Cihan v Cihan (No 2)

[2022] NSWSC 962

Supreme Court

New South Wales

Medium Neutral Citation:

Cihan v Cihan (No 2) [2022] NSWSC 962

Hearing dates:

On the papers; final date for evidence and submissions 6 July 2022

Date of orders:

19 July 2022

Decision date:

19 July 2022

Jurisdiction:

Equity

Before:

Parker J

Decision:

See [33]

Catchwords:

COSTS – trusts and trustees – discretionary family trust – nominator purports to remove trustee – without notice of purported removal trustee purports to amend trust deed to appoint additional nominators – trustee’s action upheld – costs inter partes – costs out of the trust assets

Legislation Cited:

Uniform Civil Procedure Rules 2005, rr 42.1, 42.25, Pt 7

Cases Cited:

Cihan v Cihan [2022] NSWSC 538

Dixon v Dixon (No 2) [2022] NSWSC 944

Miller v Cameron (1936) 54 CLR 572

National Trustees Executors and Agency Co of Australasia Ltd v Barnes (1941) 64 CLR 268

Category:

Costs

Parties:

Mehmet Cihan (Plaintiff)
Kadir Cihan (First Defendant)
Cihan Property Pty Limited (Second Defendant)

Representation:

Written submissions:
T McGrath (Solicitor) (Plaintiff)

Solicitors:
Hitch Advisory (Plaintiff)
Cleary Hoare (Defendants)

File Number(s):

2018/391788

Publication restriction:

Nil

Judgment

1. These are proceedings involving a discretionary family trust on which I delivered judgment on 5 May: Cihan v Cihan [2022] NSWSC 538. This judgment assumes familiarity with my May judgment to which I will refer as “J1”. It also uses abbreviations and terms used in the May judgment.

2. The parties in these proceedings are related; the plaintiff (“Mr Cihan”) is the father of the first defendant (“Kadir”). The subject trust is called the “Cihan Family Trust” (“the Trust”). Under the Trust Deed, Mr Cihan was the Trustee and Kadir was the Nominator.

3. The dispute arose out of near-simultaneous attempts by Mr Cihan and Kadir to remove or neutralise the other. Kadir purported to exercise his power as Nominator under the Trust to remove Mr Cihan as Trustee and replace him with the second defendant (“CPPL”). Mr Cihan purported to exercise his power as Trustee to appoint himself and his other son, Memduh, as additional Nominators alongside Kadir.

4. In my May judgment, I concluded that the steps purportedly taken by Mr Cihan were effective, and those purportedly taken by Kadir were not. I adjourned the proceedings to allow the parties to agree, if possible, on the form of orders to give effect to my judgment, and on costs. The parties later agreed on the form of declarations to be made. Costs remain in dispute and are the subject of this judgment.

Background, procedural history and decision

5. The background to the case is set out at J1 [14]-[50]. The Trust was established by deed executed in May 1997 and its assets consists of six properties with a total value of around $40 million. Some of the properties were purchased using bank finance from the NAB.

6. Under the original Trust Deed, Mr Cihan was appointed Trustee for the Trust which gave him the power to add and remove persons from the list of beneficiaries and to amend the terms of the Trust. Kadir was specified as the Nominator of the Trust which gave him the power to replace the existing Trustee with a new Trustee. The original Deed has been followed by five further Deeds, or purported Deeds, which I referred to in my May judgment as the “Second Deed”, the “Third Deed”, and so on.

7. Mr Cihan has had an off-and-on relationship with his other son Memduh. From 2007, they were estranged. During this period the Second Deed was executed, removing him as a nominated beneficiary. By 2012, relations between Mr Cihan and Kadir also broke down. While communication between them did not cease, Kadir was no longer involved in Mr Cihan’s financial affairs.

8. In late 2017, Mr Cihan and Memduh reconciled, resulting in the preparation (around February or early March 2018) of the Third Deed (see J1 [36]-[37]). The Third Deed reinstated Memduh as an eligible beneficiary. It provided for the Nominator to remove Mr Cihan as Trustee, replacing him with Memduh and Kadir. It also provided for the Trustee to replace Kadir as Nominator with Memduh. Importantly, it required the Nominator to consent to the amendments, including the replacement of Kadir by Memduh as Nominator. Kadir was asked to sign the Third Deed but he refused to do so; it was however signed by Mr Cihan and Memduh.

