Oxer v Astec Paints Australia Pty Ltd - [2005] SASC 192

SUPREME COURT OF SOUTH AUSTRALIA
(Civil: Application)
OXER v ASTEC PAINTS AUSTRALIA PTY LTD
Reasons of Judge Lunn a Master of the Supreme Court
30 May 2005
EQUITY - TRUSTS AND TRUSTEES
Application under s 84C of the Trustee Act by beneficiary to have an inspector appointed to investigate the administration of the trust - relevant criteria - one beneficiary receiving proportionately more than another from trust - order for inspector.

OXER v ASTEC PAINTS AUSTRALIA PTY LTD
[2005] SASC 192

JUDGE LUNN In this action the plaintiff seeks an order that the Court appoint an inspector to investigate the administration of the Ceramic Coatings Unit Trust (“the Trust”). Before the Court at present are paragraphs 1-3 of the plaintiff’s notice for specific directions issued on 11 March 2005, which read:
1That an inspector is appointed onto the administration of the Ceramic Coatings Australia Unit of which the defendant is trustee pursuant to Section 84C of the Trustee Act 1936.
2That the Inspector of the Ceramic Coatings Australia Unit Trust be directed to investigate all matters concerning the administration of the unit trust.
3That the Inspector have available to him all of the powers vested in an inspector pursuant to Section 84D of the Trustee Act 1936.
The appointment of an inspector is sought under s 84C of the Trustee Act 1936. S 84C is contained in Part 5A of that Act which provides:
Part 5A – Records to be kept by trustees and investigations
Interpretation
84AIn this Part –
“inspector” means a person appointed as an inspector under this Part;
“trust” means a trust created by a will or other instrument of trust; and “trustee” means the trustee administering such a trust.
Records to be kept by trustee
84B(1)A trustee shall keep such records relating to his administration of the trust property as may be prescribed.
(2)A trustee shall, at the request of –
(a)the Public Trustee; or
(b)another trustee of the trust; or
(c)a beneficiary under the trust,
produce the records kept by the trustee in pursuance of this section for inspection and permit the Public Trustee, the other trustee or the beneficiary (as the case may be) to examine and make copies of those records.
Penalty: Five hundred dollars.
Appointment of inspector
84C(1)The Supreme Court may, of its own motion, or on the application of any person who has, in the opinion of the Court, a proper interest in the matter, appoint an inspector to investigate the administration of any trust.
(2)An inspector must be a person who holds prescribed qualifications.
(3)The Supreme Court may make orders for the payment of the whole or part of the costs of an investigation under this Part –
(a)by the applicant for the investigation; or
(b)by a trustee or beneficiary of the trust; or
(c)out of the trust estate.
Powers of an inspector
84D(a)For the purpose of investigating the administration of a trust, an inspector may –
(a)require any person to produce documents relevant to the administration of the trust; and
(b)take copies or, or extract from, any such documents; and
(c)require any person to answer any questions relevant to the administration of the trust; and
(d)exercise any other power conferred on him by the Court.
(2)A person who –
(a)refuses or fails to produce documents in his custody or power when required to do so by an inspector; or
(b)refuses or fails to answer to the best of his knowledge, information and belief any question put to him by an inspector under this section; or
(c)hinders an inspector in the exercise of his powers,
shall be guilty of an offence and liable to a penalty not exceeding two thousand dollars or imprisonment for six months or both.
(3)A person may decline to answer a question put to him by an inspector under this section if the answer to the question would tend to incriminate him of an offence.
Reports to be made to Attorney-General
84E(1)Upon completing an investigation under this Part, an inspector shall make a report in writing to the Supreme Court and to the Attorney-General upon the results of the investigation.
(2)An inspector shall make such interim reports to the Supreme Court and to the Attorney-General in relation to an investigation under this Part as the Court may direct.
