Colonial Foundation Limited v Attorney-General of the State of Victoria

[2007] VSC 344

IN THE SUPREME COURT OF VICTORIA Not Restricted

AT MELBOURNE

COMMERCIAL AND EQUITY DIVISION

No. 6358 of 2007

COLONIAL FOUNDATION LIMITED (ACN 075 441 815)	Plaintiff
v
THE ATTORNEY-GENERAL OF THE STATE OF VICTORIA	Defendant

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JUDGE:	SMITH J
WHERE HELD:	Melbourne
DATE OF HEARING:	7 August and 11 September 2007
DATE OF JUDGMENT:	18 September 2007
CASE MAY BE CITED AS:	Colonial Foundation Ltd v The Attorney-General of the State of Victoria
MEDIUM NEUTRAL CITATION:	[2007] VSC 344

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TRUST – Variation of trust deed – Otiose provision – Limits on power of Trustee to amend trust deed – Inability to access realised capital gains.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Dr I J Hardingham QC with Mr K J Lyons	Maddocks
For the Defendant	Mr G Staiger	Victorian Government Solicitor

HIS HONOUR:

The Proceeding

1. By originating motion filed 23 May 2007, the plaintiff, Colonial Foundation Limited, as Trustee of the Colonial Foundation Trust under a Deed of Trust dated 20 September 1996 seeks orders that the plaintiff be empowered to vary the Trust Deed in accordance with the marked up version of the Trust Deed attached to these reasons.[1]

   [1]The Originating Motion sought orders varying the Deed, but counsel in the course of submissions indicated that the orders sought were as indicated above.

1. The changes sought fall into three categories:

(1)the deletion of provisions of the Trust Deed which have been rendered otiose by past changes and events but which cannot be deleted by the Plaintiff because of the terms of cl.12.2 of the Trust Deed;

(2)removal of the restrictions on the Plaintiff’s ability to vary the Trust Deed in cl.12.2;

(3)empowering the Plaintiff to distribute both income and capital of the Trust for charitable purposes.

History of the Trust

1. The Trust was created on 20 September 1996 as a response to the demutualisation of Colonial Mutual Society.  Under a scheme of arrangement approved by Mandie J on 6 December 1996, two trusts were created of the shares in the newly incorporated Colonial Limited.  One of the trusts was in respect of what was described as the “Permanent Fund”.  The other was in relation to what was described as the “Transitional Fund”.  The Transitional Fund was for missing or unlocated members of Colonial Mutual Society.  This particular trust had a life of five years and thus came to an end on 31 December 2002.  The missing or unlocated members were described as the “unconfirmed members” and the five year period was referred to in the documents as “the unconfirmed period”.  Prior to that period coming to an end, however, the Supreme Court approved the merger of Colonial Limited and Commonwealth Bank of Australia Limited on 1 June 2000.

1. Subsequently, the Trust Deed was amended.  In particular, on 24 September 2003 the two abovementioned funds were amalgamated and consequential amendments were made by supplemental deeds under cl.12 of the Trust Deed on 24 September 2003 and 27 May 2004.  Further amendments are now sought.

The Statutory Jurisdiction

1. The plaintiff relies upon s.63(1) of the Trustee Act 1958.  It provides as follows:

Where in the management or administration of any property vested in trust deeds, any sale, lease, mortgage, surrender, or lease or other disposition, or any purchase, investment, acquisition, expenditure or other transaction, is in the opinion of the Court expedient, but the same cannot be effected by reason of the absence of any power for that purpose vested in the Trust Deeds but the trust instrument (if any) or by law, the Court may by order confer upon the Trustees, either generally or in any particular instance, the necessary power for the purpose on such terms and subject to such provisions and conditions (if any) as the Court thinks fit and may direct in what manner any money authorized to be expended, and the cost of any transaction are to be paid or borne as between capital and income.

Section 63(3) authorises the Trustee to make this application under the section.

Proposed Changes – Deletion of Otiose Provisions

1. The abovementioned changes and events have had the result that the Trust Deed contains references to funds and periods and like matters which no longer have any application or relevance.  Their continued presence in the Trust Deed can only confuse matters and it seems to me plainly expedient[2] under s.63 in the management and administration of the property vested in the Trustees to make the amendments sought.  I am satisfied that the proposed amendments would constitute transactions for the purpose of the provision.[3]

   [2]Riddle v Riddle (1952) 85 CLR 202, 222.

   [3]Re Bowmil Nominees Pty Ltd [2004] NSWSC 161 at para [16] pr Hamilton J; James N Kirby Foundation v Attorney-General (NSW) (2004) 276 at p280 per White J; Stein v Sybmore Holdings [2006] NSWSC 1004 at para [45] per Campbell J.

1. The proposed changes which are identified in the attached document involve the deletion or the changes shown to the following clauses:

·    Clause 1.1 – The definition of Trust Fund to delete the reference to the Permanent Fund.

·    Clause 3.1 – Dealing with the requirements for the Trustee during the Unconfirmed Period.

