Markin v Animals Australia Federation
[2020] VSC 113
•13 March 2020
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMON LAW DIVISION
TRUSTS, EQUITY & PROBATE LIST
S ECI 2018 02474
IN THE MATTER of the Will and Estate of VIVIENNE ROSARIA ROSS, deceased
-and-
IN THE MATTER of an application pursuant to Rule 54.02 of the Supreme Court (General Civil Procedure) Rules 2015 for the determination of a question arising in the administration of the estate
BETWEEN
| HOPI JULIAN MARKIN (as Executor of the Will and Estate of VIVIENNE ROSARIA ROSS, deceased) | Plaintiff |
| v | |
| ANIMALS AUSTRALIA FEDERATION ACN 617 080 387 | First Defendant |
| - and - | |
| SYDA FOUNDATION | Second Defendant |
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JUDGE: | Moore J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 7 March 2019 |
DATE OF JUDGMENT: | 13 March 2020 |
CASE MAY BE CITED AS: | Markin v Animals Australia Federation & Anor |
MEDIUM NEUTRAL CITATION: | [2020] VSC 113 |
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WILLS AND ESTATES – Devolution of shares in company on death of registered holder – Deceased bequeathed plaintiff all shares in company – Dividend declared by directors of company following death of deceased – Whether plaintiff is entitled to the dividend or whether it forms part of the residue of the estate to be paid to the defendants – Prior practices of the company – Apportionment of dividend – Availability of profits for declaration of dividend – Supreme Court (General Civil Procedure) Rules 2015 r 54.02 – Corporations Act 2001 (Cth) ss 140, 1070A, 1070B, 1070E – Supreme Court Act 1986 ss 53, 54, 55, 56 – Re Campbell (deceased) [1973] 2 NSWLR 146 – Re McCutcheon, deceased [1960] VR 289 – Re West; West v Roberts [1909] 2 Ch 180 – O’Brien v McCormick [2005] NSWSC 619 – Re Wakley (1920) 2 Ch 205.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr M Flynn QC | Nicholson Ryan Lawyers |
| For the Defendants | Mr S Pitt | Lawson Hughes Peter Walsh |
HIS HONOUR:
Until her death on 28 April 2017, Vivienne Rosaria Ross and her husband Maxwell Arthur James Ross were the ultimate owners of a successful cosmetics business, Natio Pty Ltd. They each separately held equal shares in Mia Rosart Pty Ltd, the holding company of Natio Pty Ltd.
The plaintiff, Hopi Julian Markin, is Mrs Ross’ nephew and, under her last will dated 10 March 2017, the executor of her estate. Mr Markin is also a beneficiary under the will. By cl 3(b), he is gifted $100,000 and ‘all [the deceased’s] shares and other interests in any private and public companies’. After payment of certain other legacies, the residue of Mrs Ross’ estate is to be paid to the two charities who are the defendants in the proceeding, Animals Australia Federation and SYDA Foundation.
On 11 August 2017, after the deceased’s passing, but before her shares in Mia Rosart were transferred to Mr Markin, the directors of Mia Rosart declared a dividend totalling $3,097,000, to be paid in proportion to the shareholdings, with ‘Maxwell Ross [sic] portion being $1,548,500 and Vivienne Ross [sic] portion being $1,548,500’.
The central issue in this proceeding is whether Mr Markin is personally entitled to the ‘Vivienne Ross portion’ of this dividend,[1] or whether it forms part of the residue of the estate, in which event the defendants would be entitled to it.
[1]For convenience, I will refer to this as ‘the dividend’.
The controversy falls to be determined in the context of Mr Markin’s application pursuant to r 54.02 of the Supreme Court (General Civil Procedure) Rules 2015 for the determination of certain questions arising in the administration of the estate.[2] Those questions are as follows:
1 Considering the events that have happened, did Mia Rosart Pty Ltd pay a dividend to the estate on or about 11 August 2017?
2If the answer to question 1 is “yes” what was the amount of the dividend actually received by the Estate?
3If the answer to 1 is “yes”, upon the true construction of the will and considering the events that have happened, did the whole of the dividend actually received belong to the beneficiary, [the plaintiff]?
4If the answer to 1 is “yes” but the answer to 3 is “no”, upon the true construction of the will and considering the events that have happened, did the whole of the dividend actually received belong to the residue of the Estate?
5If the answer to 1 is “yes” but the answers to 3 and 4 are “no”, upon the true construction of the will and considering the events that have happened, is the dividend actually received to be apportioned between the residue of the Estate and the beneficiary, [the plaintiff] under ss 53 and 54 of the Supreme Court Act 1986, and if so, on what basis?
[2]Supreme Court (General Civil Procedure) Rules 2015 r 54.02 (‘the Rules’).
I will address these questions after setting out the factual background to the application.
Factual background
Mr Markin was granted probate of Mrs Ross’ will on 3 August 2017, some three months after her death.[3] The inventory of assets and liabilities of the estate disclosed total net assets of $16,865,447.03.
