Cohen v Amberley Corporation Australia Pty Ltd
[2016] VSC 140
•8 April 2016
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
S CI 2015 5315
| SAMANTHA AINLEY COHEN & ORS | Plaintiffs |
| v | |
| AMBERLEY CORPORATION AUSTRALIA PTY LTD | Defendant |
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JUDGE: | Derham AsJ |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 16 March 2016 |
DATE OF JUDGMENT: | 8 April 2016 |
CASE MAY BE CITED AS: | Cohen & Ors v Amberley Corporation Australia Pty Ltd |
MEDIUM NEUTRAL CITATION: | [2016] VSC 140 First Revision: 11 April 2016 |
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PRACTICE AND PROCEDURE – Particular discovery in proceeding relating to administration of discretionary trust – Plaintiffs seek declaration that deed of variation of trust removing the plaintiffs as beneficiaries is beyond power and invalid – Allegations of alack of good faith, improper purpose, lack of impartiality and not giving proper effect to the terms and purpose of the trust – Whether grounds for belief that a document of a class of document in possession of the defendant – Whether pleadings of lack of good faith, improper purpose, lack of impartiality and not giving effect to the terms and purpose of the trust should be struck out – Pleading struck out with liberty to re-plead.
PRACTICE AND PROCEDURE – Discovery of documents – Discretionary trust – Removal of primary beneficiaries pursuant to discretionary power to revoke, add to or vary the trust – Extent to which discovery of documents may be allowed where allegations of lack of good faith, improper purpose, lack of impartiality and not giving proper effect to the terms and purpose of the trust are raised – In the absence of a proper pleading no discovery ordered – Karger v Paul [1984] VR 161; Mandie v Memart Nominees Pty Ltd (2014) 42 VR 325.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr A K Panna QC | Hall & Wilcox |
| For the Defendant | Mr M A Robins QC | Nathan Kuperholz |
TABLE OF CONTENTS
Introduction......................................................................................................................................... 1
The Application.................................................................................................................................. 1
Background......................................................................................................................................... 1
Applicable law.................................................................................................................................... 7
Submissions and Consideration................................................................................................... 11
Plaintiffs’ Submissions............................................................................................................... 11
Defendant’s Submissions........................................................................................................... 15
Consideration.............................................................................................................................. 18
Conclusion......................................................................................................................................... 23
HIS HONOUR:
Introduction
The application in this case concerns a dispute between the parties as to the discovery obligations of a trustee of a discretionary trust. The proceeding was commenced by the plaintiffs who claim that their removal as beneficiaries pursuant to a discretionary power was ultra vires and was made in bad faith, lacked impartiality, did not give proper effect to the terms of the trust and was made for an improper purpose.
The Application
The plaintiffs apply by summons[1] for discovery pursuant to r 29.08 of the Supreme Court (General Civil Procedure) Rules 2015 (‘Rules’) and under s 26 of the Civil Procedure Act 2010 (Vic) (‘CPA’). The order they seek is that the defendant make and serve an affidavit stating whether it has, or has had, in its possession, power or control any of the following documents:
[1]Filed on 18 December 2015.
(a)trustee resolutions, or other documents, regarding or relevant to the plaintiffs’ removal as primary beneficiaries of the relevant trust (‘Removal Documents’); and/or (Category 1);
(b) any trustee resolutions regarding distributions of income made by the trustee for the financial years referred to in paragraph 11(a) to 11(e)[2] of the defendant’s affidavit of documents (‘Distribution Resolutions’) (Category 2); and
(c) other documents relevant to the questions and issues in this proceeding (Category 3).
[2]Paragraphs 11(a) to (e) of Schedule 1 to the affidavit of Krystyna Linda Campbell-Pretty sworn 7 December 2015 refers to the financial statements of the Campbell-Pretty Family Trust for the financial years ending 30 June 2001 to 30 June 2005.
Background
The plaintiffs are the children of Harold Campbell-Pretty (‘Harold’) and Kerry Ainley Watkins (‘Kerry’). Harold and Kerry married in about January 1964 and divorced in about 1972. After that divorce, Harold married Rosalind Wendy Rich (‘Rosalind’) and shortly thereafter divorced her and married Krystyna Campbell-Pretty (‘Krystyna’).
On 27 March 1975, the Campbell-Pretty Family Trust was established by a deed of settlement (‘Trust’ or ‘Trust Deed’).[3] Under the terms of the Trust, Harold was specified as the Appointor and, by reference to the Schedule to the Trust Deed (which needs to be read with the definitions referred to below):
[3]Exhibit NK-2 to the affidavit of Nathan Kuperholz sworn 19 November 2015.
(a)each of the plaintiffs were specified as Primary Beneficiaries;
(b) the other Primary Beneficiaries were the children of Harold and Rosalind; and
(c) the General Beneficiaries were specified to be Harold and Rosalind.
On 29 December 1987, the Trust Deed was varied by Deed so that the defendant was appointed Trustee in place of the previous Trustee. From about December 1986, Krystyna and Harold (until his death on 25 May 2014) were the directors of the defendant. On 29 December 1987, Krystyna was appointed as an additional member of the class of General Beneficiaries under the Trust.
By a further variation dated 8 July 2005, the defendant as Trustee of the Trust purported to exercise a power given by clause 20 of the Trust Deed declaring that the plaintiffs were ‘deleted’ as Primary Beneficiaries under the Trust (‘the 2005 Deed of Variation’). Harold, as Appointor, consented to the variation.
The Trust is a common form of discretionary trust. In its recitals it says that the Settlor:
[B]eing desirous of making provision for the Primary Beneficiaries and the General Beneficiaries hereinafter described and in the manner hereinafter set out and for the purpose of giving effect to such desire has upon the execution hereof transferred or is about to transfer to the Trustees the settled sum referred to in the Schedule and the Trustees have consented to become the Trustees hereof upon the trusts and with and subject to the powers and provisions hereinafter expressed.