Confidentiality
84FAn inspector shall not divulge any information that comes to his notice in the course of an investigation under this Part and relates to the administration of the trust subject to the investigation except –
(a)to the Supreme Court and to the Attorney-General; or
(b)as directed by the Court.
There was a substantial dispute about the relevant criteria which the Court should apply in exercising its discretion under s 84C to appoint an inspector. The plaintiff’s counsel contended that there was a low threshold because it was the interests of the beneficiaries which were at risk if the trust had not been administered properly, and that a chance that the trust was not being administered properly was the primary consideration. He submitted that the power under s84C(3) for the Court to order the costs of the investigation against the applicant was a sufficient deterrent against an unjustified appointment. The defendant’s counsel contended that the plaintiff had to make out a prima facie, or at least a colourable, case of impropriety or fraud against the trustee before an appointment would be made, and the mere assertions of them were not sufficient.
Part 5A was introduced into the Act in 1980. It seems to be peculiar to this State: “Jacobs’ Law of Trusts in Australia” Sixth Edition para [1713]; Ford & Lee Principles of the Law of Trusts para [9325]. Apart from Rouse v IOOF Australia Trustees Ltd, mentioned below, there is no reported authority on its use. The second reading speech in Hansard (1979-80 pp 1252-3) is of no assistance in determining what, if any, evidentiary threshold needs to be satisfied by a plaintiff before the Court will exercise its discretion to appoint an inspector.
It should be noted that the power under s 84C(1) is to appoint an inspector “to investigate the administration of any trust”. I doubt this allows the Court to limit the investigation to part of the administration of a trust. In any event the plaintiff here did not seek any partial investigation. There may well be great difficulty in formulating the proper terms for an order for a partial investigation. The significance of the point in this matter is that if any aspect of the administration of the trust is considered by the Court to justify investigation under s 84C, then effect could only be given to this conclusion by ordering an investigation into the whole of the administration of the trust. One factor in the exercise of the discretion would be whether an investigation into that particular part of the trust affairs would justify an investigation into the whole administration of the trust. However, if so, a consequence of this is that the investigation would then extend to the other aspects of the administration of the trust which in themselves would not have justified the appointment of an inspector.
Another relevant factor in the exercise of the Court’s discretion is whether the plaintiff should be confined to his rights under s 84B of the Act to examine the records of the trust. While resort to s 84B is not a necessary pre-requisite for the exercise of the Court’s power under s 84C, it nevertheless it is a relevant consideration. Here it was not suggested that the complaints raised by the plaintiff could be adequately addressed under s 84B, or that at least initially he should exhaust his rights under it before proceeding to seek any remedy under s 84C.
The only reported judicial consideration of s 84C was by Doyle CJ, with whom Perry and Martin JJ concurred, in Rouse v IOOF Australia Trustees Ltd (1999) 73 SASR 484 at 494. He was only briefly dealing with a subsidiary argument. He held that s 84C gave the Court an unfettered discretion to make the appointment. This was not disputed by either counsel in this case, and indeed it is patent from the face of the section. He also held that in the circumstances of that case that the mere exercise by the trustee of a discretion available to it to refuse to allow inspection of trust documents by a beneficiary did not require the exercise of a discretion under s 84C to appoint an inspector.
Under s 169 of the repealed uniform Companies Act 1962 the Court had a similar power to appoint inspectors to investigate the affairs of companies. In re Mercantile Finance Company (1893) 12 NZLR 248 it was held that such an appointment should not be made merely because the company had suffered large losses, but only where there was some definite allegation of misconduct by the directors or the majority shareholders in concealing things or acting unfairly to the minority. In Norwest Holsted v Secretary of State for Trade [1978] Ch 201 the English Court of Appeal held that a government power to appoint an inspector to a company if otherwise properly made could not be challenged because the appointment would cause some temporary disadvantage to the company. Part VIA has now been replaced by s 247A of the Commonwealth Corporations Act 2001 which is the equivalent of a hybrid of ss 84B and 84C. The reported authorities on s 247A do not assist in the context of this matter: Ford’s Principles of Corporation Law [10,420].
