George v Kollias
[2007] VSC 46
•5 March 2007
| IN THE SUPREME COURT OF VICTORIA | Not Restricted | |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
No. 6364 of 2005
IN THE MATTER of the S M CARNEGIE TRUST
IN THE MATTER of an application under the Trustee Act 1958, s 63A
BETWEEN
| JENNIFER ANNE GEORGE | Plaintiff |
| and | |
| BRIAN CHARLES KOLLIAS & ORS | Defendants |
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JUDGE: | Hansen J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 6 and 7 February 2007 | |
DATE OF JUDGMENT: | 5 March 2007 | |
CASE MAY BE CITED AS: | George v Kollias & Ors | |
MEDIUM NEUTRAL CITATION: | [2007] VSC 46 | |
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TRUSTS – Trustee Act 1958, s 63A – Discretionary trust - Application for approval of arrangement – Consented to by all beneficiaries of full age and capacity - Whether for benefit of minors and persons unborn – Whether to be approved.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr D G Collins SC and Mr P G Willis | Allens Arthur Robinson |
| For the Second and Third Defendants | Mr R R Boaden | Maddocks |
| For the Fourth Defendant | Mr R B Phillips | Donaldson Trumble |
HIS HONOUR:
This is an application for an order under s 63A of the Trustee Act 1958 (Vic) (“the Act”) approving an arrangement varying the S M Carnegie Trust (“the Trust”) established under the will of Sunday Millicent Carnegie who died on 25 May 1995. I will refer to Mrs Carnegie as the testatrix.
On 28 September 1995 probate of the will (dated 21 April 1994) was granted to the executors appointed therein namely, her brother Jack Morton Tallis, her accountant Roger James Gilchrist and her solicitor Brian Charles Kollias. The testatrix also appointed the executors as trustees of the estate. Thus on the establishment of the Trust the executors became the trustees thereof. Subsequently changes have occurred in the identity of the trustees. On 11 December 1996 Perpetual Trustees Victoria Ltd was appointed an additional trustee of the Trust. On 19 December 1996 Mr Tallis died. On 26 January 2007 Mr Kollias died. No person has yet been appointed to replace him as a trustee.
The proceeding was commenced in June 2005 by a beneficiary of the trust. The defendants were the trustees and another beneficiary as a representative party. By amendment pursuant to orders made on 13 December 2006 that representative party was replaced as such by an independent solicitor, Jan Moffat.
The testatrix was one of four children of Sir George Tallis who died in 1948. Her siblings were:
(a)George Cassius Tallis who died in 1990 survived by two children, June Patricia Tallis and George Michael Tallis;
(b)Jeffery Andrew Tallis who died in 1998 survived by two children, Suzanne Joyce Knight and Jeffrey Peter Tallis; and
(c)Jack Morton Tallis who died in 1996. He had no issue.
The testatrix died without issue. She was survived by her four nephews and nieces referred to above.
By her will, after providing for some legacies and a devise of her house property at Mornington, the testatrix left the residue of her estate to her trustees on trust to pay debts and expenses and two legacies and, following that, to hold the residue (called “my residuary estate”) “to set up a trust fund (‘the fund’) to consist of:-
(i) my residuary estate; and
(ii) any income added to the fund from time to time.”
The fund was to be known as “the S M Carnegie Trust” (cl 7).
Clause 8 identified the beneficiaries of the fund, as follows:
“8. THE BENEFICIARIES of the fund shall comprise:-
(a)(i) the children of JUNE PATRICIA KIRK (nee TALLIS) being GEORGE WILLIAM KIRK, ROBERT TALLIS ANDREW KIRK, JAMES ALEXANDER KIRK and ROSALIND PATRICIA MACKAY;
(i)the children of GEORGE MICHAEL TALLIS being GEORGE ANDREW TALLIS, KATHERINE MARY BAIN, BELINA SUSAN ROTH and JENNIFER ANNE GEORGE;
(iii)the children of SUZANNE JOYCE KNIGHT (nee TALLIS) being JENNIFER SUZANNE COLLINS, JEFFREY DONALD KNIGHT and IAN TALLIS KNIGHT; and
(iv)the children of JEFFREY PETER TALLIS being RICHARD LEARMONTH TALLIS, MARK PETER TALLIS, CAROLINE MARY MACLACHLAN and JOHN GEORGE TALLIS.
(b)any person who shall at any time be or have been a spouse or defacto spouse of the persons referred to in (a) above;
(c)any child, grandchild or great grandchild of the persons referred to in (a) above born before the termination date.
(d)any company which now or before the termination date is incorporated in Australia of which a Director or person who beneficially owns a share carrying a right to vote at general meetings is a beneficiary by reason of sub-paragraphs (a), (b) or (c) above.”
In cl 9 the testatrix provided that the first trustees to the fund shall be her named executors. The power to appoint a new trustee in place of an existing trustee was vested in Jack Morton Tallis in his lifetime and upon his death in Mr Gilchrist and Mr Kollias or such other person as they appoint acting jointly. Clause 10 provided that the trustees shall: not at any stage be less than three, act by unanimous decision, and include if possible but at the sole discretion of the trustees a member of the Tallis family.
