross Defendants)
McGirr Lawyers (First, Third, Fifth Defendants/Cross Claimants)

File Number(s):

2017/252703

Publication restriction:

Nil

Judgment

1. These proceedings concern an optometry business which operates in Charlestown, a suburb of Newcastle. The business is known as “Smart Eyes” and began trading in January 2007.

2. The individuals responsible for the foundation of the business were Paul Vincent Sheehan, Mustafa Sedat Baba and Steven John Carney. Each of them was, and is, a qualified optometrist. The business was, and is, conducted through a unit trust known as the Smart Street Optical Unit Trust (“the SSO Trust”).

3. At the time of the events which gave rise to these proceedings, the units in the Trust were owned as to 25% by Rijalu Pty Ltd (“Rijalu”), a company controlled by Mr Sheehan; as to 35% by Serdani Pty Ltd (“Serdani”), a company controlled by Mr Carney; and as to 40% by Monica Anna Baba (formerly known as Annika Monica Orlowski), who is Mr Baba’s wife. The trustee of the Trust was Smart Street Optical Pty Ltd (“SSO”). The directors of that company were Mr Sheehan, Mr Baba and Mr Carney. SSO had three issued shares, owned by Rijalu, Mr Baba and Mr Carney.

4. Mr Sheehan did not work in the business. He left the day-to-day management of the business to Mr Baba and Mr Carney. Mrs Baba worked in the business as a book keeper, or at least was paid a salary for doing so.

5. According to Mr Sheehan, in 2016 he became concerned about the way in which the business was being managed. He thought he was being excluded by Mr Baba and Mr Carney.

6. The Trust Deed for the SSO Trust gave Mr Sheehan the power to appoint a new trustee. Mr Sheehan purported to exercise this power in October 2016 by replacing SSO with Silktote Pty Ltd (“Silktote”). Silktote is a company owned by Mr Sheehan and his wife in equal shares and of which they are the directors.

7. Following the purported appointment, Mr Sheehan sought to have Silktote take over control and operation of the business from SSO. This was resisted by Mr Carney and Mr Baba. For a while they remained in day-to-day control of the business. It took Mr Sheehan some time to get control of the Trust’s bank account (then in the name of SSO). Eventually he did so and established a new account in the name of Silktote. Even after this, Mr Carney and Mr Baba had access to cash takings. But eventually Silktote obtained control. In March 2018 Mr Baba ceased to work in the business. Mrs Baba’s employment had purportedly been terminated the previous August. Mrs Baba did not accept the validity of the termination but ceased to maintain that she was an employee of the business once her husband ceased to work there.

Issues for determination

8. These proceedings were commenced by Mrs Baba, in her capacity as a unit holder in the SSO Trust, in August 2017. Mrs Baba challenged the validity of Silktote’s appointment as Trustee and sought orders for the winding up of SSO and for the appointment of a receiver to wind up the Trust. Mr Sheehan, Rijalu, and Silktote were named as the first, third and fifth defendants. SSO was named as the fourth defendant. Sedarni was named as the second defendant.

9. Silktote cross-claimed, seeking an account of monies allegedly overpaid to Mr Carney and Sedarni, Mr Baba and Mrs Baba. The cross-claim named SSO as first cross-defendant. Mr and Mrs Baba were the second and third cross-defendants. Mr Carney and Sedarni were the fourth and fifth cross-defendants.

10. SSO has taken no active role in the proceedings.

11. A mediation took place between the Sheehan interests, the Baba interests and the Carney interests in June 2018. The mediation failed to resolve the dispute between the Sheehan interests and the Baba interests. But a side deal was reached between the Sheehan interests and the Carney interests. The Carney interests agreed to a transfer of Sedarni’s units in the SSO Trust and Mr Carney’s share in SSO to Rijalu. In return, the Sheehan interests abandoned their claims on behalf of the Trust to an account from the Carney interests.

12. The proceedings came on for hearing before me on 14 and 15 November 2018. Mr JT Johnson of counsel appeared for the Baba interests. Mr JM Ireland QC, solicitor, appeared for the Sheehan interests. There was no appearance for the Carney interests, which took no part in the hearing.

13. At the hearing, Mr Johnson raised a new issue. He pointed to a provision of the Trust Deed which provided that in the event of a proposed sale by a unit holder of its units, the other unit holders were to have a right to purchase a proportionate share of the units being sold. Mr Johnson sought to challenge the transfer of Sedarni’s units to Rijalu on the ground that this provision had not been complied with. Mr Ireland took the point that this claim had not been pleaded, but sought to contend, if the claim were permitted, that Mrs Baba was estopped by her conduct at the mediation and thereafter from raising it.

14. The result was that the hearing could not be completed. The proceedings were adjourned and eventually came on for further hearing in March this year. The Statement of Claim was amended and a fresh Defence filed by the Sheehan interests to reflect the new allegation by Mrs Baba concerning the transfer. Although given notice of the amendment, the Carney interests maintained their non-appearance.

