NSW v Lepore & Anor, Rich v Qld, Samin v Qld & Ors

[2002] HCATrans 335

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Brisbane  No B88 of 2001

B e t w e e n -

JANETTE ANN PEARSON as beneficiary of the JANCY TRUST

Applicant

and

COMMISSIONER OF TAXATION

First Respondent

JANCY PTY LTD (In Liquidation)

Second Respondent

Application for special leave to appeal

GLEESON CJ
HAYNE J

TRANSCRIPT OF PROCEEDINGS

AT BRISBANE ON WEDNESDAY, 26 JUNE 2002, AT 12.03 PM

Copyright in the High Court of Australia

MR S.L. DOYLE, SC:   Your Honours, I appear with MR P. DAVIS for the applicant.  (instructed by Hewlett & Company Lawyers)

MR P.A. KEANE, QC:   If it please the Court, I appear with MR R.M. DERRINGTON for the respondent.  (instructed by Australian Government Solicitor)

GLEESON CJ:   There is a certificate from the Deputy Registrar that she holds a letter from the solicitors for the liquidator of the second respondent to advise that the second respondent will submit to any order of the Court save as to costs.

Yes, Mr Doyle.

MR DOYLE:   Your Honours, this application raises two points, neither of which has been determined by this Court.  They both concern the nature of a derivative proceeding commenced by a beneficiary of a trust who pursues or wishes to pursue or exercise a right which is held by a trustee.  In this case, they both arise in the taxation context, but they have a wider relevance.  The first question is whether a beneficiary may bring a derivative claim in relation to a statutory right held by a trustee.

HAYNE J:   Is that the place at which we begin or do we begin in the Taxation Administration Act?

MR DOYLE:   Well, we move from what I have just expressed to the Taxation Administration Act to section 14ZZ which is referred to in the reasons below which expresses the right in terms of a person being able to do something and it is accepted by the applicant that that person relevantly means the taxpayer and the taxpayer here was the trustee. 

HAYNE J:   Therefore, how do questions of derivative action or the like ever emerge or arise?  The only right in issue is a statutory right given by 14ZZ to an identified person, is it not?

MR DOYLE:   Your Honour, it is always the case that when a derivative claim is brought, the right being pursued is that held by someone else by the trustee, whether it is an equitable right or a common law right or, we would submit, a statutory one.  It is nonetheless the taxpayer’s right.  The question which is raised by this application is whether that right can be articulated in proceedings which are commenced by a beneficiary asserting the trustee’s, the taxpayer’s right for the benefit of the trustee or the taxpayer.

There is a case to which we refer in our submissions in reply called Parker- Tweedale – I need not take your Honours to it.  I am sorry it is not in our bundle and I have not given copies to your Honours, but it says, in effect, that when a beneficiary takes proceedings in a derivative claim it sues for the benefit of the trust and “in the room” is the expression used, in the room of the trustee which must mean in the place of the trustee.  Now, if that is right and our submission is at least arguably right, when the beneficiary brings its derivative claim, it is doing so to enforce the taxpayer’s right.

GLEESON CJ:   But on pages 34 and 35 in the reasons for judgment of Justice Emmett, he assumed in your favour that a derivative proceeding was available but ruled it out on discretionary grounds.

MR DOYLE:   All of their Honours did, your Honour.

GLEESON CJ:   Yes.

MR DOYLE:   The majority did the same.

GLEESON CJ:   Well, how do we get to the legal issue of the availability of derivative proceedings?

MR DOYLE:   It is essential if the appeal is to succeed that the appeal succeed on both points, that there is a right of ‑ ‑ ‑

GLEESON CJ:   Yes, but if the appeal is to fail, it might fail on a point that does not raise the question of principle.

