Re Cooper Street Property Trust
[2016] VSC 756
•9 December 2016
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMON LAW DIVISION
TRUSTS, EQUITY & PROBATE LIST
S CI 2016 02764
| IN THE MATTER of the Cooper Street Property Trust -and- IN THE MATTER of an application pursuant to ss 48 and 51 of the Trustee Act 1958 | |
| ROBERT SCOTT WOODS (as trustee of the bankrupt estate of Ergun Omer) | Plaintiff |
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JUDGE: | McMillan J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 21 October 2016 |
DATE OF RULING: | 9 December 2016 |
CASE MAY BE CITED AS: | Re Cooper Street Property Trust |
MEDIUM NEUTRAL CITATION: | [2016] VSC 756 |
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TRUSTS — Terms of trust deed — Where trustee company deregistered and appointor bankrupt — Application by appointor’s trustee in bankruptcy for appointment of new trustee by the Court — Welfare of the beneficiaries — Effect of deregistration of trustee company — Where Commonwealth acts as trustee — Trustee Act 1958, s 48 — Corporations Act 2001 (Cth), ss 601AD and 601AE
TRUSTS — Standing — Whether the plaintiff is a ‘person beneficially interested in the property’ of the trust — Gartside v Inland Revenue Commissioners [1968] AC 553 — Australian Securities and Investments Commissioner v Carey (No 6) (2006) 153 FCR 509 — Public Trustee v Smith [2008] NSWSC 397 — Trustee Act 1958, s 64
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr G W Moffatt | Mills Oakley |
HER HONOUR:
Introduction
The plaintiff was appointed trustee in bankruptcy of the estate of Mr Ergun Omer (‘Mr Omer’) pursuant to a sequestration order of the Federal Court of Australia on 14 October 2014.
In this proceeding, the plaintiff seeks an order appointing Mr Michael Carrafa as a trustee of the Cooper Street Property Trust (‘the Cooper Street trust’), pursuant to s 48(1) of the Trustee Act 1958 (‘the Act’), and a vesting order under s 51 of the Act.
The plaintiff relies on three affidavits in support of his application: two by the plaintiff sworn 14 July 2016 and 20 October 2016 respectively and one by Mr Carrafa sworn 5 July 2016. Mr Carrafa deposes that he is a registered liquidator, official liquidator of the Supreme Court and Federal Court, and a registered trustee in bankruptcy, with over 20 years’ experience in corporate insolvency and bankruptcy. He provided the Court with his consent to act as trustee, a schedule of his hourly rates and a declaration of independence.
Background
The plaintiff has investigated the assets or interests of Mr Omer and has identified an undated trust deed (‘the trust deed’) settling the Cooper Street trust. The trustee of the Cooper Street trust named in the schedule to the trust deed is Omer Property Group Pty Ltd (‘OPG’) and the appointor is stated as:
Ergun Omer and such other person as may be nominated in writing or by will but failing such appointment then on his death or her death the personal representative of such person.
OPG was incorporated on 18 October 2006. At that time Mr Omer was the sole director and the sole shareholder of the twelve issued shares in the entity.
On 28 September 2007, OPG and another entity, DNP Constructions Australia Pty Ltd (‘DNP Constructions’) became registered as joint proprietors of a property at 127 Metrolink Circuit, Campbellfield (‘the property’). The purchase price for the property was $790,069.50 and the property was encumbered by a registered mortgage to the National Australia Bank. The plaintiff deposes that OPG became registered proprietor as trustee of the Cooper Street trust, although this is not expressly documented in the exhibits to the affidavits relied on by the plaintiff.
On 5 September 2014, OPG and DNP Constructions lodged caveat No. AL340698N to protect their interest in the property from registration of a second mortgage.
The plaintiff’s investigations also disclosed financial statements for the Cooper Street trust for the year ending 30 June 2010 and the ‘DNP Omer Group’ for the year ending June 2014. The DNP Omer Group is a partnership that was registered as from 2 July 2007 to the ‘Cooper Street Property Trust & DNP Constructions Australia Pty Ltd’. The financial statements indicate that, in 2010, the Cooper Street trust held an ‘interest in a partnership’ of $300,681, with total assets of $301,375 and liabilities of $362,006. The liabilities included a loan of $162,006 to Mr Omer. The DNP Omer Group balance sheet indicates that as at 30 June 2014 the partnership had total assets of $2,063,306 and liabilities of $1,445,909. Non-current assets of the partnership included ‘Buildings’ with an ‘at cost’ value of $2,063,452. The chief liability was a loan of $1,400,000 to the National Australia Bank.
On 1 August 2014, Mr Omer ceased as the director and secretary of OPG. He was replaced by a Charbel Kanati who, on 30 September 2014, also became the owner of the twelve issued shares in OPG.[1] On 20 March 2015, Charbel Kanati ceased as director and secretary and OPG became deregistered.
[1]In the plaintiff’s first affidavit in support, sworn 14 July 2016, it was deposed that Mr Omer continued as owner of the twelve shares in OPG until the company was deregistered. This was amended in the plaintiff’s second affidavit in support, sworn 20 October 2016.