Clause 11 dealt with the annual payment of income and capital as follows:
“11. MY TRUSTEES shall by the 30th day of June of each year pay all or part of the income and all or part of the capital of the fund to any one or more of the beneficiaries referred to in paragraph 8 in the shares and in the amounts and at the times my trustees in their absolute discretion shall think fit without any obligation to make payment for all or any of the said beneficiaries or to ensure equality among those to whom payments are made.”
Clause 12 provided that the trustees “may in their absolute discretion:
(a)accumulate income so that any surplus becomes part of the capital of the trust; and
(b)determine what parts of the income or capital of the fund will be used in paying any taxation liability.”
It is unnecessary to refer to cl 13 which dealt with the manner of making payments for beneficiaries. Investment powers of the usual type were conferred in cl 14 and cl 15 dealt with trustees’ liability.
Clause 16 provided that the trustees may take and act upon legal and accounting advice regarding the trust, and shall be entitled to reimbursement from the trust of all monies expended and debts incurred in relation to the administration of the trust.
Termination of the trust was provided for in cll 17 and 18 as follows:
“17. THE FUND shall be wound up and will terminate on the first to occur of:
(a)A decision in the absolute discretion of the trustees that it would be in the interests of the beneficiaries to terminate the trust; or
(b)The period of eighty (80) years from the date of my death.
18. ON TERMINATION my trustees shall:
(a)pay all debts and liabilities in relation to the trust; and
(b)distribute the balance of the trust to such one or more of the beneficiaries referred to in paragraph 8 as my trustees shall in their absolute discretion determine without any obligation to ensure equality among those to whom payment is made or to take into account any previous distributions made.”
Finally, cll 19 and 20 provided for commission and professional charges. As to the former, the trustees were authorised “to deduct and retain as remuneration for their services a commission upon the corpus and income of my estate at the same rate as would have been chargeable by a trustee company acting as executor and trustee of this my will” and if there be more than one trustee such remuneration shall subject to agreement between them be shared by them in equal shares.
It will immediately be noted that the trust thus provided for is discretionary as to income and capital and the recipient of any payment, and is one trust with one fund for the benefit of the objects identified in cl 8. The trustees duly established the Trust in accordance with the will. At 31 December 2006 the value of the assets held by the trust was $17,157,593.
The next matter to note concerns the number of persons who are or may be beneficiaries under cl 8. It is important to be clear on the number of generations and possibilities that cl 8 comprehends. The beneficiaries are:
(a)Under sub-cl (a), the 15 named children of the two nieces and two nephews of the testatrix. At the time of the hearing that number had reduced to 14 by reason of the death in 1997 of one of the children Robert Tallis Andrew Kirk.
(b)Under sub-cl (b), any person who at any time is or was a spouse or defacto spouse of “the persons referred to in (a) above”. While no question was raised as to this it seemed common ground that the expression “the persons” referred to the sub-cl (a) beneficiaries and not, in addition, to those of their parents who were the nephews and nieces of the testatrix. Thus understood, at the time of the hearing there were 15 sub-cl (b) beneficiaries.
(c)Under sub-cl (c), any child, grandchild or great grandchild of the sub-cl (a) beneficiaries born before the termination date. To the time of the hearing 33 children have been born of the sub-cl (a) beneficiaries, a number of whom are minors. More such children may be born. As yet there are no persons born in the categories of grandchild and great grandchild.
(d)Under sub-cl (d), any Australian incorporated company of which a sub-cl (a), (b) or (c) beneficiary is a director or beneficially owns a share carrying a right to vote at general meetings. Construed literally this clause would comprehend a public company in which a beneficiary had a minor shareholding. And the fact is that the beneficiaries are directors or own voting shares in a variety of companies including large public companies. Notwithstanding that the present proceeding did not seek determination of the construction of sub-cl (d), counsel for the plaintiff submitted that it should be read purposively in the context of the will and consistently with the intention of the testatrix to benefit the sub-cl (a), (b) and (c) beneficiaries. Approaching the matter in that way, counsel submitted that the intention of sub-cl (d) is to provide a means to benefit indirectly sub-cl (a), (b) and (c) beneficiaries by distributions to companies in which they had a substantial personal interest, in lieu of a distribution to the individual. Accordingly, the reference to a company in sub-cl (d) should be interpreted so as to include only a company in which a sub-cl (a), (b) or (c) beneficiary has a substantial personal interest as a result of which a payment to the company would materially benefit such a beneficiary. Assuming that to be the correct interpretation of sub-cl (d), all such sub-cl (d) companies had consented to the proposed arrangement. If, however, that is not the correct interpretation then the sub-cl (a), (b) and (c) beneficiaries of full age and capacity will resign their directorships and dispose of their shares in the companies so that the companies cease to be beneficiaries. Such resignation and disposition would occur before the proposed Deed embodying the arrangement is executed.