Clause 1 of the Trust Deed defines certain terms used in the Deed. ‘Primary Beneficiary’ and ‘Primary Beneficiaries’ are defined to mean the person or persons named and described or defined as such in the Schedule. The term ‘General Beneficiaries’ is defined to mean and include the Primary Beneficiary or Primary Beneficiaries and, amongst others, the brothers, sisters, spouses, widows, widowers, children and grandchildren of the Primary Beneficiaries, any corporation any share in which is beneficially owned or held by any General Beneficiary or by the Trustees of any trust or settlement under which any General Beneficiary has an interest. It is also provided in the definition of General Beneficiary, as a proviso, that the Trustees may at any time declare in writing that any person shall be excluded from the class of General Beneficiaries. I note that a child of Harold and Rosalind, Emily Jane Campbell-Pretty, born on 23 June 1976 (‘Emily’), is a Primary Beneficiary under the Trust. She is the plaintiffs’ half-sister.[4]
[4]Affidavit of Krystyna Linda Campbell-Pretty sworn 11 March 2016.
The Trust Deed contains provisions for the Trustees to stand possessed of the Trust Fund and, in summary, gives them power to distribute the income and capital to the General beneficiaries in their absolute discretion, and without assigning any reason, as they shall think fit.[5] The Primary Beneficiaries take the Trust Fund and its income as from the Vesting Day, being 27 March 2054 or such earlier day as the Trustee may appoint.
[5]This is a broad summary of a number of separate clauses of the Deed of Trust and is not a precise summary. For example, the power to distribute the income may be done “without assigning any reason.” This is separate from the power to distribute capital which is not expressly conditioned by the words “without assigning any reason.” There is no general limitation on a beneficiary’s right to obtain information, as is common in family trusts: see for example Mandie & Anor v Memart Nominees Pty Ltd [2014] VSC 290; (2014) 42 VR 325 at [35], on appeal Mandie & Anor v Memart Nominees Pty Ltd [2014] VSCA 181 at [10]; Guest v Guest [2015] VSC 761 at [59] (‘Mandie’).
The Trust Deed includes a provision relating to the discretionary powers of the Trustees, as follows (clause 17):
Subject always to any express provision to the contrary herein contained every discretion vested in the Trustees shall be absolute and uncontrolled and every power vested in them shall be exercisable at their absolute and uncontrolled discretion and the Trustees shall have the like discretion in deciding whether or not to exercise any such power. No Trustee shall be responsible for any loss or damage occasioned by the exercise of any discretion or power hereby or by law conferred on the Trustee or by failure to exercise any such discretion or power or for any loss or damage accruing as a result of concurring or refusing or failing to concur in the exercise of any power or discretion.
The Trust Deed also includes a power to revoke, add to or vary the trusts and provides as follows (clause 20):
The Trustees for the time being may at any time and from time to time by deeds revoke add to or vary all or any of the trusts hereinbefore limited or the trusts limited by any variation or alteration or addition made thereto from time to time and may by the same or any other deed or deeds declare any new or other trusts or powers concerning the Trust Fund or any part or parts thereof the trusts whereof shall have been so revoked added to or varied but so that the law against perpetuities is not thereby infringed and so that such new or other trusts powers discretions alterations or variations –
(i)may relate to the management or control of the Trust Fund or the investment thereof or to the Trustees’ powers or discretions in these presents contained;
(ii)shall not be in favour of or for the benefit of the Settlor or result in any benefit to the Settlor or Trustees but shall otherwise be for the benefit of all or any one or more of the General Beneficiaries or the next-of-kin of any of them or the next-of-kin of the Primary Beneficiary or Primary Beneficiaries or any of them;
(iii)shall not affect the beneficial entitlement to any amount set aside for any Beneficiary prior to the date of the variation alteration or addition.
Harold died on or about 25 May 2014. He left a will under which he appointed Krystyna as his Executrix. The plaintiffs received nothing under the will of their father. Later in 2014, the plaintiffs commenced a proceeding under Part IV of the Administration v Probate Act 1958 (Vic) seeking further provision out of the estate of the deceased.[6] The plaintiffs and the estate are represented, respectively, by the same solicitors as represent the plaintiffs and the defendant in this proceeding.
[6]Proceeding SCI 2014 04998 (‘the Part IV proceeding’).
Paragraph 14 of the plaintiffs’ statement of claim alleges that the exercise by the defendant of the power under clause 20 of the Trust Deed to remove the plaintiffs as Primary Beneficiaries was a breach of fiduciary duty because such exercise of power:
(a)was not made in good faith in the conduct and execution of the Trust;
(b) was not made impartially as between the beneficiaries under the Trust;
(c) was not made in the best interests of the Trust and did not give proper effect to the terms of the Trust; and
(d) was made for an improper purpose, namely to deprive the plaintiffs as Primary Beneficiaries of their interest in the Trust-
(collectively ‘the allegations in paragraph 14’).
The particulars to the allegation of bad faith and improper purpose are as follows:
The purported removal of the plaintiffs as Primary Beneficiaries of the Trust by the 2005 Deed of Variation was for the sole purpose of removing the natural children of Harold Pretty as potential beneficiaries under the Trust in favour of Krystyna Campbell-Pretty and her daughter (from another relationship).
The plaintiffs then claim that the 2005 Deed of Variation constituted an equitable fraud on the power under clause 20 of the Trust Deed, was a breach of trust and was invalid. In consequence, the plaintiffs are entitled to declarations to that effect and that the plaintiffs be reinstated as a part of the class of Primary Beneficiaries.