On 12 May 2015, DNP Constructions applied to become the sole registered proprietor of the property by way of survivorship, pursuant to s 50 of the Transfer of Land Act 1958.
By letter dated 26 May 2015, the plaintiff’s solicitors requested that DNP Constructions withdraw its survivorship application, claiming that upon the deregistration of OPG, any property that OPG held on trust became vested in the Commonwealth, pursuant to s 601AD(1A) of the Corporations Act 2001 (Cth) (‘the Corporations Act’). Further, they advised that the plaintiff was seeking to have OPG reinstated, such that any property that had vested in the Commonwealth would vest in OPG again. Despite the plaintiff’s request, on 9 June 2015, DNP Constructions was registered as sole proprietor of the property.
On 20 November 2015, the plaintiff’s solicitors were informed that the property had been sold that day for $2,520,000. Subsequent correspondence from the solicitors of DNP Constructions stated that settlement of the sale took place on 18 December 2015 and any surplus funds were to be paid into court. Settlement documents provided to the plaintiff’s solicitors on 31 March 2016 indicated that after adjustments, costs and discharge of the National Australia Bank mortgage, $1,040,679.75 was distributed to DNP Constructions. The plaintiff has not been able to determine the net proceeds from the sale, however, and he has not received notification that they have been paid into court.
Counsel for the plaintiff submitted that the only asset of the Cooper Street trust is the interest left from the sale of the property, being ‘in the vicinity of about $300,000’, and that the application to appoint a new trustee is for the purpose of making a claim for half of the net proceeds of sale of the property on the grounds of a constructive trust arising out of a failed joint venture.
The trust deed
The trust deed gives extensive powers to the trustee to appoint trust property. In relation to income, the trustee may determine to ‘pay apply or set aside the same to or for any one or more of the General Beneficiaries living or in existence at the time of the determination’ or accumulate the same. Similarly, subject to any wishes of an appointed guardian, the trustee may convey or transfer the whole or any part of the trust fund or out of the capital of the trust fund to any beneficiary for his own use or benefit absolutely. Broad administrative powers are also provided in relation to investment, lending and borrowing from any person whatsoever (including any beneficiary or trustee) with or without security, and entering into transactions in which the trustee is interested personally.
Subject to any express provision to the contrary and the wishes and powers of any guardian appointed, every discretion vested in the trustee ‘shall be absolute and uncontrolled and every power vested in the trustee shall be exercisable at the trustee’s absolute and uncontrolled discretion’. The trust deed, however, does not appoint a guardian. This lack of appointment also allows the trustee to exercise certain ‘reserved powers’, including the power to nominate a beneficiary or declare that a person is a member of the excluded class. In exercising discretion, the trustee’s liability is also expressly limited.
As to trustees, clauses 21 and 22 relevantly state as follows:
21. EVENTS IN WHICH A TRUSTEE CEASES TO HOLD OFFICE
The trustee shall be disqualified from holding office if such Trustee being an individual shall be found to be a lunatic or of unsound mind or if he shall be the subject to any bankruptcy law or if such Trustee being a company shall enter into liquidation whether compulsory or voluntary (not being merely a voluntary liquidation for the purposes of amalgamation or reconstruction).
22. REMOVAL AND APPOINTMENT OF TRUSTEE
22.1 The Appointor has the power to
22.1.1remove any Trustee;
22.1.2appoint any additional trustee or trustees;
22.1.3appoint a new trustee in the place of any trustee who is removed, resigns as trustee or ceases to be a trustee by operation of law or the provisions of this Deed.
22.2It shall be permissible for one trustee only to act as trustee of this Trust irrespective of the number of trustees appointed whether or not originally appointed at the time of creation of the Trust constituted by this Deed.
22.3The appointor and any person who may by succession become Appointor may resign or renounce the powers and authorities vested in such position by notice in writing to the Trustee and on doing so will cease to act as Appointor.
22.4The Appointor may declare in writing by deed or will that:
22.4.1another person act as Appointor in his or her place or jointly with the Appointor or on the death of the Appointor;
22.4.2any other person who has not yet become the Appointor but who would or might become the Appointor at some time shall not become Appointor in the Schedule.
22.5 If at any time there is no person to act or entitled to act as Appointor for any reason whatsoever then:
22.5.1the Appointor shall be:
22.5.1.1on the death of the last surviving Appointor his or her legal personal representative; or
22.5.1.2the liquidator of a corporate Appointor.
22.5.2if no one is entitled to act as the Appointor then the Trustee or the legal personal representatives of the last surviving Trustee or the liquidator of a corporate Trustee shall become Appointor.
22.6If the Appointor (including any person who succeeds as Appointor) becomes subject to a legal disability including being certified mentally incapable (by a medical practitioner), declared bankrupt or an order being made for the sequestration of the Appointor’s estate then from the time of that disability and while it continues, the powers vested in the Appointor will vest in any person named in this Deed to succeed the Appointor;
22.7Unless otherwise specified to the contrary in the terms of appointment a person appointed to act as Appointor shall have the same right or appointing a person to act as Appointor as the person who has appointed him or her.
22.8 Where two or more persons are appointed as Appointor then they shall act jointly and the survivor or survivors shall continue to act as Appointor.
