Dwyer v Ross

[1992] FCA 20

JUDGMENT (No. .$g./...&

IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY BANKRUPTCY DIVISION

BETWEEN :	CATHERINE DWER & JOHN MICHAEL DWYER
Applicants

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BERNARD HUGH DANBY ROSS

First Respondent

MARTIN MADDEN

Second Respondent

TUREE PASTORAL CO PTY

LIMITED

Third Respondent

Davies J.

7 February	.g92
Sydney

NOTE :	Settlement and entry of orders is dealt with in
Rule 124 of the Bankruptcy Rules.

MINUTES OF ORDER

THE COURT ORDERS THAT:

The motion for interlocutory orders be dismissed
with costs.

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY	) No P1709 of 1991
BANKRUPTCY DIVISION
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BETWEEN :	CATHERINE DWYER & JOHN MICHAEL DWYER
Applicants
BERNARD HUGH DANBY ROSS First Respondent
MARTIN MADDEN Second Respondent
TUREE PASTORAL CO PTY LIMITED
Third Respondent

Coram:	Davies J.
Date:	7 February 1992

Place: Sydney

REASONS FOR JUDGMENT

The applicants, Catherine Dwyer and John Michael Dwyer, seek interlocutory relief to prevent the disposition of assets pending the hearing of a petition for the sequestration in bankruptcy of the estate of the first respondent, Bernard Hugh Danby Ross.

The second respondent, Martin Madden, is the
receiver of the third respondent, Turee Pastoral Co. Pty

Limited. As receiver, he has entered into a contract for the sale of a pastoral property known as Turee Station for a sale price of $6.55 million. It is anticipated that most of the sale moneys will be distributed to creditors of a company, Australian Corporate Finance Limited, in respect of which a scheme of arrangement was approved by the Supreme Court of New South Wales on 1 June 1989. However, a sum of $1.6 million approximately will remain in the receiver's hands. It is anticipated that he will pay the same to Turee Pastoral CO Pty Limited and will retire frocthe receivership.

Mr Ross and his wife, Susan Mary Ross, appear to have been the shareholders of, and to have had legal and factual control of Australian Corporate Finance Limited and of Turee Pastoral Co. Pty Limited, as well as of a certain number of other companies whose affairs have been related or interconnected. They and their children are beneficiaries in a discretionary trust estate known as the Bylong Trust which was established on 14 March 1979 by Dorothy Mary Ross. The

and the $1.6m which that company will receive will form part	trustee of the Bylong Trust is Turee Pastoral Co. Pty Limited
of the assets of that Trust as the property, the Turee Station, was a trust asset.
Mr and Mrs Dwyer lodged money on deposit with Australian Corporate Finance Limited. That company became insolvent and subsequently became the subject of the scheme of arrangement. Mr and Mrs Dwyer lost money as a result. In

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Proceedings No. 1476 of 1991 in the Supreme Court of New South	!
Wales, Mr and d s Dwyer sued Mr Ross on a number of grounds,	I,,
including the ground that he had negligently advised them to
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deposit moneys with Australian Corporate Finance Limited.	On	1 .
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15 November 1991, on a motion for summary judgment, Master	1
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McLaughlin ordered that Mr and Mrs Dwyer have judgment against	.:
Mr Ross in the sum of $400,846.28, there being in his view no

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triable defence to the claim based on negligence. An appeal from that judgment is listed for hearing on 12 February 1992.	1 ,
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No payment has been made by'd	Ross under the judgment.

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A petition for the sequestration in bankruptcy of Mr Ross's estate has been lodged by Dr David Ho and is listed for	a	I
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hearing on 11 February 1992.	However, it appears from the	!
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affidavits before the Court that Mr Ross and Dr Ho are likely

to resolve or have resolved their differences. I assume that, i I

in this event, Mr and Mrs Dwyer will seek to be substituted as

petitioning creditors and that the petition will be adjourned	l '
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to await the outcome of the appeal from the judgment of Master	1

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McLaughlin.	I
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Mr and Mrs Dwyer now seek orders vesting all Mr Ross's powers and rights in and in respect of the Bylong Trust	i '
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in the Official Receiver. Section 50 of the Bankruptcv Act : .,

Moreover, orders are sought restraining Turee Pastoral Pty Limited from disposing of any part of the $1.6m which it is anticipated the company as trustee will receive. The application seeks to preserve a fund from which Mr and Mrs Dwyer and other creditors, if any, of Mr Ross may be paid. Under s.30 of the Bankru~tcv Act, the Court has adequate power to make all orders that may be necessary or desirable for the

purposes of carrying out or giving effect to the Act. See

Bavliss: Ex Darte Official Trustee (1987) 15 F.C.R. 167.

