Hunter v Colton
[2009] SASC 129
•15 May 2009
SUPREME COURT OF SOUTH AUSTRALIA
(Civil: Application)
HUNTER & ANOR v COLTON & ANOR
[2009] SASC 129
Reasons of Judge Lunn a Master of the Supreme Court
15 May 2009
EQUITY - TRUSTS AND TRUSTEES
Application under s 84C of Trustee Act by beneficiaries to have an inspector appointed to investigate the administration of the trust - relevant criteria - failure of trustees earlier to keep all records required by Regulation 6 of the Trustee Regulations 1996 - missing records subsequently reconstructed by accountant employed by trustees - no allegations of wilful misconduct or fraud against trustees - inspector appointed.
HUNTER & ANOR v COLTON & ANOR
[2009] SASC 129Reasons on plaintiffs’ application to appoint an inspector for the Trust.
JUDGE LUNN:
Background.
The JB Colton Family Trust (“the Trust”) was established by an indenture made on 4 February 1971 by John Colton as settlor and John Colton and his wife, Joyce Colton, as trustees. It was a discretionary trust for the benefit of the children and grandchildren of John and Joyce Colton. They had two children being Rosemary Hunter (nee Colton) and the defendant, Alan Colton. Rosemary Hunter had two children who are the plaintiffs. Rosemary Hunter died in 1994.
Alan Colton was appointed as an additional trustee of the Trust on 8 October 1994. John Colton died in 1996. In 1999 Alan Colton was appointed as the investment manager for the Trust and was paid remuneration for this work. From the death of John Colton until the death of Joyce Colton on 29 December 2005, Joyce and Alan Colton were the trustees of the Trust. They employed a Mr Gregory Broadbent as an accountant for the affairs of the Trust and he prepared its tax returns.
In late 2006 the retainer of Mr Broadbent was terminated. More will be said of this later. On 31 October 2006 John Powell, the second defendant, was appointed as an additional trustee and since then he and Alan Colton have been the trustees of the Trust.
In early 2007 Harold Handley was appointed to be the accountant for the Trust. He found that the financial records of the Trust which were given to him were incomplete and unsatisfactory. He has had to perform substantial work to implement, and bring up to date, proper financial records for the Trust.
As at 30 September 2006 the Trust had a share portfolio worth approximately $7.5 million and about $350,000 on deposit. Its accounts have never been audited.
This action.
On 22 December 2008 the plaintiffs instituted this action seeking the appointment of an inspector under s 84C of the Trustee Act 1936 (“the Act”) by reason of the failure of the defendants to keep the records prescribed by s 84B(1) of the Act and Regulation 6 of the Trustee Regulations 1996 (“the Regulations”). I have before me an interlocutory application seeking the appointment of such an inspector for the Trust. On 17 April 2009 the defendants filed a counterclaim seeking a declaration that there was a binding agreement between the parties for the winding up of the Trust and orders that the plaintiffs perform their obligations under that agreement. No defence has yet been filed to that counterclaim, but the grounds of defence are contained within the affidavit evidence before me and in the submissions of counsel.
The Law.
Sections 84A to 84E of the Act provide:
Part 5A – Records to be kept by trustees and investigations
Interpretation
84AIn this Part –
“inspector” means a person appointed as an inspector under this Part;
“trust” means a trust created by a will or other instrument of trust; and “trustee” means the trustee administering such a trust.
Records to be kept by trustee
84B(1)A trustee shall keep such records relating to his administration of the trust property as may be prescribed.
(2)A trustee shall, at the request of –
(a)the Public Trustee; or
(b)another trustee of the trust; or
(c)a beneficiary under the trust,
produce the records kept by the trustee in pursuance of this section for inspection and permit the Public Trustee, the other trustee or the beneficiary (as the case may be) to examine and make copies of those records.
Penalty: Five hundred dollars.
Appointment of inspector
84C(1)The Supreme Court may, of its own motion, or on the application of any person who has, in the opinion of the Court, a proper interest in the matter, appoint an inspector to investigate the administration of any trust.
(2)An inspector must be a person who holds prescribed qualifications.
(3)The Supreme Court may make orders for the payment of the whole or part of the costs of an investigation under this Part –
(a)by the applicant for the investigation; or
(b)by a trustee or beneficiary of the trust; or
(c)out of the trust estate.
Powers of an inspector
84D(a)For the purpose of investigating the administration of a trust, an inspector may –
(a)require any person to produce documents relevant to the administration of the trust; and
(b)take copies or, or extract from, any such documents; and
(c)require any person to answer any questions relevant to the administration of the trust; and
(d)exercise any other power conferred on him by the Court.