[3]Leave was reserved to a co-executor, Bibi Viro, Mrs Ross’ sister, to prove the will at any time.
Aside from interest, Mia Rosart’s only source of income was the payment of dividends from Natio. As I have already noted, on 11 August 2017, the directors of Mia Rosart declared a dividend in the amount of $3,097,000 that was to be paid in proportion to the shareholders’ holding. The resolution was as follows:
…that a fully franked dividend totalling $3,097,000 be declared and paid in proportion to the shareholders holdings of 1 ordinary share each. Maxwell Ross portion being $1,548,500 and Vivienne Ross portion being $1,548,500.
Mr and Mrs Ross each had loan accounts with Mia Rosart. Those accounts were treated as a joint loan account. At the time of the declaration of the dividend on 11 August 2017, Mrs Ross’ share of the joint loan account was $1,400,547.94.
Upon declaring the dividend on 11 August 2017, the directors of Mia Rosart applied the sum of $1,400,547.94 to discharge Mrs Ross’ share of the joint loan account. Generally, in previous financial years, any dividend that was declared by Mia Rosart was used to pay out the loan balance which each shareholder had accrued with the company in the preceding financial year.
On 12 September 2017, Mr Markin executed a share transfer form to have Mrs Ross’ shares in Mia Rosart transferred to him in his personal capacity from his capacity as executor of her estate. The share transfer was registered by Mia Rosart on 27 October 2017.
On 15 December 2017, Mr Markin in his capacity as executor of Mrs Ross’ estate, wrote to Mr Ross. Mr Markin stated that the deceased was indebted to Mia Rosart in the amount of $1,400,547.94 and confirmed that, in order to extinguish that liability, he would arrange for payment of this sum out of the estate funds.
Mr Ross responded on 19 December 2017. He stated that Mrs Ross’ loan balance at the date of her death had been cleared in full by the dividend declared on 11 August 2017 and, as such, no further payment was required by the estate.
Question 1: Considering the events that have happened, did Mia Rosart pay a dividend to the estate on or about 11 August 2017?
The parties were agreed that the answer to this question is ‘yes’. I am satisfied that this is correct. On 11 August 2017, Mia Rosart declared a dividend in favour of its shareholders. It paid the dividend by crediting it to Mr and Mrs Ross’ joint loan account. As noted above, this is consistent with the manner in which Mr and Mrs Ross’ had previously treated payments of dividends.[4]
Question 2: If the answer to question 1 is “yes”, what was the amount of the dividend actually received by the estate?
[4]See also the general principle in Re Harmony and Montague Tin & Coffee Mining Company (1873) 8 Ch App 407, 414.
The defendants submit that the answer to this question is $1,548,500, being half of the total dividend declared on 11 August 2017. Mr Markin submits that the answer to the question is $1,400,547.94, being the amount that was set off against Mrs Ross’ portion of the joint loan account.
The Court’s jurisdiction under Order 54 is discretionary and may not be suitable for resolving disputed questions of fact.[5] Given the parties’ conflicting position on this question, a determination of the amount of the dividend ‘actually received’ by the estate would require the Court to make findings of fact on the basis of both disputed and incomplete evidence. In the circumstances, the Court declines to answer this question.
[5]Nutter v Holland [1894] 3 Ch 408, 410; Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar The Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand (2008) 237 CLR 66, 102–3 [106]; Re AGW Funds Management Ltd [2017] VSC 124, [21] (Sifris J).
Questions 3 & 4
Question 3:If the answer to 1 is “yes”, upon the true construction of the will and considering the events that have happened, did the whole of the dividend actually received belong to the beneficiary, [the plaintiff]?
Question 4:If the answer to 1 is “yes” but the answer to 3 is “no”, upon the true construction of the will and considering the events that have happened, did the whole of the dividend actually received belong to the residue of the Estate?
These questions raise the same underlying issue and concern the central controversy in the proceeding: whether Mr Markin is personally entitled to the dividend as a beneficiary under the will, or whether it forms part of the residue of the estate to be paid to the defendants. It is therefore convenient to deal with them together.
Mr Markin’s case that the whole of the dividend belongs to him was submitted to be the result required by the long established principle that, in the absence of an express direction otherwise, income passes to a specific legatee or devisee from the date of death. An early statement of the principle was made by Fry J in Re Buckley’s Trusts who observed that, where a gift is given absolutely, ‘the accretions of income not required for maintenance belong … to the person who takes absolutely’.[6] The principle likewise finds recognition in various learned texts.[7]
[6]Re Buckley’s Trusts (1883) 22 Ch D 583, 584. See also Re Marten [1901] 1 Ch 370, 373.
[7]See, for example, John Ross Martyn and Nicholas Caddick, Williams, Mortimer and Sunnucks on Executors, Administrators and Probate (Sweet and Maxwell, 20th ed, 2013) [1394].
