Munro v Munro

[2017] SASC 48

SUPREME COURT OF SOUTH AUSTRALIA

(Civil)

MUNRO & ORS v MUNRO & ORS

[2017] SASC 48

Judgment of The Honourable Justice Stanley

30 March 2017

EQUITY - EQUITABLE REMEDIES - ACCOUNTS AND INQUIRIES

EQUITY - EQUITABLE REMEDIES - ACCOUNTS AND INQUIRIES - JURISDICTION GENERALLY

EQUITY - EQUITABLE REMEDIES

EQUITY - TRUSTS AND TRUSTEES - APPLICATIONS TO COURT FOR ADVICE AND AUTHORITY

SUCCESSION - ADMINISTRATION OF ESTATE

ESTOPPEL - ESTOPPEL BY CONDUCT - ACT, OMISSION OR ASSUMPTION - REPRESENTATION GENERALLY

MORTGAGES

DEEDS

Two applications were before the Court concerning the estate of the late Richard James Munro (Rick) deceased. The first is an application brought pursuant to 6SCR206 by the plaintiffs, who are the widow and children of Rick, seeking orders and directions without administration. Draft minutes of order were handed to the Court seeking, among other things, orders for the transfer of shares, an inquiry and report, and production of documents. The second application is brought by the first defendant, Rick’s brother, in his capacity as executor of the estate seeking advice and direction in relation to the administration of the estate pursuant to s 69 of the Administration and Probate Act 1919 (SA).

The Munro family collectively operated farming businesses through two trusts, the Munro Family Trust (MFT) and the Munro Land Trust (MLT). Over time, the fourth defendant, Herbert Munro and his wife Janet were joined in the farming business by their sons Rick and the first defendant, Kevin. The MFT was established in 1976. The farmland and farm business was owned by Munrose Nominees Pty Ltd (Munrose) as trustee for the MFT. The MLT came into existence in 1988. Galaquill Pty Ltd (Galaquill) was appointed as the trustee for the MLT. The MFT borrowed funds to finance the MLT purchase of farming property known as Galaquill Downs in Western Victoria. These borrowings were secured by a mortgage over Billabong Gums of which Rick was the registered proprietor in his personal capacity, as well as a mortgage over an MFT controlled property called ‘Youngys,’ and a second ranking mortgage over Galaquill Downs. The MLT also borrowed funds to finance the purchase, secured by a mortgage over Galaquill Downs.  In 1992 the MFT drew down on their existing loan in order to discharge the MFT loan.

Sometime during the beginning of the 2004 calendar year a split of the farming businesses occurred. Prior to 2004 the faming businesses were run collaboratively by a number of members of the Munro family including Rick, Kevin and their parents. After 2004 the MFT was primarily controlled by Rick and operated farming properties in the South-East of South Australia. After 2004 the MLT was primarily controlled by Kevin and operated farming properties in Victoria.

A report was prepared by a forensic accountant regarding the operational history of the two trusts and those involved, with certain conclusions drawn about potential liabilities. The report concluded that there was insufficient information before the accountant and also the Court to conclusively determine the answers to pertinent questions concerning liability and the accurate balances of any determined liabilities.

Rick’s will bequeathed the shares in Munrose equally to his two children, Oliver and Molly. Rick’s parents claim that there was an improper transfer of two of the four shares in Munrose in 2010. This is part of the principal proceedings before the Court. Kevin, in his capacity as executor, has not transferred the remaining two undisputed shares in Munrose to the second and third plaintiff. An order for transfer of the two undisputed shares is sought by the plaintiffs.

A beneficiary loan account debt is owed to the MFT by Rick and his wife. The second and third plaintiff have indicated their intention to forgive the debt should it eventuate that they are the controlling parties of Munrose. The forensic accountant states that detailed entries to the loan account are required to fully assess the outstanding loan account balance.

The plaintiffs have requested that Kevin, as executor, undertake various inquiries in relation to the liabilities of the estate. Kevin is in a position of conflict as executor of the estate and in his personal capacity. It is accepted that this conflict was created by Rick’s assignment of Kevin as executor, but the conflict exists nonetheless.

•  An issue exists as to whether between 1988 and 2004 the MFT and the MLT were effectively operated as a combined farming business.

•  Questions arise as to the relationship between the two trusts both before and after the 2004 split.

•  Questions arise as to which entity is liable for the repayments of the MFT loan and in what proportion.

•  Whether the trusts were truly independent of each other.

•  Whether the MFT accrued a debt or debts which were applied for the benefit in part or in whole of the MLT.

•  Whether and how the relationship between the trusts affects the liabilities of the estate.

•  Issues regarding the transfer of shares in Munrose pursuant to the will of the deceased also arise.

•  Issues arise regarding who the lawful trustee of the MFT is due to issues in the principal proceedings regarding the fourth defendant’s assignment by deed, appointing the third defendant as the trustee of the MFT following Rick’s death.

Held (per Stanley J):

1.  The material and the circumstances before the Court are sufficient to put a diligent and independent executor on inquiry (at [36]).

2.  An inquiry and report, and the production of documents is ordered in the terms sought by the draft minutes of order filed by the plaintiffs save an except for draft orders 2, 5, 6 and 10 which are not pressed at this stage by the plaintiffs and 1, 3.2, 7.4, 7.14, 7.15 and 14 (at [66]).

3.  Order 1 of the draft minutes of order is to be made only in respect of the transfer of the two undisputed shares (at [66]).