Clause 1.2 defines ‘the Appointor’ to mean ‘the persons or persons (if any) successively named in the Schedule or determined according to the provisions of Clause 22’. As noted above, Mr Omer is identified in the schedule to the trust deed as the appointor.
‘Specified Beneficiary’ and ‘Specified Beneficiaries’ are defined as the person or persons named, described or defined as such in the schedule. ‘General Beneficiaries’ means and includes:
1.9.1the Specified Beneficiary or the Specified Beneficiaries (as the case may be);
1.9.2the parents grandparents brothers sisters spouses widows widowers children grandchildren uncle aunts and cousins of the Specified Beneficiary or Specified Beneficiaries and the spouse widows widowers children and grandchildren of such brothers and sisters spouses children and grandchildren uncles aunts and cousins;
1.9.3the estates or personal representatives of those persons referred to in Clauses 1.91 and 19.2.
1.9.4any of the following entities whether formed in Australia or elsewhere namely;
….
1.9.5such other persons corporations and trusts (if any) as may be named described or defined in the Schedule as additional members of the class of General Beneficiaries;
1.9.6subject to clause 11 any other person nominated by the Trustee.
The terms ‘Specified Beneficiaries’ and ‘General Beneficiaries’ extend to persons who fall within the stated definitions notwithstanding that at the date of the trust deed such persons may not have been in existence. The schedule to the trust deed lists Mr Omer as a specified beneficiary and does not identify any additional members of the class of general beneficiaries.
Of final note, the schedule to the trust deed excludes ss 37, 38 and 42(1)(c) of the Act relating to trustee powers to apply income and capital towards maintenance, education, advancement and benefit of beneficiaries and the regulation of the number of trustees that may be appointed where only one trustee was originally appointed.
Plaintiff’s submissions
The plaintiff submits that upon deregistration, OPG ceased to exist at law and a new trustee needs to be appointed. The plaintiff identifies three potential avenues for appointment.
The first is that, in accordance with cl 22.1.3 of the trust deed, Mr Omer has the power to appoint a new trustee. There are difficulties with this approach. Clause 22.6 of the trust deed provides that where the appointor of the trust becomes ‘subject to a legal disability’, including being declared bankrupt or having an order made for sequestration of the appointor’s property, then from that point the powers vested ‘in the Appointor will vest in any person named in [the] Deed to succeed the Appointor’. No person is specifically named in the trust deed to succeed Mr Omer and although cl 22.5.2 provides that in circumstances where no one is entitled to act as appointor, the liquidator of a corporate trustee shall become the appointor, there has been no occasion for a liquidator to take office.
As the trust deed is silent in relation to who succeeds any appointor subject to a legal disability, the plaintiff submits that it is open to the Court to find that Mr Omer can continue to exercise the power of appointment despite being bankrupt. Reliance is placed upon both the language used in the schedule of the trust deed and authority supporting the principle that the power to appoint is not property vesting in the trustee in bankruptcy but rather remains with the bankrupt. Even if this submission, which is considered below, is correct, the plaintiff contends that it is an option not easily pursued. The plaintiff has had limited contacted with Mr Omer and since has not heard from him since 6 June 2016.
The second avenue is to engage cl 22.5 of the trust deed. If OPG can be reinstated under s 601AH(2) of the Corporations Act and placed into liquidation, it is submitted that the liquidator shall become the appointor and capable of appointing a new trustee. The ability of the plaintiff to pursue this option has been clarified since the commencement of this proceeding. In his first affidavit, the plaintiff was of the belief that Mr Omer held shares in OPG when the plaintiff was appointed. If this were the case, ownership of the shares would have vested in the plaintiff, aiding his standing to make an application as a ‘person aggrieved’ under s 601AH(2). As in fact there was a change of shareholding in OPG from Mr Omer to Charbel Kanati, difficulties arise as to whether the plaintiff has standing in relation to both the reinstatement and winding up of OPG. A further complication is that Charbel Kanati, the last director of OPG, became bankrupt on 26 September 2014.
The final avenue submitted for appointment of a new trustee is the application made in this proceeding pursuant to s 48 of the Act, which provides:
48Power of Court to appoint new trustees
(1)The Court may, whenever it is expedient to appoint a new trustee or new trustees, and it is found inexpedient difficult or impracticable so to do without the assistance of the Court, make an order appointing a new trustee or new trustees either in substitution for or in addition to any existing trustee or trustees, or although there is no existing trustee.
In particular and without prejudice to the generality of the foregoing provision, the Court may make an order appointing a new trustee in substitution for a trustee who is convicted on indictment of any offence, or is a patient within the meaning of the Mental Health Act 2014, or is a bankrupt, or is a corporation which is in liquidation or has been dissolved.
(2)Nothing in this section gives power to appoint an executor or administrator.
It is submitted that, consistent with Thorne Developments Pty Ltd v Thorne,[2] deregistration of a corporation is encompassed within the word ‘dissolved’ in s 48 of the Act.
[2]Thorne Developments Pty Ltd v Thorne (2015) 106 ACSR 481; [2015] QSC 156 (11 June 2015).