MR DOYLE:   It may – and I will be coming to the second of the points of this application raises in a moment.  But I have mentioned this first because it is a matter which, whilst assumed in favour of the applicant below, has not been decided by this Court at all.  There have been some observations by lower courts in our favour.  It is a point that the respondent takes issue with.  The respondent contends that the beneficiary cannot assert the right of the taxpayer to bring these proceedings and it will ultimately need to be decided if the appeal proceeds.  We have said that there are some cases and we have set them out in our written submissions.

GLEESON CJ:   I do not want to be captious, but it will not, will it?  If the appeal proceeds and the discretionary decision is regarded as sound, it will not need to be decided.

MR DOYLE:   That is so.  There are two ways in which the appeal, if it proceeds, may be disposed of against my client’s interests.

GLEESON CJ:   What you are saying to us so far is this case might raise a question of general importance.

MR DOYLE:   This case raises both questions, each of which is of general importance.  The one that I have addressed, your Honour, is the one of statutory construction and the characterisation of the nature of a derivative claim asserted by a beneficiary.

Might I move on to the second, if that is convenient, your Honours, which is what can amount to special circumstances which is the question which was decided by their Honours against the respondent below.  Now, the second point is, what are the facts and circumstances which may amount to special or exceptional circumstances to warrant a beneficiary bringing a derivative claim and our ‑ ‑ ‑

GLEESON CJ:   Where does this concept of exceptional or special circumstances come from?

MR DOYLE:   A variety of cases.  I will take your Honours to some in a moment.  I will deal with them now.  The principle seems to be that in certain circumstances a beneficiary is entitled to assert a right which reposes in the trustee and the question, what are those circumstances.  A well‑recognised example is where there is collusion between the third party against whom the right is to be asserted and the trustee.  Another well‑recognised example is insolvency of the trustee and I will come back to that in a moment.  The third category is described generically as those in which special or exceptional circumstances exist and that is described in various cases.  The question really becomes what can amount to special or exceptional circumstances.

Now, our learned friends say against us that that is ultimately a question of fact and that there have been findings of fact made below and in the Full Federal Court against the applicant and that, they say, ought to be the end of the matter.  It is true that the judges below made findings of fact against the applicant but in doing so, they fell into two errors which we have identified in our submissions in reply to your Honours.  They are overlapping errors, but they are both made by the members of the court below.  The first is that each of the members of the court has taken the approach that special circumstances can only exist if the applicant first exhausts its ability to try to persuade the trustee itself to take the proceedings in its own name.  Each of the members of the court below pointed out that a failure by the applicant to provide relevant information to the trustee and to provide some cost indemnities to the trustee was determinative against her, demonstrating special and exceptional circumstances.

The second error which their Honours made is that they have held that it is a prerequisite to the establishment of special and exceptional circumstances that you can demonstrate or at least seek to demonstrate that the refusal by the trustee to take the proceedings itself is a breach of trust.

Now both of those, in our submission, are erroneous, but can I take you first to the reasons to show that that is how their Honours proceeded.  If you would go in the application book to page 21, and this is the joint judgment, in paragraph 17 of the joint judgment you will see their Honours set out the various things which they saw as significant as to why special and exceptional circumstances did not exist, and they are all related to the nature of the approach which the beneficiary made to the trustee to try to persuade it to bring the proceedings.  Could we ask your Honours to read paragraph 17.

Then in the reasons of his Honour Justice Emmett at page 35 of the application book in paragraph 52.  Whilst still in his Honour’s reasons, if your Honours would turn back the page to read paragraph 49, where his Honour identifies what we submit is the second of the errors to conclude that it is a prerequisite of the derivative claim that you demonstrate the trustee is acting in breach in failing to bring the proceedings. 