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Accordingly, this issue does not turn upon a question of power but upon the operation of the Bankru~tcv Act in circumstances I have mentioned and upon matters of discretion.

The application is opposed by Mr N.R. Burns, counsel for Mr Ross, reliance being placed on the point that the $1.6m will not be property of his estate but an asset of the Bylong Trust and also on the discretionary ground that the trustee of the Bylong Trust has almost completed arrangements to acquire another pastoral property or properties which will serve as a replacement for Turee Station.

Mr D.L. Patten, solicitor for Mr and Mrs Dwyer, submitted two bases upon which the creditors of Mr Ross could receive payment from the $1.6m. He submitted first that all

Mr Ross's interest in the Bylong Trust would vest in the

trustee in bankruptcy.

However, Mr Ross does not have an entitlement to any particular asset of the Trust or to any aliquot share of the total assets. Mr and Mrs Ross and their children are "Eligible Beneficiaries" with the result that, if the Trustee

does not distribute the income of a year of income to one or more "nominated beneficiaries", then the trustee shall pay or apply the income for the benefit of:-

"such one or more to the exclusion of the other or others of the Eligable Beneficiar~es existlng on the last day of that year of income and in such shares and proportions as the Trustee may not later than one month after the end of that year of ancome

determine." -

If the trustee fails to make a determination within the period, then the trustee is-to hold the income upon trust for the eligible beneficiaries as are then existing in equal shares. The trustee also has power to apply the whole or any part or parts of the trust fund "to or for the advancement, maintenance, education or benefit of all or any one or more exclusively of the other or others of the Eligible Beneficiaries and in such shares or proportions and in such a manner as the Trustee shall in its absolute discretion think fit." Upon the vesting of the trust fund, the trustee has similar discretions with respect to the distribution of the

exclusion of the other or others of the Eligible Beneficiaries	nominated beneficiary, then for "such one or more to the fund to one or more nominated beneficiaries or, if there be no
then existing and in such shares and proportions as the Trustee may determine." The trustee also has power to execute a document declaring the date of execution thereof to be the vesting date of the Trust.

The nature of such a beneficiary's interest such as
Mr Ross has was described by Lord Wilberforce in Gartside v.

Inland Revenue Commissioners (1968) A.C. 553 at 617-8 as

follows :  -

"No doubt an a certarn sense a beneficiary under a discretionary trust has an 'interest': the nature of it may, suffaciently for the purpose, be spelt out by saying that he has a right to be considered as a potential recipient of benefat by the trustees and a right to have hra interested protected by a court of equity. Certainly that as so, and when it is saad that he has a right to have the trustees -

exerci~e their drscretion 'fairly' or 'reasonably' or 'properly' that indicates clearly enough that some objective consideration (not stated explicitly rn declaring the dascretaonary trust, but latent in it) must be applied by the trustees and that the right is more than a mere spes."

Similarly, in Re Goldsworthy (1969) V.R. 843 at 848, Smith J. said: -

"an object of a discretionary trust of the kind here in question rs entitled merely to have the trustee's discretron honestly exercised and, if and when a decision has been made m his favour, to recerve what the trustee has then decided he should recerve. "

See also Sainsbury v. Inland [l9701 CH 712; In re Weir's Settlement Trusts [l9711 CH 145. Hardingham and Baxt on Discretionarv Trusts, 2nd Ed. at para. 606, put

the matter in this way, with which I respectfully agree:-

"an object of a discretaonary trust has no interest in any of the assets comprising the distributable fund for at no time, even after due administration, can he necessarily clam any asset or aliquot share; but he has a right of due administration entitling him to call upon the trustees to deal appropriately with the distributable fund; in a popular sense, he may be said to have an interest rn the totalaty of the distributable fund. As far as each asset comprasing the fund is concerned, he will have nothing more than an expectancy."

The property of a bankrupt divisible in his bankruptcy includes property of every kind. See ss.5 and 116 of the Bankruptcv Act. As was stated in Williams on Bankruptcy, 15th Ed. p.237:-

"Broadly speaking, the bankrupt's estate consists of every benefrcral interest which the bankrupt has (Smith v. Coffin, 2 H. B1. 444); hrs entire un~ver~itas juris is by hrs adjudication taken from hrm and grven to the trustee, who steps rnto h ~ s

shoes and takes a trtle no better and no worse than the bankrupt's, and who, further, becomes the owner of everything which the bankrupt acquires between the adjudication and the moment when his discharge becomes effective."