I accept the plaintiff’s submission that the exercise of the Court’s discretion under s 84C is to be exercised against the background of the equitable principles governing the obligations trustees to their beneficiaries. Subject to some exceptions beneficiaries have a right to information and documents about the trust affairs because in effect they are the owners of the trust business: O’Rourke v Darbishire [1920] AC 581 at 626; Butt v Kelson [1952] Ch 197 at 204. As was stated in Spellson v George (1987) 11 NSWLR 300 at 315-6:
At the risk of being regarded as overly simplistic, it is as well to start with the fundamental proposition that one of the essential elements of a private trust, be it a discretionary trust of some other form of trust, is that the trustee is subject to a personal obligation to hold, and to deal with, the trust property for the benefit of some identified, or identifiable, person or group of persons: ….. It is, so it seems to me, a necessary corollary of the existence of that obligation that the trustee is liable to account to the person, or group of persons for whose benefit he holds the trust property, ….. and, that being so, the trustee is obliged not only to keep proper accounts and allow a cestui que trust to inspect them, but he must also, on demand, give a cestui que trust information and explanations as to the investment of, and dealings with, the trust property: …..
This being the essential nature of the position of a trustee, and the liability to account being an essential ingredient in it, it seems to me that it is inescapable that the cestuis que trust, or any one of the cestuis que trust, have, or has, a correlative right to approach the Court for its assistant in enforcing the personal obligation of the trustee, and, in particular, in enforcing the trustee’s obligation to account. Since that right is, as it seems to me, a fundamental right of the cestuis que trust, or of a cestui que trust, it seems to me that it is not correct to say that its enforcement by the court is dependent upon the cestuis que trust, of the cestui que trust in question, first raising an allegation, or establishing a prima facie case, of fraud or some other like breach of trust. On the contrary, so it seems to me, where the court’s assistance in enforcing the trustee’s obligation to account is invoked, the court should be concerned with only two questions, they being, first, whether the plaintiffs are, or the plaintiff is one of the, cestuis que trust, and, second, whether the defendant trustee has failed to observe his obligation to account.
In the 19^th century such obligations and duties of trustees were readily enforced by Courts of Equity by orders for the general administration of trusts, but more recently without the need for orders for general administration: McLean v Burns Philp Trustee Co Pty ltd (1985) 2 NSWLR 623 at 633. Nevertheless, Courts have recognised some limitations in disputes between trustees and their beneficiaries for disclosure of documents by trustees, but they are only exceptions to the general rule: Hartigan Nominees Pty Ltd v Rydge (1992) 29 NSWLR 405; Rouse v IOOF above. (See generally Dal Pont & Chalmers Equity and Trusts in Australia Third Edition [2330, 2335 and 2340].)
In enacting s 84C Parliament has provided an alternative for a beneficiary under a trust who alleges possible misconduct against a trustee to have to pursue complex and drawn out litigation under the successors to orders for general administration to obtain the information and documents necessary to see whether there is a proper basis for some claim for substantive relief against the trustee. In suitable cases the appointment of a registered auditor under s 84C to investigate the affairs of the trust will be an expeditious and economical way of achieving this objective. However, it is for the Court in the exercise of its discretion under s 84C to decide whether the appointment of an inspector is the appropriate vehicle in the circumstances to obtain the information and documents to which the beneficiary would otherwise generally be entitled.
The crux of the issue here is the extent to which the plaintiff is to be required to support his assertions of possible misconduct by the defendant. The defendant’s counsel cited a passage of Lander J in another decision in Rouse v IOOF Australia Trustees Ltd at (1999) 202 LSJS 79 at 89 where he said:
It is not enough that a party simply asserts that the privilege does not attach to a communication because of fraud: Attorney-General (NT) v Kearney (1985) 158 CLR 500 at 516. The party must be able to point to evidence or material which prima facie establishes the fraud, although there is no obligation on the party to prove the existence of the fraud. There must be some evidence or material which gives colour to the charge: Commission of Australian Federal Police v Propend Finance Pty Ltd and Others (1997) 188 CLR 501.