The issue in relying on s 48 to appoint a new trustee is standing, as required by s 64(1) of the Act:
64Persons entitled to apply for orders
(1)An order under this Act for the appointment of a new trustee or concerning any property, subject to a trust, may be made on the application of any person beneficially interested in the property, whether under disability or not, or on the application of any person duly appointed trustee thereof.
According to the plaintiff, Mr Omer is a person ‘beneficially interested in the property’ of the trust and the question is whether that interest is property that vests in the plaintiff.
The plaintiff submitted that, traditionally, a beneficiary’s interest in a discretionary trust is a mere expectancy and it is not until a trustee makes a distribution to the bankrupt would the trustee in bankruptcy be entitled to the property, citing in support of these propositions the cases of Royal v El Ali[3] and Dwyer v Ross,[4] both of which concerned the provisions of the Bankruptcy Act 1966 (Cth) (‘the Bankruptcy Act’).
[3]Royal v El Ali [2016] FCA 782 (5 July 2016).
[4]Dwyer v Ross (1992) 34 FCR 463.
In Royal v El Ali, a trustee in bankruptcy and creditors sought declarations from the Federal Court that certain transactions performed by Mr El Ali, the bankrupt, were void or voidable against the trustee in bankruptcy. Some of the transactions related to property claimed by Mr El Ali to be assets of two discretionary family trusts, of which Mr El Ali was the appointor, an object and, at times, the owner and controller of the corporate trustee. Mr El Ali asserted that these transactions did not involve property within the meaning of s 116 of the Bankruptcy Act, such that they could not be deemed voidable.
Ultimately, Davies J determined that the property in question was not trust property. In discussing the position in the event that her Honour was wrong, however, her Honour stated:
It must be accepted that Mr El Ali as an object of the family trusts has no beneficial interest in the property of the trusts. Likewise, the power to remove and replace a trustee is a power, not property.[5]
[5]Royal v El Ali [2016] FCA 782 (5 July 2016) [196] (citations omitted).
In Dwyer v Ross, creditors sought interlocutory relief to prevent the disposition of assets held in a trust. The debtor, who was the subject of a pending petition for bankruptcy, and his wife controlled the corporate trustee and were beneficiaries of the trust. He was also the appointor under the trust deed. In refusing to grant interlocutory relief, Davies J determined:
The property of a bankrupt divisible in his bankruptcy includes property of every kind. See ss 5 and 116 of the Bankruptcy Act. As was stated in R V Williams, The Law and Practice in Bankruptcy (15th ed), p 237:
Broadly speaking, the bankrupt's estate consists of every beneficial interest which the bankrupt has (Smith v Coffin (1795) 2 H Bl 444; 126 ER 641); his entire universitas juris is by his adjudication taken from him and given to the trustee, who steps into his shoes and takes a title no better and no worse than the bankrupt's, and who, further, becomes the owner of everything which the bankrupt acquires between the adjudication and the moment when his discharge becomes effective.
Such property may include a chose in action or entitlement which a beneficiary of a trust estate has to the due administration of a trust estate … In Commissioner of Stamp Duties (NSW) v Perpetual Trustee Co Ltd (Watt's case) (1926) 38 CLR 12; Commissioner of Stamp Duties (Qld) v Livingston [1965] AC 694, entitlements to due administration of a trust estate were held to be personal property situated where the trustees against whom the rights could be enforced were resident.
However, where the interest in the trust is a mere discretionary interest, the right to be considered for the purposes of a distribution, it is difficult to see that the right to enforce the due administration of the trust can be property which passes to the trustee in bankruptcy. The interest in the trust would seem to be a personal right which remains with the bankrupt. Of course, if a distribution of money or property is made to the bankrupt during the period of the bankruptcy, the trustee will be entitled to it as after acquired property. See ss 58(2) and 116(1)(a) of the Bankruptcy Act.[6]
[6]Dwyer v Ross (1992) 34 FCR 463, 466.
The plaintiff submitted that the circumstances of this case justify departure from the traditional position as adopted in Royal v El Ali and Dwyer v Ross. Specifically, it was contended that Mr Omer had a contingent interest in the trust, following the approach of the Federal Court in Australian Securities and Investments Commissioner v Carey (No 6)[7] and Deputy Commissioner of Taxation v Vasiliades.[8] Pursuant to ss 5(1) and 58(1) of the Bankruptcy Act, this contingent interest is said to have vested in the plaintiff such that he can be considered a person ‘beneficially interested in the property’ for the purposes of s 64 of the Act.
[7]Australian Securities and Investments Commissioner v Carey (No 6) (2006) 153 FCR 509 (‘Carey’).
[8]Deputy Commissioner of Taxation v Vasiliades (2014) 323 ALR 59; [2014] FCA 1250 (24 November 2014) (‘Vasiliades’).
Carey was an interlocutory application by the Australian Securities and Investments Commission (‘ASIC’) to amend previous orders made by the Federal Court under s 1323 of the Corporations Act appointing receivers to the property of certain companies and company officers.[9] The amendments sought by ASIC included, within the scope of the property under receivership, property held by third parties as trustees of discretionary trusts, where the company or officer of the company was a general beneficiary of the trust.[10] At issue was whether the interests of the companies and officers in the property of the trust came within the definition of property in s 9 of the Corporations Act.