Might we then take your Honours to two cases.  The first is Ramage v Waclaw which is No 2 in our bundle of cases, and we do so to demonstrate what are properly to be recognised as special circumstances.  Both of these cases are cases where a beneficiary was seeking to assert a derivative claim and I will not take your Honours to the facts.  If you turn to page 91, between B and C, there is a paragraph commencing “The true position”.  His Honour then sets out a statement of law from Jacob  s’ Law of Trusts and after that in the paragraph commencing at paragraph F.  His Honour then proceeds to summarise a series of cases where special circumstances might exist.  If your Honours then turn to the next page at about point E, one of the factors which he identifies as significant and is as quoted from an earlier decision which I need not take you to:

unless it is satisfactorily made out that there exist assets which might be recovered, and which, but for such suit, would probably be lost to the estate.

That is a circumstance which, in his Honour view, amounts to special circumstances.

If you go then to page 93, in the circumstances of the case then before him, about halfway down the page just before paragraph  D, his Honour says this:

In the light of the matters to which I will shortly refer, I have concluded that the plaintiff has established that there are present “special circumstances” sufficient to justify the plaintiff having filed the summons –

et cetera.  None of those special circumstances, your Honours, are particularly important, save for paragraph 12 which we would ask you to note.  “The Public Trustee, no doubt bona fide because of the advice given to him and the size of the estate immediately available to him, has declined to commence proceedings.”  It is plain, in our submission, from that case from the passages I have just taken your Honours to that it is not a prerequisite to the establishment of special or exceptional circumstances that the trustee has to be shown to be in breach of its trust.

The same appears from the second case to which we take you of Lamru v Kation which is the fourth case in our bundle.  If we could ask your Honours to go to page 437, just before point F, there is a sentence commencing “Shortly before the time”, if we could ask you to read to the end of that page and the first two lines on the next page.  Now, your Honours, in this case the trustee was in liquidation and, as it is shown, in Ramage v Waclaw’s Case, insolvency is one of the recognised circumstances where a derivative claim can be commenced.

Also in this case, the liquidator had no relevant interest in the proceedings proceeding.  When he ultimately responded explaining why he would not join in the proceedings, his explanation was that he wanted to assess ‑ firstly, that he had no funds and, secondly, that he wanted to assess whether it was in the interests of the creditors of the company to take the proceedings which, of course, is the wrong question for a trustee to ask himself.  It is whether it was in the interests of the beneficiaries to do so.  The trustee in this case was a former trustee.  It had been removed as trustee and had no relevant remaining interest in enabling the proceedings to be taken for the benefit of the beneficiaries.  Its only real interest was in avoiding exposure to costs and that was the focus of his correspondence to identify that he had no funds and needed to be put in funds to take proceedings.  Yet that concern can be accommodated by the beneficiary itself taking derivative claim.

Now, as we have said in our written submissions in reply, none of those circumstances have been identified by the members of the court below as relevant to the question of special or exceptional circumstances.  The fact that it was in liquidation, the fact that it had been removed as trustee, the fact that it had no interest in carrying into effect the terms of the trust and the fact that any exposure to costs can be avoided by it not being an applicant but, rather, the applicant being the beneficiary of the trust, each of which, in our submission, amount to special circumstances and none of which were adverted to by the members of the court below demonstrate the error of principle they made of approaching the question by asking, has the beneficiary exhausted its efforts to persuade the trustee itself to bring the proceedings.  That is the first error of principle, in our submission, which their Honours made.  The second I have already adverted to and that is that their Honours proceeded on the basis that it was essential to demonstrate that the trustee was refusing to bring proceedings in breach of trust and, in our respectful submission, that is simply wrong.  The two cases which we have already given you of Ramage v Waclaw and of Lamru both are cases in which it cannot be said of the trustee that it was in breach of its trust not to have pursued the right.

The case to which our learned friends refer you and also in our bundle, your Honours, at No 3 is Hayim v Citibank.  Can we ask you to go to that case please.  If you go first to page 747, paragraph C:

The authorities cited by Mr Nugee only demonstrate that when a trustee commits a breach of trust or is involved in a conflict of interest and duty or in other exceptional circumstances a beneficiary may be allowed to sue a third party in the place of the trustee.