It was submitted on behalf of Mr Markin that, given cl 3(b) of the will specifically gifts to him all of Mrs Ross’ shares in private or public companies, it followed from the above principle that, subject only to any question of apportionment pursuant to ss 52–56 of the Supreme Court Act 1986, the gift carried with it all of the dividends paid on those shares from the date of death.
Counsel for the defendants accepted the existence of the ‘high level general principle’ relied on by Mr Markin, but rejected its applicability to the present matter on the basis that it was drawn from old cases which pre-dated the Corporations Act 2001 (Cth) which were not on all-fours with this matter involving a claim to dividends from shares.[8]
[8]Corporations Act 2001 (Cth) (‘Corporations Act’).
I do not accept this attempt to diminish the relevance of the principle relied on by Mr Markin. In an early case, Re West; West v Roberts,[9] Swinfen Eady J confirmed the application of the principle in relation to shares and dividends as follows:[10]
In the case of a specific legacy it is well established that immediately after the executors’ assent the legacy vests in the legatee, and he can maintain an action at law in respect of it. If the plaintiff has a legal right to the shares as from the testatrix’s death, it seems to me that he has also a legal right to the interest or dividends.
[9][1909] 2 Ch 180.
[10]Ibid 185.
This statement was referred to with approval and applied by J Forrest J in Re Blake.[11] More recently in Tschirn v Australian Executor Trustees Ltd,[12] Doyle J referred to it as a ‘well accepted principle or convention of construction’.[13] The following statement by Campbell J in O’Brien v McCormick stands as a comprehensive modern statement of the general principle:[14]
Income arising after the date of death on property which is left as an unconditional and immediate gift by a specific legacy or devise goes to the specific legatee or devisee: Hasluck v Pedley (1874) 19 LR (Eq) 271; In Re Buckley’s Trusts (1883) 22 Ch D 583; In Re Marten; Shaw v Marten [1901] 1 Ch 370; In Re West; West Roberts [1909] 2 Ch 180; Jarman on Wills, 8th ed p 1079, Theobald on Wills, 10th ed p 130, Williams Mortimer and Sunnucks Executors, Administrators and Probate, (16th edition) p 930. (Though In Re Marten; Shaw v Marten [1901] 1 Ch 370 was reversed by In Re Marten; Shaw v Marten [1902] 1 Ch 314, the reversal was on the construction of the gift, and did not question the decision below so far as the destination of intermediate income of a specific gift was concerned.) The intermediate income which goes with the specific legacy or devise is that which accrues from the date of death, regardless of when the incomes comes to hand: Conveyancing Act 1919 (NSW) s 144. The right to the intermediate income arises from the fact that, once an executor assents to a specific legacy or devise, the assent relates back to the date of the deceased’s death: In Re Pearce; Crutchley v Wells [1909] 1 Ch 819, 821; In Re West; West v Roberts [1909] 2 Ch 180, 185; In Re Rooke ; Jeans v Gatehouse [1933] 1 Ch 970, 972.
This state of affairs is consistent with the rule that the expenses of upkeep, care and preservation of specifically bequeathed or devised property, from the time of death until the time of the executor’s assent, and the cost of transporting or transferring that property to the specific legatee or devisee, are payable by the specific legatee or devisee, unless the proper construction of the gift is that the legatee or devisee is to receive the gift free of such expenses: In Re Pearce; Crutchley v Wells [1909] 1 Ch 819, 821; Lloyd v Frape (1922) 23 SR (NSW) 11; In Re Rooke; Jeans v Gatehouse [1933] 1 Ch 970.
[11](2009) 25 VR 27, 38 [58]. In relation to income earned from certain moneys (as distinct from dividends).
[12][2016] SASC 149.
[13]Ibid [38].
[14][2005] NSWSC 619, [38]–[39].
The more fundamental contention advanced on behalf of the defendants was that the application of this ‘high level general principle’ was displaced by the operation of Mia Rosart’s Constitution, the operation of certain provisions of the Corporations Act and by the chronology of events.
Before referring to the relevant provisions of the Constitution and the Corporations Act, it is appropriate to set out the following analysis by Barrett J in Wood v Inglis of the process of devolution of a share in a company,[15] which the parties accepted was a correct summary of the law. His Honour stated:[16]
[15][2008] 68 ACSR 420 (‘Wood v Inglis’).
[16]Ibid [38]–[44].
Where, as here, the deceased shareholder left a will which is admitted to probate, the estate passes to the executor to whom probate is granted. The passing occurs on the grant but so that the property is vested in the executor as from the time of death… The executor to whom probate is granted obtains the whole of the legal estate in the property of the deceased. In the hands of the executor, the deceased’s property represents assets for the payment of all duties and fees and of the debts of the deceased in the ordinary course of administration… In the case of a solvent estate, the property is to be applied towards discharge of expenses, debts and liabilities according to the provisions in Pt 2 of the third schedule to the Act… Under those provisions, any assets specifically disposed of by will are available for this purpose, but that is the last class of assets to which resort is to be had…
Property that is the subject of a specific bequest – such as each parcel of four shares in this case – will come to be available to the named legatee if not absorbed and applied in the course of administration. Pending full administration, the legatee has no proprietary or other interest in the particular item of property. He or she, like every other beneficiary under the will, has what was described by the Privy Council in Commissioner of Stamp Duties (Qld) v Livingston (1964) 112 CLR 12…, as a chose in action capable of being invoked for any purpose connected with the due administration of the estate.