· Clauses 3.2 to 3.4 – Because the definition of “Board” was deleted in the deed of 24 September 2003, cl.3.2(a) is meaningless. It is also put that it is no longer appropriate for the Trustee to have the ability to retire voluntarily and 3.4 deals with the right of the now non-existent Board to terminate the appointment of any person. In my view all these changes satisfy the requirements of s.63. I also am satisfied that the law as it stands provides the mechanisms needed to deal with any issues of the removal of the Trustee should that be appropriate in the circumstances. I refer in particular to the power under s.48 of the Trustee Act 1958.

·    Clause 4.1 – A number of changes are proposed in respect of cl.4 and its sub-paragraphs, some of which are of significance.  For the moment I will focus on the changes that are said to be expedient because the provisions are now otiose.  In cl.4.1(h) and (i), two purposes for the trust were listed which concerned the promotion of “Colonial” or related bodies corporate.  It being no longer possible or appropriate to engage in such activities,  it is expedient to remove the references that appear in cl.4.1 generally and in the sub-paragraphs I have mentioned.  The deletion of cl.4.1(i) has the consequence that there is no purpose to be served by cl.4.1(k) and it also should be deleted.

·    Clause 4.3 – A minor amendment is required there to reflect the fact that the fund is now described as the “Trust Fund” and there is no need to distinguish between the two funds that were originally created.

·    Clause 4.4 – This clause was included to address issues relating to purposes that were not charitable at law.  The deed, once amended, will no longer have any non-charitable purposes and therefore this clause will have no operation.  It is expedient to delete it.

·    Clauses 4.5 and 4.7 – These related to the purposes to be deleted relating to the promotion of  Colonial and related bodies and should be deleted.

·    Clauses 4.6 and 4.8 – These provisions no longer have any operation because they relate to the Unconfirmed Period.

·    Clause 5 other than cl.5.21 – It will be seen from the attachment that a number of deletions have already occurred.  The bulk of the provisions that remain are related to the issue of the Transitional Fund which no longer exists.  They are therefore otiose and it is expedient to delete them.

·    Clause 8 – This clause is no longer relevant.  It concerns the preservation of rights during the Unconfirmed Period, a period that has now ended. 

Proposed Changes – the Trustee’s ability to vary the Trust Deed

1. It is proposed that cl.12.2 should be amended to delete all limits expressed in it on the power of the Trustee to amend the Trust Deed[4].  That will include deletion of the words “subject to cls.12.3 and 12.4”.  The power to amend conferred by cl.12.2 will, however, appropriately remain subject to cl.12.3 and cl.12.4 because they will remain.  I am satisfied that it is expedient that these changes be made.

   [4]Clause 12.2 contains out of date and irrelevant references to the Unconfirmed Period and clauses relevant to the objective of the promotion of Colonial which will also be removed.

1. The deletion of the limit by reference to cl.13 will be seen to have the result that the Trustee under the proposal would have the power to amend the provision that deals with the disposition of net assets in the event of the winding up or dissolution of the Trust.  It confers upon the Trustee the power to distribute such property to an Approved Institution.  It goes on to provide that in the event of the Trustee failing to make such a decision the disposition will be determined by a judge.  It is not proposed to remove that provision but what is proposed is that the Trustee should have power to amend that provision along with all other provisions in the Trust Deed save and except for cls.12.3 and 12.4.

1. Such a power will enable the Trustees to discharge their duties without having to come to court to seek changes when, in their judgment, changes to the Trust Deed are needed.  The deed already has broad powers, in fact, of amendment and what is proposed is not in fact a significant change.  It would appear to be expedient and should be allowed.

The Power to Distribute Capital as well as Income

1. The Trust Deed does not authorise the Trustee to distribute capital.  The powers given to the Trustee under the present Deed are set out in cl.4.1.  It provides that:

The Trust Deed shall … hold the Permanent Fund UPON TRUST in perpetuity to pay or apply all or part of the net income therefrom of each Financial Year to or for the benefit of any of the following objects, purposes or beneficiaries …

The application, as originally framed, sought to amend most of that provision, include a sub-clause (2) and read as follows:

The Trustee shall hold the Trust Fund UPON TRUST in perpetuity to pay or apply:

(1)all of part of the net income therefrom of each Financial Year; and

(2)if and when the Trustee in its discretion thinks fit the whole or any part or parts of the capital of the Trust Fund,

to or for the benefit of any of the following objects purposes beneficiaries …

1. The Colonial Foundation Trust has assets, valued as at 31 March 2007 at  $198,310,000.  With funds of this size, it is able to commit to large projects for significant periods.  The Chairman of the Board of Trustees, David Stow Adam has deposed that the Trustee considers that that is one of the best ways to utilise so large a trust fund.  He points out that such funding allows applicant organisations to undertake significant projects for the benefit of the community and enables proper planning, staffing and budgeting for those projects.  He states that in his experience such long term funding attracts and retains appropriately qualified staff and encourages other philanthropic organisations to lend their support to projects.  It also relieves the organisations from the burden of seeking ongoing funding from different sources.  Combined, these factors maximise the prospects of success of any project that is funded.