9. From 10 May, Kadir retained Bartier Perry, solicitors, who then prepared the Fourth and Fifth Deeds. The parties to the Fourth Deed were Kadir and CPPL. By this instrument, Kadir purported to exercise his power as Nominator to replace Mr Cihan with CPPL as Trustee. The parties to the Fifth Deed were also Kadir and CPPL. By the Fifth Deed, CPPL purported to exercise its power as Trustee to amend the Trust Deed to require the consent of Kadir (as Nominator) to the addition of any eligible beneficiaries or to amend the Trust Deed.

10. Both the Fourth and Fifth Deeds were dated 5 June 2018 but were signed on 31 May by Kadir and his brother-in-law Mr Elutsu (then a director of CPPL). But the Deeds were retained by Bartier Perry while approval was pending with the NAB (see J1 [130]). This was because under the Trust’s loan facilities, a change of Trustee without the NAB’s consent was an event of default (see J1 [43]).

11. On 1 June, Bartier Perry wrote to the NAB seeking their consent to the amendments in the Fourth Deed. A further letter was sent to the NAB on the same day asking it to freeze the Trust’s bank accounts (see J1 [69]). On 5 June, the NAB notified Bartier Perry that the Trust’s bank accounts were frozen but withheld its consent to the changes in the Fourth Deed (J1 [72]).

12. The NAB’s freezing of the Trust’s bank accounts on 4 June put Mr Cihan and Memduh on notice that something was afoot; they retained Mr Morris Maroon, solicitor, who prepared the Sixth Deed. By this instrument, Mr Cihan purported to exercise his power as Trustee to execute the Sixth Deed which appointed himself and Memduh as additional nominators alongside Kadir. The Trust Deed was also amended to impose a requirement that actions taken by the Nominator be taken by majority. On 13 June, a copy of the Sixth Deed was delivered by hand to Kadir.

13. On 20 December 2018, the proceedings were commenced by statement of claim. Expedition does not appear to have been sought. The matter eventually proceeded to hearing before me in late November and early December last year. My judgment was delivered on 5 May this year.

14. I concluded the Third Deed needed to be executed by all the parties (namely, Mr Cihan, Memduh and Kadir). When Mr Cihan and Memduh signed the Deed they intended it would become effective when all parties had signed (see J1 [112]). Kadir’s failure to sign meant the Third Deed was ineffective.

15. It was argued for Mr Cihan that Kadir’s purpose in purportedly executing the Fourth Deed was improper, thus rendering it invalid under the equitable doctrine of fraud on a power (a discussion of the authorities appears at J1 [99]-[103], [119]-[121]). I concluded, however, that the challenge based on a fraudulent exercise of the power of appointment failed.

16. I accepted the argument made by counsel for Mr Cihan that the Fourth Deed was held in escrow by Bartier Perry pending approval by the NAB. That approval was never given and it would not have happened before the Sixth Deed was signed and registered on 8 June and served on 13 June.

17. But as a further point, I also concluded that the removal of a Trustee could not be effective until notification of the removal had been given; Kadir had not done so after signing the Fourth Deed. The Fourth Deed therefore did not take effect before the Sixth Deed; as a result the Fifth Deed was also invalid. The Sixth Deed, having been registered and served on Kadir, was valid and effective.

18. Following delivery of my judgment, the parties agreed to a minute of order giving effect to my conclusions. On 21 June I made consent orders in accordance with the agreed minute declaring the Third, Fourth and Fifth Deeds invalid and of no effect, and declaring the Sixth Deed valid and effective. I also declared that Mr Cihan had been the Trustee of the Trust since 15 May 1997.

19. Mr Cihan sought orders that the defendants pay his costs of the proceedings and for an indemnity out of the Trust assets. The consent orders provided for the costs issues to be determined on the papers. The plaintiffs were to file submissions on 29 June, with the defendants to respond on 6 July.

20. On 6 July at 5:02pm, Ms Kate Chalker of Cleary Hoare, solicitor for the defendants, sent an email to chambers, attaching a notice of removal of solicitor (a Form 78) signed on behalf of CPPL. The Form, signed by Kadir (as sole director and secretary of CPPL) identified Richard Arnold as the person acting for CPPL. Ms Chalker said the defendants had requested that their engagement with Cleary Hoare be terminated “with immediate effect”. She noted that a Form 78 was provided to Kadir for signing but had not been received.