4.  Question of costs is reserved pending the outcome of the inquiry, report and production of documents (at [65]).

5.  Directions in relation to the further administration of the estate are reserved pending the outcome of the inquiry and report by the Master (at [64]).

Administration and Probate Act 1919 (SA) s 69, referred to.
Gonozales v Claridades (2003) 58 NSWLR 188; McLean v Burns Philp Trustee Co Pty Ltd (1985) 2 NSWLR 623; Palmer v Ayres [2017] HCA 5, discussed.
Midgley v Midgley (1893) 3 Ch 282; In re Rownson (1883) 29 Ch D 358; In re Davies (1888) 38 Ch D 210; In re Giles (1890) 43 Ch D 391; Hudson v Gray (1927) 39 CLR 473; Templeton v Leviathan Pty Ltd (1921) 30 CLR 34; Gonzales v Claridades (2003) 58 NSWLR 211; Wombats Downunder Pty Ltd & Anor v G & WA Dicenso Pty Ltd & Anor (No 2) [2011] SASC 3; Clarke & Ors v Edwards [2012] SASC 213, considered.

MUNRO & ORS v MUNRO & ORS
[2017] SASC 48

Civil

STANLEY J:    

Introduction

1. The Court has before it two applications concerning the estate of the late Richard James Munro deceased (Rick). There is an application pursuant to 6SCR206 brought by the plaintiffs, who are the widow and children of Rick, which seeks orders and directions without administration. The plaintiffs want orders for an inquiry and report into certain questions arising in the administration of the estate and orders for the production of documents. Subsequently, a separate application has been brought by the first defendant Kevin Raymond Munro (Kevin), the brother of the deceased, in his capacity as the executor of Rick’s estate, seeking advice and direction in relation to the administration of the estate, pursuant to s 69 of the Administration and Probate Act 1919 (SA).

   The evidence

2. I received the sixth affidavit of Rodney Lawrence Jones affirmed 25 May 2016, the seventh affidavit of Mr Jones affirmed 8 June 2016, the third affidavit of Christina Rose Flourentzou sworn 29 August 2016 and the third affidavit of Kevin Raymond Munro sworn 11 July 2016.

   Factual background

3. Central to understanding the applications is the farming business undertaken by the Munro family through the Munro Family Trust (MFT) and the Munro Land Trust (MLT).

4. Rick and Kevin’s parents are Herbert and Yvonne Janet Munro (Janet). They farmed land in the south east of the state near Tintinara.  Those properties included Lowan Park and Youngies. In time they were joined in that farming business by their sons Rick and Kevin. The farmland and the farm business was owned by Munrose Nominees Pty Ltd (Munrose Nominees) as trustee for the MFT.  The MFT was established in 1976. At some time before 1988 Rick separately acquired a farm property at Billabong Gums, which was held on Crown lease. He became the registered proprietor of Billabong Gums.

5. In 1988 the MLT was established. Galaquill Pty Ltd (Galaquill) was appointed the trustee for the MLT. At about this time the MFT borrowed $350,000 to finance the purchase by the MLT of farmland in western Victoria known as Galaquill Downs. Those borrowings were secured by a first ranking mortgage over the Youngy’s property and Billabong Gums and a second ranking mortgage over Galaquill Downs. This sum was borrowed from Rabobank.[1] At the same time in order to finance the purchase the MLT borrowed a further $350,000 from Rural Finance and that loan was secured against Galaquill Downs.

   [1]  At the time Rabobank was known as PIBA.

6. In October 1992 the Rural Finance loan was refinanced with Rabobank and secured by the existing mortgages on the Youngy’s property and Billabong Gums. The stamped security was $700,000.  The Rural Finance mortgage over Galaquill Downs was discharged.

7. It is claimed by Kevin that between 1988 and 2004 the MFT operated the Tintinara properties and the MLT operated Galaquill Downs and Quicks[2] effectively as one combined farming operation although the two Trusts kept separate accounts. Kevin asserts that throughout this period he and Rick and their parents all had the same interest in the South Australian and Victorian properties and the farming operations, except for the fact that Rick was the registered proprietor of Billabong Gums. The beneficiaries of the MFT and the MLT were the same. The shareholdings in Munrose Nominees and Galaquill were the same. Directors of Munrose Nominees and Galaquill were the same. During this time beneficiary loan accounts in favour of Rick and his wife and Kevin and his wife were created in both Trusts.

   [2]  Quicks is another property in western Victoria that was acquired by the MLT in 2001.

8. Kevin says that in 2003 he and Rick agreed to change these arrangements. The agreement embodied what is described as the “2004 split”. By the 2004 split Rick was to take control of the MFT and the South Australian properties and Kevin was to take control of the MLT and the Victorian properties.  Rick was to resign as a director of Galaquill and transfer his share to Kevin.  Kevin was to resign as a director of Munrose Nominees and transfer his share to Rick.  Herbert and Janet were to continue their involvement in both the MFT and the MLT.

9. Kevin asserts that pursuant to the split agreement, he and Rick agreed that the MFT and the MLT would share the Rabobank debt equally such that Galaquill would borrow monies from Rabobank with which to pay down the debt in the name of Munrose Nominees to achieve the split. The beneficiary loan accounts were ignored except to the extent that it was intended that after the split the MFT would not owe Kevin or his family any money and the MLT would not owe Rick or his family any money. It was left to the accountant to decide how to reflect the split in the accounts.

