Fischer & Ors v Nemeske Pty Ltd & Ors
[2015] HCATrans 321
[2015] HCATrans 321
IN THE HIGH COURT OF AUSTRALIA
Office of the Registry
Sydney No S223 of 2015
B e t w e e n -
ROBERT WILLIAM FISCHER
First Appellant
JOHN JULES FISCHER
Second Appellant
ANDREA JULIANA FISCHER MUSSER
Third Appellant
SYLVIA BETH FISCHER KRAMER
Fourth Appellant
and
NEMESKE PTY LTD (ACN 002 870 797)
First Respondent
LORAND LOBLAY
Second Respondent
KAREN LOBLAY
Third Respondent
LAURA MUSSER SLOAT
Fourth Respondent
TOBIAS MUSSER
Fifth Respondent
EVE FISCHER GREGG
Sixth Respondent
SETH DAVID FISCHER
Seventh Respondent
TODD MUSSER
Eighth Respondent
KATHLEEN ELIZABETH FISCHER
Ninth Respondent
WILLIAM GEORGE MARCEL FISCHER
Tenth Respondent
CORINNE AYERS
Eleventh Respondent
AARON KRAMER
Twelfth Respondent
FRENCH CJ
KIEFEL J
BELL J
GAGELER J
GORDON J
TRANSCRIPT OF PROCEEDINGS
AT CANBERRA ON WEDNESDAY, 2 DECEMBER 2015, AT 10.18 AM
Copyright in the High Court of Australia
____________________
MR N.C. HUTLEY, SC: If your Honours please, I appear with my learned friends, MR A.B. EDINGTON and MR R.A. YEZERSKI, for the appellant. (instructed by S Moran & Co Solicitors)
MR C.J. BIRCH, SC: May it please the Court, I appear with my learned friend, MR B. DeBUSE, for the second and third respondents. (instructed by Curwoods Lawyers)
FRENCH CJ: There is a submitting appearance for the fourth to the 13th. I think we have on record a summons for the removal of the 13th.
MR HUTLEY: Yes, the 13th respondent is dead, and it is not necessary her representative to be made a party. In fact, I think the first appellant is her legal representative, but she was there as a necessary party for an argument which really has gone by the by. Nothing need be done other than a removal.
FRENCH CJ: Yes, the 13th respondent will be removed as a party. Yes, Mr Hutley.
MR HUTLEY: Thank you, your Honours. Your Honours have a three‑page outline, and in the way of it in my proofreading, in the second line between “did” and “alter”, I left out a somewhat critical “not”. If your Honours would be kind enough to insert that, and if your Honours would like to take a moment to read it.
FRENCH CJ: Yes, please take a seat while we do. Yes, Mr Hutley.
MR HUTLEY: Thank you, your Honour. I just need to make one further observation. Last Friday we received a communication from our learned friends that they wished to raise two further small alternative arguments in the notice of contention. I say nothing against it. That of course will be a matter for your Honours. Your Honours will find no written submissions, obviously, of ours relating to that, so to that extent your Honours will only hear from us this morning. But whether your Honours allow it to take place I say nothing against it. We are in a position to deal with it, if your Honours wish it to take place.
FRENCH CJ: If you wish to address those arguments in anticipation, as it were, or save them for reply is a matter for you.
MR HUTLEY: I will deal with them in reply, just to make sure. It is going to require me to take you in advance to some paragraphs of the trust deed which I would not do but for them – but that is no particular difficulty from my point of view.
As your Honours will have appreciated my clients, the appellants, are all specified beneficiaries of the trusts and your Honours will find those identified in clause (g) at appeal book 95. The second and third respondents, whom we will call the executors - and are the executors of Mr Emery and Mrs Madeleine Nemes, contend that a series of acts in 1994 and 1995 resulted in the first instance, and then was confirmed, in Nemeske becoming indebted to those two deceased specified beneficiaries. By way of cross‑claim the executors seek to recover, or sought to recover and obtain judgment in debt from Nemeske of that sum and the former cross‑claims at appeal book 34, just an ordinary claim in debt.
We propose to deal with the argument shortly in this order. We will take your Honours through the trust deed. Then, if we might, we will take your Honours through the relevant documents because all relevant material is documentary dealing with the events of September 1994 and August 1995, whilst the facts, your Honours will find set out in the trial judgment between paragraphs 25 and 52 at appeal book volume 1, 454 and following, and in the Court of Appeal, paragraphs 7 to 16, appeal book 2, 515. Because of some of the arguments, particularly which have been developed by our learned friends, we think it would be of assistance if your Honours are taken through the actual document.
FRENCH CJ: As to the resolution, is it correct – and I am taking this from paragraph 56, I think, and preceding of your submissions - that your proposition is reduced to this, that there is no application because there is no change in beneficial ownership and there is no advance because there is no separation out of the property, the subject of the resolution.
MR HUTLEY: Your Honour, yes. When it comes to separation, of course, we do not submit that, for example, there could not be – there requires to be, as it were, physical separation. For example, if it were cash, this Court has dealt with that question, but we say that there was no act sufficient for an advance and certainly no act sufficient for application. One of the points our learned friends seek to deploy is to say that there was a raising for the purposes of clause 4(b) and that is one of the points which has been raised in our – which turns to something which was dealt with at trial.
But after we have taken your Honours through the documents we will then address the two issues on our appeal. If we succeed on our first point, which is identified in our outline at paragraph A1, then the second point, which is identified in our outline at A2, does not arise. Our friend’s notice of contention raises various matters; I will defer consideration.
Can I take your Honours then to the trust deed, which your Honours will find at page 81 in volume 1 of the appeal book. Justice Barrett dealt with the provisions in between paragraphs 20 and 38 in the judgment below at appeal book 520. The settlement, your Honours, was made on 24 June 1974. The original trustee company was a company called Challice Limited, but Nemeske became the trustee of the trust on or about 2 May 1987; that appears from appeal book 443. The original settlement sum was $200, and the trust defines the term “trust funds” to mean the settlement sum and all other assets from time to time held.
It was common ground that at all material times the only assets of the trust under this settlement were 10 “B” class shares in a Norfolk Island company called Aladdin Limited; that is at paragraph 8 of the judgment on appeal, 516. The trustee never held any sum of money; that is judgment paragraph 54, appeal book 529. Thus, at all times, the 10 “B” class shares comprised the whole of the trust funds as that term is defined under the trust deed.
Clause 1 of the trust deed included a discretionary power to alter investments and to reinvest money in investments authorised by clause 3. Clause 8, if your Honours would go over to that at 86 – I have jumped over clause 4 for the moment; I will come back to it, of course – similarly empowered the trustee to sell trust property and reinvest it. In the relevant period, neither of those powers was utilised. The power which formed the principal focus, as your Honours know, is clause 4(b). Can I take your Honours to that? At the moment, for the purposes of the appeal, all that is necessary to consider is up to the words “Provided However”:
At any time or times to advance or raise any part or parts of the whole of the capital or income of the Trust Funds and to pay or to apply the same as the Trustee shall think fit for the maintenance education advancement in life or benefit or any of the Specified Beneficiaries –
As the Court of Appeal observed there were, as it were, four possible alternative ways of exercising that power. You could advance and pay, advance and apply or raise and pay or raise or apply. The court held that what had occurred was sufficient to effect an advance and apply of the trust fund.
Now, can I mention briefly other provisions of the trust deed, having regard to an issue which is now being raised about the meaning of the word “raise”? Clause 4(c) deals with a power to insure and pay premiums and rates and taxes and your Honours will see in the last two lines “for that purpose” – in the event that the trustee is unable to apply income to that purpose:
he shall be at [liberty] to resort to capital and for that purpose to raise money by way of mortgage.