15. At the hearing, Mrs Baba’s application to have SSO wound up was abandoned. The application for the appointment of a receiver to the Trust was, however, maintained.

16. Silktote’s cross-claim was also amended. The claim against the Carney interests was formally removed so that no account was sought against Mr Carney or Sedarni. Mr Ireland maintained, however, that Mr Baba should be required to account for the amounts paid to Mr Carney. This claim was ultimately abandoned in final submissions, leaving the claim for an account from Mr and Mrs Baba for the monies they themselves received.

17. As a result, the issues for determination by the Court are as follows:

(1)   whether the purported appointment of Silktote as Trustee in place of SSO was valid;

(2)   whether the purported transfer of Sedarni’s units in the Trust to Rijalu was valid;

(3)   whether a receiver should be appointed to the assets of the Trust;

(4)   whether Mr and Mrs Baba should be required to account for any of the monies received by them from the Trust.

Terms of SSO Trust

18. The Trust Deed for the establishment of the SSO Trust was dated December 2006. The parties to the Deed were James Patrick Tuite (who appears to have been a lawyer associated with Mr Sheehan) as Settlor; Mr Sheehan as Appointor; SSO as Trustee; and Mrs Baba, Sedarni and Rijalu as Foundation Unit Holders.

19. The Trust Deed provides in a conventional way for the Trust Fund to consist of a nominal amount ($10) together with other monies accepted, acquired or accumulated by the Trustee for the purposes of the Trust (cl 1(r)). The beneficial interest in the Trust Fund is divided into units. Initially 100 $1 units were issued to the Foundation Unit Holders.

20. The Trust Deed contains wide powers to invest the Trust Fund by way of “Authorised Investment”. These include investment in “any partnership, firm or business whatsoever or wheresoever situate” (cl 9.2(g)) and investment in “such other manner as the Trustee in its absolute discretion thinks fit” (cl 9.2(l)).

21. The Trust terminates on the Vesting Day (cl 13.1) which is defined as 75 years from the date of the Deed (or such shorter period as might be required by the rule against perpetuities). The Trustee, however, has power to appoint an earlier date as the Vesting Day (cl 13.2).

22. The Trust Deed also provides for redemption of units at the discretion of the Trustee (cl 11). Such redemption is to be effected at “Current Unit Value”, which is determined by agreement among all of the unit holders or in default of such agreement by an accountant appointed under the terms of the Trust Deed. The Trustee may also issue new units but unless all unit holders agree, they must be issued at Current Unit Value (cll 5, 8).

23. The Trustee is entitled to remuneration for its services as fixed by resolution of the unit holders from time to time (cl 17(a)). Clause 30 deals with the exercise of the Trustee’s discretions and powers. Subclause 30.3 provides:

Any Trustee (where the Trustee is a company) any member or statutory officer of the Trustee may exercise or concur in exercising all powers and discretions hereby or by law given to the Trustee notwithstanding that it or he respectively may have a direct or other personal interest in the mode or result of exercising any such power or discretion but any Trustee, member or statutory officer as aforesaid may nevertheless abstain from acting except as a merely formal party in any matter in which it or he may be so personally interested and any person so exercising or concurring in the exercise of any such power or discretion or so acting shall not be liable to account to the Unit Holders or the Trustee for any remuneration or other benefits accruing therefrom.

24. Clause 2.1 provides:

The Appointor and on the death of the last surviving appointer or such other person as he shall have appointed to act as appointer and in default of appointment his legal personal representative shall be entitled by instrument in writing at any time and from time to time:

(i)   to remove a trustee hereof;

(ii)   to appoint any new or additional trustee or trustees;

(iii)   to appoint a new trustee or trustees in the place of any trustee who resigns his trusteeship or ceased to be a trustee by operation of law.

25. Clause 16 deals with removal, retirement and appointment of the Trustee. It provides:

16.1   A Trustee may be removed by the Appointor in accordance with    clause 2.1 of this Deed.

16.2   A Trustee may be removed by a written or oral resolution agreed to by all the Unit Holders or by a Deed executed by all the Unit Holders.

16.3   A Trustee may retire upon giving 2 months notice to the Unit Holders of its desire so to do.

16.4   Appointment of a new trustee in place of a Trustee or of an additional trustee shall be by written or oral resolution agreed to by all the Unit Holders or a Deed executed by all the Unit Holders.

16.5   The number of trustee may at any time be one but shall never be more than four.

26. Clause 2.1 confers power on the Appointor both to remove a Trustee and to appoint a new Trustee. Clause 16.1 refers only to removal in accordance with cl 2.1. Clause 16.4 deals with the appointment of a new Trustee. But it was not suggested that the power of appointment in cl 2.1 was restricted by cl 16.4.

27. Clause 28 contains additional provisions concerning the transfer of units. It provides that a unit holder intending to transfer units must give a transfer notice to the Trustee. On receipt of a transfer notice the Trustee is to give notice to other unit holders allowing them to purchase the units in question in the same proportions as their existing holdings at a price to be agreed upon by the unit holder and the Trustee, or in default of such agreement at Current Unit Value.