To the extent that it was submitted that a specific legatee of shares forming part of an estate not yet fully administered has an equitable interest in the shares, the submission is not accepted.
…
Once the estate is fully administered, it becomes the duty of the executor to put a specific legatee into the possession of the subject matter of the bequest, assuming that it has not been absorbed and applied in the course of administration.
Because, under the statutory provisions already noticed, all the deceased’s property becomes vested in the executor upon and by virtue of the grant of probate, some act on the executor’s part is necessary to bring about a situation where the subject matter of the specific bequest is vested in the legatee instead of the executor. The nature of the executor’s act will differ according to the nature of the property bequeathed and the circumstances in which the legatee is to assume dominion over it. But some act of assent is necessary.
The concept was explained by Jacobs J (with concurrence of Owen J and Collins J) in Bryen v Reus [1961] SR (NSW) 396 at 399 in this way:
Of course, in the case of a specific legacy or a general bequest the beneficiary takes under the will. However, he does not take absolutely and immediately because the subject matter of the legacy may be required by the executor for the purposes of administration, particularly for the payment of the testator’s debts. The effect of the assent of an executor to a legacy is to give the beneficiary a complete title to the asset. An assent is a mere indication that the property is not required for administration purposes and therefore may pass as the will directs… The bequest of a legacy, whether general or specific, transfers only an inchoate property to the legatee; to render it complete and perfect, the assent of the executor is requisite’… Thus, is the case of executors it would indeed be difficult to describe their assent to a legacy as an assignment of the subject matter of the legacy. The asset causes the property to vest in the legatee, but it is not the instrument of vesting.
In the case of shares in a company registered under the Corporations Act, the process by which complete title to specifically bequeathed shares comes to reside in the legatee to the exclusion of the executor comes from statutory provisions and, if applicable, provisions of the constitution of the company. A number of provisions of the Corporations Act should be mentioned.
His Honour later identified that the scheme of the provisions of the Corporations Act (to which reference is made below), as they affect a share in a company registered under that Act, is such that:[17]
the characteristic of a share that makes it capable of devolution by will or by operation of law may be affected or shaped by a provision of the company’s constitution (or, if applicable, a ‘replaceable rule’ in the Corporations Act), provided that such a provision is not inconsistent with any provision of the Corporations Act itself.
The Corporations Act
[17]Wood v Inglis (n 15) [51(c)].
A company’s constitution (and any ‘replaceable rules’ that apply to the company) have effect as a contract between the company and each member, between the company and each director and company secretary and between a member and each other member: s 140(1).[18]
[18]Corporations Act (n 8) sub-s 140(1).
The Corporations Act recognises that a share is transferrable or transmissible as provided by the company’s constitution and, subject to the company’s constitution and any replaceable rules that apply, is capable of devolution by will or operation of law: ss 1070A(1)–(2).[19]
[19]Corporations Act (n 8) sub-ss 1070A(1)-(2).
A company must only register a transfer of shares if a proper instrument of transfer has been provided to the company: s 1071B(2).[20] This is without prejudice to the power of a company to register, as the holder of securities, a person to whom the right to the securities has devolved by will or by operation of law: s 1071B(5).[21]
[20]Corporations Act (n 8) sub-s 1071B(2).
[21]Corporations Act (n 8) sub-s 1071B(5).
An application by a personal representative of a dead person for registration as the holder of a security in place of the dead person is taken to be an instrument of transfer effecting a transfer of the security to the personal representative: s 1071B(12).[22] In respect of a share in a body corporate that is registered in Australia, a trustee, executor or administrator of the estate of a dead person who was the registered holder of a share in a corporation may be registered as the holder of that share as trustee, executor or administrator of that estate: s 1072E(2).[23]
The Constitution of Mia Rosart
[22]Corporations Act (n 8) sub-s 1071B(12).
[23]Corporations Act (n 8) sub-s 1072E(2).
Clause 11.6 of the Constitution of Mia Rosart deals with the registration of a transfer of shares. It provides as follows:
A person transferring shares remains the holder of shares until the transfer is registered and the name of the person to whom they are being transferred is entered into the register of members in respect of the shares.
Under the heading, ‘Transmission of shares on death (replaceable rule)’, subclauses 11.10–11.14 provide as follows:
11.10 If a member who does not own shares jointly dies, the Company will recognise only the personal representative of the deceased member as being entitled to the deceased member’s interest in the shares.
