In the Estate of RAYMOND PERLA (DECEASED)
[2020] SASC 153
•14 August 2020
SUPREME COURT OF SOUTH AUSTRALIA
(Testamentary Causes Jurisdiction: Application)
In the Estate of RAYMOND PERLA (DECEASED)
[2020] SASC 153
Judgment of The Honourable Justice Stanley
14 August 2020
EQUITY - TRUSTS AND TRUSTEES - POWERS, DUTIES, RIGHTS AND LIABILITIES OF TRUSTEES - LIABILITY FOR BREACH OF TRUST - RELIEF FROM LIABILITY - GENERALLY
MENTAL HEALTH - GUARDIANS, COMMITTEES, ADMINISTRATORS, MANAGERS AND RECEIVERS - OTHER MATTERS
SUCCESSION - ADMINISTRATION OF ESTATE - PAYMENT OF DEBTS: ORDER OF APPLICATION OF ASSETS - GENERALLY
This matter involves two separate actions, one brought pursuant to the Aged and Infirm Persons’ Property Act 1940 (SA) and a probate action pursuant to the Administration and Probate Act 1919 (SA).
On 6 December 2000 the Court made a protection order pursuant to the Aged and Infirm Persons’ Act appointing Raymond Victor Perla (the deceased) manager of the whole of the estate of Matilda Perla (his sister). On 1 May 2003 Ian Allan McFarlane was appointed the manager of Ms Perla’s estate in substitution for the deceased.
The deceased died on 21 April 2017. He left an estate owning assets in Australia and in Florida. The deceased made his last will and testament on 18 April 2012. Various of the dispositions made by the deceased in his will have proven to be a cause of disputation between the beneficiaries. Civil proceedings related to these disputes were commenced in 2018.
On 27 October 2017, in respect of the Australian estate, probate of the deceased’s will was granted to Carmel Edwards and George Panuccio (the executors). Mr Panuccio has since ceased to act as an executor of the deceased’s estate pursuant to orders made in the related civil proceedings.
In respect of the Florida estate, a Florida court appointed George Mantzidis, a Florida attorney, to be the personal representative in charge of administration according to the terms of the deceased’s will. This administration has almost been completed. The assets of the deceased’s Florida estate have been realised. Previously, rather than distributing the money direct to Ms Perla, Mr Mantzidis paid US$583,862.22 in three tranches in March, August and October 2018 into the trust account of the solicitors for the executors of the Australian estate on the basis they were to be held on trust for Ms Perla.
The executors intermingled that money with the funds held by them in the Australian estate. The executors then used nearly all of the intermingled funds at the direction of Mr McFarlane to pay the debts and testamentary expenses of the Australian estate and to lend money from the estate to the Lonestar Trust, of which the trustee formed part of the estate.
A range of orders are sought by the manager of a protected estate in the Aged and Infirm Persons’ Act action, and by the executor in the probate action.
Ms Edwards applies to the Court for an order pursuant to s 56 of the Trustee Act 1936 (SA) excusing the executors from personal liability for the potential breach. Mr McFarlane seeks a similar order for the past receipt of the Florida moneys and their use on behalf of the Australian estate.
Mr McFarlane seeks orders that will facilitate the completion of the administration of the Florida estate for the benefit of Ms Perla, including the express authority to waive the right to a formal accounting of the Florida estate; to grant an indemnity to Mr Mantzidis; and to direct him to execute documents on behalf of Ms Perla for those purposes.
Mr McFarlane applies to the Court for orders granting him additional powers to act as the litigation guardian for Ms Perla in the probate action and the related civil proceedings.
Ms Edwards seeks advice and direction pursuant to s 69 of the Administration and Probate Act that she would be justified and should sell land forming part of the deceased’s estate at Francis Road, Wingfield.
Finally, Ms Edwards seeks advice and direction in respect of Rayvic Investments Pty Ltd (Rayvic) which is the trustee of the Lonestar Trust. The Lonestar Trust does not trade. It has a surplus of liabilities over assets in an amount of approximately $260,000. The parties eventually reached an agreed position that there should be a creditors’ voluntary winding up of Rayvic pursuant to Division 3 of Part 5.5 of the Corporations Act 2001 and that Ms Edwards should appoint the liquidator appointed by Rayvic to be the trustee of the Lonestar Trust.
Held:
1. It is not appropriate to make the order pursuant to s 56 of the Trustee Act 1936 (SA) in favour of the executors at this time. It may be that evidence either before or not currently before the Court will assume a different complexion in the light of the potential for further evidence concerning their dealings with the estate;
2. Mr McFarlane is excused, pursuant to s 56 of the Trustee Act 1936 (SA), from liability for any breach of trust he may have committed in relation to the receipt and use by the executors of distributions from the Florida estate;
3. I t is appropriate, in all the circumstances, that Mr McFarlane be cloaked with the necessary powers to facilitate the finalisation of the administration of the Florida estate. It is in the best interests of Ms Perla that this occur;
4. Mr McFarlane is directed to exercise those powers on behalf of Ms Perla to execute documents necessary to waive the right to a formal accounting of the Florida estate and to grant Mr Mantzidis an indemnity;
5. Ms Perla’s interest as residuary beneficiary falls within her protected estate. The Court can confer on Mr McFarlane the power to act as Ms Perla’s litigation guardian pursuant to s 13(2) of the Aged and Infirm Persons’ Property Act 1940 (SA);
6. In all the circumstances it is appropriate the Court confer upon Mr McFarlane the power to act as litigation guardian for Ms Perla. That order should be made nunc pro tunc from 24 April 2018;
7. The executors are directed that they would be justified and should sell land forming part of the deceased’s estate at Francis Road, Wingfield;
8. The executors are directed that they should cause Rayvic to resolve to be wound up by way of a creditors’ voluntary winding up and to appoint the liquidator of Rayvic as trustee of the Lonestar Trust.
Aged and Infirm Persons' Property Act 1940 (SA) s 3(1), s 18, s 13(1), s 13(2), s 25; Administration and Probate Act 1919 (SA) s 69; Trustee Act 1936 (SA) s 4(1), s 56, referred to.
Green v Wilden Pty Ltd [2005] WASC 83; Jeavons v Chapman (No. 2) [2009] SASC 3; Barns v Barns (2003) 214 CLR 169; Kennon v Spry (2008) 238 CLR 366; In the Estate of McBride [2019] SASC 204, discussed.