[9]Carey (2006) 153 FCR 509, 511 (French J).
[10]Ibid 512.
In considering the interest held by a beneficiary of a non-exhaustive discretionary trust, French J (as his Honour then was) discussed the House of Lords’ decision in Gartside v Inland Revenue Commissioners:
A principal issue in the case was whether the potential beneficiaries of the trust had “interests in possession” in the trust fund for estate duty purposes. The House of Lords rejected that contention. Lord Wilberforce said (at 617):
No doubt in a certain sense a beneficiary under a discretionary trust has an “interest”: the nature of it may, sufficiently for the purpose, be spelt out by saying that he has a right to be considered as a potential recipient of benefit by the trustees and a right to have his interest protected by a court of equity.[11]
[11]Ibid 517–8 [27], quoting Gartside v Inland Revenue Commissioners [1968] AC 553, 617 (‘Gartside’).
His Honour found that in the ordinary case the beneficiary of a discretionary trust, other than a sole beneficiary of an exhaustive discretionary trust, does not have an ‘equitable interest in the trust income or property which would fall within even the most generous definition of “property” in s 9’.[12] This could be distinguished, however, from circumstances ‘in which the beneficiary effectively controls the trustee’s power of selection’.[13] In those circumstances, a contingent interest may be recognised, broadly described as ‘the possibility that a right of a proprietary character will come into existence at a future time if some event occurs’:[14]
I am inclined to think that a beneficiary… at arms length from the trustee, does not have a “contingent interest” but rather an expectancy or mere possibility of a distribution… On the other hand, where a discretionary trust is controlled by a trustee who is in truth the alter ego of a beneficiary, then at the very least a contingent interest may be identified because, to use the words of Nourse J, “it is as good as certain” that the beneficiary will receive the benefits of distributions either of income or capital or both.
…
… the beneficiary who effectively controls the trustee’s power of selection because he or she is the trustee or one of them and/or has the power to appoint a new trustee has something approaching a general power and the ownership of the trust property.[15]
[12]Ibid 518 [29].
[13]Ibid 519 [29].
[14]Ibid [34].
[15]Ibid 520–1 [36]–[37] (citations omitted).
In reaching this conclusion, his Honour drew upon cases in the family law jurisdiction and the following comments of Gummow J in Federal Commissioner of Taxation v Vegners:
… a power exercisable in favour of any person including the donee of the power would be a general power and thus would be tantamount to ownership of the property concerned, whilst the objects of a special power would be limited to some class, and the objects of a hybrid power would be such that the donee might appoint to anyone except designated classes or groups.[16]
[16]Ibid 515 [19], quoting Federal Commissioner of Taxation v Vegners (1989) 90 ALR 547, 552 (‘Vegners’).
In circumstances where an officer was the appointor of a trust with the power to remove and appoint new trustees and was one of an open class of beneficiaries, and the trustee had ‘every power as if he were the absolute owner of the trust fund’, French J was prepared to find that the officer had at least a contingent interest in the property of the trust, if not a general power approaching ownership.[17] As such, the interest fell within the definition in s 9 and was amenable to control by the receivers under s 1323 of the Corporations Act.
[17]Ibid 522 [44].
Carey was considered by Gordon J in the Federal Court decision of Vasiliades, where the Deputy Commissioner of Taxation sought interlocutory orders freezing the assets of the defendant in the context of certain income tax assessments. An issue that arose was whether property held on trust under a discretionary family trust by a corporate trustee could be considered a relevant asset of the defendant. Relying upon Carey, Gordon J stated:
A beneficiary who effectively controls a trustee’s power of selection because he or she is the trustee or one of them and/or has the power to appoint a new trustee may have something approaching a general power and the ownership of the trust property…[18]
[18]Vasiliades (2014) 323 ALR 59, 69 [60].
The defendant was the sole director and sole shareholder of the corporate trustee. He also held a power to appoint a new trustee and was one of two specified beneficiaries.[19] After raising the issue of whether the defendant could be considered to be effectively controlling the trustee or the ‘alter ego’ of the trust, her Honour stated:
It is unnecessary to finally resolve that question. It is sufficient for present purposes to find that I am satisfied that the Commissioner has a good arguable case that it can be said that [the defendant] does have a contingent interest of the kind identified by French J.[20]
[19]Ibid [58].
[20]Ibid [61].
Although the plaintiff submitted that her Honour found that the defendant had a contingent interest in the trust, it is clear that Gordon J determined only that there was a ‘good arguable case’ for the purposes of the interlocutory application for the freezing orders.
At the hearing, counsel for the plaintiff conceded that the authorities relied upon by him in relation to standing had limited similarity to the circumstances in this proceeding. Although the plaintiff was given the opportunity to provide the Court with additional submissions, none were filed.
Does the plaintiff have standing?
A preliminary issue in the application is the plaintiff’s standing. Pursuant to s 64 of the Act, an order for the appointment of a new trustee ‘may be made on the application of any person beneficially interested in the property, whether under disability or not…’.[21] To determine standing, the question is whether Mr Omer, under the terms of the trust deed, can be considered ‘beneficially interested in the property’ within the meaning of s 64, and if so, whether that interest then vested in the plaintiff.