Next, your Honours will see at (e), which is the power to deal with the management and superintendence of the management of trust property, amongst the various powers to effectuate that, at about halfway through the clause, your Honours will see:
and to raise out of any capital or income in the hands of the Trustee any sum or sums from time to time required –
Then, finally, and in this regard, if your Honours go down to (h):
To pay calls on shares and for that purpose to raise money on the security of the Trust Funds –
I think I should refer to just one last matter. I think our learned friends would take your Honours also to (f), although I do not think it is suggested that (f) is engaged. I would just ask your Honours to note that. Next, your Honours, just for completeness, there was a power to vary the trusts vested in some nominated – specified beneficiaries at paragraph 17 on page 90.
Now, the key events, as your Honours will be aware, all occurred in 1994 and 1995, and the evidence was solely documentary. However, there was some limited testamentary evidence but as was observed at judgment paragraph 7, page 515 that threw no light upon the transaction.
If your Honours would then go to appeal book 122, in about July 1994 the assets of the trust were revalued and an accounting entry was created in the accounts to reflect that revaluation. The entry was identified as an “asset revaluation reserve”. Your Honours will see that there is a reference to an opening balance of $1,000, different to the trust deed, which refers to only $200, but that is of no moment. It just seems that some sort of inflationary figure was probably assumed or applied.
If your Honours would go to appeal book 126, your Honours will see that it appears that Aladdin Limited, that is, the company whose shares formed the sole assets of the trusts, in turn owned three other companies - Nichols Court, Gaypat Pty Limited and EGM Pty Limited, which had investments ‑ ‑ ‑
FRENCH CJ: They were the holders of real property at various times - apartments and things?
MR HUTLEY: In different parts of the world – in the United States and other parts of the world. That was the structure. The accounts appear at page 122, as I indicated, as at 31 July. Your Honours, those accounts appear to have actually been prepared a year later, namely, as at around 31 July 1995, which explains some of the oddities, which I will just observe upon in a moment. Your Honours can see that from pages 127 and 130 - 127 is an accountant’s report. It has a cross through it, but it says:
We have prepared the accompanying balance sheet as at 31st July, 1995 –
But it was for the prior year. They seemed to have prepared the accounts a year after the relevant events. The balance sheet your Honours will find at 124. It shows a total trust capital of $3,905,000‑odd, the entire amount, consisting of the 10 “B” class shares. Then on 23 September 1994 there was a meeting of directors of the company Nemeske - your Honours will find that at 129.
Your Honours will see that there is an unsigned minute, but there was no dispute that it reflected the occurrence of a meeting. Gabriel Elliott was a principal of an accounting firm, and I will take your Honours to a bit of correspondence from that firm in a little while, and Lorand Loblay was a barrister who was a friend, as we understand it, of Mr and Mrs Nemes. In fact, he gave evidence, but he was 94, I think, when he gave his evidence, and surprisingly he did not have a precise recollection of the detail as to what took place, but there you go.
Now, your Honours will see that there is a reference to 30 September 1995. That was, by agreement, a typographical error and it should have referred to 1994. That was common ground, and your Honours will see that from the judgment, paragraph 10 at page 516. Then, the resolution purported to distribute what was the value recorded in the accounts as the asset revaluation reserve. That is of some portion of the value described by that accounting error.
The entry in turn simply recorded a portion of the value of the 10 “B” shares. There was no way of realising that value and distributing it to Mr and Mrs Nemes without dealing with the shares in some way. There was, as it were, no money, and we make the point in our submissions in‑chief at 34 to 36.
Next, the resolution speaks in terms of a final distribution, which is somewhat unusual language in the context. We address that in our submissions at 31 to 33. It appears that what the directors had in mind was that they were resolving to declare something equivalent to a final dividend of a company. Of course, in respect of a dividend of a company, the declaration gives rise to a debt, but the significance of the fact that one was dealing with a trust does not seem to have occurred to anyone. It appears from the language that the directors intended something similar to that here. They provide:
That a final distribution be and is hereby made out of the asset revaluation reserve . . . and that it be paid or credited to:- the beneficiaries in the following manner and order:
The entire reserve if any, to be distributed to –
the two individuals as “joint tenants”. So there was a possibility of payment. Payment would, of course, have required the liquidation of the shares, or possibly the transfer of the shares. That does not appear to have been contemplated in reality.
KIEFEL J: Do you accept that an advancement and application may be made by entries in books of account?
MR HUTLEY: Your Honour, can I answer that? It depends upon the nature of the asset. If, for example, one had pure cash and it was able to be inferred from that entry that one was holding thereafter that cash upon, in effect, a bare trust in favour of the beneficiary and that was reflected by an entry to that effect in an account we accept that. We say that to advance, to apply, requires an alteration in the beneficial interest on the cases. It is not purely an act of saying in respect of an asset, the beneficial interest in which does not change, some money which might be realised out of the sale of it is to be held.
GAGELER J: But by bare cash do you mean to encompass money in a bank account?
MR HUTLEY: Yes. This Court has held that one can, in effect, have a declaration of trust over a part of a bank account and we accept that that is the case. We say that is really what was determined in Vestey’s Case. The Court, in effect, was looking for, by way of application, an alteration, as they said, whereby the children became absolutely entitled to their – a portion of the income.
KIEFEL J: But you become absolutely entitled if the trustee applies – expresses an intention to apply the moneys for your benefit.
MR HUTLEY: If it is pure money, your Honour, that may be sufficient to, in effect ‑ ‑ ‑
KIEFEL J: Or an asset.
MR HUTLEY: We would respectfully submit no, because the one thing which is clear and was not found was that these shares remain subject to the discretionary trust completely.
KIEFEL J: Well, save for the possibility in what was expressed by the trustee that another trust was created.
MR HUTLEY: In our respectful submission, in that event there was no certainty of trust property because the trust property would have to be the shares which ex hypothesi they could not be. Therefore, there would be no trust property for such a trust. That is the difficulty. It could have been, for example, your Honour, that a decision had been made by the trustee to apply eight out of the 10 shares and declare them as, in effect, being held upon trust for the beneficiaries to apply them, that is, vest a fixed equitable interest in the beneficiaries absolutely to eight out of the 10 shares.
We would accept that would be an application to apply the trust fund. We accept that. But that is exactly what could not occur here because there was clearly no intent to alter the beneficial interest in the shares. That was found by the Court of Appeal. Justice Barrett said it was sufficient to effect an application, to have something less than that, and that appears from paragraph 62 in his Honour’s reasons which your Honours will find in appeal book 2, page 532. The analysis which leads to that commences at about 59, when dealing with Vestey, and I will have to come to that, but it results ultimately in his Honour’s conclusion which is in the last six lines of 62 commencing:
The specific setting aside or appropriation that the resolution effected by means of the words “be distributed to” – which carried precisely the same connotation as the words “shall belong to” in Vestey’s case –
I will come back to that –
did not result in any cash payment or change in ownership of specific property.
KIEFEL J: Well, there might be a question about whether “or change in ownership of specific property” is correct because if the trustee had actually intended to apply and said that the property in the trust was to be applied for the benefit of those specified beneficiaries then by stating that would not the property be divested from the trustee and then held until distributed to the beneficiary - held on trust?
MR HUTLEY: Depending upon the facts such a thing could occur, but here what was specifically distributed was not an interest in the shares but what was described as the asset revaluation reserve.
KIEFEL J: I follow that.
MR HUTLEY: In a sense there seems to have been a very clear determination not to alter the beneficial interests in the shares ‑ perhaps for very good tax reasons associated with the fact that I do not think they went to Norfolk Island for the pines – and a desire that whatever happened those assets not leave the control of the trust or be vested in the Nemeses.
KIEFEL J: But at the heart of your case must be the notion that what was expressed was not in error by infelicitous expressions about how to describe the trust property and what was being done. Your case is that it was intended to the contrary of an application and distribution – that must be your case.
MR HUTLEY: Your Honour, our case is I can accept they were intending to exercise the power under clause 4(b), they wanted to, but their scheme was such as to not effectuate it.