Such property may include a chose in action or entitlement which a beneficiary of a trust estate has to the due administration of a trust estate. See e.g. Re Pevsner: Ex parte Trustee in Bankruptcy (1983) 68 F.L.R. 234; Silvia v. Thomson (1989) 87 A.L.R. 695; Thomson v. Silvia (Davies J., unreported 31 October 1990); In Commissioner of Stamp Duties

v. Perpetual Trustee CO Ltd (Watt's case) (1926) 38 C.L.R. 12 and in Commissioner of Stamp Duties (Old1 v. Livinaston [l9651 A.C. 694, entitlements to due administration of a trust estate were held to be personal property situated

were resident.	where the trustees against whom the rights could be enforced
However, where the interest in the trust is a mere discretionary interest, the right to be considered for the purposes of a distribution, it is difficult to see that the right to enforce the due administration of the trust can be property which passes to the trustee in bankruptcy. The interest in the trust would seem to be a personal right which

remains with the bankrupt. Of course, if a distribution of I i.

money or property is made to the bankrupt during the period of	1 .
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the bankruptcy, the trustee will be entitled to it as after-	! .
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acquired property. See ss.58(2) and 116(l)(a) of the	, .
Bankruntcv Act.	!
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However that may be, if Mr Ross's estate is
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sequestrated, the operation of ss.58 and 116 of the Bankru~tcy	I '
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will not entitle the trustee in bankruptcy to claim the $1.6m or any aliquot share'thereof.	I-!
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The distribution of the

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income and assets of the Trust Fund will continue to be a

matter for the trustee of the Bylong Trust and in the

trustee's discretion. Examples of the application of this	I
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principle will be found in Holmes v. Pennev (1856) 3 K & J 90; Re Coleman (1888) 39 Ch. D. 443; and Re Bullock (1891) 64 L.T.
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736.	i
Mr Patten relied upon the fact that Mr Ross has under the deed a power to remove a trustee and to appoint a new trustee or trustees in place thereof. Mr Patten submitted
pursuant to s.116(1) of the Bankru~tcv Act which provides	that such a power was property divisible amongst the creditors	inter a1i.a:-

"Subject to this Act -

(b) the capacity to exercise, and to take proceedings for exercising, all such powers in, over or in respect of property as might have been exercised by the bankrupt for his own benefit at the cormnencement of the bankruptcy or at any time after the commencement of

the bankruptcy and before hls

discharge.

is property divisible amongst the cred~tors	of the
bankrupt"

Mr Patten submitted that, once this power vested in the

trustee in bankruptcy, the trustee in bankruptcy could remove the existing trustee, Turee Pastoral Co. Pty Limited, substituting himself or another trustee having the interests of the bankrupt estate at heart, that the replacement trustee could then distribute capital from the-trust fund to Mr Ross or, alternatively, could determine a vesting date and thereby bring the Trust to an end requiring the net assets to be distributed to the beneficiaries in the discretion of the trustee. Mr Patten submitted that, either way, the assets distributed to Mr Ross would pass to the trustee in bankruptcy as after-acquired property and would be available for distribution to the creditors of the bankrupt estate.

However, the submissions of Mr Patten overlook the
point that equity will not permit a trust power to be used for
an object which is extraneous to and in conflict with the objects of the trust. Thus, in Duke of Portland v. Touham

(1864) 11 H.L.C. 32 at 54, Lord Westbury said:-

"I think we must all feel that the settled principles of the law upon this subject must be upheld, namely, that the donee, the appointor under the power, shall, at the time of the exercise of that power, and for any purpose for which it is used, act w ~ t h good faith and sincerity, and with an entire and single view to the real purpose and object of the power, and not for the purpose of accomplishing or carrying into effect any bye or sinister object (I mean sinister in the sense of ate being beyond the purpose and intent of the power) which he may desire to effect in the exercise of the power. I think it would be

endangerang the whole of the establ~shed principles of our law upon this subject if we were to permit a transaction of this k ~ n d to stand, or to hold that it is a transaction which can be reconciled with the faithful, sancere, just, and honest exercise of the power committed to the appointor, and whlch he is to exercise as a trustee."

Similarly, in Vatcher v. Paul1 [l9151 A.C. 372 at 378, Lord
Parker said:-

"The tern fraud in connection with frauds on a power does not necessaraly denote any conduct on the part of the appointor amountrng to fraud an the common law meaning of the term, or any conduct -.

w h ~ c h could properly be termed- dishonest or immoral. It merely means that the power has been exercised for a purpose, or with an intention, beyond the scope of, or not justified by, the rnstrument creating the power."

See also Farwell on Powers, 3rdi~d., Chapter X.

It follows that no trustee of the Bylong Trust should exercise the trust powers for the purpose of benefiting not the beneficiaries of the Trust but the creditors in the bankrupt estate of one of the beneficiaries. It is one thing for a trustee to pay or advance money to a beneficiary to enable the beneficiary to pay his debts, which action could benefit the beneficiary. It is another matter entirely for a

trustee to act, not in the interests of the beneficiaries, but

in the interests of the creditors of a beneficiary. If Mr Ross is made bankrupt, that will be a relevant fact for the trustee to take into account when exercising its discretion to pay or apply income or capital to or for the benefit of the Eligible Beneficiaries. Such a factor may indeed encourage the trustee to pay or apply the trust funds to or for the benefit of other beneficiaries, a step which will achieve the

objects of the Trust, rather than to pay the funds to Mr Ross
and thereby benefit not him but his creditors.