Without debating the question of construction counsel for the trustees and the representative defendant accepted the implicit limitation on sub-cl (d) beneficiaries of a substantial personal interest.
I make the following observations concerning this construction of sub-cl (d). The construction would significantly narrow the reach of sub-cl (d). But is it a correct interpretation? As to that, the present proceeding is not one for the proper construction of sub-cl (d) and I have not heard an argument as to construction that one would hear in such a proceeding. It may be that sub-cl (d) is to be understood as intended by its wide application to aid flexibility of payment to suit a beneficiary. And, as to that, it may be noted that cl 13(c) provides that the trustees may make payment “to a beneficiary not being a natural person notwithstanding that such beneficiary may have a manager, receiver and manager or provisional liquidator appointed in respect of its assets”. That sub-cl (d) may be understood as intended to aid flexibility of payment to suit a beneficiary is not to deny that the trustees, generally or in a particular case, might well incline to confine any distribution to a company in which a beneficiary had a substantial personal interest. But in providing for the trust the testatrix was not contemplating a variation of trust application under s 63A, rather, she was establishing a discretionary trust, and a framework for its operation, which might run for 80 years and for the purpose of which the wide terms of sub-cl (d) might have seemed appropriately complementary. Of course it may seem otherwise when one approaches the matter as the plaintiff does through the prism of an application under s 63A when natural self-interest may lead to a rationalisation of the terms of the will. However that may be, it is unnecessary to deal further with this aspect. I say merely that as at present advised I am not persuaded to the construction preferred by the plaintiff and accepted by the defendants. Further, the alternative course of the present sub-cl (a), (b) and (c) beneficiaries resigning as directors and disposing of their shares does not overcome the difficulty presented by sub-cl (d) because beneficiaries hereafter may become directors or hold voting shares within the meaning of sub-cl (d). That is, sub-cl (d) would have an ongoing potential application. The question is, how is that category of beneficiary to be accommodated by an arrangement proposed under s 63A?
In summary, there are (or, more strictly, were at the time of the hearing) 62 living beneficiaries constituted by 14 cl 8(a) beneficiaries, 15 cl 8(b) beneficiaries and 33 cl 8(c) beneficiaries. As yet there are no beneficiaries born in the cl 8(c) categories of grandchild or great grandchild. There are a number of cl 8(d) companies; they are referred to in the affidavits and a chart of them was attached to the written submission of counsel for the plaintiff.
That is the present position, but what will the numbers be in the future? This was considered by Anthony Hamilton Tom Starkins who provided an affidavit of an expert nature for the plaintiff. He calculated the expected number of beneficiaries to be:
Year Total 2005
2010
2015
2020
2025
2030
2035
2040
2045
2050
2055
2060
2065
2070
2075
62
62
67
91
105
119
124
118
118
150
187
212
227
229
229
No challenge was made to this projection of future numbers. These numbers raise the question as to how many of the present 62 beneficiaries who are now adults will survive to the termination date in 2075. In the way of things of course what will happen if the Trust runs its course is that the present 62 beneficiaries will age and some will have died by the termination date in 2075. Counsel for the trustees hypothesised that even if half of those of the 62 individuals who are presently adults survived to the termination date there would then be living some 200 or so other individual beneficiaries who are not presently adult or born, and who as cl 8(c) beneficiaries would be eligible to receive a distribution. This provides an indication of the numbers of persons in respect of whom the Court is asked to consent to the proposed variation.
I have already referred to the parties to the proceeding but, with the above introduction, it is convenient to say something more about them. The plaintiff is Jennifer Anne George (nee Tallis) who is a cl 8(a) beneficiary and a competent applicant under s 64(1) of the Act. The trustees of the Trust are the first to third defendants. As I have noted, Mr Kollias, who is the first defendant, died on 26 January 2007. The fourth defendant, Jan Moffat, was added as a defendant by orders made by Harper J on 13 December 2006 and by which orders also the person who until then had been the fourth defendant ceased to be a party. As stated in the order Ms Moffat, who as mentioned is an independent solicitor and not a beneficiary under cl 8, was made a defendant as representing:
a)all persons who are beneficiaries of the S M Carnegie Trust who are minors, being the persons identified in Part A of Annexure A to the affidavit of Jennifer Anne George sworn 23 May 2005 in this proceeding who have not attained the age of 18 years;
b)all persons as yet unborn who when born will become beneficiaries of the S M Carnegie Trust, being within the class of beneficiaries specified in clause 8(c) of the Will of Sunday Millicent Carnegie deceased made 21 April 1994 (the “Will”);
c)all persons, including those as yet unborn, who will become beneficiaries of the S M Carnegie Trust at a future date, upon becoming a person within the class specified in clause 8(b) of the Will; and
d)all companies which will in the future become beneficiaries of the S M Carnegie Trust upon becoming companies within the class specified in clause 8(d) of the Will.
I note that in the amended originating motion filed pursuant to the orders of Harper J, the representative capacity in which Ms Moffat is sued is not set out after her name in the Schedule of Parties. The representative capacity should have been stated.