KIEFEL J: I see. I misunderstood your argument. I thought it must – because I would have thought the essential question is what was the trustee’s intention?
MR HUTLEY: Your Honour, the trustee’s ‑ ‑ ‑
KIEFEL J: You are not saying that, you are saying that the intention was there but it was not effected.
MR HUTLEY: They tried to do something which, in law, they could not do.
GORDON J: You accept they had power to, in effect, pass the resolution but the mechanism they adopted you say was wrong?
MR HUTLEY: When your Honour says to pass the resolution ‑ ‑ ‑
GORDON J: Well, they had power to apply, they had a power to pay, they had power to raise.
MR HUTLEY: I accept that. They had the power to do acts in law which would effectuate any one of the four alternatives your Honour has observed. I accept that, there is no doubt about that.
GORDON J: You just said that what they do, what they did - the mechanism they adopted was ineffective?
MR HUTLEY: Did not do that – could not do that as a matter of law.
FRENCH CJ: What is the effect of the agreement referred to in paragraph 41, page 525, in the judgment of Justice Barrett that said:
The parties agreed that all purported actions and transactions reflected by documents in evidence . . . were to be accepted as genuine and effective according to the terms of the documents.
What is the effect of that in relation to the resolution, for example?
MR HUTLEY: That is just that it took place in its terms. Not that it, in effect, did anything in law, just that it was a resolution which was paid - passed in those terms and that it embodies what was intended to be done.
FRENCH CJ: Then the debate was about the effect of it.
MR HUTLEY: The debate was about the effect of it. There was no doubt that they could have transferred all the shares to the Nemeses. That is quite clear: they had no desire to do it. It is absolutely clear - and I will take your Honours to the judgment – they had no desire that the Nemeses acquire an interest in those shares. In fact, they went to some beneficial interest in those shares.
In fact, the whole point of a year later taking a charge by, of necessity not acknowledge that the Nemeses did not own the shares because if they owned the shares they did not need to charge – it was all over. This was designed with tax legislation front and centre and the intent was, under no circumstances, should there be a distribution by way of changing beneficial ownership. The real question is, we say, you cannot “distribute an asset revaluation reserve” in the way they have sought to do it.
That is why our learned friends by way of notice of contention seek to run an argument that, in effect, what happened was a notional round robin. They say, notionally, one is to pretend this happened, that the Nemeses lent to the trust the $3.9 million. Notionally, then that was, we think, then paid back to the Nemeses by way of distribution, although they say it is applied, but I think their case must entail that it is a payment and that left the situation where the trust was left with a debt, being the borrowing from the Nemeses, and the Nemeses received the distribution by way of an actual payment.
Now, we think that is either – firstly, we say there is no evidence to that effect. It is inconsistent with this document which is clearly not contemplating a borrowing from the Nemeses to fund the distribution which is essential to theirs. The crediting takes place after the distribution. So, our case is whatever was conceived by the lawyers/accountants who undertook this, they got into their head essentially a confusion and they did something which in law was just incapable of being achieved, or sought to do it.
BELL J: In the case of a trust that has as its assets only shares, the trustee cannot on this analysis distribute, thereby converting the contingent interest of the beneficiary to an absolute interest, other than by dealing with the shares. Is that the ‑ ‑ ‑
MR HUTLEY: You could give a fixed trust with the shares.
BELL J: Yes.
MR HUTLEY: But you would have to ‑ ‑ ‑
BELL J: But by dealing with the shares, whereas, if one looks at the analysis here, the primary judge said you have to read the resolution as a resolution to distribute an amount of money equal to the value in the standing in the asset revaluation reserve.
MR HUTLEY: Yes. I am content to accept that that would be how it would be worked.
BELL J: You accept that, but on your argument, that does not get them.
MR HUTLEY: That does not take you - and even the round robin does not work, we would say. One way of interpreting this is that they just thought that they could make the declaration and that would create thereby a debt such that they could credit it. That seems to be one interpretation of it. Another possible interpretation, which, again, our learned friends do not want, is that they thought they could, in effect, notionally distribute the money and then borrow it back, i.e. the crediting was after the distribution and one was borrowing it back.
The difficulty with that and why that has not been advanced is that there would be no power for the trust to borrow the money back. It has no need for it. So, therefore, our learned friends are driven, subject to the conclusion that Justice Barrett came to, to have this notional round robin. So, we have Justice Barrett’s conclusion that, in effect, you can apply by something less than giving a vested equitable interest in the way it is expressed in 62 – and I will have to deal with the cases in relation to that and we say that is wrong.
KIEFEL J: For revenue purposes, in terms of what was sought to be achieved, was it necessary that the shares remain in the trust?
MR HUTLEY: Yes, there was absolutely no doubt and also, for the trust purposes because, as your Honours will see, they only, in effect, sought to distribute the then value.
GORDON J: If any.
MR HUTLEY: If any, quite, because it was just an asset revaluation reserve and these were investments in different parts of the world. That would be of its nature to fluctuate. What they sought to do is, in effect, have this distribution and then turn it into a debt. They thought they had achieved that. That is what they were seeking to do. Could I return to the factual chronology just to make good the point that this is how they were proceeding? That is the resolution. That then leads to a balance sheet, which your Honours will see at 134.
GORDON J: Before you get to the balance sheet, can we just go to the beneficiaries’ accounts at 132? Do you propose to deal with that?
MR HUTLEY: At 132 - the opening balance settlement capital distribution, your Honour?
GORDON J: Yes.
MR HUTLEY: I am going to come to 132, because they clearly thought they had effected a capital distribution, no doubt about it. The question is, had they in law done that? We say they cannot do it in the way they do it.
GORDON J: The reason why I ask that is because it seems as though there is a great debate about the distribution of income in the judgments below. I cannot quite understand how that is relevant when you have a recorded capital distribution in the accounts.
MR HUTLEY: Your Honour, we made exactly the same submission ‑ ‑ ‑
GORDON J: I see.
MR HUTLEY: ‑ ‑ ‑ and we make the same submission to this Court. It is quite clear from that they thought they were distributing capital. In one sense, I think the confusion about income got tied up with the difference between what is available profit for distribution from a company for an asset revaluation reserve, of course, can be, because it is profit for the purposes of a distribution of a dividend, which is completely different to tax accounting where an asset revaluation reserve is not income; it is a distribution of capital.
GORDON J: There are instances, are there not, with discretionary trusts where trustees ‑ ‑ ‑
MR HUTLEY: Have the power to declare one thing or another?
GORDON J: Correct. They take up the asset revaluation reserve, and then declare it as income, as they did in Inglis’ Case.
MR HUTLEY: Precisely, your Honour. Then, there are questions as to what effect that has for taxation purposes ‑ ‑ ‑
GORDON J: That is not this case.
MR HUTLEY: That has got nothing to do with it.
GORDON J: This is a capital distribution, and there is no distribution of income.
MR HUTLEY: That is what we would submit.
GORDON J: I see.
BELL J: I think in the Court of Appeal, Justice Barrett considered it unnecessary to determine that issue.
MR HUTLEY: Quite. I think it also got tied up with the significance of Clark v Inglis in relation to the case which led to observations upon the point. I think our learned friends are going to take you to Clark v Inglis and shortly put, we say, that was a case which proceeded on agreed facts and is of no assistance to you in dealing with these questions.
If I could then return, if I might, to the facts, and I was taking your Honours to the balance sheet of the trust after these events, as at 30 September and your Honours will see “Beneficiaries Funds”, again represented by investments - in Aladdin, $3,900,000‑odd. “Non-Current Liabilities”, it says “Loans – Secured”. It was found, and I think it is common ground, that the reference to security was an error as at September 1994, and again reflected the fact that these accounts were being done a year later, by which time a charge had been issued. But at the relevant time, what the parties did, as said, was took the effect of the resolution, there having been no payment, was that there existed a loan owed by the trust to Mr and Mrs Nemes.