The defendant denies the allegations in paragraph 14 and specifically claims that the allegations are improper and lack any properly pleaded basis in law or fact and that the conclusions pleaded in reliance on the allegations in paragraph 14 are not supported by any proper or responsive particulars and are based upon mere unsubstantiated speculation. They plead that the claims are baseless and misconceived. They also point out that, contrary to the particulars set out above, Emily remains a Primary Beneficiary.
Before the summons the subject of these reasons was issued, the parties entered into extensive correspondence regarding the discovery made by the defendant and the rights of the plaintiffs as beneficiaries of the Trust to information, and their rights to discovery of documents in this proceeding. In the course of that correspondence, the defendant and the estate of the deceased made an open offer, without any admission of liability or obligation, to pay a substantial amount to each of the plaintiffs to resolve both proceedings.[7] That offer was rejected and a counteroffer was made (in the Part IV proceeding only) and the plaintiffs sought from the defendant the financial statements of the Trust for the financial years ending 30 June 2006 to 30 June 2015. They did so on the basis that these documents were critical for the resolution of the disputes[8] and they were so critical to the resolution of the disputes because of the obligation of the parties to cooperate in the conduct of the proceeding,[9] to use reasonable endeavours to resolve the disputes by agreement[10] and to use reasonable endeavours to ensure that legal costs incurred are reasonable and proportionate to the complexity of the issues in dispute.[11] In substance, the plaintiffs contended that the financial statements of the Trust from 2006 to 2015 were relevant to any negotiated settlement of the claims and a mediation because they would reveal the assets of the Trust. The plaintiffs also proposed a timetable which included the discovery of documents generally.
[7]Affidavit of Nathan Kuperholz sworn 19 November 2015, exhibit NK-1.
[8]Section 26 of the CPA.
[9]Section 20 of the CPA.
[10]Section 22 of the CPA.
[11]Section 24 of the CPA.
In the course of the correspondence, the parties agreed that the Part IV proceeding and this proceeding be both mediated and tried together.
The solicitors for the defendant responded by denying the right of the plaintiffs to the financial statements for the 2006 to 2015 financial years and reminding the plaintiffs’ solicitors of the law as to the entitlement of beneficiaries to any documents that in any way relate to the reasons for, or the circumstances surrounding, the exercise of the various discretions under the Trust Deed. The solicitors for the plaintiffs responded that the discoverable documents extended to those in the possession of the defendant relating to its purported exercise of the powers under clause 20 of the Trust Deed to remove the plaintiffs as Primary Beneficiaries. They contended that where there is a breach of trust alleged, it is appropriate for the Court to examine whether the trustees have failed to give real and genuine consideration to the exercise of discretion and that it is relevant to look at evidence of the inquiries which were made by the trustees, the information they had and the reasons for, and manner of, exercising their discretion, referring to Karger v Paul.[12]
[12][1984] VR 164 (‘Karger’), quoted with approval in Mandie & Anor v Memart Nominees Pty Ltd [2014] VSC 290 at [60].
The solicitors for the defendant responded that the reliance on incomplete passages from the decision in Karger was misleading and that it was not open for the plaintiffs to look at the evidence of the inquiries which were made by the trustees, the information they had and the reasons for, and manner of, their exercise of the discretion for the independent purpose of impugning the exercise of discretion. In this respect, the defendant’s solicitors also relied upon Karger.
Further, the defendant’s solicitor claimed that the allegation in paragraph 14 of the statement of claim was baseless and that the discovery sought amounted to fishing in support of that baseless claim. In the circumstances, the defendant’s solicitor proposed that orders should be made under s 55(2)(b) of the CPA relieving the defendant of any obligation to give discovery in relation to the allegations in paragraph 14 of the statement of claim, or narrowing the discovery under s 55(2)(c) of the CPA.
Applicable law
The duties of trustees in exercising discretionary powers have been expressed in various ways by numerous judges according to differing facts and circumstances. As a consequence, the summary below, which draws upon these disparate sources, involves some repetition. It is also the case that the language used in this area has not always been distinguished by its precision.[13]
[13]Hardingham and Baxt, Discretionary Trusts, 1975, p. 92; Karger at 164-5.
The duties have been compendiously stated as:[14]
… a trustee of a discretionary trust is bound to exercise its discretions and powers in good faith, giving real and genuine consideration to the exercise of the discretion, and in accordance with the purposes of the trust.[15]
[14]Mandie at [3]; (2014) 42 VR 235 at 327.
[15]Karger; Curwen v Vanbreck Pty Ltd (2009) 26 VR 335 (‘Curwen’).
The duties of trustees with a discretionary power are to:
(a)act honestly and in good faith. There is no distinction between these concepts[16] and mere carelessness or honest blundering will not negative good faith;[17]
(b) act upon genuine consideration. This means the trustees must take an informed view of whether or not to exercise their discretion and not to act irresponsibly, capriciously or wantonly.[18] Trustees are not, however, required to observe the rules of natural justice, and may exercise a power to the disadvantage of a beneficiary without seeking that beneficiaries views;[19] and
(c) exercise the power with due consideration for the purpose for which it was conferred and not for some ulterior purpose.[20]
[16]R v Holl (1881) 7 QBD 575 at 580-1; Jacobs’ Law of Trusts in Australia, 7th Ed, JD Heydon and MJ Leeming, 2006 at [1608].
[17]Jones v Gordon (1877) 2 App Cas 616 at 628-9; Jacobs’ Law of Trusts in Australia, 7th Ed, JD Heydon and MJ Leeming, 2006 at [1608].
[18]Pilkington v IRC [1964] AC 612 at 641; Lutheran Church of Australia South Australia District Inc v Farmers' Co-operative Executors and Trustees Ltd (1970) 121 CLR 628 at 639.
[19]Karger at 166.