10. From about 2004 until 2010 Rick was a joint shareholder and director of Munrose Nominees with his parents. From 2010 he was the sole shareholder and director of Munrose Nominees until his death in May 2014. Until 2014 Munrose Nominees was the trustee for the MFT.  By deed dated 26 September 2014, Herbert removed Munrose Nominees as the trustee of the MFT and appointed in its place, Colara Farms Pty Ltd (Colara Farms) as trustee of the MFT. The question of whether Munrose Nominees or Colara Farms is the trustee of the MFT is an issue in proceedings between the parties where the plaintiffs seeks declarations that Munrose Nominees is the proper trustee of the MFT which holds its assets on a constructive trust for them (the principal proceedings).  The plaintiffs allege that Rick relied upon inducing conduct and an agreement that, as part of the 2004 split, control of Munrose Nominees and the MFT would be surrendered to Rick and Herbert would refrain from exercising his power of appointment under the MFT inconsistently with this agreement. 

11. Pursuant to his will Rick bequeathed his four shares in Munrose Nominees to his children Oliver and Molly Munro. Kevin as the executor of Rick’s estate has declined to transfer those shares to Oliver and Molly. On 16 January 2017 Herbert and Janet brought a counterclaim asserting that two of the shares in Munrose Nominees were wrongly transferred to Rick in 2010 and sought orders for the retransfer of the shares into their names. That is also an issue in the principal proceedings between the parties.

12. By the time of the split agreement in 2004 the Rabobank debt had increased from $700,000 to about $1.12 million. This appears to be a result of a series of draw-downs by both Rick and Kevin. In October 2010 Rick executed a guarantee in favour of Rabobank for the benefit of the MFT. At this time Herbert and Janet were released from their guarantee.

13. It appears that Rabobank has lent the MFT a large sum of money, the exact amount of which is unknown, but securities are stamped up to $2.57 million.

14. The principal asset of Rick’s estate is Billabong Gums.  In 2015 it was valued for ratings purposes at $790,000. 

15. The estate has three substantial liabilities.  Billabong Gums is mortgaged to Rabobank. The Rabobank facility stood at $1.26 million on 11 July 2016. By his guarantee Rick’s estate has a contingent liability for these borrowings. Rick’s estate also has a contingent liability to the MFT pursuant to the beneficiary loan account which stood at $622,586 as at 30 June 2015.  The estate also has a contingent liability to Westpac pursuant to a mortgage given by the MFT over a property at Bell Avenue, Tintinara, which is the former residence of Rick and his family.  The Bell Avenue property was purchased by Rick and his wife in 2001. In 2008, the Bell Avenue property was transferred to the MFT for nil consideration.  The outstanding balance is about $76,000.  Rick guaranteed this loan (as did his wife, Kevin, Herbert and Janet).

16. As executor of Rick’s estate, Kevin, is working Billabong Gums and actively repaying the Rabobank borrowings. He expects that he will have repaid the loan within a year.

17. The plaintiffs have obtained a report from a forensic accountant Mr John Irving. Having considered the information available to him from the financial records the plaintiffs have been able to obtain, he considers the deceased’s estate has a contingent liability in regard to the recovery of the Rabobank debt from the MFT. He considers that if the security of the mortgage is called upon to repay the MFT debt the deceased’s estate will have a subrogated claim against the MFT for the value contributed by the sale. However a key issue in regard to the MFT debt is whether it results solely from the activities of the MFT and not the MLT.  He says that requires a better understanding of the nature of the relationships between the MFT and the MLT and Rabobank. Mr Irving considers that there is some evidence that the interests of the MFT and the MLT with Rabobank were intermingled both before and after the 2004 split. He also considers there is a question as to the extent of the liability of the deceased’s estate to the MFT pursuant to the beneficiary loan account. In order to address these matters Mr Irving requires the following:

    a.Full access to the MFT accounting system for the period June 2003 to the current day, including the general ledger and the detail of all journal entries.  This may require me to query the external accountants for MFT to fully understand the journal entries taken up, particularly in relation to the loan account at year end

    b.Detail of the accounting entries taken up to reflect the split of the farming interests in 2003/04, for MFT and MLT

    i.The MLT records are needed as there should be corresponding entries to the beneficiary loan accounts in that trust to remove any loan account relating to Rick and Kate

    c.MLT’s financial statements and relevant loan account records so as to better understand the financial relationship between MLT and MFT, and between them both and Rabobank, both before and after the split in 2003/04

    i.This is relevant given that we are aware that plant and equipment was shared between the farms prior to the split and that Rick worked on the Galaquill property from time to time (see the affidavit of Kathryn Lyn Munro paragraphs 70 to 73)

    d.The detail of every entry made to Rick and Kate’s loan account with the MFT from June 2004 to June 2015

18. The plaintiffs have requested that Kevin, as the executor of Rick’s estate, undertake various inquiries in relation to the liabilities of the estate. He has declined to do so. Those inquiries concern whether the Rabobank borrowings, which are secured by the mortgage over Billabong Gums and which is guaranteed by the estate, were used for the benefit of Galaquill and the MLT. The plaintiffs bring the application pursuant to 6SCR206 in the face of Kevin’s refusal to make those inquiries. The plaintiffs also seek orders for the transfer of the shares in Munrose Nominees from Kevin, who holds them as executor of the estate, to Oliver and Molly.