However, that was not stated in the context of the obligations of a trustee to its beneficiaries. The degree of colourability required will generally be less in this context, although it must still be found to be bona fide. The sanction of a potentially substantial costs order against the beneficiary under s 84C(3) if the allegations of possible misconduct are shown to be unfounded is an important consideration in not placing too high an onus on a beneficiary. Where the Court is to have regard to the matters mentioned, it is in the end result an unfettered exercise of a judicial discretion in the circumstances of the case which is in issue and that should not be unduly circumscribed by articulated criteria.
The plaintiff has raised eight separate, although in some cases related, grounds to justify the appointment of an inspector. These allegations are:
1The trustee maintained false trust records.
2The trustee failed to keep proper trust records.
3The trustee preferred the interest of other unit holders to that of the plaintiff.
4The trustee failed to act impartially.
5The trustee failed to respond to reasonable requests for information.
6The trustee breached its obligations in the procedures adopted for issuing additional units in the trust.
7The trustee allowed breaches of the trust deed in permitting transfer of units between other unit holders.
8The trustee acted in breach of the Corporations Act.
It is sufficient to dispose of this action to deal with the allegations 3 and 4 above. The appointment of an inspector will allow the inspector to investigate the other allegations insofar as they relate to the administration of the trust. I need not go into whether the other matters in themselves, or in combination, would have led to the Court appointing an inspector. As they may be the subject of subsequent substantive proceedings between the parties it is better that the Court says as little as possible about them at this stage. I need not go into the issue of whether insofar as some of the grounds require conclusions of the law as distinct from fact, or require resolution of factual disputes, they are proper matters for a report by an inspector.
For the present purposes the relevant facts are as follows, although there is a much wider history to the disputes between the parties. The Trust was set up by a deed made on 13 November 1989. As at early 2002 the plaintiff’s family trust held 25% of the issued units in the Trust, 55% of the units were held by the M K Waters Family Trust which was controlled by Mark Waters, and the other 20% were held by the A Caruana Family Trust. Under the Trust Deed all issued units have apparently equal rights attaching to them.
As at early 2002 the defendant company was the sole trustee of the Trust. The plaintiff and Mark Waters held its issued shares in similar proportions to those in which their family trusts held the units in the Trust. The plaintiff and Waters were the only directors of the defendant company. The Trust owned and operated a substantial business. The plaintiff was employed in the production side of the business and Waters in its administrative side.
In about May 2002 the personal relationship between the plaintiff and Waters began to deteriorate and that deterioration thereafter escalated. On 10 December 2003 the plaintiff served a statutory demand under s 459E of the Corporations Act 2001 on the defendant for moneys owed to him by the Trust. There were acrimonious dealings between the plaintiff and Waters about this, although they were ultimately resolved. On 12 December 2003 Waters claimed that the plaintiff had resigned as an employee of the defendant, but the plaintiff disputed this. On 15 December Waters barred plaintiff from the defendant’s business premises and had him forcibly removed. In April 2004 Waters used his greater shareholding in the defendant to have the plaintiff removed as a director of the defendant. Since then the only directors of the defendant have been Waters and his wife.
The financial statements for the Trust for the financial year ended 30 June 2003 (“the 2003 accounts”) were signed by Mark Waters on 20 May 2004. They were prepared by Mr Garrett, a chartered accountant. The Compilation Report signed by Mr Garrett on 20 May 2004 contains a number of disclaimers and in particular stated, “The special purpose financial report was prepared for the benefit of the trustee(s) ….. We do not accept responsibility to any other person for the contents of the special purpose financial report”. The “special purpose financial report” appears to be the whole of the 2003 accounts of the Trust. There is no suggestion that these accounts have been audited. It is significant that they disclaim any responsibility to the beneficiaries of the Trust for their contents. The accounts of the Trust for the 2004 financial year have not yet been prepared, but they are expected to be ready by about the end of May 2005.