Each of those is posited as alternatives, that is, it is an alternative that the trustee refuses to sue in breach or the existence of other exceptional circumstances and if your Honours then go to the next page and read the paragraph at point E and the following first four or five lines of the next paragraph, their Lordships there refer to In re Field.  We have included that case in our bundle of authorities.  I need not take your Honours to it, but can I remind your Honours that in that case the beneficiary had applied to have an order made that the trustee in fact sue the third parties and that application failed.  Nonetheless, the beneficiary was entitled to bring a derivative claim directly against the third party, notwithstanding that it could not be said the trustee was acting in breach of its trust by failing to bring the proceedings itself and in the following paragraph of their Lordships’ speech make it clear that the entitlement of the beneficiary to sue in special circumstances embrace a failure which is excusable or inexcusable which demonstrates, in our submission, that if it is an excusable failure, it cannot be one which is said to be in breach of trust.         Yet the reasons below proceed on the basis that it must be demonstrated for the beneficiary to be entitled to sue in the derivative claim that it seeks to make out that the trustee is acting in breach of trust by failing to sue.

Now, those two errors, in our submission, do raise important questions as to what are the prerequisites for a beneficiary exercising a derivative claim.  They have a significance beyond anything to do with the administration of taxation and apply generally to the laws of trusts in this country.  For those reasons, we would urge that special leave be granted.

GLEESON CJ:   Thank you.  Yes, Mr Keane.

MR KEANE:   Your Honours, the first thing we should say is that your Honours have been taken to that passage from Jacobs and we are content to use it as a useful starting point because it says that:

derivative actions may be available either to compel the trustee to do his duty or to protect the beneficial interests of the beneficiaries in the estate.

Their Honours were addressing the question of the availability of the derivative action by reason of exceptional circumstances compendiously.  We do not actually read their Honours as confining themselves on the footing that there must be shown to be a breach; rather, that it must be shown to be a reason for thinking that the trustee has failed to do its duty or needs to be compelled to do so or that, otherwise, there is some reason to move by way of derivative action to protect the trust estate.   As to the first, it is clear and important that their Honours identify as significant the fact that the trustee was not actually asked to do it.

If your Honours go to the letter that was written on behalf of Mrs Pearson to the liquidators of the trustee ‑ it is at page 26 in paragraph 32 in the judgment of Justice Emmett and it is set out in full ‑  can we ask your Honours to read that letter at the bottom of page 26 and then over the top of the page to the paragraph that states the reasons why it is said to be “desirable to appeal also against the assessments” and that appears to be for tactical reasons relating to Mrs Pearson’s own appeals against assessments, as well as for the simple reason “We have been advised that the assessment is wrong”.  When one looks down, one sees in the third paragraph that the assessments:

are in respect of moneys that were never actually received so it is doubtful whether they are liabilities provable in the estate –

Then the request that is actually made is not that the trustee move, but that the trustee give its written approval to Mrs Pearson lodging an appeal.  Then if you look at the balance of the letter, your Honours will see that there is certainly no suggestion that the basis of the advice is being provided and perhaps, most importantly, there is nothing identified to suggest that the beneficial interests of anyone in this trust estate require the trustee to move. 

The liability for tax is the trustee’s. No one seeks to identify a trust estate in relation to which Mrs Pearson has an interest that might be affected, nor is there any suggestion that there is a multiplicity of suits to be avoided.  It is on that footing that their Honours proceed to conclude, albeit in a compendious way, that there are no exceptional circumstances shown

or no sufficient exceptional circumstances shown of the kind which have been recognised in equity in the passage in Jacobs and the other authorities to which our learned friends have taken your Honours to think that something special needs to be done to side-step a trustee who, in the words of the Privy Council, excusably or inexcusably fails in the performance of its duty or that there is a beneficial interest that needs to be protected.  There is simply in the letter that we have taken your Honours to no suggestion that there is any good reason for this, other than some tactical thing relating to Mrs Pearson’s own affairs. 