19. I will return later in these reasons to the question of the transfer of the two uncontested shares in Munrose Nominees which are the subject of the application by the plaintiffs. Those shares are also the subject of the application by Kevin for advice and direction pursuant to s 69 of the Administration and Probate Act. 

20. Kevin opposes the application for orders pursuant to 6SCR206. He submits that the inquiries and documents sought are pointless investigations. In his personal capacity, Kevin says that the liability of the MFT for the Rabobank debt incurred before the 2004 split was the subject of the agreement which effected the split. Kevin denies that Galaquill or the MLT have enjoyed any use of the monies borrowed by Munrose Nominees from Rabobank since the 2004 split, which are secured by the Billabong Gums mortgage and the deceased’s guarantee. In any event, in his capacity as executor, Kevin submits that, even if a portion of the Rabobank debt had been used for the benefit of Galaquill, the estate’s liabilities for the Rabobank debt under the Billabong Gums mortgage and the deceased’s guarantee are contingent upon default by Munrose Nominees and other contingencies, the occurrence of which is so unlikely as to be speculative. Accordingly, he submits that the inquiry and orders for the production of documents sought by the plaintiffs in respect of any supposed debt owed by Galaquill to Rabobank would not benefit the estate in any way and would harm the estate by wasting its assets.

21. Herbert and Colara Farms also oppose the application. 

    Duties of an executor

22. The duties of administration which an executor is required to perform are identified in Gonzales v Claridades[3] by Campbell J to include:[4]

    [3]    Gonzales v Claridades [2003] NSWSC 508, (2003) 58 NSWLR 188.

    [4]    Gonzales v Claridades [2003] NSWSC 508 at 42, (2003) 58 NSWLR 188 at 199.

    ·ascertaining what are the assets of the deceased,

    ·getting in those assets,

    ·ascertaining what are the liabilities of the estate,

    ·discharging those liabilities,

    ·apportioning the burden of all liabilities among the beneficiaries,

    ·keeping accounts and proper records of all dealings with the   assets and liabilities of the estate,

    ·delivering accounts to those entitled to them, and

    ·distributing the net assets of the estate to the people entitled to      receive them.

1. The basic obligation of an executor is to identify and take steps to secure the assets of the estate.  In certain circumstances, that may necessitate the executor litigating claims against, or defending claims by, third parties, and compromising the same.[5]

   [5]    G. E. Dal Pont and K. F. Mackie, Law of Succession (2013) at [12.11]-[12.14].

2. While it is the duty of the executor to discharge obligations of the deceased, it is equally the duty of the executor not to ignore available defences to any claim to enforce the obligation, and even to make use of available opportunities to compromise those claims. As was said in Midgley v Midgley[6] by Lindley LJ:[7]

   The general principle is, that it is the executor's duty to protect the estate against demands which by law cannot be enforced against it. That is his duty. That general principle is a wholesome principle, not to be cut away or narrowed, and it was discussed and recognised and enforced in a recent cause in this Court of In re Rownson - F52,[8] where the point was whether the executor could pay a debt to which the Statute of Frauds was pleaded. The Court said, No. On general principle I take it to be clear that it was distinctly wrong for the executor to pay a debt which had been judicially decided not to be recoverable out of the estate which it is his duty to protect.

   [6] (1893) 3 Ch 282.

   [7] (1893) 3 Ch 282 at 299.

   [8]    See also In re Rownson (1883) 29 Ch D 358 per Cotton LJ at 361 and Bowen LJ at 363.

3. Accordingly, the duties of an executor are not limited to simply identifying assets and liabilities, whether they be present liabilities or contingent liabilities.  It extends to protecting the estate from claims that are defensible. 

   Application pursuant to 6SCR206

4. 6SCR206 provides:

   206—Actions for administration

   (1)In an action related to a trust or deceased estate, the Court may (if it thinks fit) determine questions arising in the action without making an order for administration.

   (2)In any such action, the Court may make orders for the protection of persons who may be interested in the trust or deceased estate (whether or not they are parties to the action).

   Examples—

   1       The Court might make orders for the ascertainment of possible beneficiaries.

   2       The Court might order the trustees, executors or administrators to file accounts of their administration in the Court.

5. 6SCR206 confers on the Court power to give all the directions and make all the orders, without administration, that it could give or make under an order for general administration. The rule avoids the expense and delay which was occasioned by the pre-1947 position reflecting the old Chancery practice where the type of relief the rule provides could only be obtained by an order for general administration which placed the whole of the conduct of the estate under the direct control of the court.

6. The scope of the procedure under 6SCR206, and the extent of the powers exercisable pursuant to it, are defined essentially by what questions could formally have been determined in an administration action. In that respect, the rule only applies to questions arising in the administration of the estate as between the executor and the beneficiaries[9] and, like the administration action, is designed to deal with problems arising within the administration of the estate[10] and to enforce administration according to legal and equitable principle, not to authorise or to direct departures from it.[11]  This includes orders for accounts and inspection of documents and orders compelling an executor to act where the executor has failed to administer the estate or complete its administration.[12]

   [9]    In re Davies (1888) 38 Ch D 210 at 212; In re Giles (1890) 43 Ch D 391 at 398; Hudson v Gray (1927) 39 CLR 473 per Higgins J at 501-504.

   [10]   Gonzales v Claridades [2003] NSWCA 227 per Mason P at 31, (2003) 58 NSWLR 211 at 218.