28. Clause 28.7 provides:

Notwithstanding any other provision of this Deed, if a Unit Holder:

(a)   becomes of unsound mind or a person whose person or estate is liable to be dealt with in any way under the law relating to mental health;

(b)   resigns as a Director of the Trustee (where the Trustee is a company);

(c)   ceases to be or to be eligible to be a Director of the Trustee (where the Trustee is a company);

(d)   becomes bankrupt or makes any arrangement or composition with his creditors generally; or

(e)   fails to carry out his duties as a Director (where the Trustee is a company) or employee of the Trustee for a period in excess of 4 weeks without the consent of the Trustee;

then such Unit Holder shall be deemed to have given an irrevocable Transfer Notice in respect of all his units as provided in clause 28.2 and the provisions of this clause shall apply mutatis mutandis to such a Transfer Notice.

Validity of appointment of Silktote as Trustee

29. On behalf of Mrs Baba, Mr Johnson contended that the purported appointment of Silktote as Trustee in October 2016 was invalid for two reasons. His first contention was that the purported appointment did not comply with the terms of the Trust Deed. Secondly, he contended that even if complying with the terms of the Trust, the purported appointment was an abuse of Mr Sheehan’s power as Appointor and invalid for that reason.

30. The Sheehan interests defended the validity of the purported appointment in October 2016. But against the possibility that the Court might find otherwise, a formal instrument in writing was executed shortly before the hearing commenced in November 2018. I did not understand Mr Johnson to argue that this instrument did not comply with the terms of the Trust Deed. But Mr Johnson contended that the appointment was invalid as an abuse of power for essentially the same reasons as the purported October 2016 appointment was invalid.

No valid instrument of appointment

31. The purported appointment of Silktote by Mr Sheehan relied on Mr Sheehan’s powers as Appointor under cl 2.1 of the Trust Deed, which I have quoted at [24] above. The contention was that there was no “instrument in writing” to support the purported appointment in October 2016.

32. The only written evidence before the Court concerning the purported October 2016 appointment was an email from Mr Sheehan sent at 10.50 am on 26 October. The email was addressed to Mr Carney and Mr Baba and was headed “Smart Street Optical Trust”. The email stated:

Dear Anna, Steve and Mustafa

Please find attached a signed copy of the Smart Street Optical Unit Trust Deed.

As the Appointor of the Trust, I inform you that effective from 8 am today I have removed Smart Street Optical Pty Ltd as Trustee and replaced it with Silktote Pty Ltd, the directors of which are Paul and Dianne Sheehan.

Please also note the Trust Deed is specific regarding the sale and/or transfer of Trust Units. This is relevant if Steve is seeking to buy units from Anna.

As a matter of courtesy I am available to meet in order to discuss any proposed changes in the operations of Smart Eyes.

As Trustee, Silktote Pty Ltd will seek to administer the Trust solely in the interests of Unit holders.

A registered mail notice of the change of Trustee will be posted to you at the Smart Eyes practice address in the coming days.

33. In his initial affidavit in the proceedings, sworn in April 2018, Mr Sheehan said:

On 26 October 2016 I exercised my rights as Appointor and removed Smart Street Optical Pty Ltd (SSO) as trustee of the Trust. I sent this notice to both Mustafa and Steven by email and registered post. This email exchange is found at page 93 of Exhibit PVS-1.

At the nominated page of the exhibit was Mr Sheehan’s email of 26 October.

34. In her affidavit in response, sworn in June 2018, Mrs Baba responded to what Mr Sheehan said in his affidavit. She denied the relevant paragraph but went on to add, evidently speaking for both Mr Baba and herself:

We accept that we received the notice, however we do not accept that the replacement of SSO with Silktote was valid. Therefore, we do not recognise Silktote as the Trustee.

35. In her cross-examination on 14 November, Mrs Baba was asked about the topic. Her attention was drawn to the statement at the end of the email that a “registered mail” notice of the change of Trustee would be posted in the coming days. The cross-examination continued:

Q.   Did you receive something in the mail subsequently?

A.   Yes, I did.

Q.   Have you got it now?

A.   No. I haven’t got it, no.

Q.   Have you looked for it?

A.   It would be at home in my files, yes.

Q.   That was something that came in the mail following this, you recall that?

A.   That’s right, yes.

Q.   You filed it away somewhere?

A.   Yes.

36. Mr Ireland made a call for the document to which Mrs Baba referred, but it was not produced at the time or at the subsequent hearing which took place in March. Mrs Baba gave some further evidence at the March hearing, but she was not asked about the document either in chief or in cross-examination.

37. In cross-examining, Mr Johnson referred to the 26 October email and put to Mr Sheehan that he did not send the email to Mrs Baba. Mr Sheehan conceded that that was so, and strictly speaking that was correct because the email was sent to Mr Baba not Mrs Baba. Mr Sheehan was not further cross-examined on this issue.