J D & K J Zohs Properties Pty Ltd v Ferme [2015] SASC 55; Emanuele v Australian Securities Commission (1997) 188 CLR 114; In the matter of Gramarker Pty ltd; Clifford Sanderson (as liquidator of Gramarker Pty Ltd) v Simon Kerr [2014] NSWSC 243; Sapphire (SA) Pty Ltd v Ewens Glen Pty Ltd [2011] FCA 600; Carter Holt Harvey Woodproducts Australia Pty Ltd v Commonwealth (2019) 93 ALJR 807; Jones v Matrix Partners Pty Ltd (2018) 260 FCR 310; McLean v Hill, In the matter of TMC Plumbing & Drainage Pty Ltd (in liq) [2019] FCA 1439; Re Parkway One Pty Limited (No 2) [2020] NSWSC 191; Hosking, in the matter of Business Aptitude Pty Ltd (in liq) (2016) 34 ACLC 16-045, considered.
In the Estate of RAYMOND PERLA (DECEASED)
[2020] SASC 153Carmel Theresa Edwards as Executor of the Deceased Estate of Raymond Perla (Deceased) v Ian Allan McFarlane in his Capacity as Manager of the Protected Estate of Matilda PERLA; and
In the Affairs of Matilda Perla
and the Aged and Infirm Persons’ Property Act 1994
Raymond Victor Perla v Matilda PerlaTestamentary Causes Jurisdiction: Application
STANLEY J:
Introduction
There are two proceedings before the Court, an action brought pursuant to the Aged and Infirm Persons’ Property Act 1940 (SA) (Aged and Infirm Persons’ Act) and a probate action. There are related civil proceedings commenced in 2018 seeking orders pursuant to s 69 of the Administration and Probate Act 1919 (SA) (Administration and Probate Act). A range of orders, some overlapping, are sought by the manager of a protected estate in the Aged and Infirm Persons’ Act action, and by the executor in the probate action.
Background
On 6 December 2000 the Court made a protection order pursuant to the Aged and Infirm Persons’ Act appointing Raymond Victor Perla (the deceased) manager of the whole of the estate of Matilda Perla. The deceased died on 21 April 2017. He was the brother of Matilda Perla. He left an estate owning assets in Australia and in the United States of America, in particular in Florida.
On 1 May 2003 Ian Allan McFarlane was appointed the manager of Ms Perla’s estate in substitution for the deceased. Ms Perla’s protected estate is valued in the vicinity of $5.7 million.
The deceased made his last will and testament on 18 April 2012.
The estate of the deceased includes an interest as the sole shareholder of PB Investments Pty Ltd (PBI) valued in the order of $2.6 million; an interest in the PB Investment Superannuation Fund valued in the order of $1.15 million; other assets valued in the order of $4 million including real estate at Francis Road, Wingfield; and an interest in a trust known as the Lonestar Trust.
One of the assets of PBI is land at 203 Cormack Road, Wingfield (the Cormack Road land).
The deceased’s estate also includes commercial properties located in Florida.
The will provides a gift of the shares in PBI to George Domenico Panuccio subject to Mr Panuccio causing PBI to transfer the Cormack Road land to Renaldo Depanfilis; and to hold the interests of the deceased in the PBI Investments Superannuation Fund for Mr Panuccio and his children. The residue of the deceased’s estate, both in Australia and in Florida, is left to Ms Perla.
Various of the dispositions made by the deceased in his will have proven to be a cause of disputation between the beneficiaries.
Broadly, the dispute arises from a challenge by Mr Panuccio to the effectiveness of the gift of the Cormack Road land to Mr Depanfilis and a claim by Mr Panuccio that the deceased is indebted to PBI in an amount greater than that shown in the relevant ledger of the loan account maintained by PBI.
On 27 October 2017, in respect of the Australian estate, probate of the deceased’s will was granted to Carmel Theresa Edwards and Mr Panuccio (the executors). Pursuant to orders I made in the civil proceedings brought pursuant to s 69 of the Administration and Probate Act Mr Panuccio has been prohibited and released from taking certain steps as executor.
In respect of the Florida estate, an order was made by a Florida court appointing a Florida attorney, George Mantzidis, to be the personal representative in charge of administering the Florida estate in accordance with the terms of the deceased’s will.
The administration of the Florida estate has almost been completed. Mr Mantzidis has realised the assets of the deceased’s Florida estate and converted it into money. Previously, rather than distributing the money direct to Ms Perla, Mr Mantzidis paid US$583,862.22 in three tranches in March, August and October 2018 into the trust account of the solicitors for the executors of the Australian estate on the basis they were to be held on trust for Ms Perla. The executors intermingled that money with the funds held by them in the Australian estate. The executors then used nearly all of the intermingled funds at the direction of Mr McFarlane to pay the debts and testamentary expenses, including legal fees, of the Australian estate and to lend money from the estate to the Lonestar Trust. It is possible that that expenditure may have been in breach of trust in that once distributed, the Florida moneys were the property of Ms Perla, and not liable to pay the debts and testamentary expenses of the Australian estate. Further, and in any event, the executors may not have had power to lend estate funds. In circumstances where Ms Perla is not able to consent to or waive this potential breach of trust, an order is sought pursuant to s 56 of the Trustee Act 1936 (SA) (Trustee Act) that the executors be excused from personal liability for the potential breach.
The application for an order pursuant to s 56 of the Trustee Act relieving the executors of any liability for the receipt and use of those funds is opposed by Mr McFarlane who contends that it is unnecessary to consider this application now and the Court does not know whether it has all the information relevant to the application to excuse the executors for any potential breach.
However, Mr McFarlane seeks an order relieving him from any liability for the past receipt of the US$583,862.22 from the Florida estate being used by the executors for the purposes of the Australian estate.
Mr McFarlane also seeks orders that will facilitate the completion of the administration of the Florida estate for the benefit of Ms Perla.
Under Florida law, in order to complete the administration of the Florida estate and be discharged, Mr Mantzidis must file a detailed, and potentially expensive, final accounting for the estate with the Florida court. However, Florida law provides that accounting may be waived by the estate’s beneficiaries by executing a formal written waiver. It is understood that waiver is the usual practice of most Florida attorneys where there is no dispute about the administration and the beneficiaries have been kept informed of the status of the estate. It is quicker and cheaper than a full accounting. Mr Mantzidis has requested that Ms Perla execute such a waiver. She is not able to do so. Mr McFarlane as manager does not have power to do so but he contends that it is in the best interests of Ms Perla that a waiver be executed. Accordingly, Mr McFarlane applies to the Court for orders expressly to empower him to waive the right to a formal accounting of the Florida estate; to grant an indemnity to Mr Mantzidis; and to direct him to execute documents on behalf of Ms Perla for those purposes.