   [11]   Gonzales v Claridades [2003] NSWCA 227 per Mason P at 34, (2003) 58 NSWLR 211 at 218; Templeton v Leviathan Pty Ltd (1921) 30 CLR 34 at 56, 65, and 73; In re Davies (1888) 38 Ch D 210 at 212.

   [12]   Haines, Succession Law in South Australia, 2003 [27.3], [25.4] referring to the predecessor to 6SCR206 r 63.04 of the 1987 Supreme Court Rules.

7. The Court has inherent power to direct an inquiry where that is required for the due administration of an estate. It can do so, even over the opposition of the executor. In addition, 6SCR251 expressly authorises the preparation of accounts or a report relevant to a question in issue in an action. This empowers the Court to make orders for the taking of accounts and making inquiries before trial.[13]  Where the beneficiaries desire the executor to take a course which the executor is unwilling to take, the Court may direct an inquiry if it does not have sufficient material before it to give the necessary direction.[14]

   [13]   Wombats Downunder Pty Ltd & Anor v G & WA Dicenso Pty Ltd & Anor (No 2) [2011] SASC 3 at [16]; Clarke & Ors v Edwards [2012] SASC 213 at [19]-[20].

   [14]   Atkin, Atkin’s Court Forms (Vol 2) Administration of Estates, 2^nd Ed 2007, p 191.

8. The Court’s power to make the orders sought by the plaintiffs is not in dispute.  The issue is whether the circumstances justify the Court making those orders. 

   Relevant legal principles

9. In McLean v Burns Philp Trustee Co Pty Ltd,[15] Young J identified the three categories of cases in which a general administration order would be made.  They are, first, where the trustees cannot pull together, or, second, the circumstances of the estate give rise to ever recurring difficulties requiring the frequent direction of the court, or third, where a prima facie doubt is thrown on the bona fides or the discretion of one or more of the trustees.[16]  Young J observed that, in the second and third categories, the court takes a relatively benign view and might act on relatively weak evidence because if the plaintiff himself puts forward a case which seems to require the court’s investigation, and it turns out not to be a proper case, the court will visit on the plaintiff the costs of the proceedings.[17]  Young J referred to procedures which a beneficiary can take to protect his or her rights in a trust fund.  His Honour said:[18]

   The beneficiary’s real right is to approach the court for the appropriate order for performance of the trust, a specific order if that will meet his case, or a general decree, if that is called for, subject to the beneficiary paying the costs of any unnecessary application, and subject also to the restrictions which the court has over the years put on that right to approach it.

   [15] (1985) 2 NSWLR 623.

   [16] (1985) 2 NSWLR 623 at 635.

   [17] (1985) 2 NSWLR 623 at 635.

   [18] (1985) 2 NSWLR 623 at 635.

10. While Young J in McLean was addressing specifically the categories of cases in which a court will make a general administration order, those principles inform the circumstances in which the court will make orders pursuant to 6SCR206 to deal with problems arising within the administration of an estate.[19]

    [19]   Gonzales v Claridades [2003] NSWCA 227 at [31], (2003) 58 NSWLR 211 at 218.

11. In Palmer v Ayres,[20] Gageler J cited with approval the reasons of Young J in McLean,[21] saying:[22]

    Fundamental to the law of trusts is that the court has jurisdiction to supervise, and in appropriate circumstances to intervene in, the administration of a trust. Indeed, a test of the validity of a trust is that it must be of such a nature that it can be administered by a court. Appurtenant to that jurisdiction is a capacity for a court on application in appropriate circumstances both to advise a trustee and to compel the provision of information by a trustee.

    [Citations omitted.]

    [20] [2017] HCA 5.

    [21]   See also the joint judgment of Kiefel, Keane, Nettle and Gordon JJ approving McLean’s case [2017] HCA 5 at [38].

    [22] [2017] HCA 5 at [84].

    Should the Court make orders pursuant to 6SCR206?

12. I am satisfied on the materials before me that the plaintiffs, the beneficiaries of the estate, have lost confidence in Kevin as the executor of Rick’s estate.  I am also satisfied that, as the executor, Kevin finds himself in a position of conflict because the plaintiffs have been pressing him to undertake inquiries in relation to the contingent liabilities of the estate for the Rabobank debt which touch his personal interests in relation to Galaquill and the MLT.  I readily accept that this conflict was created by Rick’s appointment of Kevin as his executor under his will, but that does not detract from the fact that the conflict exists. 

13. I consider that Kevin as the executor of Rick’s estate has a duty to protect the estate by examining the nature of the Rabobank debt which is secured by the Billabong Gums mortgage and guaranteed by the estate. 

14. The material before the Court is sufficient to put a diligent and independent executor on inquiry whether the Rabobank debt was a debt incurred, in part, for the benefit of Galaquill and the MLT and whether the MFT was acting as the banker for Galaquill and the MLT.  This inquiry is directed to events pre and post the 2004 split.  This requires examination of the records of Galaquill and the MLT. These are records within Kevin’s power and control.

15. The following material puts one on inquiry.

16. First, the stamping of the Billabong Gums mortgage as collateral security in Victoria in October 1992, July 1995, November 1999 and September 2001, and the up-stamping of the mortgage in South Australia on various dates in 2007, 2008 and 2009 including, in particular, on 12 May 2009 where the Billabong Gums mortgage was stamped in South Australia for collateral in the amount of $1,970,000.  On the same date, a property owned by Galaquill was mortgaged in favour of Rabobank.  While Kevin says that this is a mere coincidence, the inference is open that the debt, in respect of which Billabong Gums is security, is a debt in relation to borrowings which were applied in Victoria for the benefit of Galaquill subsequent to the 2004 split.