[20]Re Pauling’s Settlement Trusts (No.1) [1964] Ch 303; Asea Brown Boveri Superannuation Fund No. 1 Pty Ltd v Asea Brown Boveri Pty Ltd [1999] 1 VR 144 at [33]-[39]; Esso Australia Ltd v Australian Petroleum Agents & Distributors’ Association [1999] 3 VR 642 at [38]-[43]; Jacobs’ Law of Trusts in Australia, 7th Ed, JD Heydon and MJ Leeming, 2006 at [1608].
The concept of acting honestly and in good faith brings with it that the trustees must not act in bad faith, or mala fides. Acting mala fides includes; fraud, a refusal to recognise that the discretion exists, a refusal to make an informed decision, a decision made for an ulterior purpose, taking into account irrelevant considerations or failing to take into account relevant considerations.[21]
[21]Jacobs’ Law of Trusts in Australia, 7th Ed, JD Heydon and MJ Leeming, 2006 at [1609], (citations omitted).
It follows from these duties that where a trustee exercises a discretion, it may be impugned on a number of different bases, including:[22]
(a)that it was exercised in bad faith, arbitrarily, capriciously, wantonly, irresponsibly, mischievously or irrelevantly to any sensible expectation of the settlor;[23] and
(b) without giving a real or genuine consideration to the exercise of the discretion.
[22]Wilkinson v Clerical Administrative and Related Employees Superannuation Pty Ltd, (1998) 79 FCR 469 at 480; 152 ALR 332 at 341; Attorney General for the Commonwealth v Breckler & Ors, (1999) 197 CLR 83 at [7]; 163 ALR 576.
[23]Re Pauling's Settlement Trusts [1964] Ch 303 at 333; Lutheran Church of Australia South Australia District Inc v Farmers' Co-operative Executors and Trustees Ltd (1970) 121 CLR 628 at 639; Re Manisty's Settlement [1974] Ch 17
As McGarvie J noted in Karger, whether a discretion has been exercised irresponsibly, capriciously or wantonly is another way of saying that there may be an examination as to whether trustees have exercised their discretion on real and genuine consideration.[24] But as Hayne J[25] noted in Esso Australia Ltd v Australian Petroleum Agents & Distributors’ Association,[26] in the absence of a statement of reasons, it is generally not possible to conclude that the trustee has taken into account irrelevant matters or has failed to consider relevant matters. Importantly, the soundness of the exercise of a discretion can only be examined where reasons have been given.[27] Trustees are, however, not bound to disclose or explain their reasons for exercising a discretion in a particular manner.[28]
[24]Karger at 165
[25]as he then was.
[26][1999] 3 VR 642 at [39].
[27]Londonderry's Settlement at 928-9; Kargerat 165-6; Wilkinson v Clerical Administrative and Related Employees Superannuation Pty Ltd, (1998) 79 FCR 469 at 480; 152 ALR 332 at 341; Attorney General for the Commonwealth v Breckler & Ors, (1999) 197 CLR 83 at [7]; 163 ALR 576.
[28]Londonderry’s Settlement; Karger; Hartigan; Mandie.
In Karger, McGarvie J held that:
(a)so long as three essential component parts of the exercise of the particular discretion are ‘present’, courts cannot examine and review a trustee’s exercise of that discretion. Those components are: that the discretion is exercised by the trustees in good faith, upon real and genuine consideration and in accordance with the purposes for which the discretion was conferred. The exception is that the validity of the trustees’ reasons will be examined and reviewed if the trustees choose to state their reasons for their exercise of discretion;[29]
(b) this exception does not apply where at trial, the trustee gives in evidence an account of its reasons as it would defeat the policy which underlies the principle if beneficiaries, by alleging lack of good faith against the trustee in an action and for practical purposes, thus virtually obliging it to disclose in evidence the way they went about exercising the discretion, obtain a right to examination and review of the discretion which they otherwise would not have. The exception to the principle seems to proceed on the basis that if trustees of their own volition disclose their reasons, they are treated as waiving their immunity and inviting examination and review of the reasons;[30] and
(c) where there is a specific allegation of breach of trust, it is open to the Court to examine the evidence to decide whether there has been a failure by the Trustees to exercise the discretion in good faith, upon genuine consideration and in accordance with the appropriate purpose. In conducting this examination, the Court may consider the inquiries made by the Trustees, the information they had and their reasons for, and the manner of, their exercise of the discretion. But it is not open to the Court to look at these matters for the independent purpose of impugning the exercise of the discretion on grounds that their enquiries were inadequate, their appreciation of the facts was wrong or their decision unwise. The Court examines whether the discretion was exercised but it does not examine how it was exercised.[31]
[29]Karger [1984] VR 161, 164; See also Mandie at [57].
[30]Ibid 166; Mandie at [58].
[31]Karger at 164; Mandie at [60].
In the decision of Macaulay J at first instance in Mandie, his Honour reviewed the authorities concerning the right of beneficiaries to trust documents and information in a proceeding that did not involve any allegation of bad faith or improper purpose, or the like, and concluded:[32]
[32]Mandie at [94].
94.It would be dangerous to suggest that the foregoing review of the authorities reveals any particular series of ‘rules’ concerning the circumstances in which documents or information should be disclosed by trustees to beneficiaries of a trust. But, at least in the context of deciding whether or not documents or information should be divulged when there is a contention that such information or documents may reveal the deliberations, reasons or motives of trustees in arriving at a decision committed to their absolute and uncontrolled discretion, I consider that my approach should be guided by the following principles or considerations:
(a)Subject to various limitations, broadly speaking a trustee has a duty to provide beneficiaries with accurate information concerning the administration of the trust and to permit examination of documents that relate to the trust and its administration.