Those orders are sought in circumstances where, as I have observed, the administration of the Florida estate has almost been completed. Mr Mantzidis presently holds approximately US$708,000 in the Florida estate, with the expectation that he will shortly receive an additional US$116,000 amounting to a total of US$824,000. The making of the orders will facilitate the completion of the administration of the Florida estate and the distribution of the US$824,000 to Ms Perla.
Apart from the appointment of Mr McFarlane as the manager of Ms Perla’s protected estate pursuant to the Aged and Infirm Persons’ Act, there is no administrator or other person with general power over Ms Perla’s affairs.
In these circumstances Mr McFarlane applies to the Court for orders granting him additional powers to act as the litigation guardian for Ms Perla in the probate action and the 2018 action.
Ms Edwards, as executor, now seeks advice and direction pursuant to s 69 of the Administration and Probate Act that she would be justified and should sell land forming part of the deceased’s estate at Francis Road, Wingfield, in order to raise funds to pay the outstanding debts and testamentary expenses of the deceased’s Australian estate.
Mr McFarlane contends that such a direction is unnecessary and without utility. The need to sell the Francis Road property is nothing more than the performance of the executor’s obligation to get in the estate.
Finally, Ms Edwards seeks advice and direction in respect of Rayvic Investments Pty Ltd which is the trustee of the Lonestar Trust. The Lonestar Trust does not trade. It has a surplus of liabilities over assets in an amount of approximately $260,000. The liabilities include a debt owing to the PB Investments Superannuation Fund. Rayvic is now controlled by Ms Edwards.
The trustee of the superannuation fund may only write off the loan to the Lonestar Trust in whole or in part on an arms-length basis.[1] The smaller loan needs to be repaid in full.
[1] Superannuation Industry (Supervision) Act 1993 (Cth) s 109.
Ms Edwards had sought advice and direction pursuant to s 69 of the Administration and Probate Act that she would be justified and should cause an application to be made for Rayvic to be wound up and a receiver to be appointed to the Lonestar Trust.
Mr McFarlane opposed that application. He contended that there should be a creditors’ voluntary winding up of Rayvic pursuant to Division 3 of Part 5.5 of the Corporations Act 2001. He submitted Ms Edwards should appoint the liquidator appointed by Rayvic to be the trustee of the Lonestar Trust. Ultimately, Ms Edwards adopted Mr McFarlane’s submission.
Applications by the executor and the manager pursuant to s 56 of the Trustee Act
Both Ms Edwards on behalf of the executors and Mr McFarlane have sought orders pursuant to s 56 of the Trustee Act relieving them from liability for any breach of trust they may have committed in relation to the receipt and use of distributions from the Florida estate.
Section 56 of the Trustee Act provides:
If it appears to the Supreme Court—
(a) that a trustee is, or may be, personally liable for any breach of trust (whether the transaction alleged to be a breach of trust occurred before or after the passing of this Act); but
(b) that the trustee has acted honestly and reasonably and ought fairly to be excused for the breach of trust, and for omitting to obtain the directions of the said court in the matter in which he has committed such breach,
then the said court may relieve the trustee, either wholly or partly, from personal liability for the breach of trust.
Section 4(1) of the Trustee Act defines “trustee” to include a representative of a deceased person. This includes an executor.[2] Accordingly the Court is empowered to relieve an executor from personal liability for breach of duty as an executor.
[2] Brine v Carter [2015] SASC 205 at [171].
Section 18 of the Aged and Infirm Persons’ Act provides that a manager appointed under the Act shall be deemed to be a trustee for all purposes of the Trustee Act. While a manager is not a trustee in the sense that a manager does not hold any of the protected estate on trust, the duties and responsibilities of a manager are analogous to that of a trustee.[3]
[3] Jeavons v Chapman (No. 2) [2009] SASC 3 at [54].
Section 56 confers power on the Court to excuse any breach of trust where the trustee has acted honestly and reasonably and ought fairly to be excused for the breach. The burden of proving that the trustee acted honestly and reasonably in the matter is on the applicant for relief. Once that has been established, it is for the Court to decide whether the trustee ought fairly to be excused for the breach of trust committed. Each case depends on its own circumstances. The Court has a wide discretion in matters of this kind and must look to the whole circumstances in which the breach took place. The Court should not be hard on a trustee who has tried to act honestly but it must not encourage laxity of dealings.[4]
[4] J D & K J Zohs Properties Pty Ltd v Ferme [2015] SASC 55 at [60].
In Green v Wilden Pty Ltd[5] Hasluck J, referring to the cognate provision in Western Australian legislation, said:[6]
The criterion of “honestly” means the trustees must have acted in good faith and for the welfare of the Trust. “Reasonably” means reasonably in the interests of the estate, not in the interests of the trustees themselves. It also means acting with a degree of prudence that a person of ordinary intelligence and diligence can be expected to exhibit in the conduct of one’s own affairs.
Conduct that has been held as unreasonable includes conduct that is negligent or careless, acting in an unauthorised manner without taking steps to ascertain whether the conduct was or was not authorised, doing nothing and simply accepting without enquiry what co-trustees have done and placing a co-trustee in a position to handle the Trust fund when he or she suspect that the co-trustee may misappropriate the Trust funds.
Relief from breach of trust does not follow as a matter of course simply because the trustee proves that he or she has acted honestly and reasonably. The Court must look at all the circumstances to ascertain whether the trustee ought fairly to be excused for the breach. The term “ought fairly to be excused” means in fairness to the trustee and to the other persons who may be affected.
[citations omitted]
[5] [2005] WASC 83.
[6] [2005] WASC 83 at [508]-[510].
It is convenient first to consider the application by Mr McFarlane for relief from personal liability for any possible breach of trust arising out of his conduct in directing Mr Mantzidis to pay distributions to the executors for the purpose of the executors applying the funds to meet the debts and funeral and testamentary expenses of the Australian estate.