11.11 If the personal representative gives the Directors the information they reasonably require to establish the representative’s entitlement to be the registered holder of the shares:
(a) the personal representative may:
(i) by giving a written and signed notice to the Company, elect to be registered as the holder of the shares;
(ii) by giving a completed transfer form to the Company, transfer the shares to another person; and
(b) the personal representative is entitled, whether or not registered as the holder of the shares, to the same rights as the deceased member.
11.12 On receiving an election under clause 11.11(a)(i), the Company must register the personal representative as the holder of the shares.
11.13 A transfer under clause 11.11(a)(ii) is subject to the same rules (for example, about entitlement to transfer and registration of transfers) as apply to transfers generally.
11.14If a member who owns shares jointly dies, the Company will recognise only the survivor as being entitled to the deceased member’s interest in the shares. The estate of the deceased member is not released from any liability in respect of the shares.
Clause 22 of the Constitution relates to the payment of dividends and provides as follows:
Terms of issue (replaceable rule)
22.1 Subject to the terms on which shares in the Company are on issue, the Directors may pay dividends as they see fit.
22.2 A dividend is only payable out of the profits of the Company and no dividend will carry interest as against the Company.
22.3 The declaration of the Directors as to the amount of the net profits will be conclusive.
Payment (replaceable rule)
22.4 The Directors may determine that a dividend is payable and fix:
(a) the amount;
(b) the time for payment; and
(c) the method of payment.
Clause 27 relevantly provides as follows:
LIEN
27.1 The Company has a first and paramount lien on every share for all money due by the member to the Company.
27.2 The Directors may at any time declare any share to be wholly or in part exempt from clause 27.1. The Company’s lien on a share extends to all dividends payable.
27.3 The Company may, at the Boards discretion, deduct from monies otherwise due to a member any money due by the member to the Company.
Discussion
As has been noted, Mrs Ross personally held shares in Mia Rosart. It was therefore contended on behalf of the defendants that, upon her death, cl 11.10 of the Constitution was engaged with effect that, pursuant to its terms, ‘the Company will recognise only the personal representative of the deceased member as being entitled to the deceased member’s interest in the shares’. This provision operated with contractual effect in accordance with s 140(1) of the Corporations Act.[24]
[24]Corporations Act (n 8) sub-s 140(1).
The defendants submitted that it accordingly followed that, at the time of Mrs Ross’ death, the directors of Mia Rosart were not permitted, by the terms of the Constitution, to recognise any interest in the shares other than Mr Markin’s interest as Mrs Ross’ legal personal representative. He too was contractually bound to observe the provisions of the Constitution as the legal personal representative of Mrs Ross’ estate.
Critical to the contention advanced by the defendants is the fact that Mr Markin did not personally obtain any legal or equitable interest in Mrs Ross’ shareholding until the transfer of shares was registered on 27 October 2017. By that time, the dividend had been declared and the sum of $1,400,547.94 had been applied to discharge Mrs Ross’ share of the joint loan account.
The defendants submitted that Mia Rosart had the authority to discharge the loan by way of a dividend payment pursuant to cl 27 of the Constitution which gave Mia Rosart a paramount lien over the shares. Mia Rosart was thereby authorised to deduct any money due to the company and specifically gave power to its directors to set off dividends against any monies due by a member, such as a loan. The defendants submitted that this is consistent with what Mr Ross told the plaintiff in December 2017.
I do not accept the defendants’ submission that the above analysis has the effect that Mr Markin does not have any entitlement to the dividend. The analysis advanced by reference to the provisions of the Constitution fixes upon the ownership of assets, such as shares, rather than income generated from them, relevantly, dividends. While it is correct that Mr Markin, in his capacity as Mrs Ross’ personal legal representative, was the only person authorised to deal with her shareholding, that conclusion does not operate to negate the established principle that, in the absence of an express direction otherwise, income passes to a specific legatee or devisee from the date of death.
Further, as counsel for Mr Markin submitted, the approach contended for on behalf of the defendants would mean that the question of entitlement to the dividend would be determined by happenstance, namely, when Mr Markin became registered in his personal capacity as the owner of the shares in Mia Rosart. The defendants frankly acknowledged that Mr Markin would have had an entitlement to the dividends if he had become the registered shareholder in Mia Rosart before the dividend was declared on 11 August 2017, rather than on 27 October 2017.[25] This highlights how, on the defendants’ argument, the identity of the person to whom the dividend would pass would not be determined in accordance with the testator’s wishes, but instead be determined by the unilateral decision of the board of the relevant company. Such a conclusion cannot be accepted.
[25]It may be noted that Mr Markin executed the share transfer form on 12 September 2017.
Subject to the question of apportionment considered below, I have therefore concluded that, consistent with the application of the general principle to which I have referred, Mrs Ross’ gift to Mr Markin of her shares in Mia Rosart carried with it all the dividends paid on those shares from the date of her death.