(2)A person who –
(a)refuses or fails to produce documents in his custody or power when required to do so by an inspector; or
(b)refuses or fails to answer to the best of his knowledge, information and belief any question put to him by an inspector under this section; or
(c)hinders an inspector in the exercise of his powers,
shall be guilty of an offence and liable to a penalty not exceeding two thousand dollars or imprisonment for six months or both.
(3)A person may decline to answer a question put to him by an inspector under this section if the answer to the question would tend to incriminate him of an offence.
Reports to be made to Attorney-General
84E(1)Upon completing an investigation under this Part, an inspector shall make a report in writing to the Supreme Court and to the Attorney-General upon the results of the investigation.
(2)An inspector shall make such interim reports to the Supreme Court and to the Attorney-General in relation to an investigation under this Part as the Court may direct.
Confidentiality
84FAn inspector shall not divulge any information that comes to his notice in the course of an investigation under this Part and relates to the administration of the trust subject to the investigation except –
(a)to the Supreme Court and to the Attorney-General; or
(b)as directed by the Court.
In Oxer v Astec Paints Australia Pty Ltd, 30 May 2005, Judgment No [2005] SASC 192, I dealt with the criteria and authorities for the appointment of an inspector under s 84C of the Act. I do not repeat in these reasons what I said there. Insofar as it is relevant to the present matter I held in that case:
·The discretion under s 84C is unfettered but it is to be exercised against the background of the equitable principles governing the obligations of trustees to their beneficiaries. The discretion is to be exercised in the circumstances of the particular case and is not to be unduly circumscribed by articulated criteria. Counsel for the defendants referred me to a New Zealand decision of Re Flat Rock Forests Trust [2000] 3 NZLR 207 where some criteria were laid down for the exercise of a similar discretion for the appointment of an inspector under s 21 of the New Zealand Unit Trusts Act 1960. The circumstances of that case were substantially different from the present case in that there was a significant public element in the unit holdings of that trust. I do not consider that it is useful to focus on the factors articulated in that case on being what is relevant to the exercise of the discretion here.
·S 84C(1) is directed to the appointment of an “inspector to investigate the administration of any trust”. It is the administration of the trust that is the primary focus of the investigation and not the conduct of particular trustees. Once a proper basis is made out to order the appointment of an inspector for any aspect of the administration of the trust the order is to be made for the investigation of its administration as a whole. (There were no submissions that terms of the order here for any investigation could, or should, be limited to part of the affairs of the Trust).
·The sanction of a potentially substantial costs order against the plaintiffs under s 84C(3) if the allegations made by them are shown to be unfounded by the inspector’s report is an important consideration.
My decision in Oxer’s case was limited to the allegations that the trustee there had preferred the interests of other unit holders to that of the plaintiff and had failed to act impartially. No such allegations are made in this case. The grounds relied upon here by the plaintiffs are quite different from those dealt with in Oxer’s case.
Compliance with Regulation 6.
S 84B(1) of the Act requires trustees to keep such records as may be prescribed. The relevant prescription is in the following parts of Regulation 6:
6Records to be kept by the trustee
(1)For the purposes of section 84B of the Act, the records that a trustee must keep relating to administration of the trust property are as follows:
…..
(b)each letter received by the trustee and a copy of each letter sent by the trustee;
…..
(g)minutes of the proceedings of all meetings relating to administration of the trust at which the trustee was or was entitled to be present;
…..
(j)a record of all reviews of investments;
(k)other records that would enable the receipt and disposition of trust property to be conveniently and properly audited, including –
(i)a register of securities recording the following information in respect of all securities received and disposed of:
(A)the date of receipt or disposition; and
(B)a description of the securities; and
(C)the consideration passing for receipt or disposition; and
(D)brief particulars of the purpose of the transaction;
(ii)a property register recording the following information in respect of all other property received and disposed of:
(A)the date of receipt or disposition; and
(B)a description of the property; and
(C)the consideration passing for receipt of disposition; and
(D)brief particulars of the purpose of the transaction;
(iii)a register of all investments of income and capital funds (including redemptions and income accretions) recording the following information in respect of each investment:
(A)the date of investment; and
(B)the amount of the funds invested; and
(C)brief particulars of the investment;
(iv)a cash receipt book recording the following information in respect of each receipt of trust money:
(A)the date and reference number of each receipt; and
(B)the name of the person from whom the money is receipted; and
(C)the trust name or reference to which the transaction relates; and
(D)brief particulars of the purpose of the receipt; and
(E)the amount of the receipt; and
(F)the date the cash receipted is deposited in an ADI account (where applicable);
(v)a cash payments book recording the following information in respect of each payment of trust money:
(A)the date of the payment; and
(B)if the payment was made by cheque – the cheque number; and
(C)the name of the payee; and
(D)the trust name or reference to which the transaction relates; and
(E)brief particulars of the purpose of the payment; and
(F)the amount of the payment;
(vi)each ADI statement and passbook issued in relation to trust ADI accounts;
(vii)trust statements, prepared not less than annually, showing for the period from the end of the last period for which a statement was prepared –
(A)cash receipts and payments; and
(B)other property received or transferred; and
(C)assets and liabilities as at the last day of the statement period.