Mr McFarlane submits that if his conduct constituted a breach of trust, the Court should be satisfied that he honestly and reasonably took the view that the debts and funeral and testamentary expenses had to be paid out of the residue of the deceased’s estate which was left to Ms Perla; that he honestly and reasonably took the view that the distributions from the Florida estate ought to be applied for the purpose of meeting the debts and funeral and testamentary expenses of the Australian estate; that the executors, on advice, had sought the funds for that purpose; and that Mr McFarlane honestly and reasonably took the view that the application of distributions from the Florida estate for that purpose was also for the ultimate benefit of Ms Perla as the residuary beneficiary of the deceased’s estate as it would avoid the executors having to realise other assets in the Australian estate.
Mr McFarlane contends that he directed payment of distributions from the Florida estate to the executors of the Australian estate to be used in this way based on his belief that it would have no net impact on the ultimate benefit to be received by Ms Perla. However, Mr McFarlane contends that it is now apparent that funds from the Florida estate have been applied by the executors in a manner which has had the effect of reducing the residual estate of the deceased. If so, that has occasioned detriment to Ms Perla. Funds were lent to Rayvic when the assets of Rayvic should have been realised to meet the debts and expenses of the Australian estate. More importantly, those advances were made without security arrangements, leaving the estate to rank as an unsecured creditor[7] and the residuary estate worse off than it would have been had the funds not been advanced.
[7] Subject to the possibility the estate might rely upon an equitable subrogation to the Commonwealth Bank’s position as a secured creditor. However, the process of having to seek such an equitable remedy would itself cause substantial cost to be incurred, particularly if it requires contested court proceedings to which the other unsecured creditors of Rayvic are party.
Initially, Ms Edwards supported Mr McFarlane’s application pursuant to s 56. However, this was at a time when Mr McFarlane was not opposed to the Court relieving the executors of any liability for any breach of trust in relation to their receipt and use of the distributions from the Florida estate. Subsequently, Mr McFarlane changed his position to opposing any order pursuant to s 56 in favour of the executors at this stage. Ms Edwards contends that the subsequent position adopted by Mr McFarlane, if correct, must logically preclude the Court from excusing him from liability for any breach of trust.
In those circumstances it is appropriate to consider the application by Ms Edwards for relief pursuant to s 56.
Ms Edwards contends that in receiving and using the distributions of the Florida estate to meet the debts and testamentary expenses of the Australian estate the executors acted honestly and reasonably. In the case of the repayment of the Commonwealth Bank of Australia (CBA) loan to Rayvic they did so not only on the advice of their solicitor but with the consent of Mr McFarlane.
Mr McFarlane submits that the executors have applied funds of the estate to discharge debts of Rayvic, in its capacity as the trustee of the Lonestar Trust, when the trust was insolvent. In these circumstances the Court should not now grant the relief sought. The facts in relation to these transactions are complex and not entirely clear. They raise a number of legal issues involving a number of parties, including the executors and their advisors. Mr McFarlane submits that the appropriate time for the Court to consider an exercise of its discretion to grant relief is if a claim is made against the executors and after the Court has made findings. He submits that no orders should be made at present which might affect the outcome of any future claim for damages, should such a claim be made.
To understand Mr McFarlane’s position it is necessary to descend, to some degree, into the details of the executors’ dealings with the Australian estate. Mr McFarlane submits that at the time of the deceased’s death, Rayvic, on the behalf of the Lonestar Trust, was the proprietor of land at Ryans Road. Rayvic had borrowed funds from the CBA secured by a mortgage over the land and supported by a guarantee from the deceased. The loan was an interest only loan. The balance was $517,000. Interest payments were made monthly by the deceased. They continued for some months after his death. At the date of the deceased’s death Rayvic was indebted to the deceased in the amount of approximately $143,000. That debt increased to $146,282.54 as a result of the further payments made subsequent to the deceased’s death. Once those payments stopped, the loan fell into arrears and CBA made a demand on the executors. On the recommendation of their solicitors on 23 January 2018 the executors paid the arrears from the residue of the Australian estate in an amount of $23,000. The loan balance was to fall due in April 2018. The executors’ solicitors recommended the loan balance be paid out of the residue which included distributions made from the Florida estate to Ms Perla. The executors paid $517,000 to CBA on the basis that it would be recorded as an inter-entity loan from the residue to Rayvic.
In addition, from 1 July 2017 the executors paid a number of different third party unsecured liabilities of Rayvic. These payments amounted to $183,826.79. By making these payments the Australian estate enabled third party creditors to be paid in full and has stepped into their shoes, leaving the estate to bear the loss which will flow from the deficiency in the assets. The total of all funds advanced by the executors was $867,908.65. The executors caused a loan agreement to be entered into between Rayvic and themselves recording a loan in that amount, payable on demand made in writing, with no provision for interest or security.
The position of Ms Edwards is that the estate is an unsecured creditor of Rayvic for that amount.
Mr McFarlane submits that the question of whether the estate is unsecured for the whole amount of the debt cannot be determined in this action. While approximately $143,000 represents the debt as at the date of the deceased’s death and has always been unsecured, the estate might be entitled to an equitable charge over the proceeds of the sale of the Ryans Road land in the amount of $537,700.32 paid to the CBA in discharge of liabilities secured by the mortgage over that land. As to $183,826.79 paid to discharge third party debts, the estate is very likely an unsecured creditor of Rayvic. If it is the case that the estate is ultimately found to be an unsecured creditor to the full extent of the $867,908.65, then the making of advances by the estate to Rayvic has had the effect of substantially increasing the exposure of the estate as an unsecured creditor of Rayvic with the result that, on the estimation of Mr McFarlane, the residuary estate is about $150,000 worse off than it would otherwise have been.
He contends that these are matters that cannot be determined in these proceedings and he wishes to preserve all rights of action in connection with this loss. Accordingly, he opposes the orders sought by Ms Edwards pursuant to s 56. He submits that if the executors are relieved from liability it may impact any rights of action they have or the estate has against their legal and financial advisors. In these circumstances, the question of whether the executors ought to be relieved from liability for breach of trust should be addressed in any future proceedings in which the circumstances of the use of the Australian estate funds to discharge the Rayvic liabilities are more fully addressed, and after the issue is resolved of whether the estate is subrogated in equity to the security previously held by CBA.