The amended originating motion seeks an order pursuant to s 63A of the Act that the Court approve on behalf of all of the persons and companies who Ms Moffat represents the arrangement varying the Trust set out in the proposed Deed of Arrangement being Exhibit JAG9 to the affidavit of the plaintiff sworn 23 May 2005.
It is important to note that at the hearing the plaintiff sought approval of a revised form of the arrangement embodied in that Exhibit JAG9. This revision was made in light of comments and written submissions of the defendants. The revised form of the Deed of Arrangement was handed to me by counsel for the plaintiff and, doubtless because it was produced very late, was not exhibited to an affidavit. The revised document, duly initialled by me, has been placed on the Court file. As a result of the revision a deal of the defendants’ written submissions filed prior to the hearing was overtaken.
Before referring to the terms of the proposal it is convenient to refer to events prior to the commencement of the proceeding in June 2005.
On 6 October 1995, very soon after learning of the Trust, the testatrix’s nieces and nephews wrote to the trustees. They expressed concern at the structure of the Trust, asserted that the testatrix would have wanted “simplicity and a fair sharing of her estate amongst the current branches of the family”, and requested that the trustees “seriously consider vesting the entire Trust capital in the [15 potential beneficiaries, being their children] as soon as possible and thereby remove a cloud of uncertainty, and anguish, that currently grips the family”.
The trustees responded by a letter dated 14 November 1995. The letter advised that because of the importance of the matter the trustees had sought counsel’s advice. Noting that probate had only recently been granted and that administration was in its early stages, the view of the trustees was that to vest the Trust now would be an abdication of their responsibility. A number of points were then made which it is not necessary to refer to. The letter concluded with an assurance that the trustees would exercise their discretion from time to time “responsibly and fairly after considering the needs and circumstances of all beneficiaries”.
On 6 December 1995 the trustees sent a circular letter to the beneficiaries. A copy of the will was enclosed and the position and duties of the trustees was stated. The request to vest the Trust was mentioned. It was also said that as an alternative the trustees had been requested to establish “sub-trusts” of the fund for each of the family groups to ensure some equality of division. The trustees could not agree to either request. It was pointed out that the trustees needed information as to the circumstances of potential beneficiaries although the nature and amount of any distribution was in the trustees’ discretion. The trustees were not obliged to ensure equality in distribution and beneficiaries had no fixed entitlement to distribution of income or capital. The letter concluded with a request for personal and financial information.
On 7 December 1995 several of the cl 8(a) beneficiaries (representing all of such beneficiaries) met with the trustees and expressed concern about matters arising from the discretionary element of the Trust namely, difficulty in administration, impossibility of achieving fairness, lack of certainty in distribution, preservation of the fund and costs of administration. The beneficiaries followed that up with a letter on 11 January 1996. They requested equal treatment and considered a needs-based approach “inherently unfair and undignified and have therefore declined to provide personal financial details”. The letter concluded with a request that the trustees distribute all of the trust assets “now”.
The trustees responded by letter on 7 February 1996. It was stated that the trustees would take into account the family wish for equal treatment. It was advised that the trustees had decided not to immediately vest the Trust.
Following this advice the cl 8(a) beneficiaries and their spouses determined not to participate in a “needs-based” administration of the Trust. Accordingly they did not, and have not to this day, provided personal information to the trustees concerning themselves or their children. As a result, commencing in 1996 and to the present, the trustees have made distributions from the Trust in equal amounts to each of the cl 8(a) beneficiaries with the sole exception that since the death of Robert Tallis Andrew Kirk the trustees have paid his share to his children equally.
Not unnaturally, having regard to the discretionary nature of the Trust and the consequent duties of the trustees, the trustees desire to administer the Trust on a needs basis and for that purpose intend to renew their invitation to the adult objects for information concerning their personal circumstances, and those of their descendants, each year.
I now refer to the proposed arrangement as it is in the form produced to me at the hearing.
The Deed of Arrangement contains only three operative clauses, cl 2.1 of which provides that in accordance with the consent of the sui juris beneficiaries (evidenced by the order of the Court) the trusts of the Trust “are varied by substituting for clauses 7 to 21 inclusive of the Will the terms set out in Annexure A and schedules 1-15”. Annexure A is headed “Common Provisions for all Varied Trusts” and, as the heading suggests, it contains a set of provisions common to the varied trusts. Details of the varied trusts are set out in the schedules following. That is the structure of the Deed.
The substance of the variation is that the single Trust and fund established under the will is replaced with 15 separate trusts, one for each of the cl 8(a) beneficiaries and his or her family. The 15 trusts are called “the varied trusts”. For this purpose, each of the surviving 14 children of the nieces and nephews is the primary beneficiary of a trust, and in the case of the deceased child his former wife is the primary beneficiary. The beneficiaries of each trust are:
(a)the primary beneficiary,
(b)any person who shall at any time be or have been a spouse or de facto spouse of the primary beneficiary,
(c)any child, grandchild or great grandchild of the primary beneficiary before termination of the varied trust, and
(d)any company incorporated in Australia of which a director or person who beneficially owns a share carrying a right to vote at general meetings is a beneficiary in the above categories.