38. Mr Ireland raised the subject in re-examination. Mr Sheehan said that he sent a letter to Mrs Baba at her home address on the same day as the email. He described the letter as a “cut and paste” exercise from the email and said that he had not retained a file copy. He had searched for such a file copy but had not found it. Although this evidence strictly speaking may have gone beyond proper re-examination, there was no objection to it from Mr Johnson.

39. This evidence is somewhat vague and unsatisfying. The evidence about generating a separate document and sending it afterwards by registered post only emerged in re-examination at the very end of the case. Mr Sheehan’s earlier evidence (which incorrectly described the earlier email of 26 October as an “email exchange”) did not refer to this. There is no independent record of it, which is rather surprising given the effort which was supposedly made to produce it and send it by registered post. While the 26 October email itself foreshadows a further notice, it is easy to imagine that the step might have been overlooked.

36. Nevertheless, Mr Sheehan’s evidence that he took the step of sending a further document was not directly challenged in cross-examination and Mrs Baba conceded that she received something. On balance I am satisfied that Mr Sheehan sent Mrs Baba a separate formal notice of Silktote’s appointment as trustee in place of SSO.

37. In passing, I should note that it might have been argued that the 26 October email itself constituted an “instrument in writing” replacing Silktote with SSO. The Trust Deed does not appear to have required any particular formality in that regard. But it is not necessary to pursue this any further. I am satisfied that there was a purported appointment in October 2016 which complied with the requirements of cl 2.1.

Abuse of power

42. It was common ground between the parties that, even if Mr Sheehan complied with the terms of the Trust Deed in making the appointment, the appointment could still be challenged under the doctrine of “fraud on a power” (see generally Geraint W Thomas, Thomas on Powers (2nd ed, 2012, Oxford University Press), chapter 9). As Lord Parker of Waddington stated in Vatcher v Paull [1915] AC 372 at 378, the doctrine applies where:

… the power has been exercised for a purpose, or with an intention, beyond the scope of, or not justified by, the instrument creating the power.

43. According to Mr Sheehan, he first became concerned about the way in which the Trust’s business was being managed in about February 2016. At this stage, the parties were contemplating a sale of the business to Better Eyecare, a larger business controlled by Mr Sheehan. For this purpose, Better Eyecare required a due diligence to be conducted and this would include the accounts. At the time the Trust’s accounting work was being done by a firm named Accounting First, whose principal was Mr Darren Tappouras. Mr Mustafa generally looked after accounting matters and he had been instructing Mr Tappouras.

44. Mr Sheehan said that an email exchange between Mr Tappouras and Mr Baba gave him some concern. That email exchange concerned finalising a tax return, presumably the Trust’s tax return for 2014-2015. Mr Baba wrote to Mr Sheehan saying that Mr Carney had declined to sign off on the return because it did not fully make sense. Mr Sheehan said that he was troubled by an apparent discrepancy in the financial figures of the Trust and by there having been no money in the bank account for unit holders’ distributions.

45. Mr Sheehan said that in April, as part of the due diligence investigations with Better Eyecare, he became concerned that Mr Carney and Mr Baba “were struggling to understand the business’ financial figures”. He did not provide any details of this. In May Mr Sheehan sent an email to Mr Tappouras requesting information about the increase in what were shown as “beneficiary loans” to Mr Carney and Mrs Baba in the 2015 financial statements. Mr Sheehan said he became concerned that he was being kept out of the affairs of the trust.

46. Early in August Mr Sheehan was sent draft accounts for the 2016 financial year. Mr Sheehan said:

I formed the view that there were some important issues raised by those figures. I discussed them with Steven and Mustafa and they advised me that the financial figures did not seem right. Mustafa said he would follow it up with the accountants.

47. In response Mr Sheehan received a copy of an email from Mr Baba to Mr Tappouras stating that some of the distributions had gone through salary sacrifice and hopefully this accounted for the discrepancy. The figures were to be rechecked. According to Mr Sheehan, he was concerned at this. He said he had never agreed to payments being made by way of salary sacrifice. He said he also became aware that Mr Tappouras was acting for Mr Carney and Mr Baba personally and he felt excluded.

48. There is then a gap in the evidence until Sunday 23 October when Mr Sheehan sent an email to Mr Tappouras. The email stated relevantly:

Please advise what company documents (copies included) you have in relation to Smart Street Optical Unit Trust ABN 18 341 313 003.

I am seeking access to the Trust’s deed and constitution, as well as any other company documents you may have access to.

Additionally lease supply copies of the past ten years tax returns plus breakdowns of salaries and other payments made to Mustafa Baba, Steve Carney and their related parties and entities, including but not limited to wives, partners, children and other related parties.

I understand that you have not been the Trust’s accountant for the whole of the past decade but hope that files from [the previous accountant] were transferred to your company.

Please advise the timelines for providing this information.

49. The following morning, Monday 24 October, Mr Sheehan sent a further email to Mr Tappouras stating:

Regarding the above entity, please provide details of the following categories in the 2016 Financials.

An itemised breakdown of:

●   Consultants Fees

●   Office Expenses

●   Legal Fees

●   Salaries and wages

●   Security

●   Superannuation

●   Superannuation – salary sacrifice

●   Telephone

●   Travel

Please advise ASAP on these matters.