Apportionment
Whether the whole of the dividend belongs to Mr Markin will depend on whether provisions taken from the English Apportionment Act 1870 and now reflected in ss 52–56 of the Supreme Court Act 1986 have application. If those provisions apply, their effect will be to treat the dividend as having accrued on a daily basis during the year ended 30 June 2017, with the consequence that the portion of the dividend accruing before Mrs Ross died on 28 April 2017, would form part of the capital of the estate, rather than income.
Sections 54 and 55 of the Supreme Court Act 1986 provide as follows:
54 Rents etc. to accrue from day to day and be apportionable
All rents, annuities, dividends and other periodical payments in the nature of income (whether reserved or made payable under an instrument in writing or otherwise) are to be considered as accruing from day to day and are apportionable in respect of time accordingly.
55 Time when apportioned part is to be payable
The apportioned part of any payment referred to in section 54 is payable or recoverable—
(a)in the case of a continuing payment, when the entire portion of which the apportioned part forms part becomes due and payable; and
(b)in the case of a payment determined by re-entry, death or otherwise, when the next entire portion of the payment would have been payable if it had not been so determined.
‘Dividends’ are defined in s 53(1) of the Supreme Court Act 1986 to include:
all payments that are made by the name of dividend bonus or otherwise out of the revenue of trading or other public companies and are divisible between all or any of the members of those companies, whether the payments are usually made or declared at a fixed time or otherwise but does not include payments in the nature of a return or reimbursement of capital;
Further, under s 53(2):
For the purposes of this Division the divisible revenue referred to in the definition of dividends is to be taken to have accrued by equal daily increment during and within the period for or in respect of which the payment of the revenue is declared or expressed to be made.
Although the definition of ‘dividends’ refers to ‘trading or other public companies’, it has been held that the definition includes dividends paid by private companies.[26]
[26]In Re Lysaght [1898] 1 Ch 115, 122, Lord Lindley M.R. said that he ‘take(s) it that any company registered under the Companies Act, 1862 is a public company within the meaning of that expression in the Apportionment Act’. In Re White [1913] 1 Ch 231, 238, Neville J said that the Apportionment Act applied to private companies under the Companies Act 1908.
Counsel for Mr Markin advanced three reasons why these apportionment provisions did not apply in relation to the dividend.
First, it was contended that the dividend was not subject to apportionment because of the application of the principle that, where a dividend is declared after the end of a company’s financial year (as occurred in this case), the dividend relates to the year in which it is declared, not the year to which it is expressed to relate. The authority relied on for this proposition was the judgment of Hudson J in Re McCutcheon, deceased which concerned a resolution in the following terms:[27]
That the dividends as recommended by the directors be paid, namely eleven per cent dividend on the whole of the company’s paid-up capital, out of the profits for the year ended 31 December 1954.
[27]Re McCutcheon, deceased [1960] VR 289, 291 (original emphasis) (‘Re McCutcheon’). There were two further resolutions in similar form, except that the periods to which the dividends related were the years ended 31 December 1955.
Despite the final words of the resolution, Hudson J concluded that the dividends were not apportionable and instead related to the current year in which they were declared. His Honour stated:[28]
Having regard to the provisions in the articles to which I have referred, I think, that had the dividends with which I am concerned been declared under a resolution which omitted the final words relied upon by the representatives of the life tenants, the proper interpretation and effect of the resolutions would be that the dividends which were made payable thereunder, were declared in respect of the financial year current at the time of the respective resolutions. And in my judgment the addition of the final words should not lead to a different conclusion.
[28]Re McCutcheon (n 27) 292.
Hudson J reached a similar conclusion in Re Buck (deceased).[29]
[29][1964] VR 284.
Together, the above authorities stand for the proposition that, if a dividend is declared after the end of a company’s financial year, the dividend relates to the current year in which it is declared, not the year to which it is expressed to relate.
A different approach was adopted by Helsham J in Re Campbell (deceased); Rowe v McMaster.[30] In that case, shareholders resolved on 30 December 1970 that a dividend be paid out of profits for the year ending 30 June 1970 (being the end of the company’s financial year). Helsham J disagreed with the approach adopted by Hudson J and concluded that the declaration of a dividend was a declaration for and in respect of the year ended 30 June 1970.[31]
[30](1973) 2 NSWLR 146 (‘Re Campbell’).
[31]Ibid 152–5.
It is unnecessary for me to resolve these divergent approaches in light of the conclusions I have reached in respect of the two other grounds relied on by Mr Markin referred to below.
The second and principal ground on which Mr Markin contended that the dividend was not subject to apportionment was because a consideration of Mia Rosart’s profits necessarily yielded the conclusion that the dividend declared on 11 August 2017 could only relate to the 2018 financial year and could not relate to the previous year.
The legal principle upon which this contention was advanced was not in dispute. The principle, established by the Court of Appeal in Re Wakley,[32] is that a shareholder has no right to a dividend until there are profits available and the company has by proper authority determined to distribute them. This principle was referred to and applied by both Hudson J in Re McCutcheon and by Helsham J in Re Campbell.[33]
[32](1920) 2 Ch 205 (‘Re Wakley’).