In 2003 financial year the Trust had sales of $2,601,829 compared with $1,838,755 in the 2002 financial year and a total trading profit in the 2003 year of $987,681 compared with $765,258 in the 2002 year. The net profit for the 2003 year is shown as $150,692 compared with $101,246 for the 2002 year. This resulted in a distribution to unit holders for the 2003 year of $82,881 for the M K Waters Family Trust and $37,673 for the Oxer Family Trust. The notes to the 2003 accounts in respect of the M K Waters Family Trust beneficiary account show an opening balance of a debit of $21,936, a credit of $82,881 (being its share of profits) and, of considerable significance, a debit of drawings of $141,460 leaving a closing debit balance in its beneficiary account of $80,516. Those notes show that the Oxer Family Trust had an opening balance of a credit of $86,973, the addition of a credit for its share of the profits of $37,673 and less drawings of $53,465, leaving a closing credit balance of $71,181. This indicates that the money taken out of the trust by the M K Waters Family Trust in the 2003 year far exceeded the proportionate amount taken out by the Oxer Family Trust in the light of their respective unit holdings. The justification, if any, for the M K Waters trust being in debit in its beneficiary account as at 1 July 2002, and it taking in the 2003 year $58,579 more than its share of the profits of $82,881 is unknown. The 2003 accounts also show an unsecured loan at call of $21,424 to M K Waters which apparently was carried forward from the 2002 financial year. There is no corresponding loan to the plaintiff.
The plaintiff’s counsel submitted these entries in the 2003 accounts showed that the defendant had benefited the Waters family at the expense of the Oxer family, and had not acted impartially between the unit holders. This is what is apparently shown on the face of the 2003 accounts, but without them being verified by anyone acting for the plaintiff. The defendant’s counsel submitted that as the plaintiff was a director of the defendant during the 2003 year he must have acquiesced in such payments to the Waters family. There is no explicit evidence of any such acquiescence, and by the time the accounts were prepared he was not a director of the defendant. The defendant’s counsel also complained that until the submission of the plaintiff’s counsel in argument before me the apparent discrepancy in these figures had never previously been put to the defendant for explanation. The defendant did not seek an adjournment to put forward any further affidavit in answer to the point. The plaintiff’s affidavits made the allegations of unequal treatment and lack of impartiality in general terms and figures in the 2003 accounts, which were well known to the defendant, speak for themselves.
It was not disputed that the plaintiff has sufficient interest the matter to be an applicant under s 84C.
The apparent substantial financial benefit given to the Waters family by the Trust in the 2003 year in itself is sufficient to justify the exercise of the Court’s discretion to appoint an inspector for the whole of the affairs of the Trust. As his counsel conceded, if the plaintiff’s allegations are not ultimately shown to be well founded, he can expect to pay the costs both of this action to date and of the inspector. The plaintiff will need to make any arrangements for the payment of the inspector for his proper fees if he requires payment before the Court has considered his final report.
The defendant suggested that the appointment of an inspector would delay the finalisation of the 2004 accounts. However, much of the preparation for those accounts should already have been done if they are to be available, as stated, by the end of May. Any prejudice is likely to be minimal and in any event it is a consequence which the defendant, as a trustee, will have to bear.
Paragraph 3 of the notice for specific directions of 11 March 2005 seeks an order that the inspector have the powers in s 84D available to him. I do not consider that Part 5A gives the Court the power to deprive an inspector of the powers conferred on him by s 84D.
The order of the Court is:
1That Brian Morris be appointed as an inspector under s 84C of the Trustee Act to investigate the administration of the Trust.
2      Costs reserved.
3      Fit for counsel on 10 May 2005.
4      Liberty to any party to apply.
5Adjourned to the Delay List on 16 September 2005 at 10.45 am to await the inspector’s report.