It is thus seen that the categories of beneficiary in cl 8 of the will have been retained but narrowed to each of the 15 “families” by introduction of the device of a primary beneficiary. So the purpose and intention of the arrangements is to establish a separate trust for each of the 15 “families”. For the purpose of establishing a fund for each trust, the present Trust fund is to be divided into 15 equal shares with the trustees of each varied trust to hold one share in trust on the terms of that varied trust. On the value of the assets held by the Trust at 31 December 2006 the share of each varied trust would be $1,143,840.
The varied trusts are discretionary in nature in the same way as the present Trust. In this and other respects the common provisions carry forward those in the will either in the same terms or with changes that are not material for present purposes. Attention should however be drawn to the following provisions.
The trustees of the varied trusts are Mr Gilchrist, Perpetual and the named primary beneficiary. Further as to trustees, cl 12 of the common provisions requires that each varied trust have three trustees, that they act by unanimous decision and that they include, if possible but at the sole discretion of the trustees, a member of the “Tallis family” that expression having the same meaning as in the will.
Provision is also made for an appointor. The inclusion of appointors is new, there being no such position under the Trust. In each varied trust there are two appointors, namely Mr Gilchrist and the named primary beneficiary “jointly”. Clause 13 of the common provisions empowers the appointors “acting jointly” to remove and appoint a trustee or appoint an additional trustee.
I turn then to consider whether the arrangement should be approved on behalf of the persons represented by the fourth defendant.
I note immediately that counsel for the defendants accepted that the variation was such that fell within that which may properly be the subject of approval under s 63A. It did not amount to a re-settlement; see In re Ball’s Settlement Trusts[1]. Further, Dwyer v Strahan[2] is an example of a single trust being split into two on the same terms as the original trust.
[1][1968] 1 WLR 899.
[2]Unreported, Supreme Court of Victoria, Southwell J, 14 September 1984.
An order of approval is and operates as a consent to the variation by those who by reason of being a minor or other incapacity or being unborn cannot consent as those who are sui juris can.
Under s 63A an arrangement cannot be approved unless the carrying out thereof would be for the benefit of those who cannot consent. If that requirement of benefit is satisfied the Court may, if it thinks fit, approve the arrangement. Pennycuick J described the latter or second stage in these terms, namely that the Court “is further satisfied that the arrangement is in its nature a fair and proper one”[3]. Thus, in Re Van Gruisen’s Will Trusts, Bagger v Dean[4] Ungoed-Thomas J, after noting that actuarially considered the provisions made in that case for infants and unborn persons were shown to be more beneficial for them under the arrangements than under the present trusts, observed that that “does not conclude the case” as:
“The court is also concerned whether the arrangement as a whole, in all the circumstances, is such that it is proper to approve it. The court’s concern involves, inter alia, a practical and business-like consideration of the arrangement, including the total amounts of the advantages which the various parties obtain, and their bargaining strength.”
[3]In re Remnant’s Settlement Trusts [1970] 1 Ch 560 at 565.
[4][1964] 1 All ER 843 at 844.
That passage was referred to with approval by Mummery LJ in Goulding v James[5] who added that:
“That overall discretion described by Ungoed-Thomas J is to be exercised with regard to all relevant factors properly considered in the statutory context. The context is that the court is empowered to approve an arrangement ‘on behalf of’ the members of a specified class. As Lord Denning MR said in Re Weston’s Settlements [1968] 3 All ER 338 at 342, [1969] 1 Ch 223 at 245, ‘in exercising its discretion, the function of the court is to protect those who cannot protect themselves’.”
[5][1997] 2 All ER 239 at 249.
An order approving an arrangement enables the sui juris parties to proceed to effect the variation by entering into a Deed as in this case proposed. The court order does not make the variation, it merely provides a consent to the arrangement by and on behalf of those who cannot otherwise give consent[6].
[6]Goulding v James [1997] 2 All ER 239 at 246-248.
It may be that an arrangement involves a risk from the point of view of infants and unborn persons. That is not necessarily decisive against approval. The arrangement and its benefits and disadvantages must be considered overall. So considering the matter it may be concluded that the risk to infants and unborn persons “is a risk that an adult would be prepared to take” and which the Court is prepared to take on behalf of those persons[7].
[7]In re Cohen’s Will Trust [1959] 1 WLR 865 at 868 per Danckwerts J.
It seems implicit but should be noted that the concept of benefit is not confined to benefit of a financial nature. In Re Weston’s Settlements[8] Lord Denning MR referred to educational and social benefit. A year later Pennycuick J in Re Remnant’s Settlement Trusts said that the court was entitled to consider not merely financial benefit but benefit of any other kind. That case concerned a forfeiture provision that operated in relation to religion and which Pennycuick J described as “a source of possible family dissension”, and in respect of which he approved an arrangement which eliminated the forfeiture provision. I would, with respect, suggest that the view of this decision expressed by McPherson J in Re Christmas’ Settlement Trusts[9] has much to commend it. That is, it extended the notion of benefit further than could be justified. McPherson J further expressed the view that “the mere hope of avoiding possible future family friction would ordinarily not suffice, at least in the case of relatives as remote as cousins living apart”. Nevertheless the possibility of family dissension may be an appropriate consideration in the circumstances of a particular case, of which Nicholas v Equity Trustees & Executors Agency Co Ltd[10] where there was substantial litigation is an obvious example. And in Dwyer v Strahan[11] Southwell J considered a risk of dissension between the families a factor but the variation there proposed was simple and otherwise appropriate.