Ms Edwards contends that there appear to be two grounds for Mr McFarlane’s opposition to an order being made in favour of the executors pursuant to s 56. The first ground is that any potential loss has not crystalised and the potential issue of subrogation has not been determined. However, Ms Edwards submits that s 56 clearly states that it may be utilised if the applicant “is, or may be” personally liable. Ms Edwards contends in the present circumstances it is open to the Court to make an order pursuant to s 56. The extent of the loss need not necessarily be determined. For the purposes of her application the Court may proceed on the estimate by Mr McFarlane that as a worse case scenario the loss may be $150,000. The second ground is the potential impact for an order pursuant to s 56 to affect future proceedings. Ms Edwards submits, however, that the relief granted by the Court is limited to excusing the executors from liability for any breach of trust. It does not relieve any other person from a potential liability. It would not impact on any action that may arise as against any other person. Ms Edwards submits the facts are sufficiently before the Court for it to make a finding as to the application for relief from liability. She submits that Mr McFarlane is seeking such relief in respect of substantially the same conduct. She contends that if Mr McFarlane’s arguments are correct, the application for relief by him must also be refused on a similar basis.
Mr McFarlane says his position is different from the executors’ because their conduct relates to the use of the funds of the estate to pay debts that were not debts of the estate and insofar as funds were applied to discharge bank debt secured by mortgage, the funds were applied in a manner that did not protect the estate by ensuring a subrogation of the estate to mortgage securities. By contrast, Mr McFarlane merely agreed in principle to the application of distributions from the Florida estate being applied to discharge the CBA debt. He was not involved in the manner in which that was done, namely, with no steps taken to protect the estate by subrogation to the bank’s security and he was not involved in the use of estate funds to pay other third party creditors of Rayvic.
I accept the submissions of Mr McFarlane. In my view he is entitled to an order pursuant to s 56 excusing him from liability for any breach of trust he may have committed in relation to the receipt and use by the executors of distributions from the Florida estate.
I reject the submissions of Ms Edwards. While I accept that there is no real issue that the executors have acted honestly, it may be that evidence not currently before the Court or evidence which is before the Court will assume a different complexion in the light of the potential for further evidence concerning their dealings with the estate. I do not have to decide now whether the executors have acted honestly and reasonably. I accept the submission of Mr McFarlane that to do so now would be premature. If the interests of Ms Perla have been harmed by any breach of trust on the part of the executors, it would be wrong for the Court to now grant relief to the executors pursuant to s 56 if that has the consequence of prejudicing any rights she had to recover any loss she may have suffered as a result of such a breach. None of this should be understood as precluding any subsequent application by the executors pursuant to s 56, however, I am not prepared to make any order at this stage.
Exercise by Mr McFarlane of power of Ms Perla in relation to the Florida estate
Mr McFarlane applies for orders and direction by the Court to facilitate the completion of the administration of the Florida estate. He seeks orders empowering him to waive Ms Perla’s right to a formal accounting of the Florida estate and to grant an indemnity to Mr Mantzidis. He also seeks direction from the Court to execute documents on behalf of Ms Perla for those purposes.
Mr McFarlane’s powers in respect of the protected estate are conferred by s 13(1) of the Aged and Infirm Persons’ Act which provides:
(1) The manager shall have the following powers, unless the court in any particular case otherwise orders:
1. To take possession of the protected estate, and to recover possession thereof from any person holding the same:
2. To repair and insure against any contingency any part of the estate:
3. To demand, recover, and receive moneys and personal effects payable to or belonging to the protected person:
4. To apply any moneys (whether arising from real or personal property, and whether income or capital) for the maintenance of the protected person, and the spouse or domestic partner and children of the protected person, and for the education of the children of the protected person, and in payment of the debts and liabilities of the protected person:
5. To carry on any trade or business theretofore carried on by the protected person, and to carry on the business of any partnership in which the protected person may be a partner:
6. To apply for and, if granted, to undertake administration for the use and benefit of the protected person during his incapacity where he would, but for his incapacity, be entitled to a grant of probate or administration.
In addition those powers were supplemented by orders of the Court in 2000 and 2003.
However, it is common ground that Mr McFarlane lacks the power to waive Ms Perla’s right to a formal accounting of the Florida estate, to grant an indemnity to Mr Mantzidis in relation to the administration of the Florida estate, and to execute documents to effect those purposes.
The Court has a discretion to confer wide powers on Mr McFarlane with respect to the protected estate.[8] The power of the Court to make these orders is conferred by s 13(2) and s 25 of the Aged and Infirm Persons’ Act. Section 13(2) provides:
(2) The manager shall have such other powers and duties in respect of the protected estate as the court in and by the protection order, or from time to time, defines or directs, and the court shall have jurisdiction to confer any such powers upon the manager to be exercised generally in respect of the estate or any part thereof, or upon any special occasion, or in respect of any particular subject matter.
[8] Jeavons v Chapman (No. 2) [2009] SASC 3 at [55].
Section 25 provides:
Where any right or power is or would be exercisable by a protected person if that person were sui juris, whether for his own benefit or in the character of a trustee, guardian or in any other fiduciary character, and it appears to the Court to be expedient that that right or power should be exercised the manager may in the name or on behalf of the protected person and with the sanction of the order of the Court made on his own application or on the application of any person interested exercise that right or power in such manner as the order directs.
The Court also has power to permit a manager, appointed under the Aged and Infirm Persons’ Act, to obtain advice and direction. In Jeavons v Chapman (No. 2)[9] Gray J held that while there is no express power in the Act permitting a manager to obtain the advice and direction of the Court, the inherent equitable jurisdiction of the Court is a sufficient source of such power.[10]
[9] [2009] SASC 3.
[10] [2009] SASC 3 at [51].
I am satisfied that in all the circumstances it is appropriate that Mr McFarlane should be cloaked with those powers and directed by the Court to exercise them. There is no other person who can exercise these powers on behalf of Ms Perla. I am satisfied that the exercise of the powers are in her best interests. Her best interests would be served by the completion of the administration of the Florida estate and the distribution to her of the US$824,000 remaining in that estate. The timely completion of the Florida estate will be facilitated by the making of these orders and the direction for the exercise of the powers thereby conferred on Mr McFarlane.
Power of Mr McFarlane to act as Ms Perla’s litigation guardian
In the 2018 action Ms Perla is named as a second defendant through Mr McFarlane as her litigation guardian. However, no order has been made appointing Mr McFarlane as Ms Perla’s litigation guardian for the purposes of that action. While Mr McFarlane was appointed Ms Perla’s litigation guardian in the probate action, the Court has not made an order conferring power upon him to undertake that role.