…..
(3)All records referred to in this regulation must be retained by the trustee, in a legible written form or so as to be readily convertible into such a form, for at least five years after the termination of the trust.
I do not accept the defendants’ submission that there has been compliance with Regulation 6 in the administration of the Trust. Nor do I accept the submission that no cash receipt book or cash payment book needed to be kept in compliance with sub-regulations (1)(k)(iv) and (v) because there were never any receipts or payments in cash as all receipts and payments were effected by bank transfers. These sub-regulations, in accordance with the common understanding of accounting practices, refer to records of the individual monetary receipts and payments, no matter how they were made. The requirements of these subrules are to be interpreted in the light of the preamble to sub-reg (k) which designates them as “records that would enable the receipt and disposition of trust property to be conveniently and properly audited”. For many years prior to the employment of Mr Handley no such cash books were kept for the Trust. They are needed to audit properly the Trust affairs.
It is implicit in Regulation 6 that the records required by sub-reg (k) are to be prepared reasonably contemporaneously with the transactions which they each record. It is not necessary to go into exactly how contemporaneous the creation of the records must be. It certainly must be within a reasonable time of the end of the financial year for the transactions occurring in that financial year. Here there was no compliance with subr (k)(i), (ii), (iii), (iv) or (v) for many years after the financial years to which they relate.
It is not disputed that Mr Handley has prepared proper financial records in accordance with Regulation 6 for the affairs of the Trust since he was appointed in 2006. He has also performed a substantial task of preparing financial records for the affairs of the Trust for the financial years prior to 2006. He has now established these records retrospectively as best he can, but he is not prepared to guarantee their accuracy because of some lack of information and relevant documents about what occurred in the affairs of the Trust prior to 2006.
Alan Colton has deposed that the problems about the record keeping were the fault of Mr Broadbent. In his affidavit sworn on 1 April 2009 Alan Colton said:
11Prior to approximately February 2007, Mr Broadbent had acted as the Trust’s accountant. He had done so for many years, having been retained by my mother. Mr Broadbent prepared the Trust’s income tax returns for the years up to and including the year ended 30 June 2004.
12Mr Broadbent was instructed to prepare returns for the Trust for the year ended 30 June 2005 and 30 June 2006.
13From about October 2006, I began to have difficulty contacting Mr Broadbent. He did not return telephone calls and was not able to be contacted at his offices. I grew concerned that he was no longer conducting his business.
14In January 2007, the trustees of the Trust commenced an action in the Magistrates Court of South Australia against Mr Broadbent seeking an order that he deliver up all trust records in his possession. This order was duly made by the Court, without any appearance by Mr Broadbent.
15My daughter Julie subsequently served the order on him at his residential address. In response he produced some, but not all, of the records in his (sic) those records with the other comparable records of the trust into the folders described above. The records appeared to include all the documents that I had previously provided to Mr Broadbent with instructions to prepare the year ended 2004 and 2005 tax returns.
(Paragraph 15 does not make sense and there appear to be some words omitted). He does not identify what documents he says Mr Broadbent should have produced but did not produce. No steps have been taken to pursue Mr Broadbent any further for missing documents.
While some correspondence, minutes and records of reviews of investments, required to be kept by sub-regs (1)(b), (g) and (j), have been produced it is likely there are substantial numbers of such records prior to 2006 which have not been produced. Whether any of these documents are still held by Mr Broadbent is unclear.
It was the responsibility of the trustees to ensure compliance with Regulation 6 at the times impliedly required by that Regulation. There were clearly substantial breaches of this duty. It is not necessary for me to go into further details of it, but its extent is shown by the substantial amount of work needed to be done by Mr Handley in an attempt to reconstruct the records which should have been kept prior to 2006. S 84B(1) places a personal obligation on the trustees which they cannot avoid by delegation to an accountant. Alan Colton has not deposed that he believed all sufficient records to comply with Regulation 6 were being kept by Mr Broadbent
The plaintiffs say they have lost confidence in the defendants and seek the appointment of an inspector to satisfy themselves that all of the assets and the income of the Trust have been properly accounted for by the defendants. They do not challenge the competence of or bona fides of Mr Handley. Mr Handley was employed by, and received his instructions from, the defendants. In effect, much of the work of Mr Handley has been to make good the defaults of the trustees prior to 2006. That creates some misgivings for the plaintiffs about whether the records produced by Mr Handley are as impartial and objective as they should be.