[8][1969] 1 Ch 223 at 245.
[9][1986] 1 Qd 372 at 376-7.
[10]Unreported, Supreme Court of Victoria, Harper J, 27 March 1996.
[11]Unreported, Supreme Court of Victoria, Southwell, J 14 September 1984.
The plaintiff submitted that benefit was to be found in a range of matters which were, in summary, the following: the avoidance of family dissension; an enhanced flexibility and capacity to make distributions adapted to the individual needs of the 15 family lines; the opportunity for more varied and appropriate investment strategies; an increased ease of administration; the capacity to reduce costs; and education by reason of increased opportunities for beneficiaries to act as trustees. These matters were elaborated upon by the plaintiff in her affidavit sworn on 23 May 2005 and by Mr Starkins in his report, and the written and oral submissions of counsel. I have regard to all that they said.
The avoidance or lessening of family dissension was much emphasised by counsel for the plaintiff. It was to be achieved by dividing the fund into 15 equal parts. That produced equality of treatment between the 15 family lines. Up to now the cl 8(a) beneficiaries have achieved such equality by refusing to provide the trustees with personal information, thus denying the trustees the ability to make a needs-based distribution. However the trustees have stated that they will endeavour to distribute on a needs-basis. The cl 8(a) beneficiaries believe it is hard to maintain equality and fairness in the present single trust. By creating a trust for each family line the capacity to make needs-based distributions and to advance income and capital in a tax-efficient manner will be enhanced, particularly as the number of beneficiaries increases.
In developing this aspect counsel said that the family groups apprehended that the testatrix had intended equality. Whilst that was not what the will provided, that was how the beneficiaries apprehended it. It was further apprehended that there would be jealousy and disharmony if there was competition between the family lines of the 15 cl 8(a) beneficiaries. The variation to 15 trusts would avoid that by producing equality between the 15 families.
Then, counsel said, no-one suggested that there was a present apprehension of dissension arising out of unequal treatment within the family group. But, as counsel rightly conceded, disharmony could arise in the future within the individual family group. This was however a “mere risk of future family friction” and not the reality of “a present apprehension that friction would exist”. The cl 8(a) beneficiaries wished to avoid such friction by the present proposal, as they had hitherto by refusing to provide personal information.
A further point in the argument is that the senior family member in each family group will be a trustee and able to bring his or her familiarity with the family and individual circumstances to the determination of distributions.
All of this seemed to me not to add up to very much. The starting point was the asserted view of the cl 8(a) beneficiaries – a view initially pressed by their parents – that the testatrix had intended equality. This view was in direct conflict with the testatrix’s intention of one large fund held on a discretionary trust with no primary beneficiary and in light of a foreseeably ever increasing number of beneficiaries. The testatrix could, for example, have provided for four trusts (one for the descendants of each nephew and niece) if she had wished, or any other number, but she determined on a single discretionary trust with one fund and with many beneficiaries. This did not manifest an intention of equality in distribution. Rather it contemplated a fund which with careful management by trustees would provide a source of payments to beneficiaries in the discretion of the trustees, a discretion likely to be attracted by particular need.
Then, even allowing that the apprehension of dissension has been held, and that the avoidance or lessening of dissension through unequal distributions among family members is beneficial, the split into 15 trusts will not, from the time when needs-based distributions are commenced, prevent the occurrence of jealousies and tensions within the family groups. It would be to deny the frailties of human nature, and the experience of life and the variety of personal circumstances within families, to suggest otherwise.
Furthermore, as the trustees’ counsel submitted, if the trusts run their course to 2075 some family lines may contract while others may increase with consequent effect on the potential for individuals to enjoy distributions of income or capital and the amount thereof. The proposal is that under the 15 new trusts distributions be made on a needs-basis. There is an inherent risk of perceived or actual unfairness in this and therein is carried the seeds of disharmony between the family lines.
For these reasons, whilst in principle the avoidance or lessening of family dissension may be a benefit to beneficiaries, in the circumstances of the present proposal the immediate perception of benefit, together with the benefit of an informed assessment of need in each family line, is accompanied by a readily foreseeable risk of disadvantage for decades ahead.