Now, the accounts thus we say indicate that the distribution recorded in the September 1994 resolution was made by crediting loan accounts of Mr and Mrs Nemes. No money or assets in fact changed hands ‑ that was common ground – between the company and Mr and Mrs Nemes at any time. The form of the resolution, we submit, contemplates no borrowing by the trustee from anyone to effectuate the distribution. The distribution takes place without any identification of an exercise of a power to get in funds to effectuate it.
Now, rather what there is is a distribution and that is then effectuated by one of two means, either a payment – which we know did not take place – or a crediting. Could I then take your Honours – there was some correspondence ‑ ‑ ‑
GORDON J: Just before you leave 134, can I just ask about this? So is your construction of this balance sheet that you have no separate setting aside by way of application or advancement of the trust fund because the assets are recorded as being held on trust represented by the investments at full value?
MR HUTLEY: Yes, the shares are – no one has put a case that these shares were held upon any form of trust other than the discretionary trust. The only point was his Honour Justice Barrett’s observation at the end of paragraph 62 that there was some form of obligation which controlled the usage of it but it did not change the beneficial interest, and we say that is simply not an application within the meaning of the law.
GAGELER J: I think the natural reading of what his Honour said in the last sentence of paragraph 62 is that he regarded the resolution as resulting in an absolute vested equitable interest in Mr and Mrs Nemes.
MR HUTLEY: But not in the shares. That is common ground. Our learned friends – it has never been said that – his Honour clearly – and that is why he says:
The specific setting aside . . . did not result in any cash payment or change in ownership of specific property.
That is beneficial ownership.
GAGELER J: I see.
MR HUTLEY: It was common ground that there was not a resettlement because to in effect move from holding the shares upon discretionary trusts to a fixed trust would require something in the nature of a resettlement, and that is what we say you can do by means of an advance, the advance changes the relationship – the trusts upon which the shares are held.
GORDON J: Though it shifts the assets out of the trust and puts it into another trust.
MR HUTLEY: In substance, you become a bare trustee and that is, in effect, what was essential to the analysis in Vestey’s Case, to which we will come. Vestey’s Case said to get to apply you had to, in effect, become a bare trustee. Now, that deals with, if I can, the document at 134. Then I am going to take your Honours to the correspondence. The next document is at 136. This is a letter from G.A. Elliott, who is, we infer and I think it is common ground, the G.A. Elliott who was shown as being present at the meeting where the resolution was made. It seems to have been written by his son, a Peter Elliott. But it says – and it is important, we say:
As we discussed on the telephone, with regard to the abovenamed, please find following the information requested –
This is written to John d’Apice, of Makinson & d’Apice. It says:
Most of the assets of Mr and Mrs Nemes are owned by companies the asset shares of which are owned by Aladdin Limited, a Norfolk Island company, the shares of which are owned by the Nemes Family Trust.
Can I stop there? One of the reasons why the round robin which our learned friends would ask your Honours to, in effect, invent, is unlikely to have taken place, is because the Nemeses never had the money to lend to the trust. If they had gone through such a device, issues of sham for tax purposes would immediately have arisen. I am not saying they thought about it, but it is pretty obvious if the facts are that you own nothing, if you start to construct arrangements on the basis you are lending $3.9 million to a trust when you own nothing, the idea of sham springs to mind or device or whatever else you want to say. So we say one of the problems with the structure which they advance is that, as a matter of fact, it is highly unlikely that the parties would have wanted that to take place and it is certainly not something that the court can, as it were, construct. It says:
Mr and Mrs Nemes, together with several others, are beneficiaries –
They give the trust and the trust deed, et cetera, and then the assets. They refer to the “asset revaluation”. Then it says:
Nemeske Pty Limited in its capacity as trustee of the Nemes Family Trust held a meeting at which it was resolved to distribute the asset revaluation reserve to Mr and Mrs Nemes jointly, a copy of the minute is enclosed for your reference.
The above distribution was made by way of crediting the loan account of Mr and Mrs Nemes in the Nemes Family Trust.
That is how they say it was done. It was just done by raising a debt.
Mr and Mrs Nemes would like to secure their loan to the Nemes Family Trust, and it is in this matter that they require your assistance –
and then instructions are given for the preparation of a debenture. That did not take place, as will be apparent, and the charge took place. Then it says:
Advise on the stamp duty and legal implications –
They were obviously concerned about that. Then the last sentence says:
The purpose of these transactions is for Mr and Mrs Nemes to secure control of their assets or estate. Should you have any further questions with regard -
et cetera. That then leads, if your Honours please, at 139 to a response from Makinson & d’Apice and it refers in the letter to what they have been instructed. The fifth paragraph:
Nemeske Pty Limited as Trustee of the Nemes Family Trust owes monies to Mr. & Mrs. Nemes. Mr. & Mrs. Nemes wish to obtain security for the amount owing to them over the shares held by Nemeske Pty Limited in Aladdin Limited and for that purpose to obtain a debenture . . .
It will be [seen] from the above that the asset being dealt with namely the shares in Aladdin Limited are a Norfolk Island asset situated in Norfolk Island.
Then it deals with the stamp duty implications and what is involved. Then it goes on and explains how the debenture will be registered in New South Wales. Then they seek certain details and information at the end to prepare that. That leads to the next piece of correspondence at 142 from G.A. Elliott again:
As per your letter . . .
(a)The amount of the debt to be secured is $3,904,300.00 -
Who the debenture is in favour of –
(c)The shares in Aladdin Ltd to be dealt with are 10 “B” class shares per enclosed certificate.
Then it says who is the debenture holder and then there is a request to prepare a power of attorney for that to be done. That then is followed by the correspondence at 144 where, for reasons which are not precisely clear, it is moved to a deed of charge, your Honours will see, and explaining why it will not be liable for stamp duty. Then, it says:
2.Transfer of the charged shares for execution in blank.
Then, there are:
Draft Minutes of a Meeting of Directors of Nemeske Pty Limited as Trustee authorising the giving of the Charge and the giving of a Power of Attorney –
Then there is an ASIC form which is to be filled in and I will come to each of those. The next two pages are memoranda of costs which just explains what they are doing – preparation of securities, charges and the like. Then one comes to the meeting of 3 July 1995, at 149, if your Honours take that up. It says:
Resolved that the company as Trustee . . . execute a Charge . . . in favour of . . . in respect of the sum of Three Million Nine Hundred and Four Thousand Three Hundred Dollars ($3,904.300.00) Australian repayable on demand which is the amount presently owing by the Nemes Family Trust to the said Emery George Nemes and Madeleine Nemes and also a Transfer in blank . . .
Resolved further that the company as such Trustee execute –
et cetera. That is that resolution. Can I then, before I come to the charge – which I will come to in a moment – take your Honours to the ASC form 309 which is at 156? When they describe the charge, the debt at line 30, they say:
briefly describe . . . debt of $3,904,300.00 presently owing . . .
the property charged . . . 10 B Class Shares in Aladdin Limited –
Then one comes to the charge itself, which is at 158. Your Honours see the parties – Nemeske, the mortgagor; George and Madeleine Nemes, the mortgagees”. They say they are the trustee in the recital:
C.The company as such Trustee is the holder of Ten B Class Fully Paid shares . . . (the mortgaged premises).
D.The Mortgagor is indebted to the Mortgagee as joint tenants in the sum of Three Million Nine Hundred and Four Thousand Three Hundred Dollars Australian ($3,904,300.00) (the principal monies) -
being the defined term –
E.For the purpose of securing repayment of the principal moneys the Mortgagor has agreed with the Mortgagee to execute this Deed of Charge pursuant to which the Mortgagor charges the mortgaged premises as hereinafter set forth in favour of the Mortgagee –
Then clause 1 is the charging. It identifies as a “fixed charge” in 2; there are certain warranties which are given. Clause 5, which is actually the covenant which in the Court of Appeal was found to be the covenant which formed the basis of the debt suit, was:
The Mortgagee covenants with the Mortgagor that the Mortgagor will pay to the Mortgagee the principal moneys on demand by the Mortgagee.