I need not determine in this application whether the power vested in Mr Ross to dismiss and replace the trustee is

property divisible among the creditors for the purposes of

s.116 and such a power "as might have been exercised by the

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bankrupt for his own benefit" for the purposes of s.l16(l)(b).
For the reasons I have mentioned, the power could not be
exercised so as to lead to'the distribution of the assets of
the Trust for the purpose of benefiting Mr Ross's creditors
rather than the Trust's beneficiaries.

For these reasons, it seems to me inappropriate to make any order which on an interlocutory basis will vest the interest which MS Ross has in the Bylong Trust in the Official Trustee or to make any order restraining Turee Pastoral Co. Pty Limited from dealing with trust property which comes into its hands. There is no sufficient evidence that either Turee

Pastoral CO Pty Limited or M r Ross intends or is likely to act	dishonestly with respect to the $1.6~~. All that is shown is
that an asset of the trust has been sold, that the net proceeds of sale will be received by the trustee and that the trustee has in mind to acquire another asset or assets to replace that which has been sold. It does not seem to me that grounds have been shown for interfering with any such course or that the balance of convenience lies in doing so. Indeed, if interlocutory orders were made and if the Trust lost some
favourable opportunity of investment as a result, I would fear for the position of Mr and Mrs Dwyer pursuant to the undertaking as to damages which they would have given.
Notwithstanding that I would refuse an interlocutory order, I should make it clear that I do not suggest that, in
the consideration of a petition for Mr Ross's bankruptcy or in

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the consideration of the position of Mr Ross should his estate -

be sequestrated, the Court would ignore- the interest which Mr Ross has in the Bylong ~rusx. It appears that the Ross family may have adequate funds to make available to M r Ross for the payment of any debt due to Mr and Mrs Dwyer. If the appeal against the judgment entered in the Supreme Court of New South Wales is dismissed, a judge in bankruptcy will expect that M r Ross will make arrangements for the payment of the judgment debt.

Mr Patten also relied upon Division 4A of Part V1 of

the Bankruotcv Act which provides for the making of orders in

bankrupt. Mr Patten submitted that the Bylong Trust was	relation to the net property of an entity controlled by the
controlled by Mr Ross, in the sense defined in s.5(1), and
that much of its worth emanated from the services which he had
provided to the Trust and in respect of which he had received .
no remuneration in money or property or substantially less remuneration than a party at arm's length in similar circumstances might reasonably be expected to have received. Mr Patten relied upon s.139E in Division 4A Part V1 of the
However, Division 4A contemplates an application by the trustee in bankruptcy. There is presently no bankruptcy
and no such application. Moreover, there is no prima facie
case adduced by the evidence now before the Court that a claim

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exists under s.l39E, let alone evidence that there is likely to be any significant or substantial claim under that provision. Not only is there little evidence as to what services M r Ross provided to the Trust but there is no evidence as to what benefits he received therefor or therefrom or any evidence as to what a person dealing at arm's length might reasonably have expected to have received. Moreover, the section deals only with the "examinable period", which is defined in s.5(1) and, in the absence of the debtor being unable to pay his debts as they became due from his or her own money over a longer period, the period is limited to two years before the commencement of the bankruptcy and ends on the day

the application is made. As the Bylong Trust was established

in 1979 and as the evidence suggests that the $1.6m came from

the value of the Turee Station which was a trust asset for many years, the facts disclosed do not show that there is likely to be a claim under this provision. Whether such a claim should be made and the extent of that claim will not be assessed until Mr Ross, if his estate is sequestrated, has been the subject of an examination and his affairs and the affairs of the Trust have been clarified and explained.

Accordingly, I do not think that the possible future application Division 4A Part V1 of the Bankruptcy Act provides a sufficient reason for making an interlocutory order or that there is any balance of convenience in favour of making that order.

For these reasons, the motion for interlocutory
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orders will be dismissed with costs.

I certify that this and'the-'l3 preceding pages
are a true copy of the reasons for judgment herein of

the Honourable Mr Justice Davies.

Associate: b Date: 7 February 1992

Solicitor for the applicants:	Mr D.L. Patten
Counsel for the 1st & 3rd
respondents:	M z N.R. Burns
Solicitors for the

1st & 3rd respondents:	Laurence h Laurence
Date of hearing:	3 February 1992

Date of judgment:  7 February 1992