The next matter advanced is an enhanced flexibility and capacity to make distributions adapted to the individual needs of those in the 15 family lines. I have already referred to the advantage of the principal family member being one of the trustees. However that person will be only one of three trustees and decisions as to distributions will be made by them acting together. Further, needs-based decisions could have been made up to now if the nephews and nieces and the cl 8(a) beneficiaries had not precluded that by their action. If they had co-operated with the trustees and provided information there is no reason to suppose that the trustees, particularly bearing in mind the experience and resources of Perpetual in such matters, would not have made decisions in an appropriate and considered way. Notwithstanding these considerations the addition of the family member as a trustee and concentration on that particular family line may be seen as a benefit by reason of the personal knowledge of the family concerned and their personalities and individual needs.
The next matter is the opportunity for more varied and appropriate investment strategy. Here reliance is placed on the report of Mr Starkins. As against that is the report of Ian Neil Ramsay which the trustees rely upon. I have read both reports. It is not necessary to set out their contents. In essence, while making no criticism of the trustees for the management of the fund to the present time, the plaintiff submits, relying on Mr Starkins, that the split into 15 trusts would permit investment decisions to be attuned to the circumstances of the beneficiaries of that trust. At present the trustees’ approach is, inevitably, a “one size fits all” approach. It seems evident enough that it would be of benefit to have the 15 trusts invested with close regard to the circumstances of each family group. But the trustees must also regard future beneficiaries. And it is to be remembered that the investment of trust funds by trustees must have regard to the matters in s 8 of the Act. In short, it may not be as easy as might be supposed to invest the fund in a manner that presently suits beneficiaries including their individual taxation requirements, particularly if the group is of a reasonably large size.
But it is not to be assumed that the trustees under the new trusts would invest with appreciably better results than those experienced to date. Mr Starkins’ report was helpful but also somewhat argumentative in his suggestions as to possible requirements in investment strategy. These in the end are matters of judgment in particular circumstances and on which views may differ. In itself growth is one thing but balance and the assessment of risk in an 80 year trust fund with discretionary payments of income and capital throughout its life is another, as Mr Ramsay cogently discussed.
It is important to bear in mind that Perpetual, under which the fund has been managed, is to be a trustee along with Mr Gilchrist. Hence, while the establishment of the 15 trusts would mean that investment decisions must be made in each trust, those decisions will be made with an eye to the circumstances of the beneficiaries, and the trustees must invest in light of the nature and period of the trust and the number and profile of the beneficiaries. Thus while the establishment of the 15 trusts may have a benefit in the area of more attuned investment decisions, those decisions will be made in the circumstances of a trust and with the benefit of the experience of Perpetual and Mr Gilchrist.
It is convenient to mention the taxation issues on which Mr Murphy gave advice. He advised on capital gains tax implications on splitting the trust, whether the varied trusts would cease to be testamentary trusts for income tax purposes, and family trust elections. Relying on counsel’s opinion it was submitted that the better view was that no liability to capital gains tax would be triggered by the arrangement. The point was not that the trust would be better off but that it would not be disadvantaged by the variation to 15 trusts. I do not consider it appropriate on an application such as the present that I undertake an analysis of the capital gains tax position. Counsel’s opinion left doubt open and a ruling could have been sought. Further, the issue has not been argued. I am left uncertain on the point, although I note that counsel for the fourth defendant was content to take the position that there was no substantial benefit or detriment from the capital gains tax point of view. I will act on that basis. It seems that the varied trusts should retain their status as testamentary trusts. There is however a difficulty with the family trust elections, which enable franking credits to be passed on to beneficiaries, which is that the benefit would not run to the final generation of beneficiaries. Nor are the cl 8(d) corporate beneficiaries covered by a family trust election.
The matters of an increased ease of administration and a capacity to reduce costs may be considered together. It was said by the plaintiff in her affidavit that the cl 8(a) beneficiaries and their spouses were predominantly trained and employed in professional occupations and have some familiarity with financial markets and investment. Thus their capacity to be a trustee and manage the trust investments or appoint competent managers or advisers to carry out or assist in that task. It was further expected that the varied trusts would be largely self-managed family trusts in which fees paid to trustees would be less than has been the case without any appreciable loss of economies of scale on account of administration or transaction costs. The Trust was paying management fees of 6 percent of income on funds under management together with commission on transactions.
These observations of the plaintiff must be considered afresh in light of the context provided by the revised Deed of Arrangement. The significant changes effected by the Deed are the inclusion of Mr Gilchrist and Perpetual as trustees and Mr Gilchrist as a joint appointor. These changes guard against early vesting but also mean an involvement of independent persons in the management of the trust in addition to the primary beneficiary. Hence the earlier foreshadowed element of the varied trusts being largely self-managed must be re-assessed in light of the arrangements now proposed for the conduct and management of the varied trusts.
A particular point arising from the identity of the proposed trustees concerns their remuneration. Clause 23 of the varied trusts common provisions carries forward from the will the right of the trustees to retain as remuneration for their services a commission upon the income of the fund at the rate chargeable by a trustee company. The rate, which is 6 percent, is payable irrespective of the work done in administering the Trust. And so it will be under the varied trust. Hence whatever amount of work is required the cost will not increase as the rate is fixed. In his reply counsel for the plaintiff conceded this was so, that even if family members did not take commission any saving would be small and unlikely to make enough difference to be a telling consideration. The position was the same in respect of commissions and fees paid to brokers and the like. These are unavoidable and in my view there is no appreciable reduction likely, nor indeed as I followed it was the likelihood strongly pressed in argument. It would be thought that a trustee such as Perpetual would be in as strong a position as anyone to gain any discount in that regard.