That is ultimately the covenant that was in force, and on which judgment was given. What we say all that shows is what the parties thought they had done by the resolution of 1994 is create a debt by crediting. They then in respect of that debt a year later sought to charge the assets of the trust as security to repay that debt, and by way of confirmation of that debt, they gave a covenant in clause 5.
Now, our learned friends at paragraphs 33 and 45 to 46 of their submissions invite the Court to proceed as if the mode of advancement could be severed from the decision to advance itself. They submit, in effect, that the decision to advance was within power, the concept of advance, and that the mode was a matter about which the Court does not need to be concerned.
Now, we say that the Court cannot proceed in that manner because it is clear from the documents that the mode of advancement was an important aspect of the scheme adopted and one deliberately pursued according to design of the accountants of the trust, and we have taken your Honours through the documents and in our reply submissions at paragraphs 2 to 4 we deal with it.
We do not know why Nemeske and their accountants thought that that course was desirable but it is not difficult to speculate, they were very concerned about all manner of tax implications of doing anything else. For these reasons the court cannot assume that if the directors of Nemeske knew that the 1994 resolution was ineffective to invoke the power under clause 4(b) they would have made a distribution at all because the manner which was the law required to effectuate that may have been utterly at odds with their tax position and they may have resolved upon a completely different course at another time such as seeing how things developed.
Now, our next point, having regard to one of the arguments, is it is quite clear that the 1994 resolution was not intended to confer any interests in the 10 “B” class shares because otherwise the security in 1995 would have been otiose.
FRENCH CJ: What was the effect of the creation of the asset revaluation reserve and what was being done ‑ ‑ ‑
MR HUTLEY: At law, we would respectfully submit, nothing, in a trust sense. It was really, in effect, no more than an assertion that the shares were worth more than their historical cost, at a legal level. It might have certain implications at a tax level, depending upon any regime you are in, but it may in effect if it was a company and one was – but we say it did no more than just recognise an increase in the value.
FRENCH CJ: It was not required as an accounting matter?
MR HUTLEY: No. I do not think of a trust estate it was required, it may have been just a convenient thing to do to keep one apprised of the state of value of your assets.
FRENCH CJ: I mean, a balance sheet would show the assets and would show their value, I suppose, from time to time ‑ ‑ ‑
MR HUTLEY: Quite. Yes, could have done ‑ ‑ ‑
FRENCH CJ: ‑ ‑ ‑ without reference to reserves.
MR HUTLEY: Exactly.
GORDON J: Could I ask two questions about that? Was there any evidence about how Mr and Mrs Nemes dealt with this amount in their own personal ‑ ‑ ‑
MR HUTLEY: I do not believe so, your Honour.
GORDON J: Was there any evidence about what had happened in the trust before the 1994 year? So, for example, in some of the cases – picking up what the Chief Justice just asked you – there may be a history of creation and taking to market each year asset revaluation reserves and distributing – treating it as income under a power in the trust deed and then each year, so that when you get to year five you can infer an intent that that practice would continue giving rise.
MR HUTLEY: I do not believe there was anything of that variety, your Honour. There was some history of some other events and their effects such as attempts – whether certain acts constituted a vesting event and your Honours may have seen that in the court ‑ ‑ ‑
GORDON J: I saw that in the judgment but that is not an issue any more.
MR HUTLEY: But that is not an issue. But I do not believe there was anything further - could I just check that, your Honour? I am reminded – if your Honours go to volume 1 at page 364, your Honours will see the accounts at 2012 and nothing had changed in those accounts since 1994. So, dealing with subsequently, nobody seems to have treated it in a way – but I do not think there was any evidence, certainly, of any course of conduct beforehand, your Honour.
FRENCH CJ: I notice the term “accretion” is used from time to time. What does that refer to?
MR HUTLEY: It is just a fancy word for “more”, I think.
FRENCH CJ: An “accretion” in the value of the shares?
MR HUTLEY: There is no “accreting” in the sense of an alteration in the substance. There may be an “accretion” in the sense of its value change.
FRENCH CJ: Yes.
MR HUTLEY: But I do not think anything beyond that, your Honour. There was some very limited evidence, which your Honours will see at 468, paragraph 100, about something to do with the tax affairs of Mr and Mrs Nemes but it was so limited Justice Stevenson did not feel he could rely upon it and there is no appeal or challenge to that conclusion.
The next point, your Honour – it is clear, we submit, that the actors believed they were engaging in two distinct transactions – the 9 September 1994 events and the securing events of August 1995. The resolution to enter it confirms that. We say the aim of the 1995 resolution was to effect a charge over the Aladdin assets to secure the purported loan. The fact that the directors of Nemeske made the 1995 resolution indicates the decision to charge was taken later, subsequent and a distinct transaction.
That observation and its force indicates why the Court of Appeal found it necessary to determine whether the steps in 1994 were sufficient to give rise to a legal debt to Mr and Mrs Nemes. If not, the subsequent act of the trustee in making the 1994 resolution and executing the deed of charge for which there would be no power in the trust – because unless there was a legal debt because of 1994, there would be no possible basis in trust law to convert what would otherwise, ex hypothesi, be some equitable obligation into a legal obligation because that would result in the trust, in effect, having removed, for the benefit of other beneficiaries, what they can derive from the equitable nature of an obligation over time.
There is no power under this trust deed for a trustee to convert equitable obligations into legal obligations. That is why his Honour Justice Barrett considered it essential to find that there was a legal debt as at 1994 and, as your Honours know, he found that on the basis there was available an action for money had and received and we challenge that.
FRENCH CJ: You challenge that on the basis that the trust continued to be active and, so long as it was active and equitable defences might be invoked, money had and received would not lie?
MR HUTLEY: It would simply not lie, yes. That depends upon the import of a supposed disjunctive reference by Justice Gummow in paragraph 67 in Roxborough to be a trustee or admission. We say that is an incorrect reading of the paragraph. When one goes to the end of the paragraph, his Honour certainly was not saying that. It is contrary to established authority in this Court, in 1910, and your Honours know the case and I will come to those in a little while if I could. That is the factual background.
Can I now come to the power to make the 1994 resolution, and if your Honours would go to the trust deed. The Court of Appeal found what had taken place was an application, advance and apply. As we said, his Honour Justice Barrett said that clause 4(b) was a composite power, with the four alternatives – and your Honours will see that at judgment 51, appeal book 528. His Honour concluded that there had been an advancing and applying – and that is at judgment 652, page 532.
That conclusion depended upon both the construction of the term “advance” and the term “apply.” With respect to the former his Honour held at judgment 52 that the term “advance” referred to the process of using immediate money that is to hand but would, in the normal course, not be outlaid until some future time. His Honour went on to say that it was a “power to earmark or assemble income or capital” – that is in paragraphs 52 and 55. It may not ultimately matter for the purposes of the disposition of this appeal but we say, with respect, it is wrong and we have put that in our submissions in‑chief at paragraphs 41 and 42.
“Advance”, used in clause 4(b), together with the power to raise and in circumstances where the clause contemplates that trust capital and income must be either raised or advanced before it can be paid or applied - that is the context in which one has to address this concept of advance. His Honour said that the power to raise described the process by which a money sum was obtained from property, usually through sale or mortgage, and implied at least that the - but appears to have concluded that neither of those possible alternatives was engaged in this case. That is again from judgment 52 at 528.
“Advance”, we say, similarly describes a process by which trust capital or income can be readied to be paid or applied but which does not involve a raising or conversion into money. The word “advance” is therefore to be understood in the context of a power to assemble or separate, whether it be physical separation or separate through, depending on the property, accounting treatment in the way that your Honour Justice Kiefel observed, relevant portions of capital or income.