Factors affecting the appointment of an inspector.
The defendants’ counsel contended that mere bookkeeping irregularities, without any more serious allegations against the trustees, was not sufficient justification for the appointment of an inspector. He pointed to the substantial inquisitorial powers of an inspector under s 84D of the Act and said it showed s 84 was confined to cases of wilful misconduct or fraud. While I accept on what is before me at present that there are no such allegations against the defendants, I do not accept that s 84 is necessarily confined to such cases. Here there have been significant irregularities in compliance with Regulation 6 over a substantial period of time in a Trust having assets worth many millions of dollars. Some income due to the Trust has ended up in unclaimed moneys accounts of some companies in which the Trust held shares. There is a reasonable possibility that an inspector may exercise his powers under s 84D to obtain relevant information and documents from Mr Broadbent. An inspector will be better able than Mr Handley to produce an impartial and objective report on the administration of the Trust.
The defendants’ counsel argued that even if the appointment of an inspector may have been justified in 2006 the need for it had been obviated by the work of Mr Handley. While this is a relevant factor, it is not a complete answer to the plaintiffs’ claim.
The defendants contended that it would have been sufficient for the plaintiffs to have sought disclosure of all the Trust records under s 84B(2) of the Act and then to have employed their own accountant to audit de facto its financial records. I have reservations about whether s 84B(1), as a penal provision, does create an enforceable civil right for all of the records of the Trust to be produced to the beneficiaries, but I need not pursue that here. The plaintiffs have had an accountant employed by them look at documents produced by the defendants, but there has been some dispute about whether all necessary documents have been produced. Their accountant has also had discussions with Mr Handley and has not sought to criticise anything Mr Handley has done. I do not consider that the plaintiffs should be confined to this course of action if they do not wish to pursue it. Subject to the question of costs, they should be entitled to the impartial and objective assessment of an inspector about the affairs of the Trust in view of the substantial irregularities which have occurred.
The defendants’ counsel submitted that the defendants should not be put to the expense and inconvenience of having to submit to the inquiries of an inspector. If there had been no significant irregularities that would be a valid argument, but it is a consequence of the defaults of the trustees prior to 2006. Insofar as Mr Powell was not a trustee at the relevant times of the defaults it is a consequence of him having subsequently having become a trustee.
The defendants’ counsel submitted that the plaintiffs’ could have sought an order from this Court for the general administration of this Trust. While that course was open to them it is a protracted, expensive and arduous exercise and should only be a remedy of last resort. The appointment of an inspector under s 84C is likely to be much quicker and less expensive than a general administration and will apparently be sufficient for the plaintiffs’ purposes.
The defendants allege that by an exchange of correspondence in October 2007 there was an agreement between the parties for them to enter into deeds which would effect the winding up of the Trust and the distribution of its assets. Those deeds have not been executed. The deeds which were contemplated included terms for releases and indemnities to the defendants as the present trustees of the Trust. I do not accept that even if there is such an agreement which is binding on the plaintiffs it precludes them from now seeking the appointment of an inspector. They claim that any agreement was subject to an implied term that they would receive a proper accounting from the defendants for the affairs of the Trust which they say they have not received. I need not go into that issue. Any winding up of the Trust and a distribution of its assets will ultimately raise the issue of whether the defendants have properly accounted for all of the assets and the income of the Trust. The appointment of an inspector is also directed to this issue. The issue is likely to arise in some form even if there is a binding agreement and it is expedient that it should now be addressed by the appointment of an inspector.
For these reasons, it is a proper exercise of the Court’s judicial discretion that an inspector should be appointed. If the report of the inspector vindicates the position taken by the defendants, the Court will take this into account in determining what order is to be made for the payment of the costs of the inspector and of the costs of this action.
These reasons have been confined to matters which I consider sufficient to justify the order for the appointment of the inspector and to deal with the objections taken by the defendants to such an order. A number of other matters were raised by the plaintiffs but it is inappropriate to deal with them as they relate to issues which will be investigated by the inspector.
I have today made the following orders:
1 That Hugh McPharlin be appointed under s 84C of the Trustee Act to investigate the administration of the JB Colton Family Trust.
2 Costs reserved.
3 Fit for counsel.
4 Liberty to apply.