Interest under the trust deed
[21]Trustee Act 1958, s 64.
Under the terms of the trust deed, Mr Omer is identified as the appointor and the ‘sole beneficiary’. Save that in accordance with cl 27.1 of the trust deed the settlor of the trust could not be appointed trustee, Mr Omer’s power as appointor was not otherwise limited by the trust deed. The trustee has extensive discretionary powers, capable of withholding income and capital, or distributing the same to an open class of objects.[22] Powers are also provided to add or remove objects. Further, at the vesting date, the trustee had discretion as to which beneficiaries any remaining trust funds would be distributed.
[22]The trust is considered ‘open’ as in the sense used in Carey: it benefits relatives of the specified beneficiary who are both born and yet to be born; see Carey, 481.
The term ‘discretionary trust’ does not have a ‘constant, fixed normative meaning’.[23] Rather, it is used to describe a species of express trust in which ‘the beneficiaries are selected from a nominated class by the trustee or some other person and this power may be exercisable once or from time to time’.[24] In the present circumstances, as in Carey and Vasiliades, the trust may be described as a non-exhaustive discretionary trust.[25]
[23]CPT Custodian Pty Ltd v Commissioner of State Revenue (Vic) (2005) 224 CLR 98, 110 [15] (Gleeson CJ, McHugh, Gummow, Callinan and Heydon JJ).
[24]Carey (2006) 153 FCR 509, 515 [19] (French J), quoting Vegners (1989) 90 ALR 547, 552 (Gummow J).
[25]The trust is considered non-exhaustive in the sense used in Carey. That is, the trustee is not obliged to distribute the trust funds. See Carey (2006) 153 FCR 509, 516 [20]–[21] (French J).
As discussed in Dwyer v Ross and Carey, objects of non-exhaustive discretionary trusts ordinarily are not viewed as having a proprietary interest in the property of the trust.[26] Rather, they hold an equitable chose in action in the right to due administration of the trust.[27] These general propositions are well established.[28] Further, a beneficiary’s right to due administration of the trust may be relied upon to seek the appointment of a new trustee.[29] As to the power of appointment of a new trustee, such a power considered in isolation is not viewed as a proprietary interest.[30]
[26]Re Beckett’s Settlement [1940] 1 Ch 279; Gartside [1968] AC 553; Re Goldsworthy [1969] VR 843; Carey (2006) 153 FCR 509. See also I J Hardingham and R Baxt, Discretionary Trusts (Butterworths, 2nd ed, 1984) 126.
[27]McPhail v Doulton [1971] AC 424, 455–6 (Lord Wilberforce); Gartside [1968] AC 553, 617–8 (Lord Wilberforce); Kennon v Spry (2008) 238 CLR 366, 393–4 [75] (French CJ).
[28]Re Goldsworthy [1969] VR 843, 848 (Smith J); Walter v Registrar of Titles [2003] VSCA 122 (31 July 2003) [15] (Chernov JA); Lygon Nominees Pty Ltd v Commissioner of State Revenue (2005) 60 ATR 135, 144 [58]; [2005] VSC 247 (13 July 2005) [58] (Hollingworth J); Kennon v Spry (2008) 238 CLR 366, 393–5 [74]–[80] (French CJ); Kambouris v Tahmazis [2012] VSC 432 (18 September 2012) [12] (John Dixon J); Australasian Annuities Pty Ltd (in liq) v Rowley Super Fund Pty Ltd (2015) 318 ALR 302, 350 [229]; [2015] VSCA 9 (12 February 2015) [229] (Garde AJA).
[29]I J Hardingham and R Baxt, Discretionary Trusts (Butterworths, 2nd ed, 1984) 127.
[30]Re Armstrong;Ex parte Gilchrist (1886) 17 QBD 521, 530–1 (Fry LJ); Public Trustee v Smith [2008] NSWSC 397 (5 May 2008) [108] (White J).
Within certain statutory contexts, however, objects of discretionary trusts have been found to hold a proprietary interest in the trust fund. Such an interest invariably relies upon the degree of ‘control’ the object can exercise over the trust, whether by virtue of their position as an appointor, trustee, or controller of a corporate trustee.
In the family law jurisdiction, control over discretionary family trusts by one or both parties to a marriage who are also objects of the trust has led to the trust fund being considered ‘property of the parties to the marriage’ for the purposes of s 79 of the Family Law Act 1975 (Cth) (‘the Family Law Act’).[31]
[31]See, eg, In the Marriage of Ashton (1986) 11 Fam LR 457; In the Marriage of Goodwin (1990) 14 Fam LR 801; Stephens v Stephens (2007) 38 Fam LR 149, 162 [55] (Bryant CJ); Kennon v Spry (2008) 238 CLR 366; E Pty Ltd & Klearchos [2016] FamCA 258 (22 April 2016) [33] (Johnston J).
As discussed, Carey applied the notion of ‘effective control’ in the context of extending injunctive orders under s 1323 of the Corporations Act. A proprietary interest by virtue of ‘effective control’ as adopted in Carey has been considered in a number of subsequent decisions. Vasiliades applied Carey for the purposes of a freezing order under Division 7.4 of the Federal Court Rules 2011 (Cth).