50. Mr Sheehan said he also tried to call Mr Tappouras about these requests but did not receive a response. Mr Sheehan said he also contacted Mr Baba and Mr Carney. He said that there were “conversations” which included words to the following effect:

Mr Sheehan:   I want to have access to the bank accounts. Tappouras isn’t giving me any information. I am concerned that you guys don’t understand your responsibilities as trustees. There are so called salary sacrifices which we never discussed, business practices that aren’t usual, and our bank accounts don’t have money for the trust distributions. It seems to me that the trust distributions are not in proportion to the unit holdings.

Mr Baba:   All of these decisions don’t need your agreement. It is majority rule. We got advice on all of this.

Mr Sheehan:   I want to see the bank statements and transaction records.

Mr Baba:   Steve [Carney] doesn’t want me to give you those records.

Mr Sheehan:   I’m entitled to them.

51. As already noted, Mr Sheehan’s email concerning the appointment of Silktote was sent on Wednesday 26 October at 10.50 am, purporting to be effective from 8 am on that day. On the following afternoon an exchange took place between Mr Baba and Mr Sheehan by email:

Mr Baba:   Though we are supposed to be mature adults (and friends), all of a sudden things seem to have got very messy. As of 5 pm tomorrow (Friday) I will not be contactable for any matters relating to Smart Eyes as I will be away to visit an ill friend. If the world ends, savour your last moments. But I am an optimist and believe the sun will rise again the following day. Hence do not despair.

I shall return to Newcastle late the following Sunday (6th November).

Mr Sheehan:   Enjoy your trip.

Usually things have an explanation but that does not ensure correct procedures have been followed. The trust is for the benefit of unit holders, not for the manipulation and tax effectiveness of employees or others. Let’s get this cleared up and move on.

Smart Eyes has been a success and I am glad it will support my future retirement in one form or another.

52. Mr Sheehan was cross-examined about the events leading up to the email of 26 October. Mr Johnson emphasised, and Mr Sheehan conceded, that his discussions with Mr Baba and Mr Carney initially took place in the context of a potential sale of the business. Mr Sheehan also said that at the time he sent the email to Mr Tappouras on 23 October asking for a copy of the Trust Deed, he already had one. He said he had found it somewhat earlier when moving house. He said that he asked Mr Tappouras for a copy to test what information he (Mr Tappouras) had.

53. At the end of the cross-examination Mr Johnson put to Mr Sheehan that his only purpose in appointing Silktote as Trustee was to obtain control of the trust for himself. Mr Sheehan denied this.

54. I did not find the evidence on this question from Mr Sheehan entirely satisfactory. I do not read the emails which are in evidence and which predate October, in themselves, as reflecting any concern on Mr Sheehan’s part about the way in which the Trust’s accounts were being kept or the way in which the Trust’s affairs were being managed. The correspondence does not itself indicate that any requests by Mr Sheehan were being ignored.

55. On the other hand, by 23 October 2016 Mr Sheehan had questions about the affairs of the company. So much is clear from the emails to Mr Tappouras on 23 and 24 October. Earlier emails had referred to a salary sacrifice arrangement without any demur from Mr Sheehan, but I am not satisfied that Mr Sheehan fully understood what had been done. He had left this to Mr Baba, Mr Carney and Mr Tappouras. It was contended on Mrs Baba’s behalf in submissions at the beginning of the hearing, and she asserted in her evidence, that Mr Sheehan had approved the “salary sacrifice” payments. But the evidence falls far short of establishing this.

56. Mr Sheehan’s evidence that he wrote the email requesting a copy of the Trust Deed from Mr Tappouras so as to test the information available to Mr Tappouras is curious. The email itself reads as a straightforward request for information. But there is no evidence that Mr Tappouras or anyone else provided the Trust Deed before Mr Sheehan sent his email of 26 October, and Mr Sheehan must have had a copy of it by then.

57. Only two working days passed between the email requests to Mr Tappouras and Mr Sheehan’s purported exercise of his power to replace SSO with Silktote. As I have said, there is no documentary evidence to support Mr Sheehan’s claims that he was being stonewalled. But the conversation which Mr Sheehan said he had with Mr Baba was not challenged in cross-examination and Mr Baba was not called to contradict it. On that conversation, there was an unequivocal refusal to allow Mr Sheehan information to which he was entitled. Mr Sheehan also said that both before and after 23 October Mr Tappouras was refusing to contact him, and that evidence was not challenged either.

58. Mr Sheehan’s account is also supported by the subsequent conduct of Mr Carney, Mr Baba and Mr Tappouras. All of them resisted the attempts by Mr Sheehan to have Silktote assume control of the business and to obtain custody of its records. Mr Tappouras’ role in this was particularly egregious. He was retained to act for the Trust yet he appears to have taken sides with Mr Carney and Mr Baba, without any real consideration of whether the action taken by Mr Sheehan in appointing Silktote was valid.