17. Second, in his third affidavit sworn 11 July 2016, Kevin deposes to the circumstances of the re-financing of the Rural Finance loan by Galaquill in October 1992.  He says that Galaquill repaid the Rural Finance loan with further funds borrowed by Munrose Nominees from PIBA (Rabobank) secured by the Billabong Gums mortgage and the Rabobank Youngies mortgage.  The Rural Finance mortgages on Galaquill Downs were discharged.  He refers to the Billabong Gums mortgage and to a stamp dated 25 September 2001, which he says appears to be placed over an earlier stamp dated October 1992, which increased the stamped security of the Billabong Gums mortgage to $700,000, the effect of which was that the purchase of Galaquill Downs was funded by a total of $700,000 loaned by PIBA (Rabobank) to Munrose Nominees.  He refers to the Rabobank Youngies mortgage and notes that there appears to be two stamps of $350,000, one dated 12 December 1988 which, he assumes from the date, secured the loan of $350,000 from PIBA to Munrose Nominees in 1988 for the purchase of Galaquill Downs, and a second stamp also for $350,000, the date of which he is unable to make out.  Kevin said he does not know whether this relates to the extra $350,000 borrowed by Munrose Nominees in October 1992.  He says that he believes that PIBA (Rabobank) also had mortgages over Galaquill Downs, but he cannot recall whether these were taken in 1988 or in 1992.  He says he has searched for such mortgages but cannot find them.  He says he does not know, but Rabobank may well have up‑stamped its mortgages over Galaquill Downs in 1985, 1989 and 2001, but he does not understand why, if it did so, Victorian duty stamps would have been placed on the Billabong Gums mortgage. 

18. Kevin expresses his ignorance and inability to recall these matters.  While he says he has searched for mortgages PIBA had over Galaquill Downs, he says he is unable to find them.  He speculates as to what the true position might be when he is in a position to undertake further investigations, as the executor, to ascertain the actual position, yet fails to proffer an adequate explanation for his failure to do so. 

19. Third, there is a paucity of evidence surrounding the circumstances of the 2004 split.  The increase in the Rabobank debt from $700,000 in 1992 to $1,120,000 in 2004 appears to be a result of drawdowns by both the MFT and the MLT, but the extent of the drawdowns by the MLT cannot be established without recourse to the financial records of the MLT.  The handwritten notes of Kevin relating to his discussions with Rick at the time of the 2004 split do not adequately explain the basis upon which the split was negotiated or how the terms of the split reflected the respective contributions of the MFT and the MLT to the Rabobank debt.  This is reflected in the reservations expressed by Mr Irving in his report.

20. Fourth, Mr Irving has not found it possible to conclude from an inspection of the documents made available to the plaintiffs, particularly the Rabobank statements, that all of the expenditure by Munrose Nominees, and therefore all of the accrued debt at any time subsequent to the 2004, was for the sole benefit of the MFT.  In this context he refers to a transfer from the Rabobank MFT account to Galaquill of $187,000 on 28 September 2007.  The analysis of the available financial records of the MFT subsequent to the 2004 split show a considerable increase in the revenues earned by the MFT at the same time as the Rabobank debt was burgeoning.  The available records indicate that the continuing drawdowns on the Rabobank facility post the 2004 split was for “working capital”.  This begs the question of whether the working capital was for the sole use and benefit of the MFT or whether some of it was the use and benefit of the MLT.  Again, this evidentiary material is sufficient for the purposes of this application to find that there is a basis to suspect the MFT was acting as the banker for Galaquill and the MLT in the period subsequent to the 2004 split. 

21. Fifth, Kevin’s evidence is that part of the agreement for the 2004 split was that the liability for the Rabobank debt was divided equally between Rick and him. However, records have not been made available to explain the basis of such an agreement between Rick and him where the circumstances in which the Rabobank debt had been accrued prior to the 2004 split are not adequately explained.  Nor is the fact of the split reflected in the accounts.  This is a matter that should put a diligent and independent executor on inquiry.

22. The evidence gives rise to a prima facie suspicion about the Rabobank debt which is secured by the Billabong Gums mortgage and Rick’s guarantee.  This evidence is capable, at least, of arousing a suspicion that, as the plaintiffs submit, the Rabobank debt owed by Munrose Nominees as the trustee for the MFT is the result of the MFT acting as the banker for Galaquill and the MLT such that the debt, or part of it, was incurred for the benefit of Galaquill and the MLT. 

23. This gives rise to questions as to whether Munrose Nominees, as the trustee for the MFT and Billabong Gums, have available defences or rights to contribution, indemnity or reimbursement on marshalling principles, to any claim by Rabobank which the estate has guaranteed and which is secured by the Billabong Gums mortgage.

24. I do not accept the submission that the Court should decline to make the orders sought by the plaintiffs because any defences or rights to contribution, indemnity or reimbursement on marshalling principles, will only arise in the remote contingency that Rabobank was to enforce the Billabong Gums mortgage and the Rabobank guarantee.  To adopt the riposte of Mr Wells QC, counsel for the plaintiffs, these are frequently famous last words.  Kevin does not put the submission that the contingent liability will never arise.  That is unsurprising.  What is clear is that Rabobank is not prepared to discharge the guarantee and obviously sees commercial advantage to maintaining it.  In any event, it is Munrose Nominees which is paying down the Rabobank debt.  If the plaintiffs’ suspicion concerning Galaquill and the MLT are well founded, the liability to repay the Rabobank debt may not lie wholly with Munrose Nominees.