The crux of the decision below, however, turned on the concept of “apply”. In construing that power, his Honour relied upon the decision in Re Baron Vestey’s Settlement [1951] 1 Ch 209, and a New Zealand case of Commissioner of Revenue v Ward [1970] NZLR 1, and Chianti Pty Ltd v Leume (2007) 35 WAR 488. His Honour at trial concluded the power to apply trust, capital or income could be exercised by:
a resolution deliberately arrived at and recorded –
That is judgment 61 – to credit trust, capital or income to a beneficiary; that is judgment 59. He said that was sufficient.
We have dealt with these cases in our submissions in 43 to 54, but can I take your Honours to Vestey’s Case. We have given your Honours the authorised report and also the All England Report; the authorised report excluded many of the facts. If we could take your Honours to the All England Report [1950] 2 All ER 891 – the facts are set out in the judgment of the Master of the Rolls.
The case, as your Honours know, concerned the discretionary trust of Sir Edmund Vestey. At 894D to E, your Honours will see identified the discretionary objects of that trust - children. They were persons who had a contingent interest in the corpus of the trust and upon final vesting, assuming they survived until that time, but they otherwise had no vested interest in any trust property. The relevant power was clause 7, which your Honours will see at 894A, which was to:
“ . . . pay or apply the income of Edmund’s fund . . . unto or in any manner –
et cetera. A meeting of the trustees was convened in February 1949. The minutes of the meeting appear at 894H and, relevantly, the minutes record that the trustee held a sum of £63,000 in hand of which they resolved to distribute some £47,000. The relevant resolution continues at 895A to C, and your Honours will see that:
“The trustees resolved –
that after making any –
distributions (if any) to adult beneficiaries –
of the trust the balance –
shall belong to such of the issue of Sir Edmund Vestey as are objects of the said power and are under twenty‑one years of age –
At 895C the minutes indicate that 5,000 was distributed to the adult beneficiaries, leaving £42,000 which would belong to “the issue of Sir Edmund Vestey”.
The issue in the case was that notwithstanding those resolutions the trustee also resolved to accumulate the amount of £42,000 purportedly in accordance with section 31 of the Trustee Act 1925 (UK), and the question was whether that was an effective accumulation for the purposes of the statute. In those circumstances, an anterior question was as to the effect of the resolution that the income shall belong to the infant beneficiaries.
The Master of the Rolls addressed the question whether this and in similar subsequent resolutions was an effective exercise of the power to pay and apply commencing at 898A. His Lordship came to the conclusion at D that it did not involve paying and therefore one had address the question as to whether it was applying. His Lordship’s reasoning in that regard ‑ if your Honours go over to 899B to C and the sentence commencing:
The first effect of the resolution of the trustees was to give to each infant [beneficiary] a specific portion of the income, and without that resolution the infant was entitled to no part of it at all.
At 899E to F he continued:
I have already indicated my view, and I do not propose to expand it, that, treating the resolutions, as I think they should be . . . In other words, I think that the effect of each of the resolutions was so to exercise the discretion that in each case each one of these infants became absolutely entitled to a particular sum of money so appropriated, and, s. 31 being inapplicable, those appropriated sums have now become part of the infants’ respective estates.
Because, in effect, there was a vested trust, the trust wherein accumulations could not apply to that sum might have applied to the income arising on that sum as they went on but not that sum. Lord Justice Asquith agreed – 900G – and so did Lord Justice Jenkins. His Lordship gave separate reasons and if your Honours go over to 901 – in the first instance, F, your Honours will see how the question arose in the context of section 31. Then if your Honours go between C and D on 902, in the sentence commencing “In this case” and then continue on down to “absolutely entitled to that sum”, shortly below E.
We make two submissions in relation to Vestey’s Case. The ratio of that decision insofar as it relates to the meaning of the word “apply” is that a power to apply trust income in a discretionary trust can be validly exercised by the trustee resolving thereafter holds some portion of the trust income on trust for a discretionary object absolutely. That is because the effect of such a declaration is to confer an interest in the assets advanced in circumstances where the discretionary object would otherwise have no vested interest in the property at all. The effect is to remove the property advanced from the original trust and to hold it on a new trust for the beneficiary absolutely.
That is why, in effect, one has advance or pay. Pay – there is no doubt the property has left the trust at law obviously and in equity. To advance is the equitable equivalent of paying, that is, it is applied such that the object is beneficially entitled to that and the asset, relevantly, is no longer subject to the same trusts.
Secondly, we say, it is apparent from the analysis in Vestey’s Case that it could not apply to the present case. The 1994 resolution did not confer any absolute and, for that matter, any vested interest in Mr and Mrs Nemes in any of the 10 class “B” shares. There was no attempt, as it were, at a resettlement.
Next is the decision of the Commission of Inland Revenue v Ward [1970] NZLR 1. This is a case which we say seeks to apply, and each Justice seeks to apply the decision in Vestey and, really, the difference in the court is upon the factual circumstances in the case and whether the factual circumstances in the light of the resolutions were sufficient to justify the relevant conclusion demanded by Vestey’s Case.
In this regard, your Honours, the case was concerned with a trust deed with a power, which your Honours will find at page 6, line 9, which is a power to pay and apply. That is the power to pay, I am sorry, and they were also dealing with section 40 of the Trustee Act. I am sorry, your Honour, in my note. Your Honours will find that at the bottom of the page at line 41, where there was a power to pay “or otherwise apply”. Now, in 1963 the trustee resolved that the income of the trust should be held “to the credit” of various beneficiaries, and if your Honours go over to page 7, below about line 30, your Honours will see the relevant document is executed by the trustee and the second entry:
To be held for held for the credit of my four children –
a certain sum of money.
The trustee’s declaration was carried into effect in the books of the trust but the –
amounts were not in fact paid to the beneficiaries until some years later. That is page 7, lines 40 to 45. Notwithstanding the trustee’s resolution, the Commissioner for Inland Revenue assessed the trust deed of income tax for the whole of the income of the trust, and your Honours will see that from page 6, lines 15 to 17.
The issue in the New Zealand Court of Appeal was whether the declaration was effective, to vest the income in the beneficiaries. The President, Mr Justice North and Mr Justice Turner agreed as to the relevant principles but disagreed as to their application. Justice North applied Vestey’s Case, finding that a resolution affected in advance because it made the relevant portion of the income the absolute property of the beneficiaries and your Honours will see that from his Honour’s judgment at page 15, line 43.
Just before I go to that, his Honour saw the question and it may have been the question which led to some of the differences between the judges as that which is identified at line 8 - 45 to the end of the page. But then his Honour’s dealing with the reasoning, after he had been through a lengthy consideration of Vestey’s Case, appears at page 15, line 43, where his Honour said:
I read Vestey’s case therefore as laying down the principle that if a trustee takes the necessary step of exercising a power “to pay or apply” income for the benefit of infants, who only have a contingent interest in the income, it is immaterial whether the income is immediately used for the benefit of the infants and is sufficient if it is allocated to them in terms which makes the parts of the income so allocated the separate property of each infant.
BELL J: If one just tracks back to the beginning of that paragraph, his Honour seems to reject that it was significant in Vestey’s Case that:
the income which had been retained by the trustees was apparently separately invested –
He suggests –
no particular attention was given to this circumstance –
in the judgments in that case, and he observes –
The retained income, if I may call it such, remained in the trust and continued to form part of the trust property.
MR HUTLEY: This is one of the vagaries in the case. There seems to have been a debate as to how much cash there was and what was sufficient. I will come to that when I deal with Justice Turner’s decision where he said, because he could not identify a fund, there was not sufficiently identified trust property. That seems to have been, in effect, the circumstance which was driving the case, but it is quite apparent that the President does not seem to have thought “the mere fact that I cannot necessarily identify a specific piece of property, as long as I can say there is an absolute vested interest in the trust property in these individuals, that is sufficient”.
Now, that may have turned upon the fact that at this time, the question as to the capacity to have trusts over parts of accounts and the like was by no means certain. That time has passed. This Court has made clear that you can do it; there are other decisions, and we have referred to them in our written submissions. That seems to have been the concern, but his Honour was clearly of the view that you had to have that absolute vesting.