59. Mr Johnson seized on the reference in Mr Sheehan’s email of 27 October to the business being a source of retirement income for Mr Sheehan. But the tone of the correspondence between Mr Baba and Mr Sheehan was somewhat flippant (surprisingly so given Mr Sheehan’s action the previous day). I think Mr Sheehan’s email was nothing more than a reference to the fact that, having assumed control of the Trust through Silktote, it would provide him with an income stream into the future. I do not read it as a denial of the other unit holders’ entitlements.

60. In these circumstances, I accept Mr Sheehan’s denial that his sole motivation in appointing Silktote was to obtain control of the Trust. I am satisfied that Mr Sheehan had genuine concerns about the way in which the affairs of the Trust were being conducted and he exercised his power to appoint a new Trustee so as to protect the interests of his company, Rijalu, as unit holder. In my view this was legitimate and not foreign to the purpose of which the power was conferred.

61. My conclusion does not depend upon Mr Sheehan’s concerns about the company having been well founded in fact. In my view it is sufficient that Mr Sheehan acted, as I have found, genuinely and in good faith.

62. But in fact, as I have already stated, the attitude subsequently taken by Mr Carney, Mr Baba and Mr Tappouras goes some way to vindicating Mr Sheehan’s concerns. Furthermore, as we will see, the “salary sacrifice” payments did actually involve a breach of trust. To my mind, this shows why the Court should not too readily find a fraud on a power in a case such as this. Mr Sheehan’s only other remedy would have been to bring proceedings for breach of trust, or possibly some form of derivative action. Otherwise the wrong to the Trust would have gone unredressed. The Court should be slow to shut a beneficiary of a trust out from using the self-help remedy of removing the trustee merely because of a doubt about the motivation behind that action.

63. At the end of the argument on this question, Mr Johnson raised a further basis for challenging the appointment of Silktote. He relied on the decision of Kay J in Re Skeats’ Settlement (1889) 42 Ch D 522. In that case funds were settled on Mrs Skeats for life. Mr and Mrs Skeats had power under the settlement to appoint new trustees in the event of the existing trustees dying, going to reside abroad, desiring to retire, refusing to act or becoming incapable of acting. The trustees wished to retire and Mr and Mrs Skeats purported to appoint Mr Skeats and another person in their place. Kay J said (at 526):

The ordinary power of appointing new trustees, under a settlement such as this is, of course imposes upon the person who has the power of appointment the duty of selecting honest and good persons who can be trusted with the very difficult, onerous, and often delicate duties which trustees have to perform. He is bound to select to the best of his ability the best people he can find for the purpose. Is that power of selection a fiduciary power or not? I will try it in this way, which I offered as a test in the course of the argument. Suppose, as happens not unfrequently, that trustees, under the terms of the deed of trust, are entitled to remuneration by way of annual salary or payment. Could the person who has the power of appointment put the office of trustee up for sale, and sell it to the best bidder? It is clear that would be entirely improper. Could he take any remuneration for making the appointment? In my opinion, certainly not. Why not? The answer is that he cannot exercise the power for his own benefit. Why not again? The answer is inevitable. Because it is a power which involves a duty of a fiduciary nature; and I therefore come to the conclusion, independently of any authority, that the power is a fiduciary power.

64. But this is not a case where Mr Sheehan appointed himself as trustee. The appointment was of Silktote, a separate legal entity. In Montevento Holdings Pty Ltd v Scaffidi (2012) 246 CLR 325, the High Court had to consider the validity of the exercise of a power of appointment of a new trustee to a discretionary trust. The trust deed contained an express prohibition on the appointor being appointed as a trustee. One of the beneficiaries, who was the appointor, appointed as trustee a company of which he was the sole shareholder and director. The High Court emphasised that the trust deed expressly provided that the trustee could be a corporation and elsewhere distinguished between individuals and corporations. The Court concluded that on a natural and ordinary meaning of its words, the clause preventing the appointment of the appointor as trustee did not prevent the appointment of a company controlled by the appointor as a trustee.

65. In my view similar reasoning applies in the current case. Clauses 28.7 and 30.3 of the Trust Deed, quoted above, expressly contemplate that the Trustee may or may not be a company. The drafter of the Trust Deed would have been aware of the doctrine in Salomon’s case: Salomon v A Salomon & Co Ltd [1897] AC 22. Accordingly, even if there is some rule which prevents an appointor from appointing himself or herself as trustee, that rule did not prevent Mr Sheehan appointing Silktote.

66. I should note in passing that it is controversial whether Kay J’s decision is authoritative today. Provisions allowing for an appointor to appoint a new trustee are commonplace in discretionary trust deeds. I think the profession would be surprised if such provisions were subject to a rigid but unexpressed limitation preventing the appointment of the appointor. If that were so, the clause in the Montevento trust deed would have been unnecessary.