25. Neither do I accept the submission that the orders sought should not be made because great trouble and expense would be incurred in complying with them.  I am far from satisfied that is the case given the nature of the enterprises concerned.  The Court in this matter is not concerned with public companies or huge, extensive commercial ventures.  The Court is concerned with the affairs of private companies who conduct farming enterprises.  Neither am I satisfied that the orders sought for production of documents are oppressive.  The width of the orders is appropriate, given the nature of the categories of documents involved and the potential they could be in the possession of various of the defendants or Galaquill or the MFT’s Victorian accountants.  Neither do I accept the submission that it is appropriate at this stage to confine the order for production of documents to those documents identified in Mr Irving’s report.  It is appropriate that the order for production extends to all documents that may aid in any inquiry that the Court considers it appropriate to order. 

26. Finally, I do not accept the submission that the amendments in the second statement of claim render the plaintiffs’ application otiose. While the principal action is not unrelated to the application pursuant to 6SCR206, I do not accept that the amended plea concerning the 2004 split destroys any possible claim against the MLT in contract or equity. I do not accept the submission of Mr Abbott SC, counsel for Kevin as executor, that the effect of the amendment is that the 2004 split was an agreement freely entered into by Rick to “wipe the slate clean” in relation to the liability of Munrose Nominees for all that had occurred previously regarding Galaquill and the MLT. The amendment does not materially change the plaintiffs’ case. In any event, I do not accept that the proposed amendments render irrelevant or otiose the issues raised in the administration application. It remains the position that a diligent and independent executor would investigate the exposure of the estate by reason of the Billabong Gums mortgage and the guarantee. The purpose of the investigation is to establish the availability of any defences, which might defeat any attempt to enforce the guarantee, and the existence of any cross-claims arising out of the guarantee and the Billabong Gums mortgage. Those investigations would be into whether, and to what extent, the MLT acquisition and borrowings were secured by the guarantee and whether Rick agreed to expose Billabong Gums to those borrowings in the exercise of a free and informed choice. Those investigations are required to determine whether it is possible to pre-empt enforcement of the securities, to have the Billabong Gums mortgage and the guarantee released, and the estate administered.

27. If the inquiries sought by the plaintiffs are undertaken, and if the result of those inquiries are that Galaquill and the MLT were taking the benefit of those borrowings, there could be available to the estate, as the guarantor, the defences or rights that are available to the principal debtor, the MFT.  Those defences or rights would relate to the primary liability of the MFT for the borrowings where it has defences or rights as against Galaquill and the MLT.  In those circumstances, the executor is under a duty to take such steps as are available to protect the estate from that exposure.  Where the plaintiffs have asked the executor to do so, and he has failed to do so, the Court, if it is satisfied in accordance with the test propounded in McLean’s case, can order an investigation into the administration of the estate. 

1. I am satisfied on the material that a sufficient basis has been established, particularly given the relatively weak standard identified by Young J in McLean’s case, justifying the intervention of the Court.  A prima facie doubt has been thrown on the exercise by Kevin, as the executor, of his discretion not to undertake the inquiries requested by the plaintiffs in relation to the Rabobank debt which is secured by the Billabong Gums mortgage and the guarantee.  The outcome of those inquiries has the potential to affect the estate.  The material before the Court is sufficient to put it on inquiry about Kevin’s administration of the estate, given his unwillingness to take steps in the administration of the estate where, to put it as neutrally as possible, there are personal interests of his involved. 

2. In the end, I am satisfied that the discharge of the executor’s duties requires transparency and the orders I propose to make are directed to achieving that.

3. That is sufficient to grant the plaintiffs’ application for inquiry and report and, subject to the matters I am about to address, orders for the production of documents relating to the Rabobank debt.  However, if the inquiries the plaintiffs seek reveal that the suspicion on which these orders are made is unfounded, the plaintiffs will be exposed to the risk of an order for payment of the costs of the inquiries they have sought.

   The beneficiary loan account in the MFT

4. The plaintiffs seek orders for production of documents relating to the estate’s contingent liability in respect of the beneficiary loan account in the MFT.  That is the beneficiary loan to Rick and his wife.  Whether recovery of that loan will be enforced depends upon the outcome of the issues of first, whether Munrose Nominees is the trustee of the MFT, second, whether the shares in the MFT are held exclusively by Oliver and Molly, or whether 50 per cent of the shareholding is held by Herbert and Janet, and third, whether the trustee will forgive or enforce the loan.  Those are matters to be decided in the principal proceedings.  There is no application for an inquiry into the beneficiary loan account.  In these circumstances, I do not propose to make an order for production of documents recording or evidencing the drawing down of the loan account as sought in paragraph 7.4 of the plaintiffs’ draft minutes of order.  Orders for production of documents should be confined to those documents relevant to any inquiry the Court might order and which aid in such inquiry.   

   Bell Avenue mortgage

5. In 2001, Rick and his wife purchased a residential property at Bell Avenue, Tintinara, as their family home.  In September 2008, the property was transferred for nil consideration to Munrose Nominees as the trustee for the MFT.  There is a mortgage over the property to the Westpac bank which is guaranteed by the estate, Rick’s wife, Kevin, and Herbert and Janet.  The outstanding balance of the debt to Westpac is about $76,000. 