While the ultimate question of whether Mr McFarlane ought to be appointed the litigation guardian for Ms Perla in the 2018 action is a question to be addressed by the Court in that action, Mr McFarlane nonetheless seeks an order conferring power upon him to act as her litigation guardian in the event that an order is made appointing him as litigation guardian in the 2018 action, and an order formalising the exercise by him of the power as litigation guardian in the probate action.
This raises two questions. First, whether the Court can confer power on Mr McFarlane to act as the litigation guardian for Ms Perla in the 2018 action and the probate action; and second, if so, whether the Court should grant Mr McFarlane power to act as the litigation guardian for Ms Perla.
As to the first question, the appointment of Mr McFarlane as the manager of the protected estate only cloaked him with the limited powers conferred by s 13(1) of the Aged and Infirm Persons’ Act and certain additional powers conferred by the terms of the 2000 and 2003 orders. Neither s 13(1) nor the 2000 and 2003 orders conferred power on Mr McFarlane to act as litigation guardian of Ms Perla.[11] Mr McFarlane does not have the power to act as the litigation guardian of Ms Perla unless the power is expressly given to him by the Court.
[11] The effect of the 2000 and 2003 orders was to “take possession of and control and manage the whole of the estate” of Ms Perla. Other powers were conferred which are irrelevant to the capacity of Mr MacFarlane to act as Ms Perla’s litigation guardian.
Section 13(2) of the Act gives to the Court jurisdiction to confer upon the manager of a protected estate powers additional to those conferred by s 13(1) in respect of the protected estate.[12] Those powers may be exercised generally in respect of the estate or any part thereof, or upon any special occasion, or in respect of any particular subject matter.
[12] Jeavons v Chapman (No 2) [2009] SASC 3 at [55].
Presumably, Ms Perla is named as a party to the 2018 action and the probate action because she is a beneficiary under the will of the deceased. That gift is in the nature of a gift of the residual estate. The question which arises is whether such an interest falls within the protected estate.
The protected estate is defined at s 3(1) of the Act relevantly to mean “the real and personal estate of a protected person”. The question is whether the interest of Ms Perla as a residuary beneficiary of the deceased’s estate falls within her real and personal estate.
In Barns v Barns,[13] Gummow and Hayne JJ said of the interest of a residuary beneficiary:[14]
The whole of the property of the testator is held by [the executor], for the purpose of carrying out the functions and duties of administration; equity does not recognise or create for [the residuary legatee], a beneficial interest in any particular asset in the hands of [the executor] during the course of the administration. What [the residuary legatee] has is a right to due administration of the assets in accordance with the duties of the executor; it is in that sense that she may be said to have an interest in the entire estate, which is capable of transmission both by her under her will, and by operation of law, as in Official Receiver in Bankruptcy v Schultz.
[Citations omitted]
[13] [2003] HCA 9, (2003) 214 CLR 169.
[14] [2003] HCA 9 at [50], (2003) 214 CLR 169 at 189.
In Kennon v Spry,[15] Heydon J described the nature of the property held by the residuary beneficiary of an unadministered estate in these terms:[16]
The right of a residuary beneficiary of an unadministered estate to have the estate duly administered can be assigned or devolve upon death. The residuary beneficiary, while having no beneficial interest in any particular asset of the unadministered estate, is correctly described as being entitled to the appropriate share of the residuary estate and hence as having “property” within the meaning of a broad legislative definition of that expression. …
[Citations omitted]
[15] [2008] HCA 56, (2008) 238 CLR 366.
[16] [2008] HCA 56 at [161], (2008) 238 CLR 366 at 418.
A residuary beneficiary does not have a beneficial interest in any particular asset in the hands of the executors. The right of the residuary beneficiary is to the due administration of the estate in accordance with the duties of the executor. A residuary beneficiary has an interest in the whole or a share of the residuary estate.
In the circumstances, I am satisfied that the interest of Ms Perla as a residuary beneficiary falls within her protected estate. Accordingly, the Court can confer power on Mr McFarlane to be exercised generally in respect of the estate or part of the estate, or any particular subject matter. In those circumstances, the Court enjoys the jurisdiction pursuant to s 13(2) to confer on Mr McFarlane power to act as Ms Perla’s litigation guardian.
As to the second question, I am satisfied the Court should give Mr McFarlane power to act as the litigation guardian of Ms Perla.
The powers conferred on a manager appointed under s 13(1) of the Aged and Infirm Persons’ Act does not include acting as the litigation guardian of a protected person. Neither do the 2000 or 2003 orders confer power on Mr McFarlane to do so.
This, however, is not a case of the manager prosecuting a claim. Rather, Ms Perla and Mr McFarlane were named as defendants because of the interest of Ms Perla in the outcome of the litigation, namely as a beneficiary under the will.
It can be assumed Mr McFarlane will conduct the proceedings with the object of achieving the best outcome for Ms Perla, and having regard to the risk of the value of Ms Perla’s interest in the deceased estate being reduced by costs orders and the possibility that the deceased’s estate is indebted to PBI in an amount greater than is recorded in the books of that company.[17]
[17] Affidavit of Ian Allan McFarlane sworn 19 November 2019 at [36]-[37] (2000 Action).
Mr McFarlane is the appropriate person to act as the litigation guardian for Ms Perla. He has been the manager of her protected estate since 2003, under the 2003 order. He has no personal interest in the estate of the deceased. Ms Perla has no spouse or children one of whom might otherwise possibly seek to be appointed her litigation guardian. He asks that the Court make the order nunc pro tunc from 24 April 2018, the date of the issue of the proceedings in the 2018 action. I am satisfied that the Court should do so. The Court is doing now what it could and should have done then.[18]
[18] Emanuele v Australian Securities Commission [1997] HCA 20, (1997) 188 CLR 114 at 131-132.
Advice and direction to the executor to sell the land at Francis Road
Ms Edwards seeks advice and direction pursuant to s 69 of the Administration and Probate Act that she would be justified and should sell land forming part of the deceased’s estate at Francis Road, Wingfield, in order to raise funds to pay the outstanding debts and testamentary expenses of the deceased’s Australian estate. There is no issue that as executor she has the power to do so. Mr McFarlane opposes the Court giving such advice on the basis that it is unnecessary and without utility as Ms Edwards has no alternative in order to pay the outstanding debts and expenses and the sale of the land for that purpose is merely an exercise of their executorial obligations.