[33]Re McCutcheon (n 27) 291; Re Campbell (n 30) 152–4.
In Re Wakley,[34] the financial year of the relevant company ended on 31 December. On 2 December 1907, the board of directors resolved to declare and pay an interim dividend ‘which payment will cover the cumulative dividend on the preferred [shares] for three years ending June, 1907, and on the deferred [shares] for two years ending 1906’.[35]
[34]Re Wakley (n 32).
[35]Ibid 209.
Lord Sterndale MR accepted the contention ‘that no right to dividend is acquired at all until profits are made and a dividend declared …’.[36] The conditional right to a payment of a dividend does not arise ‘until the two conditions of the existence of profits and the determination to distribute come into existence’.[37] Accordingly, notwithstanding the terms of the resolution of the board of directors, ‘the dividend which is paid is not in respect of each year but in respect of the year in which profits are declared for division’.[38] The conditions essential for the making of the payment in the previous years referred to in the resolution had not been performed.
[36]Re Wakley (n 32) 216.
[37]Re Wakley (n 32) 217.
[38]Ibid.
Lord Justice Warrington put the matter succinctly:[39]
[T]he shareholder has no right to a dividend, whether cumulative or otherwise, until there are profits available, and the company by the proper authority has determined to distribute them.
[39]Re Wakley (n 32) 222. No different approach was adopted by the remaining member of the Court, Younger LJ.
Mia Rosart’s financial statements for the 2014–2017 years were in evidence. For 2017, they recorded a balance of profit brought forward as at 30 June 2017 of $833,150 and a balance of Mr and Mrs Ross’ loan account of $3,095,298.16. As has been noted, on 11 August 2017, Mia Rosart declared the dividend of $3,097,000, which sum was applied to discharge the joint loan account.
The same pattern appears in relation to the 2014, 2015 and 2016 financial years. At the end of each year there is identified a balance of profit brought forward and a balance on the joint loan account. The reports then record the payment of a dividend in the following financial year, being an amount closely approximate to the total amount of the balance of the joint loan account at the end of the preceding financial year.
Counsel for Mr Markin submitted that it followed from this analysis that the dividend paid on 11 August 2017 could not have been in respect of the 2017 financial year because there were insufficient profits to fund it. The total dividend declared on 11 August 2017 of ($3,097,000) was substantially greater than Mia Rosart’s profit as at 30 June 2017 ($833,150).
Counsel for the defendants criticised this submission on the basis that it rested on a mere ‘accounting entry’ and did not accord with what the company had actually done. What actually occurred was said to be evident from versions of the balance sheet for Mia Rosart for the 2014, 2015 and 2016 years which bore handwritten annotations next to the amount recorded each year in respect of the item ‘Max & Vivienne Ross Loan Acct’. For each year, the annotation was ‘Dividend Cleared Loan’ followed by the date 1 July of the relevant year.[40] The only evidence given about these documents was given by Mr Markin. His evidence was that were internal documents which he believed were prepared by the person who worked as Natio’s financial controller.
[40]Being 1 July 2014 for the Balance Sheet as at 30 June 2014; 1 July 2015 for the Balance Sheet as at 30 June 2015; and 1 July 2016 for the Balance Sheet as at 30 June 2016.
It was submitted on behalf of the defendants that these documents showed that Mia Rosart’s practice was that, on 1 July each year, the dividend declared by the company was used to clear the joint loan account for the immediately preceding financial year. As a matter of common sense, the fact that this occurred on 1 July could only mean that the dividend used to discharge the joint loan account was one which was declared for or in respect of the previous financial year.
The defendants also argued that the submission advanced on behalf of Mr Markin did not accord with what he was actually told by Mr Ross on 19 December 2017. As I have noted, on that day Mr Ross informed Mr Markin that Mrs Ross’ loan balance had been cleared in full by the dividend declared on 11 August 2017. This was said to be powerful evidence from a director of Mia Rosart which demonstrated that the dividend was declared for and in respect of the previous financial year.
I do not accept these submissions advanced on behalf of the defendants. The issue is whether, for the 2017 year, Mia Rosart had sufficient profits to fund the total declared dividend of $3,097,000. As I have noted, Mia Rosart’s financial statements for 2017 prepared by its external accountants make clear that it did not. The proposition, unsupported by any evidence, that this report should be dismissed as a mere ‘accounting entry’ cannot be accepted.
Further, the appeal made by the defendants to the ‘common sense’ of Mia Rosart’s profit position wrongly conflates the position of Natio with that of Mia Rosart. It is Natio which operated the cosmetics business from which profits were earned. Mia Rosart’s profits were not earnt from the cosmetics business, but from dividends paid by Natio. Accordingly, the annotation on Mia Rosart’s internal balance sheets showing the clearing of the joint loan account on 1 July does not necessarily indicate that Mia Rosart’s profits from which the dividends were paid are attributable to the previous financial year. As I have explained, the company’s financial statements indicate that this could not be the case.