(b)The source of the trustee’s duty, and the beneficiaries’ correlative right, has in the past been explained by reference to proprietary rights enjoyed by the beneficiaries, or the categorization of documents as either trust or non-trust documents. But, in recent times, it has been viewed as an aspect or manifestation of the court’s jurisdiction to supervise and, where appropriate to intervene in, the administration of trusts.
(c)The duty and the correlative right extends beyond the provision of information in documentary form to information of a non-documentary kind.
(d)Generally, beneficiaries cannot pursue disclosure of the reasons why a trustee exercised an absolute discretion, whether in writing or otherwise, outside of an action brought by the beneficiaries for breach of trust or mala fides when issues of relevance can appropriately be determined.
(e)The protection afforded to trustees against having to disclose their reasons extends to protecting the disclosure of evidence of the trustees’ deliberations and the material upon which the trustees’ reasons were or might have been based – that is, at the least, material that is so integrated with the trustee’s reasoning process that its disclosure may reveal that reasoning process.
(f)A trustee’s immunity from giving reasons for the exercise of a discretion is founded upon (1) the irrelevance of those reasons because, absent a breach of trust, a court will simply not interfere; (2) the essentially confidential nature of the trustee’s task, serving the interests of the beneficiaries as a whole; and (3) the avoidance of making the task of a discretionary trustee intolerable.
(g)An exception to that principle of immunity exists where a trustee has volunteered the reasons for exercising the discretion and thereby waived the immunity.
(h)In any conflict between the application of the two principles, that is, between a beneficiary’s entitlement to inspect trust documents and to obtain information about the administration of the trust, and the trustees’ immunity for giving reasons for the exercise of a discretion, the principle of the trustees’ immunity is generally to prevail.
(i)Even in an action brought against the trustee alleging breach of trust in the exercise of discretion – and assuming the trustee has not waived the immunity - the trustee’s reasons are only examinable to ascertain whether the discretion has been exercised (ie. honestly, for a proper purpose and on fair consideration), not how it was exercised.
Submissions and Consideration
Plaintiffs’ Submissions
The plaintiff submitted that the underlying purpose of the creation of the Trust was to provide for the then children of the Appointor, Harold, being the plaintiffs. This provides a substratum to the Trust Deed. It is a long standing principle in the construction of trusts that the power of amendment must not be used to alter or defeat the main purpose or purposes of the Trust.[33] Thus, the power to vary a trust deed does not extend to a variation which would alter the substratum or underlying purpose of the trust.[34] Further, a trustee exercising a power of amendment is under an implied obligation to act in good faith.
[33]Re Courage Groups’ Pension Schemes; Ryan v Imperial Brewing and Leisure Ltd [1987] 1 WLR 495 per Millet J (as he then was) particularly at 512.
[34]Lock v Westpac Banking Corporation (1991) 25 NSWLR 593 at 607-608 per Waddell CJ in Eq; Imperial Group Pension Trust Ltd v Imperial Tobacco Ltd [1991] 1 WLR 589 at 597-8.
The scope of the discovery required by the Rules of Court, in particular under r 29.01.01(3) is:
…documents of which the party giving discovery is, after a reasonable search, aware at the time discovery is given—
(a) documents on which the party relies;
(b) documents that adversely affect the party's own case;
(c) documents that adversely affect another party's case;
(d) documents that support another party's case.
In addition to the requirement of the Rules, s 26(1) of the CPA provides that there is an overarching obligation to disclose the existence of documents that are, or have been, in the person’s possession, custody or control of which he is aware and which the person considers, or ought reasonably consider, are critical to the resolution of the dispute.
The Court has ample power under s. 55 of the CPA to make any order or give any direction in relation to discovery that it considers necessary or appropriate. This very broad power embraces and extends to relieving a party from the obligation to provide discovery or limiting the obligation of discovery in virtually any way.
The combination of the overarching purpose of the CPA, and the provisions of ss 26 and 55, together with r 29.01 of the Rules, provides a very comprehensive and powerful basis for the Court to make discovery orders that are directed to the most efficient, effective and economic management of discovery in the proceeding.
Given that the issues in the proceeding include a challenge to the defendant’s bona fides in the exercise of the discretionary power given under clause 20 of the Trust Deed, the obligation under r 29.01.01 of the Rules is to discover documents that adversely affect the case of the defendant or support the case of the plaintiff.
Rule 29.08 of the Rules authorises the Court to order a party to make an affidavit of the kind sought by the plaintiffs’ summons, where it appears to the Court from evidence or from the nature or circumstances of the case or from any document filed in the proceeding that there are grounds for a belief that some document or class of document relating to any question in the proceeding may be or may have been in the possession of the party.
No documents other than correspondence between the parties and the Trust Deed and its variations have been discovered by the defendant. So, for example, it is reasonable to expect from the nature and circumstances that a corporate trustee would formally pass a resolution of directors before or at the same time as executing the 2005 Deed of Variation. It would be reasonable to expect, having regard to the nature and circumstances of the case, that there may be correspondence between officers of the defendant, its directors, and solicitors engaged to draw the Deed of Variation.
I should note that in the course of the hearing, the 2005 Deed of Variation was provided to the Court with the consent of both parties. It had been discovered by the defendant. It is apparent on the face of it that it was drawn by a lawyer. It may also be the case that advice was sought and given in relation to the exercise of the power under clause 20 to exclude the plaintiffs as Primary Beneficiaries.
No doubt, in respect of the documents constituting that advice, there would be a claim for client legal privilege. But that does not excuse the failure to disclose the existence of such advice in the affidavit of documents prepared in accordance with the Rules. In Victoria, however, it is common to claim client legal privilege in a rolled up form and not to identify individual documents (and that was done in this case) until that is requested by another party.