67. The statement by Kay J that the power of appointment is a fiduciary one was criticised by Professor P D Finn (as he then was) in Fiduciary Obligations (1946, The Law Book Company) at [627]. Some of the cases in which Kay J’s decision has been considered were collected by Mossop J in Australian Conservation Services Pty Ltd v Liladel Holdings Pty Ltd [2017] ACTSC 162 at [24]-[35]. None of these cases has gone so far as Kay J. It may be that the illustrations given by Kay J of selling the office of trustee or accepting remuneration for making an appointment are best considered, not as a breach of fiduciary duty, but under the general rubric of fraud on a power: cf the cases discussed in Thomas on Powers at [9.21]. But it is not necessary to consider this further for the purposes of the present case.

68. I reject the challenges which Mr Johnson made on Mrs Baba’s behalf to Mr Sheehan’s exercise of the power of appointment. In my view the power was validly exercised in October 2016.

Validity of the transfer of units from Sedarni to Rijalu

69. On the face of it, there was a clear breach of the Trust Deed in registering the transfer of the units from Sedarni to Rijalu. Clause 28.2 expressly provided that no transfer of units should be valid unless the transfer notice procedure was followed, and it was not.

70. Mr Ireland did not really contest this. He relied instead on an estoppel. That estoppel was said to arise from Mrs Baba’s failure to object to the transfer until the issue was raised by Mr Johnson at the hearing in November. Mr Sheehan gave evidence, which was not contested, that at the beginning of the mediation the Babas’ solicitor said that they were not interested in buying more units as they had left the business.

71. This statement was not made in a context where either party had considered the application of cl 28 of the trust deed. It is therefore difficult to read it as a clear representation that the clause did not apply, or that Mrs Baba would not rely upon it. It is also far from clear whether there was any relevant detriment. The decision by the Sheehan interests to settle with the Carney interests was made as a result of separate negotiations and agreement was apparently reached before the Babas were told about it.

72. But it is not necessary to go into this any further. Even if there was a breach of the clause, Mrs Baba has not sought any relief against the transfer. This is despite the fact that her Statement of Claim was amended after the point was raised by Mr Johnson. The Statement of Claim does not seek any order for rectification of the register, nor any order compelling the transfer notice procedure to be followed. Nor was it suggested that, were the transfer notice procedure followed, Mrs Baba would have any interest in acquiring Sedarni’s units. There is no relief for the Court to grant.

Appointment of receiver

73. The relief sought by Mrs Baba in the Statement of Claim and which is now pressed is an order appointing David Anthony Hurst, a registered liquidator, as receiver of the business and property of the Trust and conferring on him all of the powers that a liquidator would have over the business and property of the Trust if it were the business and property of a company. In particular, the receiver was to have the power to do all things necessary or convenient to effect the sale of the business and the assets of the Trust, and the power to pay dividends. Although not expressly stated, it was clear that the purpose of the orders is to secure in effect a winding up of the Trust. The idea is that the receiver would take control of the assets of the Trust, sell the business and distribute the net proceeds.

73. The Court’s power to make these orders is questionable. In Re Gaydon [2001] NSWSC 473, Barrett J (as his Honour then was) said (at [29]):

Order 4 is framed upon some implicit assumption that the Court may, by order, dissolve a trust in the same way as it may, for example, dissolve a partnership (Partnership Act 1892, s35). Any such assumption is, of course, unwarranted. It is the duty of the Court to uphold and protect trusts, not to destroy them, although where the terms of the trust envisage, in certain circumstances, realisation of property, winding up of the trust's affairs and final payments to beneficiaries, the Court will, naturally enough, give effect to those "winding-up" provisions. There are no such provisions in the instrument governing the Crane Trust.

75. The way in which the orders are formulated in this case appears to involve the same error. The Court has no power to order the “winding up” of the Trust on some sort of “just and equitable” ground. The Court can appoint a receiver, but only as an interlocutory step for the purpose of getting in and preserving assets so that they may be dealt with in accordance with the parties’ rights. The appointment of the receiver to liquidate the business and (even more obviously) then to distribute the assets of the Trust would not be in accordance with principle.

76. The Court does have power under Uniform Civil Procedure Rules 2005 (NSW), Part 54 (the successor to the old administration suit procedure) to make orders requiring the Trustee to take steps in the execution of the Trust. In a proper case that could extend to ordering the Trustee to wind up a business of the Trust. In the present case, the Trustee has power to bring the Vesting Date forward and thus precipitate the winding up of the Trust. In theory the Court could, in an administration suit, order the Trustee to take this step. But it would only be proper to do so if the interests of the unit holders demanded it.

77. It should be emphasised that in an administration suit, where the Court concludes that something should be done in execution of the trust, usually the trustee is ordered to do it. If the trustee is unable or unwilling to comply with the order, the Court might be able to remove the trustee and appoint someone else to do so. In a case of urgency a receiver might be appointed. But all this is a far cry from the present case.

78. In September 2006, the parties signed a partnership agreement concerning the then proposed optometry business. That agreement, however, seems to have been superseded by the Trust Deed. The individuals involved may have seen themselves as being in substance partners in the business of the Trust, but that is not reflected in the Trust Deed. No claim for rectification of the Trust Deed has been made. Nor was any contention made for the Babas that there was some sort of overarching partnership agreement: cf Palermo v Palermo [2015] WASCA 49; see also Shazbot Pty Ltd v Warner Capital Pty Ltd [2018] NSWSC 1645 at [161]-[163].