6. The Bell Avenue property was transferred to the MFT shortly after Rick and his wife purchased a residential property at Burnell Street, Linden Park, in June 2008.  It is apparent that the purchase of the Linden Park property was funded by drawings on the loan account of Rick and his wife in the MFT.

7. The plaintiffs seek orders for an inquiry into the terms of the Westpac loan, the amount of the debt, the purpose of the underlying transaction, payments that have been made, and whether Rick was party to any guarantee or other surety in respect of the underlying transactions, and if so, the terms of such a surety, the parties to it and the date or dates on which it was given.

8. I accept that the estate’s contingent liability under the Bell Avenue guarantee, should it crystallise, is unlikely to be more than $20,000 considering there are five guarantors.  However, in circumstances where the evidence suggests that the MFT paid the deposit and all the mortgage payments for the Bell Avenue property; and the contingent liability of the estate in respect of the guarantee over the Westpac mortgage on the property is relatively modest; I do not consider that the orders sought by the plaintiffs are justified.  There is no basis to suspect that the interests of the plaintiffs have been adversely affected by any failure on the part of Kevin as executor to investigate the circumstances surrounding the Westpac mortgage, the estate’s guarantee and its contingent liability for the Westpac debt.

9. I would decline to make the draft orders 3.2 and 7.14 sought by the plaintiffs. 

10. The question of the beneficial ownership of the Bell Avenue property is a matter to be determined in the principal proceedings.

    The MFT appointer

11. The plaintiffs seek an order in paragraph 7.15 of the draft minutes that Kevin, in his personal capacity and as executor, produce all documents recording or evidencing instructions given by Rick and advice given by Mellor Olsson in respect of deeds having the effect of changing the appointor of the MFT.  The plaintiffs in the principal proceedings plead that Herbert agreed to refrain from exercising his power of appointment under the MFT inconsistently with the surrender or control of Munrose Nominees and the MFT to Rick, or is otherwise estopped from asserting the contrary by reason of an assumption on Rick’s part to that effect induced by Herbert’s representations, promises and encouraged expectations.  The plaintiffs plead that, in these circumstances, it would be unconscionable on the part of the defendants if, subsequently, they were to depart from the induced assumptions; that there were subsequent departures and that the consequences of those departures is an estoppel giving rise to a trust in favour of Munrose Nominees.  I accept the submission of the defendants that, in these circumstances, documents recording or evidencing the instructions given by the deceased and advice given by Mellor Olsson in respect of deeds having the effect of changing the appointer of the MFT, while relevant to the issues in the principal proceedings, are not relevant to the estate. Further, the documents are not directly relevant to the subject matter of the inquiry which is sought. In any event, if the defendants join issue with the allegations in the amended pleading, those documents will be a matter for disclosure in the principal proceedings.  Accordingly, even if I had come to a different conclusion concerning the relevance of these documents to the application for an inquiry and report, I would decline to make an order for the production of those documents in the exercise of my discretion.

    Application for the transfer of the undisputed shares in Munrose Nominees

12. The plaintiffs apply for orders that Kevin as executor transfer to Oliver and Molly the two undisputed shares in Munrose Nominees. Kevin, in his capacity as executor, has applied to the Court for advice and direction pursuant to s 69 of the Administration and Probate Act in relation to, inter alia, whether he should transfer those shares.  All of Rick’s shares in Munrose Nominees were the subject of a specific bequest in his will to Oliver and Molly.  Two of the shares are in dispute and the subject of a claim by Herbert and Janet that they were wrongly transferred to Rick. 

13. While the plaintiffs originally sought orders for the transfer of all the shares, they now press only for an order for the transfer of the two undisputed shares in the light of the dispute over the remaining shares.  I do not understand Kevin in his capacity as executor, to oppose the order for the transfer of the two undisputed shares.  He merely observes that the estate is yet to be fully administered.  Nonetheless, I am satisfied that the orders sought by the plaintiff for the transfer of the undisputed shares should be made.  There is no good reason not to transfer the shares.  There is no obstacle to the transfer of the shares.  I am satisfied that the transfer of the shares would confer rights on Oliver and Molly under the Corporations Act to bring derivative proceedings on behalf of Munrose Nominees, which on the plaintiffs’ case is the true trustee of the MFT.  Whether they exercise those rights will be a matter for them.

    Executor’s application pursuant to s 69 of the Administration and Probate Act 1999 (SA)

14. The reasons for the orders I propose to make on the plaintiffs’ application render otiose much of the first defendant’s application pursuant to s 69 of the Administration and Probate Act for advice and direction. 

15. I reserve consideration of the application for advice and directions in relation to the sum of $66,130.40 and the directions in relation to the further administration of the estate pending the outcome of the inquiry and report by the Master. 

16. I also reserve the question of who is to bear the costs of this application and the costs of the inquiry and report, and the production of documents, pending the outcome of the inquiry and report, and the production of the documents. 

    Conclusion and orders

17. In these circumstances, I would make orders in terms of the draft minutes prepared by the plaintiffs, except for orders 2, 5, 6 and 10 which are not pressed at this stage, and orders 1, 3.2, 7.4, 7.14, 7.15 and 14.  I would make order 1 only in respect of the two undisputed shares. I reserve the question of costs.  I direct the plaintiffs to bring into court minutes of order reflecting the terms of these reasons.