GORDON J: It may be, though, because of the terms of the resolution or the steps that led to this - if you go back to page 7, what was happening in this case, which is different from our circumstances, was that they were determining the income of the trust in a particular year for the purposes of determining what the trust position was for tax purposes, and then working out where the distributions were to go.
MR HUTLEY: Yes.
GORDON J: You have a specified sum being the total income derived as a fixed figure. You may not be able to work out which bit of that bit was going where, but there was a precise allocated fund.
MR HUTLEY: Your Honour’s observation, with respect, is wholly correct. That is really the difference between the President and Mr Justice Turner, when I come to his reason for disagreeing. They agreed on the principle; they just disagreed on the question in point of fact whether there was sufficient certainty of trust property of this attempt to declare a trust of asset being a portion of the income to create a trust. They otherwise agreed on the principles. It is only some observations of Mr Justice McCarthy which might be thought to be different, but Mr Justice McCarthy explicitly says he is seeking to apply Vestey’s Case. He just may have had a different interpretation of it.
Could I then take your Honours to Mr Justice Turner, if I could, in this regard? Now, he dissented in the result, but agreed with the President as to the applicable principles. One sees that, with respect, at page 25, lines 2 to 26, where he sets out the principles which are required; what was required by Vestey’s Case. Your Honours, down at 40 he thought the significance of “shall belong to” in Vestey’s Case, he refers to.
KIEFEL J: The purpose of the estoppel by convention is to give effect to assumptions, and in a way it is giving effect to the parties’ intentions by holding them both to an assumption upon which they have operated, but that is only for the purpose of their dealings with each other, is it not? I am not sure that you can extend the notion of holding parties to assumptions to conduct of the parties in another sphere.
MR BIRCH: Well, the recital is background to the covenants in the deed.
KIEFEL J: You are making it operate with respect to testamentary undertakings later on, not as to dealings as between the trustee and the beneficiaries, Mr and Mrs Nemes, in relation to the trust itself or in relation to the debt obligation. You are applying it in another sphere.
MR BIRCH: That might be the poor or confusing way I opened it. The way I meant to open it was to say that the deed itself brought about an estoppel by deed at the date ‑ ‑ ‑
FRENCH CJ: You are distinguishing between estoppel by deed and estoppel by convention.
MR BIRCH: No, sorry, the estoppel by deed or convention arose when the deed was executed in 1995. The promissory estoppel argument depended upon the reliance by making their wills, but they did not make their wills until 2005 that are the ones that represented their reliance. So far as the detrimental reliance and the promissory estoppel case is concerned, that was not created or perfected until 2005 or ‑ ‑ ‑
KIEFEL J: For the promissory estoppel you participate in having the trustee make a representation to you and then you use that against the trustee to say that you have to be held to that representation in relation to my will. Is that how it operates?
MR BIRCH: Yes. I understand the point your Honour has raised to me about differing capacities but that does not arise in regard to the original execution of the deed in 1995.
KIEFEL J: I think the conduct of the parties might be relevant to whether equity would enforce it.
MR BIRCH: Well, the arguments on the deed were ‑ there was no sort of laches‑type defence, so far as I recall, in regard to the attempt to enforce promissory estoppel or the estoppel by deed case, but the deed itself though once it was executed we say just sat there creating, if you wish, the binding arrangement, and the continuing representation up until the day when it was finally called upon and it did not lose any of its effect nor so far as estoppel by deed was concerned gain anything further ‑ ‑ ‑
KIEFEL J: Perhaps it is not so much a question of how equity would approach it. If one just approaches how a promissory estoppel operates there would have to be a question, would there not, about whether or not there is a clear representation upon which it is intended they act in relation to matters such as their testamentary dispositions?
MR BIRCH: Yes. I have to say we ‑ ‑ ‑
KIEFEL J: It is hard to effectively make a representation to yourself is really what I am saying.
MR BIRCH: Well, there could be this though. There could be that not so much a representation to myself as a mutually assumed state of affairs ‑ ‑ ‑
KIEFEL J: That does not sound awfully like a promissory estoppel though, does it?
MR BIRCH: Well, your Honour might accuse me of shifting my ground to an estoppel by convention but so far as ‑ ‑ ‑
KIEFEL J: You are moving backwards and forwards a little bit.
MR BIRCH: Yes. So far as the will case was concerned, I am accepting that that arose in 2005 out of that conduct and that conduct was a mutually assumed state of affairs between the will makers on the one hand and the existence of the deed and the representation by Nemeske of its indebtedness. But the point made against us is that Nemeske could be personally bound but not in its capacity as trustee, and we accept we have to
wrestle with that, which is why it may be that I never get past the estoppel by deed point, but we say that the deed itself works because all that was being acknowledged and all that the trustee was seeking to do was what it was entitled to do, in any event. If the Court please.
FRENCH CJ: Thank you, Mr Birch. Yes, Mr Hutley.
MR HUTLEY: I will deal with the estoppel point first. As to the estoppel by deed point, this was not dealt with in our learned friend’s submissions, and we make no complaint, but in the Court of Appeal it was raised although not dealt with, and we have prepared a short note because there is quite a number of cases which speak to this. If I could hand them up rather than quote them to your Honours and if your Honours would take just a moment to look at it. That is the estoppel by deed point, before I come to a more fundamental problem with the estoppel case.
KIEFEL J: Are these cases referred to in paragraph 2 of the submissions referring to an estoppel by convention or estoppel ‑ ‑ ‑
MR HUTLEY: It is estoppel by deed and its effect in equity, your Honour. Firstly, can I deal with the estoppel cases in globo? Insofar as the trustee comes under an in personam obligation to the estate, we do not speak to that. There are problems with it such as your Honour Justice Kiefel has observed upon, but the fundamental problem is an estoppel by a trustee with beneficiary one cannot bind beneficiaries two, three and four in respect of the distribution of the estate. It just cannot happen, because the trustee is not dealing with property which it owns beneficially. It is not affecting its property. It is affecting the property of others. Unless the others participate in the estoppel they cannot be estopped from contending, as here, that the trustee had no power to do that which the trustee contends it had power to do such that it could have recourse to the trust estate to exonerate itself.
This is not about whether there is a legal debt at the end of the day between the trust company and the estate. On one view, if you enter into a covenant under deed, clause 5, one can say that is a legal obligation. The trustee as a company had the power to enter into such legal - as any human beings, so be it. What this case is all about at a substantive level is whether this obligation is an obligation which can be – in respect of which the trustee can exonerate itself out of the trust assets.
So, in other words, talking about estoppel without, in effect, confronting the fact is are the other beneficiaries bound by this estoppel ‑ which have not been addressed at all, it really does not assist – and the reason it has not been addressed is because there is no conduct which could possibly be pointed to by the balance of the specified beneficiary such that they could not say, that is all very interesting between the trustee and the Nemeses but it is of absolutely no interest to what we are really talking about here is the effect upon the property.
So one of the reasons we did not debate in great part the facts of the estoppel case is because they frankly went nowhere because the real question is are the specified beneficiaries precluded from saying, quoad the trustee and, for that matter, the estate, what the trustee did was beyond power such that the trustee has no right of indemnity.
GORDON J: Can I ask whether that proposition holds true for both ways Mr Birch puts it? So, as I understood his argument in relation to the deed, it is self‑executing – and I understand that your estoppel point that you just raised then goes to that argument ‑ ‑ ‑
MR HUTLEY: Yes, your Honour.
GORDON J: ‑ ‑ ‑ and then the alternative way I understood he put it was that it was perfecting a step.
MR HUTLEY: The perfecting a step is another way of saying I did not exercise the 4(b) power in 1994 but in some way it was executed in 1995. Now, the simple answer to that is one goes to the resolution with the charge and it is quite clear that no power under 4(b) is being executed – is being purported to be executed. What is being purported to be done is granting a charge over the trust assets to secure the existing debt obligation which the trustee believed was its act effecting the 4(b) power.