In Australian Securities and Investments Commission v Burnard,[32] ASIC sought freezing orders over the property of certain persons, pursuant to s 1323 of the Corporations Act. The defendant and his wife were the owners and controllers of the corporate trustee and the defendant was one of the beneficiaries under the relevant trusts. Barrett J, while finding that Carey supported a freezing order over the interests of the defendant in the trust assets, held that the approach did not extend to an order directly against the trustee company.[33] His Honour described the analysis in Carey as directed towards:
… the existence and nature of the separate interest a person might have because standing in a particular relationship to a trustee or trust property—whether because included in a class of persons who might be selected to benefit under a discretionary trust, or because a member of a superannuation scheme established as a trust, or because occupying under a trust instrument a position of “guardian” or “appointor” involving some power to alter the composition of classes of discretionary objects or to participate in decision-making with respect to allocation of benefits.[34]
[32]Australian Securities and Investments Commission v Burnard (2007) 64 ACSR 360; [2007] NSWSC 1217 (31 October 2007).
[33]Ibid 377 [71].
[34]Ibid [70].
The case of Elliott v Secretary, Department of Education, Employment and Workplace Relations[35] was an appeal from the Administrative Appeals Tribunal to the Federal Court. Kenny J had to consider the application of Part 3.18 of the Social Security Act 1991 (Cth). At issue was whether the ‘aggregate of the beneficial interests in the corpus or income of the trust’ held by the respondents was 50 per cent or more for the purposes of s 1207V(2)(d) of the Social Security Act 1991 (Cth). Kenny J noted that Carey drew attention to ‘the fact that the degree of control, if any, that a discretionary beneficiary may enjoy under a discretionary trust depends on the terms of the trust’.[36] After reviewing the relevant authorities, including Gartside and Carey, her Honour determined that they made it:
… plain that, although the object of a discretionary trust holds a bundle of rights, these do not necessarily amount to what can be termed an “interest” or “beneficial interest”, when considered from the perspective of a particular statute. Of course, this is not to say that, in a particular statute, such rights might not be so regarded and described.[37]
[35]Elliott v Secretary, Department of Education, Employment and Workplace Relations (2008) 249 ALR 182; [2008] FCA 1293 (20 August 2008) (‘Elliott’).
[36]Ibid 196 [45].
[37]Ibid 196–7 [46] (citations omitted).
In the circumstances, the respondents who had no capacity to control the trust were not considered to have a ‘beneficial interest’ capable of aggregation for the purposes of s 1207V(2)(d).[38] An appeal to the Full Court of the Federal Court was dismissed. The Full Court stated:
The issue of whether a person who is a beneficiary or object … has an “interest” in that trust or the income thereof, invariably described as a “beneficial interest”, has been addressed in a number of cases over the last 120 years in different statutory contexts. In every case, the answer or conclusion arrived at has depended on two matters:
1.the nature of the discretionary trust in relation to the beneficiary or objects; whether the trust is exhaustive with respect to the class of which the beneficiary or object is a member … or whether the trust is non-exhaustive by reason that the trustee has, in the case of income, a power to accumulate, or, in the case of corpus, there is a gift over in default of exercise of the discretion; and whether the relevant class is, at the relevant time, still open or closed; and
2.the statutory context in which the issue arises; in particular whether the mechanism of the statute cannot operate unless the precise extent of the interests can be identified.[39]
[38]Ibid 197–8 [50].
[39]Secretary, Department of Families, Housing, Community Services and Indigenous Affairs v Elliott (2009) 174 FCR 387, 393–4 [21] (Black CJ, Stone and Edmonds JJ).
At general law, in Public Trustee v Smith White J considered whether a testatrix who was the appointor of a trust, the sole shareholder and a director of the corporate trustee, and an object of a discretionary trust (after rectification of the trust deed) could be regarded as the ‘beneficial owner’ of the trust assets. The testatrix purported to devise a property under her will, yet the registered proprietor of the property was the trustee company. The defendant, who was the devisee, submitted that the testatrix was the beneficial owner of the property by virtue of effective control.
White J found against any beneficial ownership. On ‘orthodox principles’, neither the ability of the testatrix to appoint a new trustee or her ability to control the trustee’s powers, including being able to appoint the assets to herself, meant that she was the beneficial owner of the property.[40] The reasoning relied upon by the defendant confused:
… power on the one hand and the disposition of property through exercise of power on the other … the argument is inconsistent with the recognition that the trust deed is not a sham, that is, that it was intended to operate according to its tenor … To say that one of the beneficiaries already has the beneficial ownership of the property would be to transmute the terms of the trust.[41]
[40]Public Trustee v Smith [2008] NSWSC 397 (5 May 2008) [109].
[41]Ibid.
His Honour doubted the finding by French J in Carey that a beneficiary who controls the trustee has something approaching a general power. Instead, the ‘power vests in the trustee and is a special power’.[42] White J did concede, however, that it was:
… not to say that the beneficiary’s ability to control the trustee would not justify characterising what might otherwise be a bare expectancy as a contingent interest for the reasons given in ASIC v Carey (No 6) … thus conferring a proprietary interest in the trust funds.[43]
[42]Ibid [135].