21. On 7 July at 11:45am, Kadir sent an email to chambers; the other parties were not copied in the email. Kadir said the defendants had discontinued their agreement with Cleary Hoare.

22. At 12:07pm, my Associate sent an email to Ms Chalker attaching Kadir’s email from 11:45am. The email pointed out that the Form 78 identified Richard Arnold as the person now acting for CPPL (Mr Arnold is an accountant who is now the sole director of CPPL: see J1 [50]). But as a corporation, CPPL needed to be represented by a solicitor unless an exception under Part 7 of the Uniform Civil Procedure Rules 2005 applied or the Court granted leave. Neither condition had been satisfied. The Court would therefore proceed on the basis that CPPL was unrepresented. And until a Form 78 was filed for Kadir the Court would proceed on the basis that Cleary Hoare was still acting for Kadir personally.

23. Furthermore, the Court’s email pointed out that the email from Ms Chalker had been received after 5:00 pm on the day the defendants’ submissions on costs were due. No submissions had been provided and the Court would therefore deal with the costs application on the basis that the defendants were making no submissions.

24. In the event, no Form 78 was lodged for Kadir and the Form 78 signed on CPPL’s behalf was not subsequently filed with the Court. Cleary Hoare therefore remains on the Court’s record as solicitor for both the first and second defendants. Nor has any application been made to extend the time for fliling submissions in response.

Costs

25. Mr Timothy McGrath (Mr Cihan’s solicitor) lodged written submissions on costs and the indemnification order. Mr McGrath contended that the defendants should be ordered to pay Mr Cihan’s costs and also that Mr Cihan should be indemnified from the assets of the Trust for his costs and expenses of the proceedings.

Costs inter partes

26. Mr McGrath relied on the general rule that costs follow the event (UCPR r 42.1). Mr Cihan was unsuccessful in upholding the validity of the Third Deed which I concluded was ineffective. He also unsuccessfully challenged the validity of the Fourth Deed on the ground that it was a fraudulent exercise of the power of appointment. But Mr Cihan successfully challenged the Fourth Deed on the grounds that it was held in escrow and was not validly served; it did not come into effect before the Sixth Deed and thus the Fifth Deed was also invalid.

27. The practical effect of these conclusions is that Mr Cihan remains as the Trustee and Kadir is no longer the sole Nominator with the unilateral power to appoint his own nominee as Trustee. Mr Cihan has therefore substantially succeeded in the proceedings. In my view, he is therefore entitled to the usual order for costs as against the defendants.

Costs out of the trust

28. Mr McGrath submitted that any order for costs payable by the defendants would not fully reimburse Mr Cihan for his costs of the proceedings. Mr Cihan therefore applied for an indemnity out of the Trust assets.

29. In support of the application, Mr McGrath relied on UCPR r 42.25. I discussed the operation of the rule in Dixon v Dixon (No 2) [2022] NSWSC 944 at [47]-[84]. As Dixon demonstrates, there are some issues that arise in the application of the rule, but none arise in this case.

30. Mr Cihan did not seek judicial advice before bringing the claim. But that is not necessarily an obstacle to him recovering costs under Rule 42.25. This is especially the case given he was ultimately successful in the proceedings (see National Trustees Executors and Agency Co of Australasia Ltd v Barnes (1941) 64 CLR 268 at 279; Dixon at [79]).

31. In bringing the claim, I conclude that Mr Cihan acted reasonably in his capacity as Trustee. Any benefit he received from discharging a personal liability was “merely an incident” of his successful defence (see Barnes at 276. Cf Miller v Cameron (1936) 54 CLR 572 at 579).

32. Mr Cihan’s position has been vindicated in these proceedings and he should be entitled to an indemnity out of the Trust assets. The effect of the indemnification order will be that Mr Cihan can immediately recover his costs in full from the assets of the Trust. If and when costs can be recovered from the defendants under the inter partes costs order, Mr Cihan will then be obliged to refund them back into the Trust.

Orders

33. The orders of the Court are:

1. The defendants pay the plaintiff’s costs of the proceedings.

2. The plaintiff’s costs of the proceedings be paid out of the Cihan Family Trust on a solicitor-client basis.

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Decision last updated: 19 July 2022