79. In this case, the Trustee’s powers of investment are in very broad terms. Nothing requires the Trustee to continue to operate the optometry business. The Trustee’s only obligation is to invest the Trust Fund in the way it considers will best benefit the unit holders as a whole. The Trust has over sixty years to run. Mr Johnson did not suggest that the Trust was impossible to perform.

80. Clause 28.7 of the Trust Deed, which I have quoted above, is clearly designed to cover a situation where a unit holder, being an individual, works as an employee or director of the Trustee in a business carried on by the Trustee. But its effect is limited. It does not oblige the Trustee to operate a particular business or a business of a particular type. Nor does it apply where the unit holder is a company controlled by an individual who is an employee or director of the Trustee. Nor, on the face of it, does it cover a situation where, as has happened here, an existing trustee is removed and replaced by a trustee of which one or more of the unit holders is not a director or employee.

81. In the present case it took some time for Mr Sheehan, through Silktote, to obtain complete control of the business. During that period there were disputes about money. But Silktote is now firmly in control. It is paying the expenses and it is receiving the income and paying the employees. The Trust’s financial affairs are being superintended by an accounting firm hired by Mr Sheehan, at a cost of $6,500 per year. On the evidence, the business remains profitable and there is no reason to think that the unit holders will not receive the distributions from the business to which they are entitled.

82. It is understandable that now Mr Baba is no longer working in the business, Mrs Baba wishes to realise her unit holding in the Trust. But that is not a sufficient reason for liquidating the business, or, still less, terminating the Trust, against the wishes of the Trustee and the majority unit holder. There is no evidence that Mrs Baba has sought to invoke the procedure for redemption of units. She has not shown that she is being oppressively treated. In any event Mrs Baba has not sought relief by way of an administration suit. In my view she has not made out any entitlement to the relief she seeks.

Claim for an account from the Babas

83. I have already referred to the salary sacrifice arrangements. What these appear to have entailed was working out the distribution entitlements of Mrs Baba and Sedarni as unit holders, and then paying part of those amounts out by way of superannuation salary sacrifice as expenses. Thus, in 2015, in addition to her salary of $40,000 Mrs Baba was paid a “salary sacrifice” of an additional $25,000 and her distribution was reduced accordingly.

84. This appears to have been an abuse of the salary sacrifice entitlements in the Income Tax Assessment Act 1997 (Cth). Those provisions only allowed a deduction for an amount taken in lieu of an agreed salary, not in addition to an agreed salary. On the face of it, the deductions were not allowable and the attempt to transfer income from unit holders distributions “below the line” to “above the line” tax deduction was ineffective. This was virtually conceded by Mr Johnson who did not make any attempt in submissions to defend the arrangement.

85. If Mr and Mrs Baba are required to repay monies to the Trust that will of course result in a restatement of the accounts and a larger distribution to the unit holders (including Mrs Baba) for the relevant years. A complication is that similar considerations apply to Mr Carney but the claims against him and Sedarni have now been released. It may be that Mr Sheehan or Rijalu, in whose interests the settlement was made, will need to reimburse the Trust for the monies which would have been recoverable. But that point has not been raised in these proceedings. Mr Ireland submitted that the Court cannot, and should not, deal with it now and I agree.

86. It is therefore clear that an account will be required. In the course of the hearing, Mr Ireland handed up a document quantifying the claims which might be made. In his final written submissions he indicated he would produce an updated version of that document but none appears to have been provided. Silktote as the Trustee should bring in Short Minutes of Order providing for the account to be taken. Hopefully the form of the orders can be agreed.

Conclusions and orders

87. I have concluded that:

(1)   Silktote was validly appointed as trustee of the SSO Trust in October 2016;

(2)   it is inappropriate to make any orders concerning the apparent contravention of cl 28.2 of the Trust Deed in the transfer of Sedarni’s units to Rijalu;

(3)   Mrs Baba has failed to make out her case for the appointment of a receiver;

(4)   Mr and Mrs Baba should account for the “salary sacrifice” payments made to them out of the assets of the Trust.

88. Mrs Baba’s claim has failed and must be dismissed. Silktote’s cross-claim has succeeded. On the face of it, costs should follow the event and I will make orders accordingly. Any application for further or different orders can be made in accordance with the Rules.

89. The orders of the Court on Mrs Baba’s claim are:

1.   Order that the plaintiff’s claim be dismissed.

2.   Order that the plaintiff pay the costs of the first, third and fifth defendants of her claim against them.

90. The orders of the Court on Silktote’s cross-claim are:

1.   Direct that the cross-claimant bring in Short Minutes of Order providing for an account in accordance with this judgment.

2.   Order that the second and third cross-defendants pay the cross-claimant’s costs of its claim against them.

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Decision last updated: 26 September 2019