Now, your Honours we have in our outline at pages 52 to 55 sought to summarise the circumstances which support the view of the court below that there are no sufficient exceptional circumstances of the kind identified in the authorities or Jacobs and we should add to those the additional point that the letter does not identify any likely jeopardy to any beneficial interest of Mrs Pearson in the estate or the interests of any other beneficiary.

As to the question of insolvency that our learned friend raises, insolvency is relevant in this regard in the authorities because where the trustee is insolvent, the usual right of the beneficiary to proceed against the trustee for a breach is not available because the trustee is insolvent or it does not mean anything.  Usually, of course, the beneficiary would proceed against the trustee and the trustee would pursue the third party.  Where the trustee is insolvent, that cannot happen.  That may be the case with individuals.  It is not necessarily the case so far as protecting the interests of the trust estate are concerned with a corporate trustee.  As to that, of course, in this case the corporate trustee was not even asked to act.

It is our submission that in relation to the existence of exceptional circumstances, the view taken by all four judges below as to the insufficiency of the case is plainly correct.  Unless that view is overturned, one does not get to the question whether in the context of section 14ZZ of the Taxation Administration Act a person other than the taxpayer may assert the taxpayer’s rights.  In this case, we would submit one does not get to it.  The liability is the taxpayer’s, it is not Mrs Pearson’s and Mrs Pearson does not show that she is in any jeopardy at all.  Those are our submissions, if the Court please.

GLEESON CJ:   Thank you.  Yes, Mr Doyle.

MR DOYLE:   Your Honours, three things.  It is plain, we would submit, from the reading of both the joint judgment and the judgment of Justice Emmett that they did proceed on the basis that it was necessary, as a prerequisite to the derivative claim, that you demonstrate or seek to demonstrate that the trustee was acting in breach of trust for failing to bring

the proceedings.  Those are the words in fact used by Justice Emmett in the passage I took you to a moment ago.  That, in our submission, is wrong.

The second point our learned friend makes is that it is relevant to the existence of special circumstances that the beneficiary did not ask the trustee to take the proceedings and that is true, the beneficiary asked the trustee for permission to take the proceedings herself which was withheld.  But that, in a sense, is the demonstration of our point as to the first error made by the court below, the concentration on the attempts by the beneficiary to persuade the trustee to do things, as distinct from the existence of special circumstances otherwise which we rely upon, that is, to concentrate on that as the thing determinative against the beneficiary is to fall into the error of assuming that special circumstances can be made only if the beneficiary entreats the trustee to take the proceedings and that ‑ ‑ ‑

HAYNE J:   What do you say, though, to the point made against you that it is not demonstrated in the courts below that there was any relevant commercial consequence to the trust estate or to the particular beneficiary from the failure to challenge the assessment?

MR DOYLE:   Your Honour, well, there is no quantification of the impact upon the assets of the trust, but what is clear is there are 60 days within which to bring proceedings against the refusal of the objection which expired the day after these proceedings were commenced and that unless the proceedings commenced in that time, the right ever to dispute the assessment is gone, such that the right which needs to be protected is the right to challenge the assessment which is for over $2.5 million.  Whatever the assets of the estate, they will be diminished by a claim of $2.5 million if the right is not exercised within that 60 days and that is the right which the trustee did not protect and which the beneficiary exercising the derivative claim sought to protect.  So it is wrong, in our submission, to ask in terms of what is the flow-on effect.  Rather, the immediate effect is that the right which reposes by force of the statute only in the trustee is lost forever unless exercised within a very short time.  Those are our submissions.

GLEESON CJ:   We are of the view that there are insufficient prospects of success of an appeal to warrant a grant of special leave.  The decisions in the Federal Court assumed the availability of derivative proceedings under the relevant provision of the Taxation Administration Act.  It is unnecessary for us to form or express a view as to the validity of that assumption.  The application is refused with costs.

AT 12.34 PM THE MATTER WAS CONCLUDED