In In the Estate of McBride[19] I considered the operation of s 69 as follows:[20]
[19] [2019] SASC 204.
[20] [2019] SASC 204 at [12]-[14].
Section 69 of the Act permits an executor, when in difficulty or doubt, to seek the advice or direction of the Court in matters connected with the administration of any estate, or the construction of any will, deed or document. Unlike analogous provisions in other jurisdictions there is no express provision as to the effect of the advice or direction. In South Australia, it has been held that:
The direction given to [the trustee] protects and indemnifies the trustee against any claim for breach of trust, provided always that the facts have been fully and fairly disclosed, but leaves the question open as between beneficiaries who have not been cited to see the proceedings.
In Re Atkinson, the Court said:
If the executor or the trustee then followed the direction of the court, it would be protected from any claim by a beneficiary or creditor arising from its action or inaction in accordance with the court’s direction.
To similar effect, in re GB Nathan & Co Pty Ltd (In Liq), the Court said:
These various statutory provisions for directions were a development from the practice of the Court of Chancery under the general law in giving directions to those entrusted with the administration of property under the control of the court. Two main classes of such persons were (1) trustees of trust property, or executors or administrators of a deceased estate, under administration by the court pursuant to a decree for general administration, and (2) receivers (and managers) appointed by the court in respect of property the subject of litigation. In such cases the exercise by those persons (to whom I will collectively refer as official administrators) of administrative or managerial functions were subject to close control by the court and in many instances they could safely exercise their powers only with the approval, and in accordance with the directions, of the court …
Generally speaking, if the court gave a direction to an official administrator who had made a full and fair disclosure to the court of the material facts, the official administrator might act in accordance with the direction without thereby incurring personal liability to any of the persons in whose interests the administration was being conducted, for example, creditors or beneficiaries of a deceased estate …
[citations omitted]
I am satisfied in the circumstances of this case that it is appropriate to give directions to Ms Edwards pursuant to s 69 out of an abundance of caution so as to afford her protection from the possibility of any future challenge to her undertaking the sale in the administration of the estate, by a different manager or, in the event of Ms Perla’s death, her personal legal representative.
Advice and direction to the executor to wind up Rayvic and appoint a receiver to the Lonestar Trust
Ms Edwards has brought an application seeking advice and direction pursuant to s 69 of the Administration and Probate Act that she would be justified and should cause an application to be made for Rayvic to be wound up and a receiver appointed to the Lonestar Trust. Mr McFarlane opposed that application.
He contended there should be a creditors’ voluntary winding up of Rayvic and the appointment of the Rayvic liquidator to be the trustee of the Lonestar Trust.
Subsequently the parties put a joint submission that the Court should give advice and direction that the executors should cause Rayvic to resolve to be wound up by way of a creditors’ voluntary winding up, and to appoint the liquidator of Rayvic as trustee of the Lonestar Trust.
Mr McFarlane’s consent to a course of action by Ms Edwards does not necessarily bind Ms Perla, or her heirs or successors.
Appointment of a new trustee
It is common ground that:
·Rayvic was incorporated for the sole purpose of acting as trustee of the Lonestar Trust;
·it only acted as trustee of the Lonestar Trust;
·the executors have power under the trust deed of the Lonestar Trust to appoint a new trustee;
·Ms Perla is the only beneficiary of the Lonestar Trust;
·all of Rayvic’s debts were incurred as trustee of the Lonestar Trust;
·those debts amount to $989,539.44, comprising:[21]
(i) the estate, in the amount of $867,908.65;
(ii) PBI Superannuation, in the amount of $53,682.00;
(iii) the ATO, in the amount of $66,153.59; and
(iv) Sothertons in the amount of $1,795.20.
[21] The exact amount of each debt might vary to some insignificant degree when the trust is wound up.
It is also not in issue that the only asset held by Rayvic is a fund held in a deposit account, the balance of which was $730,772.32 at the time of Ms Fagan’s affidavit of 16 October 2019.[22] Further, it is common ground that:
·Rayvic holds that asset as trustee of the Lonestar Trust;
·the fund is the only asset of the Lonestar Trust;
·Rayvic is entitled to be indemnified from the asset of the Lonestar Trust; and
·Rayvic is likely to be insolvent because the one asset available to it to discharge its debts is insufficient to meet those debts.
[22] The exact balance is subject to change because of interest earned and bank fees payable.
The task which needs to be attended to is the application of the Lonestar Trust’s one asset to pay the debts incurred by Rayvic as trustee in the winding up of Rayvic according to law. After the assets are applied in this way, there will be no assets left in the Lonestar Trust for distribution to Ms Perla.
There is no basis, of which Ms Edwards or Mr McFarlane are aware, on which any of the third party creditors of Rayvic could throw any doubt over the matters set out above. The issue is the most cost effective way to carry out the task of applying the fund to meet the debts.
In several cases, this has been achieved by the appointment of a liquidator by the Court as a receiver of the assets of the trust.[23] However, for the following reasons, that is not the appropriate course in this matter.
[23] In the matter of Gramarker Pty Ltd; Clifford Sanderson (as liquidator of Gramarker Pty Limited) v Simon Kerr [2014] NSWSC 243 at [9]; Sapphire (SA) Pty Ltd v Ewens Glen Pty Ltd [2011] FCA 600 at [11].
Pursuant to clause 4.4(f) of the trust deed,[24] upon Rayvic resolving to be wound up, the office of trustee under the trust deed becomes vacant.
[24] Exhibit FRF21 (at 190) to the affidavit of Fiona Ruth Fagan affirmed 16 October 2019.
Rayvic has a right of exoneration out of the trust assets. It is a property right of the company, and is held by the company in preference or priority to the beneficiaries’ interests.[25]
[25] Carter Holt Harvey Woodproducts Australia Pty Ltd v Commonwealth [2019] HCA 20 at [28], [32]-[33], [80], [83]-[84] and [133]-[139], (2019) 93 ALJR 807 at 818-820, 828-830 and 839-840; Jones v Matrix Partners Pty Ltd [2018] FCAFC 40 at [69], (2018) 260 FCR 310 at 329.