Regarding the matter from the simple point of the number of beneficiaries to be considered, the lesser number in each of the varied trusts would result in a concomitant reduction in the burden of administration. Of course the actual number of beneficiaries in each varied trust, and their circumstances, will vary from time to time. Nevertheless, overall an advantage is seen there but against it is the fact that whereas there is now one Trust with a single set of annual accounts and tax return, and fees related thereto, under the variation there will be 15 sets of accounts and tax returns and related fees. Likewise there will be an exponential increase in the number of meetings required in the administration of the trusts including for the purpose of determining on distributions. It is axiomatic also, as counsel for the plaintiff conceded on the matter of ease of administration, that if the trustees are now to consider the circumstances of families (as the beneficiaries have thus far precluded the trustees from doing) the burden of work will increase. In this respect I note the position of the existing trustees that they see the additional burdens on their time as being extensive and foreshadow that they might need to have their remuneration arrangements altered if they have to administer 15 trusts. In my view this apprehension is reasonably based and indicates a significant disadvantage in the proposal.
The final matter advanced by the plaintiff was the educative benefit to a beneficiary derived from acting as a trustee. That may be accepted as a benefit to those individuals[12]. It also accords with the wish of the testatrix that from time to time a member of the Tallis family be a trustee.
[12]It was so considered in Dwyer v Strahan, unreported, Supreme Court of Victoria, Southwell J, 14 September 1984.
Whilst I have accepted certain matters as being of benefit to the beneficiaries represented by the fourth defendant, such matters are much affected by the range of balancing or off-setting considerations discussed. So regarded, in my view, no appreciable benefit of financial value is clearly enough made to appear. Indeed the likelihood is greater administration and costs.
But there is another factor which was strongly pressed by the trustees and the fourth defendant as telling against the proposal. It is this. Whereas as at present a beneficiary has a hope or expectation of payment in respect of a fund of $17,157,593 (as at 31 December 2006) under each varied trust the fund would be $1,143,840. Whilst it is true that no beneficiary has a right to payment yet the present fund has a much greater capacity to cater for beneficiaries who might suffer a significant financial distress. The trustees instanced the premature death of a parent with a dependent spouse and children, the destruction of a business or the loss of a home. The plaintiff herself gives the actual example of a family member who lost a business due to fire. The larger the fund the greater must be the ability to make a payment of an appropriate amount to aid a beneficiary without significantly reducing the fund and thereby the ability to provide for other beneficiaries until the fund had grown. It is so obvious as to go without saying that trustees of a fund of the size to be held by each varied trust would have significantly less capacity to make a substantial payment to such a beneficiary.
I accept that this is a significant and readily appreciable matter that tells against the proposal. It is not a mere argumentative or ephemeral matter, of which there are elements in the plaintiff’s contentions, but a matter of material concern to beneficiaries both now and throughout the period of the varied trusts. There is a difference in the degree of cover or protection that the larger fund offers a beneficiary in the event of a downturn in personal circumstances and the need for capital or income.
It is not an irrelevant consideration that the present single fund exists because that is what the testatrix determined upon as being appropriate in the circumstances which included the reasonable foresight of a large number of beneficiaries. A division of the fund into 15 parts with the consequent diminished ability to make payments of income and capital would constitute a significant change in her intended position. This is a relevant although not determinative consideration. The question remains one of benefit for the represented beneficiaries and whether it is fit and proper to approve the arrangement. Nevertheless the departure from that intended is substantial and it is proposed to occur at a very early stage in the life of the Trust before the majority of beneficiaries have been born.
It cannot be said, or at least there is no evidentiary basis for doing so, that any approximate number of beneficiaries will be likely to suffer circumstances that might warrant an appreciable amelioration by the trustees. The point is not put in that way. Indeed with good fortune the risk of beneficiaries suffering such a misfortune might not become a reality, although the occurrence of relationship breakdown and employment and business failure is common. Hence, conversely, beneficiaries might suffer misfortune and it is to cater for such possibilities that the discretionary trust is ideal, and the larger the fund the better for reasons of the type discussed.
I am of the view that to approve the variation would involve the beneficiaries accepting a risk that an adult acting sensibly in his or her own interest would not take when regard is had to the relatively minimal benefits to be gained.
In the end I conclude, allowing for the benefits discussed, and having regard to the advantages and disadvantages of the proposed arrangement, that the arrangement should not be approved on behalf of the represented persons. On balance their position is diminished by the split into 15 funds, and that disadvantage is not offset or outweighed by any financial or other benefit of the arrangement.
For these reasons the application will be refused. I add merely that I have of course dealt only with the arrangement before me, the essential element of which was to divide the fund into 15 parts, a proposal which in my view was too bold by half.
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