For similar reasons, the defendants’ emphasis on Mr Ross’ email to Mr Markin of 19 December 2017 does not lead to a different result. The fact that Mr Ross informed Mr Markin that Mrs Ross’ loan balance had been cleared in full by the dividend declared on 11 August 2017 does not necessarily lead to the conclusion that the dividend was declared for and in respect of the previous financial year.
Finally, I am not assisted by the defendants’ submission that the contention advanced on behalf of Mr Markin should not be accepted because it does not accord with ‘common sense and fairness’ as it would mean that a successor shareholder would be entitled to the full benefit of a dividend, without the loan liability to which the previous shareholder was subject. The Court’s function under Order 54 of the Rules is not to answer questions posed for consideration by reference to claims and counter-claims as to what outcome might be said to be ‘fair’. The Court is asked to answer the questions posed ‘upon the true construction of the will and considering the events that have happened’.
I accordingly accept the second ground advanced by Mr Markin as to why the dividend was not subject to apportionment.
The third ground advanced by Mr Markin upon which it was contended that the dividend was not subject to apportionment was that, in order for a payment to be apportionable, it is essential that it be declared or expressed to be made for or in respect of a definite period; otherwise it could not be considered to be accruing from day to day.[41] That principle was endorsed by Hudson J in Re McCutcheon who stated:[42]
Whether a dividend paid has been declared or expressed to be made for or in respect of some definite period and if so what that period must depend upon the terms of the resolution by which it is declared and its effect considered in the light of the provision in the company’s memorandum and articles of association.
[41]Re Jowitt; Jowitt v Keeling [1922] 2 Ch 442, 446.
[42]Re McCutcheon (n 27) 291.
Counsel for Mr Markin emphasised that cl 22 of Mia Rosart’s Constitution left it to the directors to determine when to declare dividends.[43] Further, the resolution declaring the dividend merely confirmed that it was resolved on 11 August 2017 that a dividend be declared and paid in proportion to the shareholder’s holdings.[44] It was accordingly submitted that the resolution did not indicate that the dividend related to any particular period, or any particular portion of profits.
[43]See [31] above.
[44]See [7] above.
The defendants did not contest the above principle or its applicability to the circumstances of this matter. They submitted however that, despite the fact that the resolution declaring the dividend was silent on its face as to the financial year to which it related, properly construed, it must be understood as being for or in respect of the financial year ending 30 June 2017. That conclusion was submitted to follow because of the prior practice adopted by Mia Rosart said to be revealed by the internal balance sheets.[45] Consistent with the arguments outlined above, the defendants submitted that the prior practice of the directors of Mia Rosart was to discharge the joint shareholder loan from the previous year’s profits or from profits derived from the previous year’s trading.
[45]Referred to in [59] above.
For the reasons I have already outlined, I do not accept this contention. The evidence indicates that dividends were paid from current year profits.
I accordingly accept the third ground upon which Mr Markin relied to contend that the dividend was not subject to apportionment. Having regard to the terms of the resolution and the evidence before the Court about the past payment of dividends, properly construed, the resolution declaring the dividend was not declared or expressed to be made for or in respect of a definite period.
I have accepted the second and third grounds relied on by the defendants as to why the dividend was not subject to apportionment. In light of my earlier conclusion referred to in [39], the answer to Question 3 is accordingly “yes”. Question 4 therefore does not fall to be answered.
Question 5:If the answer to question 1 is ‘yes’, but the answer to questions 3 and 4 are ‘no’ upon the true construction of the will and considering the events that have happened, is the dividend actually received to be apportioned between the residue of the Estate and the beneficiary, the plaintiff, under ss 53 and 54 of the Supreme Court Act 1986 and if so, on what basis?
Given that my answer to Question 3 is “yes”, Question 5 does not fall to be answered.
Summary
For the above reasons, the questions posed in the originating motion are answered as follows:
Q1. – Considering the events that have happened, did Mia Rosart Pty Ltd pay a dividend to the estate on or about 11 August 2017?
A. – Yes.
Q2. – If the answer to question 1 is “yes” what was the amount of the dividend actually received by the Estate?
A. – The Court declines to answer this question.
Q3. – If the answer to 1 is “yes”, upon the true construction of the will and considering the events that have happened, did the whole of the dividend actually received belong to the beneficiary, Mr Markin?
A. – Yes.
Q4. – If the answer to 1 is “yes” but the answer to 3 is “no”, upon the true construction of the will and considering the events that have happened, did the whole of the dividend actually received belong to the residue of the Estate?
A. – Not required to be answered.
Q5. – If the answer to 1 is “yes” but the answers to 3 and 4 are “no”, upon the true construction of the will and considering the events that have happened, is the dividend actually received to be apportioned between the residue of the Estate and the beneficiary, Mr Markin under ss 53 and 54 of the Supreme Court Act 1986, and if so, on what basis?
A. – Not required to be answered.
I will hear the parties on costs.