In the course of argument, Counsel for the plaintiff also submitted that the financial reports of the Trust for the financial years from and including 2006 to and including 2015 should be disclosed. When questioned as to the relevance of these documents to the issues in the proceeding, he frankly conceded that the discovery of these documents, although not expressly relevant, were documents to which the plaintiffs were entitled as putative beneficiaries of the Trust. Moreover, he grounded the discovery of these financial reports on the necessity for the plaintiffs to have proper information as to the assets of the Trust for the purposes of any negotiation of a resolution of the plaintiffs’ claim at a mediation. Given the open offer previously referred to, it was in the interests of a just, efficient, timely and cost effective resolution of the proceeding to order material relevant to the quantum of any payment.
The plaintiff made other submissions as to the basis upon which a beneficiary under a discretionary trust is entitled to seek access to trust documents and information and what properly constitutes trust documents, referring to such authorities as In Re Londonderry’s Settlement,[35] Hartigan Nominees Pty Ltd v Rydge,[36] Schmidt v Rosewood Trust Ltd,[37] Guest v Guest[38] as well as Karger and Mandie.
[35][1965] Ch 918.
[36](1992) 29 NSWLR 405 (‘Hartigan’).
[37][2003] 2 AC 709 (‘Schmidt’).
[38][2015] VSC 761 (‘Guest’).
The effect of the submission was, to adapt the words of Macaulay J in Mandie, after he referred to the inhibition on the disclosure of the Trustee’s reasons he referred to a qualification, being:[39]
… a situation, unlike the present, in which the plaintiffs have commenced an action alleging, on a proper basis, some want of good faith or some other impugning feature of the exercise of discretion, such as pursuit of an improper purpose or failure to give fair consideration to the issue. In such a situation, the authorities reveal, the reasoning and the material used in that consideration may then be examined, but even then only for the limited purpose of ascertaining whether the discretion was lawfully exercised and not how it was exercised.
[39]Mandie at [109].
Similarly, in Guest where Mukhtar As J observed:[40]
If he brings a claim of mala fides presumably on the basis that the discretion to dispose of trust assets was exercised not in good faith and not real and genuine consideration or not in accordance with the purposes for which the discretion was conferred, then it is open for the Court to examine the evidence to decide whether there has been a failure by the trustees to properly exercise their discretion. As part of the process of, and solely for the purpose of, ascertaining whether there has been such a failure, it will be relevant to look at evidence of the enquiries which were made by the trustees, the information they had and the reasons for, and the manner of, their exercise their discretion. That is what the well-known decision in Karger v Paul[41] stands for. To that end discovery in the ordinary way will be opened up.
[40][2015] VSC 761 at [73].
[41][1984] VR 161.
The plaintiff contended that as the claim was clearly based on an allegation of mala fides, breach of fiduciary duties and an improper exercise of the power under clause 20 of the Trust Deed, the defendant cannot properly resist discovery and production of documents relevant to whether the defendant exercised that power in good faith and upon a real and genuine consideration and in accordance with the purpose for which the power was conferred. The evident basis on which discovery has been given, having regard to the limited range of documents discovered, is that the defendant regards documents relevant to the allegations in paragraph 14 as not discoverable. The power to require an affidavit as to whether such documents are or were in its possession is therefore applicable in the current circumstances.
Defendant’s Submissions
The defendant submits that the application is devoid of merit and constitutes a fishing expedition by which the plaintiffs seek to find some arguable basis for the present proceeding as none is disclosed on the face of the plaintiffs’ statement of claim or reply.
The defendant claims that the statement of claim is grossly deficient as it is a farrago of speculative and baseless allegations of bad faith, breach of trust and equitable fraud. The allegations are not supported by proper particulars and they amount to bare allegations. A pleading of fraud, be it common law or equitable fraud, should not be based upon mere speculation. The defendant contends that the pursuit of the proceeding is contrary to the overarching obligations to which the plaintiffs are subject under the CPA, including those is ss 16, 18, 19, 20, 23 and 24.
Even though an affidavit of discovery sworn by a party, in this case by a director of the trustee, may no longer be regarded as conclusive, the defendant asserts that there is no evidentiary basis advanced by the plaintiffs beyond bare assertion to suppose that the affidavit is incomplete.
The defendant points to the inclusion of documents in categories 2 and 3 in the application to underscore the fishing nature of the present application, adding that:
(a)the application for discovery of documents in category 2 is wholly misconceived and lacks any evidentiary foundation. There is no pleading that there has been any misconduct or breach of duty by the trustee in respect of any discretionary distribution during the financial years ending 30 June 2001 to 2005. For this reason, the documents in category 2 are simply not relevant to any issue in the proceeding; and
(b) the application for discovery of the documents in category 3 is equally misconceived and lacking in any evidentiary foundation. The defendant asks rhetorically – what other ‘unidentified’ document does the plaintiff speculate exists.
The defendant submits that, in essence, this proceeding is a thinly veiled attempt to circumvent the restriction on beneficiaries having material relating to the reasoning of trustees in the exercise of their discretion. In short, the absence of any proper particulars to the allegations in paragraph 14 shows that the pleading is designed to drive an order for a broader range of discovery and thus circumvent the principles stated in Karger and the other cases to which reference has been made.
The defendant submitted that I should adopt the course taken in Timbercorp Finance Pty Ltd (in liq) v FTN Nominees Pty Ltd and Ors.[42] There, the Court was confronted with an application for further discovery under r 29.08 of the Rules in circumstances where it was noted that the power under s 55 of the CPA existed. Judd J concluded at [27] that the defendant’s pleaded case upon which the further discovery was sought was untenable, and as a result refused the application for discovery and struck out the offending part of the pleading.
[42](2015) 108 ACSR 531.