The liquidator having control of the company takes control of all assets held by the company, including trust assets which are held subject to the right of indemnity.[26] Here the right of indemnity is a right of exoneration, as Rayvic has not itself paid trust debts using its own money.[27] Rayvic’s power of exoneration passes to its liquidator.[28]
[26] Jones v Matrix Partners Pty Ltd [2018] FCAFC 40 at [82], (2018) 260 FCR 310 at 332.
[27] Carter Holt Harvey Woodproducts Australia Pty Ltd v Commonwealth [2019] HCA 20 at [29] and [130], (2019) 93 ALJR 807 at 819 and 838.
[28] Carter Holt Harvey Woodproducts Australia Pty Ltd v Commonwealth [2019] HCA 20 at [35], (2019) 93 ALJR 807 at 820-821.
Upon the winding up of Rayvic, while its appointment as trustee under the deed is terminated, Rayvic continues to hold the assets of the trust as a bare trustee for the benefit of those persons who have a beneficial interest in the assets, including the former trustee.[29]
[29] Jones v Matrix Partners Pty Ltd [2018] FCAFC 40 at [142], (2018) 260 FCR 310 at 344; McLean v Hill, In the matter of TMC Plumbing & Drainage Pty Ltd (in liq) [2019] FCA 1439 at [16].
If the trust asset was not a fund, but was a form of property that would need to be realised by sale, the liquidator would need the intervention of the Court either by the appointment of a receiver[30] or by the Court granting him or her a power of sale.[31] That is not required here.
[30] See for example, McLean v Hill, In the matter of TMC Plumbing & Drainage Pty Ltd (in liq) at [20]-[24] and ReParkway One Pty Limited(No 2) [2020] NSWSC 191 at [12]-[14].
[31] Jones v Matrix Partners Pty Ltd [2018] FCAFC 40 at [89] and [91], (2018) 260 FCR 310 at 333-334.
The proposed course would enable the liquidator to act armed with all the powers of the trustee under the trust deed, including the power to apply the trust asset to discharge the former trustee’s right of indemnity.
In addition, there are other considerations which favour the appointment of the liquidator as trustee.
It will simply align the finalisation of this aspect of the estate with what would be the case if the trust deed did not have the effect of removing Rayvic as trustee. In that situation, Rayvic, under the control of the liquidator, would continue as trustee and the liquidator’s powers would include the administration of the trust as part of the administration of the affairs of the company.[32]
[32] See the observation of Allsop CJ in Jones v Matrix Partners Pty Ltd [2018] FCAFC 40 at [90], (2018) 260 FCR 310 at 333.
The liquidator will not be in a position of conflict undertaking both roles. He or she would be in the same position as if either the company continued as trustee or if he or she were to be appointed receiver of the trust.[33]
[33] As to the liquidator not being in a position of conflict merely from being appointed a receiver, see Jones v Matrix Partners Pty Ltd [2018] FCAFC 40 at [198], (2018) 260 FCR 310 at 352 and Hosking, in the matter of Business Aptitude Pty Ltd (in liq) [2016] FCA 1438 at [26], (2016) 34 ACLC 16-045 at 738.
The proposed course will enable the liquidator to deal with the trust asset without the need for an application to the Court to appoint the liquidator as a receiver and without the need for the receiver, as an officer of the court, to report to the Court. This saving of costs, which would ultimately be borne by Ms Perla, is an important consideration.
Even if the liquidator is not appointed trustee, he or she would be holding the trust fund as bare trustee for Rayvic and subject to Rayvic’s equitable interest in the property anyway. In respect of “cash at bank”, Rayvic’s right of indemnity is a right to be paid money on request.[34] The appointment of the liquidator as trustee will remove any possible doubt that the liquidator is entitled to exercise power over the fund to meet Rayvic’s right of indemnity.
[34] Carter Holt Harvey Woodproducts Australia Pty Ltd v Commonwealth [2019] HCA 20 at [30], (2019) 93 ALJR 807 at 819.
Ms Edwards has the power to proceed by appointing the liquidator as trustee. Pursuant to clause 4.4(b) of the trust deed,[35] the “Principal” has power to appoint a new trustee. The “Principal” is defined in clause 1.1[36] to be the person named in the Schedule, and, under (c), the legal personal representative of that person. The deceased is named as the Principal in the Schedule to the trust deed.[37] This is an appropriate case for Ms Edwards to exercise that power.
[35] Exhibit FRF21 (at 190) to the affidavit of Fiona Ruth Fagan affirmed 16 October 2019.
[36] Exhibit FRF21 (at 169) to the affidavit of Fiona Ruth Fagan affirmed 16 October 2019.
[37] Exhibit FRF21 (at 197) to the affidavit of Fiona Ruth Fagan affirmed 16 October 2019.
Form of order
The appropriate form of order in respect of paragraph 3A of the Third Originating application, given Mr Panucio has ceased to act as an executor in relation to Rayvic, is:
3A. Pursuant to s. 69 of the Administration and Probate Act 1919 (SA), the applicant in her capacity as executor of the Deceased's estate would be justified and should:
(a) cause RAYVIC INVESTMENTS PTY LTD (ACN 603 684 000) to resolve to be wound up by way of creditors' voluntary winding up; and
(b) upon such resolution being made, she should exercise her power under the Trust Deed to appoint the liquidator of RAYVIC INVESTMENTS PTY LTD (ACN 603 684 000) as trustee of the LONESTAR TRUST.
Conclusion
I would not at this stage grant the application for an order pursuant to s 56 of the Trustee Act relieving the executors of any liability. However, I would direct Ms Edwards that she would be justified and should sell land forming part of the deceased’s estate at Francis Road, Wingfield.
I would grant the application for an order pursuant to s 56 of the Trustee Act relieving Mr McFarlane from liability for the past receipt of the US$583,862.22 from the Florida estate being used by the executors for the purposes of the Australian estate. I would make an order empowering Mr McFarlane to waive the right to a formal accounting of the Florida estate and to grant an indemnity to Mr Mantzidis. I would direct Mr McFarlane to execute documents on behalf of Ms Perla for those purposes. I would also make an order nunc pro tunc granting Mr McFarlane additional powers to act as litigation guardian for Ms Perla in the probate action and the 2018 action.
I would direct that Ms Edwards should cause Rayvic to resolve to be wound up by way of a creditors’ voluntary winding up and to appoint the liquidator of Rayvic as trustee of the Lonestar Trust.
I direct the parties to confer and bring into Court minutes of order that reflect these reasons. I would hear the parties as to costs.
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