So my learned friend again has to go to, in essence, his “let us not talk about the detail, let us not talk about what happened”. There is a in the best of all possible worlds we could have done this in some way that this would have all meant something and equity and your Honours have to, as it were, enter the best of all possible worlds and in a sense do it for them.
Now, the cases to which reference is made in relation to this - the Collards Case and Pilkington - establish no such principles. They are authority for this proposition. If trustee A has an obligation to pay to X the value of asset Y held upon trust, trustee A does not have to sell the asset and pass the money, instead trustee A can transfer the asset to the beneficiary, and we would say only if the beneficiary wants it because the trustee may in effect have certain skills in turning the assets to account, they may have opportunities which a beneficiary does not have, but what the beneficiary can in effect say, I am satisfied with getting the asset, and no other beneficiary can then say that is a breach of trust, you cannot do it, you must sell the asset.
That is all that principle stands for. It has nothing to do with, in effect, this imaginary world which my learned friends would have it because one simply has to state it to reject it because where does it end. Your Honour Justice Kiefel I think observed do we pretend there is a bank involved? Why not? We can imagine they could have done it with a bank, et cetera, and on it goes.
So my learned friends, in effect, have never dealt with that and therefore all their imaginary cases fall down. That essentially throws them back onto the argument that the determination in 1994 gave rise to an equitable obligation to pay. Now, that in a sense to an extent is question begging because there was only an equitable obligation to “pay” if there had been a power which created that equitable obligation to pay and it had been exercised.
Therefore, the question resolves into does a determination of that variety, such as your Honour the Chief Justice observed, amount to the act of advancing and applying? We have made our submissions in relation to that so one has moved in effect no further than that inquiry, and we made our submissions why it is not an advance because it would have the odd consequence that if a trustee resolved to pay then the power would have been executed before they paid because by definition it would be an advance.
The trust deed provides for a distinction between – sorry, apply – I am sorry, it would have been an application – it would be applying. If resolving to pay amounted to applying, which is essential to that argument, then the moment you resolve to pay you had applied and then when you paid you would have, in effect, have done nothing more than the act of paying, the trust would have already been executed.
Now, obviously there is a difference between resolving to pay and applying. Our learned friends have never identified what that difference is and, with all due respect to Justice Barrett, nor did he in a way which we say was consistent with the cases.
In that regard, I should say something about the reference to this Court’s decision in MSP Nominees. That, of course, was a case which was concerned with this proposition, that for the purposes of valuing a trust which is a trust and an interest in a trust, do you have regard for certain tax purposes to the fact that its subject, the trustee, has a right in respect of legal obligations which the trustee has incurred in the performance of the trust to exonerate itself or seek to recoup itself out of the trust asset and, not surprisingly, this Court held that for the purposes of valuation one had to have regard to those fixed charge‑like obligations upon the trust and that is all it stands for and does not speak to the problem with which your Honours are concerned.
My learned friend made a further submission about the excess value which now exists. In fact, there are agreed facts dealing with this. Your Honours will find them at appeal book 445, paragraph 4. Now, I would just like to say something about the characterisation of a resolution to pay as being an equitable debt.
The term “equitable debt” has had a somewhat chequered career in the law and it becomes ever more chequered, but we have referred to the decision of Mr Justice Fry in Webb v Stenton (1883) 11 QBD 518 at 530. This Court referred to that passage in Youyang Pty Ltd v Minter Ellison Morris Fletcher (2003) 212 CLR 484 at paragraph 43 with approval, albeit the statement has two limbs to it and the approval was to the breach of trust limb where the Court observed that so far as a breach of trust one can characterise a claim to seek the restoration of the trust as a claim in equitable debt and your Honour the ‑ ‑ ‑
FRENCH CJ: There is a lot of recent discussion, I think, about the characterisation of so‑called equitable compensation as in fact recovery of an equitable debt.
MR HUTLEY: Your Honour has recently reserved upon it on a speech which is on the High Court website. We follow everything your Honours say with a sort of sycophantic obsession.
FRENCH CJ: One has to be careful.
GORDON J: We do not actually believe that.
MR HUTLEY: It is - it is on the website.
GORDON J: I said we do not actually believe what you just said.
MR HUTLEY: Your Honours, the Supreme Court in the United Kingdom has recently observed upon the matter in AIB Group United Kingdom PLC v Mark Redler & Co Solicitors [2014] 3 WLR 1367. The relevant passages are in paragraphs 60 and 61, much to the effect of the observation your Honour the Chief Justice made that, in effect, it is kind of going out of style, it is not particularly helpful, that characterisation. But Lord Justice Fry’s statement in Webb v Stenton is in these terms:
A trustee is not, in my opinion, an equitable debtor to the cestui que trust until there is money in his hands which he ought to pay to his cestui que trust –
So it is, in effect, very close or analogous to the circumstances where there is a “money had and received” claim. In our respectful submission, the equitable debt analysis of our learned friends goes nowhere. But also, of course, our learned friends seek to say that we raise the issue as if there is an equitable obligation from 1994. We observe that there does not appear to be a power to convert it to a legal obligation. Our learned friends assert we have not identified some fundamental principle which makes that so. Our response is it is not for us to raise a fundamental principle. It is for my learned friend to point to a power under the trust deed which allows the trustee to take legal obligations, equitable obligations and convert them into legal obligations with all the potential effect upon other beneficiaries over time when the trustee has removed from itself the power to, in effect, raise equitable defences to the claims which, of course, are essentially for the benefit, not only of the trustee, but for competing claims of other beneficiaries.
I think in paragraph 72 of our written submissions we have explained how that could, in effect, work to the disadvantage of my client. The example we give is take – and it was not investigated, it wholly was a claim in law and this equitable claim is a new thing, but anyway, let us deal with it.
If the Nemeses participated in 1994 in the determination, in effect, that an equitable obligation would come into existence and it would not be met they seem to have participated in the trustee not paying them, quite content for them to stand by. That seems to have been maintained for somewhat close to 20 years thereafter.
If there had been solely an equitable obligation, and this has not been investigated, and the assets had gone up and down in value, fluctuated all around the world, and, for example, the trustee had been in breach of the trust at some point in that period in not turning its mind – to turning to account the assets beneficially to all beneficiaries, potential beneficiaries, because it was much larger, for example, than the 3 million – if the beneficiaries then sued the trustees at the end of that period for breach, the beneficiaries may well have said we should have access to the fund in preference to the claims of the Nemeses for the 3 million because they have stood by and participated in the wrong of the trustee to not turn the assets to account for 14 years.
That stands in a sense as an equitable defence of the trustee, but the trustee has to utilise that defence by obligation in favour of other beneficiaries. Equitable defences are not solely defences for the benefit, of course, of the trustee. They are essentially for the benefit of the trust estate.
Sometimes they are defences to the trustee and they are personal – but most are for the benefit of the trust estate.
So we submit that unless a specific power is pointed to which would warrant the creation of the charge, and none is, it simply has created a legal obligation which, whilst it stands as between the trustee and the estate, cannot form the basis of exoneration out of the trust estate for the benefit of the Nemeses – the estate. We say that is the end of it. So that is how we put it.
We say all our learned friend’s points by way of defence fail to come to terms with the fundamental question of power and, if there is no power, all of it falls over because the legal acts are only acts as between the trustee in its personal capacity and Mr and Mrs Nemes, and now the estate.
I have said all I wish to say about round robins and things like that. My learned friends in their submissions refer to the charge as a stand‑alone exercise of power – I think I have said all that is necessary. The rest is in our written submissions, I think. If your Honours please, those are our submissions.
FRENCH CJ: Yes, thank you, Mr Hutley. The Court will reserve its decision. The Court adjourns until 10.15 tomorrow.
AT 3.42 PM THE MATTER WAS ADJOURNED
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