1. Mr Adam also expresses concern on behalf of the Trustee, about committing to large projects over a number of years and not being able to provide funds in the event that net income in a particular year is reduced.  He states that this concern has resulted in an investment strategy directed to minimising the risk of that occurring which focuses on income returns rather than a strategy which seeks to achieve both satisfactory income returns and capital growth to maintain the value of the Trust in real terms.

1. The Trustee received advice from an international consulting firm, Watson Wyatt (from which it receives regular investment advice) to the effect that it is likely to be able to achieve greater earnings over time if its investment strategy is changed towards one seeking both satisfactory income returns and capital growth.  This led to the Trustee seeking an independent report from Mercers Investment Consultants (Mercers).  Following an exchange of correspondence, including information relating to the Trust Fund, Mercers, through Mr Arnold, provided the Trustee with a report dated May 2007.  He took as the real return objective a return, net of investment expenses, of at least five per cent per annum in excess of price inflation as measured by the Consumer Price Index over five year periods.  He took as the  downside risk objective that of investing so that the likelihood of achieving a negative return (net of investment expenses) over any twelve month period is less than once every four years and to limit the “poor outcome” nominal return over a one year period to a moderate level.

1. He has expressed the opinion that continuing with the present strategy will achieve the real return objective of the Trust Fund and its downside risk objectives and that therefore the current strategy is appropriate given the constraints imposed by cl.4.1.

1. He referred to the break-up of asset classes as at June 2006 as follows, a breakdown which reflects the current strategy.

Asset Class	Range %	Benchmark %
Australian Shares	37 – 43	40.0
Overseas Shares (Unhedged)	12 – 18	15.0
Property	7 – 13	10.0
Infrastructure	2 – 8	5.0
Hedge Funds	7 – 13	10.0
Total Growth Assets	77 – 83	80.0
Australian Fixed Interest	7 – 13	10.0
Australian Inflation Linked Bonds	2 – 8	5.0
Cash	2 – 8	5.0
Total Defensive Assets	17 – 23	20.0

1. He puts forward an alternative arrangement of asset classes should the investment strategy be one where capital could be used to fund commitments as well as income.  The example he gives is as follows:

Asset Class	Old Benchmark %	New Benchmark %
Australian Shares	40.0	40.0
Overseas Shares (Unhedged)	15.00	25.0
Property	10.0	10.0
Infrastructure	5.0	5.0
Hedge Funds	10.0	15.0
Total Growth Assets	80.0	95.0
Australian Fixed Interest	10.0	0.0
Australian Inflation Linked Bonds	5.0	0.0
Cash	5.0	5.0
Total Defensive Assets	20.0	5.0

1. Without going into the detail of his analysis, his assessment is that with the change of strategy the probability of the alternative strategy achieving the real return objective increases slightly from 53 per cent to 57 per cent and the downside risk remains acceptable with the probability of a negative return in any one year of one in five.

1. It is to be hoped that the opinions of Mr Arnold are borne out in the future if the Trustee’s power is changed to allow access to the capital of the Fund for payments.  I think it would be unwise, however, to decide whether the proposed change should be made on the basis that it is probable that it will achieve greater capital growth than is presently achieved.  The predicted improvement is slight and so much of the success of any investment policy depends on the choices made by those making the investment decisions and developments in the local and world economies at any given time.  It is other matters that carry more weight.

1. I accept that it is highly desirable that a charitable trust such as the Colonial Foundation Trust be able to assist the community in the way identified by Mr Adam.  At the present time, the Trust Deed limits the Trustee to funding such projects out of its income.  It is put, and I accept, that this inevitably has distorted its investment strategy somewhat because the Trustees must give priority to maximising income returns and is not able to give appropriate recognition to the need to adequately secure capital growth.

1. I accept that the present somewhat income-skewed investment strategy carries with it the risk, that over the long term, it will not maximise earnings because the focus on income disadvantages capital growth and it is the capital growth that ultimately will secure the trust for the future.

1. These present limits in turn carry their own risks for the capital of the fund in that the Trustees are to a degree fettered in the decisions they may wish to make about investment decisions for capital growth.  It is undesirable for the future of the trust fund that such constraints should continue.

1. Accordingly I am satisfied it would be expedient to enable the Trustees to distribute from the capital as well as income.  I raised a concern with the plaintiff, however, as to whether the change originally sought which would empower the Trustee to distribute the whole of the capital was supported by the evidence.  The plaintiff gave the matter further consideration and has changed the proposed amendment to limit the proposed power of the Trustee to distributing the whole or any part of the Net Realised Capital Gain.  I am satisfied that that amendment is supported by the evidence and is expedient in the interests of the Trust.

For the foregoing reasons, the Trustee should be empowered to vary the Trust Deed in the manner sought.