It is a diversion to address the principles in Karger and Schmidt and Hartigan because they do not address the real issue in the present application. There is in any event, no distinction to be drawn between the reasoning of a trustee in the exercise of a discretionary power and the basis upon which the trustee acted (or was available to the trustee for the purposes of exercising his discretion).[43]
[43]Mandie v Memart Pty Ltd [2014] VSCA181 [18].
Further, even if the allegations in paragraph 14 remained, the plaintiffs were not entitled to discovery of documents revealing the reasoning of the Trustee or the basis on which it acted. The reasoning in Karger did not support discovery of documents at this stage as that would be for the purpose of impugning the exercise of the discretion, rather than ascertaining whether the discretion was lawfully exercised.
The defendant submitted that the effect of s 26(3)(b) of the CPA is to preserve the position of trustees to resist the disclosure of reasons. That section provides, so far as relevant:
Overarching obligation to disclose existence of documents
(1)Subject to subsection (3), a person to whom the overarching obligations apply must disclose to each party the existence of all documents that are, or have been, in that person's possession, custody or control—
(a)of which the person is aware; and
(b)which the person considers, or ought reasonably consider, are critical to the resolution of the dispute.
…
(3)Subsection (1) does not apply to any document which is protected from disclosure—
(a)on the grounds of privilege which has not been expressly or impliedly waived; or
(b)under any Act (including any Commonwealth Act) or other law.
The very presence of an exception to the disclosure requirement where the document is protected from disclosure by any other law preserves the trustees right to restrict disclosure to beneficiaries under discretionary trusts of their reasons, or the basis thereof, for the exercise of discretion.
Consideration
In the course of argument, I raised with Counsel for the plaintiff whether or not paragraph 14 of the statement of claim was intended to allege that the terms of clause 20 did not allow the removal of the Primary Beneficiaries. This might be the position under the Trust Deed because, by the opening words of the clause, the breadth of the power is limited. The following extract from clause 20 shows the limitation:
…so that such new or other trusts powers discretions alterations or variations…shall otherwise be for the benefit of all or any one or more of the General Beneficiaries… or the next-of-kin of the Primary Beneficiary or Primary Beneficiaries or any of them.
Counsel for the plaintiff, Mr Panna QC, readily indicated that the allegations that the exercise of the power was not made in the best interest of the Trust and did not give proper effect to the terms of the Trust does encompass a claim that the power in clause 20 does not extend to enable the Trustees to remove the Primary Beneficiaries as Primary Beneficiaries of the Trust. Counsel for the defendant, Mr Robins QC, indicated that this was not the meaning he had attributed to the pleading and submitted that this meaning was not at all apparent from paragraph 14.
If it is accepted that the pleading does go so far as to raise this construction question, or if it is amended to make that position clear, then paragraph 14 of the statement of claim, and with amendment all the other paragraphs that turn upon it, can have an operation independently of the allegations of bad faith, lack of impartiality and improper purpose.
Apart from this construction question, and the impact it may have on the allegation of improper purpose, I consider that the pleading in paragraph 14 is deficient - as the defendant submits. It is not a sufficient basis to permit the discovery of the documents broadly referred to in Categories 1, 2 or 3.
In my view, it does not show an improper purpose, a lack of good faith or a lack of impartiality to state, as the particulars to paragraph 14 do, that the effect of the 2005 Deed of Variation was undertaken for the sole purpose of removing the plaintiffs and benefiting Krystyna and her daughter. This is so because:
(a)first, Emily is a Primary Beneficiary under the Trust and so it cannot be properly be said that a purpose, let alone the sole purpose, was to benefit Krystyna and her daughter;
(b) second, Krystyna’s daughter is not the beneficiary under the Trust; and
(c) third, and most importantly, the particulars really only identify the fact of the Deed of Variation. They say nothing about the purpose other than by reference to the effect of the Deed of Variation. That cannot be a particular of bad faith or improper purpose. An intention by a Trustee or an appointor to obtain an improper end is not necessarily to be inferred because the effect of an appointment is consistent with there having been an improper purpose in the making of the appointment.[44] On the face of the particulars, they do not show a lack of impartiality in the exercise of a discretion, assuming impartiality to be required.
[44]Curwen at [48].
I agree with the defendant’s submissions that the appropriate course in this case is to strike out paragraph 14 of the statement of claim (and that brings with it as a necessary consequence striking out of paragraphs 15, 16, 17, 18 and 19). This is the course that recommended itself to Judd J in the Timbercorp proceeding referred to above, although in that matter there was a formal application to strike out the offending pleading before the Court.
In this case, the defendant’s Counsel applied in the course of the hearing to strike out paragraph 14. Notice of that course was clearly flagged in the submissions filed on the defendant’s behalf. Further, the Court has power of its own motion to strike out a pleading that offends the rules of pleading, as paragraph 14 does in my view. There are reasons in addition to those advanced by the defendant why paragraph 14 should be struck out with leave to re-plead:
(a) the pleading rolls together a number of different concepts, prime amongst them being the allegation that as a matter of construction, the power in clause 20 does not extend to deleting the plaintiffs as Primary Beneficiaries with allegations of a lack of good faith, improper purpose, lack of impartiality and not being made in “the best interests of the trust’”;
(b) it is inappropriate to combine the construction allegation with the other allegations. The construction issue should be clearly and separately pleaded so that the defence can appropriately deal with it; and
(c) it is unclear what is encompassed by alleging that exercise of the power under clause 20 to remove the plaintiffs as Primary Beneficiaries was not being made in “the best interests of the trust”.
In addition, removing the offending pleading has the effect of inhibiting the plaintiffs circumventing established principles relating to the disclosure of the reasons of the trustee for the exercise of the power. As Macaulay J observed in Mandie, generally, beneficiaries cannot pursue disclosure of the reasons why a trustee exercised a discretion, whether in writing or otherwise, outside of an action brought by the beneficiaries for breach of trust or mala fides when issues of relevance can appropriately be determined.[45] The issues of relevance cannot be appropriately determined where, as in this case, the pleading is embarrassing, and liable to be struck out, because it is unclear and because it alleges dishonesty (lack of good faith) and equitable fraud without providing proper particulars of those allegations.
[45]Mandie at [94(d)].
The parties were at odds regarding the scope of discovery if there were a viable allegation of lack of good faith or improper purpose. Although it is not presently necessary to decide the issue, I consider that the authorities support the view that the Trustee’s exercise of the power under clause 20 of the Trust Deed is examinable, but only to ascertain whether the discretion has been lawfully exercised but not however, how it was exercised. Given that the Trustee’s exercise of discretion is examinable for that purpose, if paragraph 14 properly raised the issues of a lack of good faith or an improper purpose, it would be open to the plaintiffs to claim that documents in the possession of the defendant that showed the exercise of the discretion should be discovered and inspected.
The principles stated by Macaulay J in Mandie which support the view that some documents exposing the reasons for the exercise of the discretion are discoverable, are based significantly on the reasoning of McGarvie J in Karger, particularly the following well known passages: [46]
In my opinion, the effect of the authorities is that, with one exception, the exercise of a discretion in these terms will not be examined or reviewed by the courts so long as the essential component parts of the exercise of the particular discretion are present. Those essential component parts are present if the discretion is exercised by the trustees in good faith, upon real and genuine consideration and in accordance with the purposes for which the discretion was conferred. The exception is that the validity of the trustees’ reasons will be examined and reviewed if the trustees choose to state their reasons for their exercise of discretion….
In my view, in this case it is open to the Court to examine the evidence to decide whether there has been a failure by the trustees to exercise the discretion in good faith, upon a real and genuine consideration and in accordance with the purposes for which the discretion was conferred. As part of the process of, and solely for the purpose of, ascertaining whether there has been any such failure, it is relevant to look at evidence of the inquiries which were made by the trustees, the information they had and the reasons for, and manner of, their exercising their discretion. However, it is not open to the Court to look at those things for the independent purpose of impugning the exercise of discretion on the grounds that their inquiries, information or reasons or the manner of exercise of the discretion, fell short of what was appropriate and sufficient. Nor is it open to the Court to look at the factual situation established by the evidence, for the independent purpose of impugning the exercise of the discretion on the grounds that the trustees were wrong in their appreciation of the facts or made an unwise or unjustified exercise of discretion in the circumstances. The issues which are examined by the Court are limited to whether there has been a failure to exercise the discretion in good faith, upon real and genuine consideration and in accordance with the purposes for which the discretion was conferred. In short, the Court examines whether the discretion was exercised but does not examine how it was exercised.
I regard it as an inherent requirement of the exercise of any discretion that it be given real and genuine consideration … It seems to me that it is in this sense only that the Court can examine whether the trustees gave “proper” consideration to the exercise of the discretion … The courts will examine whether a discretion has been exercised irresponsibly, capriciously or wantonly … This is another way of saying that there may be an examination as to whether trustees have exercised their discretion on real and genuine consideration … It is an established general principle that unless trustees choose to give reasons for the exercise of a discretion, their exercise of the discretion cannot be examined or reviewed by a court so long as they act in good faith and without an ulterior purpose … For reasons given above, I would add the further requirement, so obvious that it is often not mentioned, that they act upon real and genuine consideration.
[46][1984] VR 161, 163–4.
These passages, given in the context of a trial where the trustee gave evidence, however, leave open argument about what documents are discoverable in a case where there is a properly pleaded and fairly arguable claim that in the exercise of a discretion the trustees have failed to act in good faith or to give a real and genuine consideration to the exercise of the discretion, or failed to act in accordance with the purposes of the trust. In the absence of properly pleaded grounds for those allegations it is both impossible and undesirable to attempt to answer that question.
Suffice it to say, that if it can be properly alleged that the Trustee has acted otherwise than in good faith, or has failed to give real and genuine consideration to the exercise of the discretion, or has not acted in accordance with the purposes for which the discretion was conferred, then particular discovery under r 29.08 will be available. I note in this context that the discretion given by cl. 20 is not described as “absolute” or ‘uncontrollable’. In cases where the discretion is not so described, the Court will intervene if the discretion has been exercised in a way which is perverse, arbitrary, capricious, wanton, irresponsible, mischievous or irrelevant to any sensible expectation of the settlor.[47]
[47]Per Hayne J (as he then was) in Esso Australia Ltd v Australian Petroleum Agents & Distributors’ Association [1999] 3 VR 642 at [42].
In my view, it is not yet appropriate to make any order for the discovery by the defendant of financial reports of the Trust after the 2005 financial year. Whether it is appropriate for the purposes of the holding of mediation at a future date remains to be seen and depends upon whether, after paragraph 14 of the statement of claim is struck out, there is a sustainable amended pleading.
Conclusion
The allegations in paragraph 14 of the statement of claim, and the consequential paragraphs to which I have referred, will be struck out with a right to re-plead. The plaintiffs’ application by summons filed 18 December 2015 will be dismissed. My present inclination is that the defendant’s costs of the plaintiffs’ application should be paid by the plaintiffs on a standard basis, but I will hear from the parties as to that question.
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SCHEDULE OF PARTIES
| S CI 2015 5315 | |
| BETWEEN: | |
| SAMANTHA AINLEY COHEN | Firstnamed Plaintiff |
| CAMERON PETER JOSEPH CLARKE | Secondnamed Plaintiff |
| FRAZER MATTHEW WATKINS | Thirdnamed Plaintiff |
| - and - | |
| AMBERLEY CORPORATION AUSTRALIA PTY LTD | Defendant |
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