[43]Ibid.
Ultimately, his Honour distinguished both the family law authorities on effective control and Carey on the basis of the statutory context and language, particularly that ‘property of a party’ as in s 79 of the Family Law Act and ‘property of [the relevant person]’ in s 1323 of the Corporations Act could extend to property which a party owns or controls as if he or she were the effective owner. This was distinct, however, from ownership:
In the construction of statutory powers such trust property might be regarded as the property “of” such a person (depending of course on the statute in question) if something short of ownership provides the necessary connection between the person and the property denoted by the word “of”.[44]
[44]Ibid [138].
In Deputy Commissioner of Taxation v Ekelmans, the plaintiff sought freezing orders over assets of the defendant and those of the trustee of a discretionary family trust. The defendant was the appointor, a director of the corporate trustee and a beneficiary. The plaintiff relied upon Carey and submitted that the defendant was ‘the ultimate controlling hand’ over the trust such that he had a contingent interest in the trust assets. Judd J, while finding it unnecessary to decide the issue, stated:
In my view, the decision in Carey does not assist the applicant. In Carey, French J was concerned with the definition of “property” in s 9 of the Corporations Act 2001, and whether the interest of a beneficiary in trust assets was susceptible to the reach of a receiver appointed over his property under s 1323 of the Corporations Act. While his Honour also considered cases decided in the Family Law jurisdiction, he did not purport to state a general rule. The remedial regime under consideration in Carey was quite different in character and purpose to the general law and rule-based regime authorising the making of freezing orders.[45]
[45]Deputy Commissioner of Taxation v Ekelmans [2013] VSC 346 (8 July 2013) [46].
More recently, in Australian Competition and Consumer Commission v Clinica Internationale (No 2),[46] Mortimer J applied the notion of ‘effective control’ to ensure that a non-party redress order under s 239(1) of the Australian Consumer Law would achieve its purpose. After reviewing the relevant authorities, Mortimer J cited the analysis of White J in Public Trustee v Smith. Her Honour then stated that what that case made clear was ‘that the context in which the characterisation of a person’s interests occurs is all important’.[47] Adopting the approach of White J in Public Trustee v Smith, the trust assets could be considered property ‘of’ the second defendant on the basis of the statutory context and language of s 239(1), which conferred power on the Court in wide terms.[48]
[46][2016] FCA 62
[47]Australian Competition and Consumer Commission v Clinica Internationale Pty Ltd (No 2) [2016] FCA 62 (9 February 2016) [286] (‘Clinica (No 2)’).
[48]Ibid [290]–[291].
Of final note, prior to Carey, the case of Re Burton addressed an argument similar to ‘effective control’ in the context of the Bankruptcy Act. In that decision, a bankrupt was a beneficiary under a discretionary trust, as well as the holder of a power to appoint a new trustee. The trustee in bankruptcy submitted that the bankrupt was able to appoint a trustee which he could control, thereby ensuring ‘that a distribution of income or capital was made in his own favour’. In such circumstances, it was submitted that the power to appoint was the equivalent to a ‘general power of appointment, and that it vested in his trustee in bankruptcy’.[49] Davies J rejected those submissions:
This submission equates the powers under the trust with “property” as described in para (a) of s 116(1)…
Even a general power of appointment is not property. But perhaps the more important point is that the power to remove a trustee and to appoint a new trustee is neither a general power of appointment nor a power which may be executed in the interests of the appointor. The interests of persons other than the appointor must be taken into account…
A power, even though not a fiduciary power, must be exercised solely in furtherance of the purpose for which it was conferred.
…
Thus, as the interests of the beneficiaries must be taken into account, and the power exercised in their interest, the power which [the bankrupt] holds as appointor is not “property” which vests in his trustee in bankruptcy nor a power “as might have been exercised by the bankrupt for his own benefit”…
It therefore follows that the power remains with [the bankrupt] and he may exercise it.[50]
[49]Re Burton; Wily v Burton (1994) 126 ALR 557, 559 (Davies J) (‘Re Burton’).
[50]Ibid 559–60. See also Dwyer v Ross (1992) 34 FCR 463, 466 (Davies J).
Ultimately, case law finding that an object of a discretionary trust has a proprietary interest in the property of the trust by virtue of effective control is sparse. The question remains whether such an interest can fall within the scope of the expression ‘any person beneficially interested’ as it appears in s 64 of the Act.
The meaning of ‘beneficially interested’
‘Beneficially interested’ is not defined in the Act and the plain and ordinary meaning of the phrase is inexact.[51] Kitto J has previously referred to the expression ‘beneficial interest’ as a ‘nomen generale, not to say a generalissimum’.[52] As stated by Lord Wilberforce in Gartside:
It can be accepted that “interest” is capable of a very wide and general meaning. But the wide spectrum that it covers makes it all the more necessary, if precise conclusions are to be founded upon its use, to place it in a setting.[53]
[51]Elliott (2008) 249 ALR 182, 189 [25] (Kenny J). See also MSP Nominees Pty Ltd v Commissioner of Stamps (SA) (1999) 198 CLR 494, 509 [34] (Gleeson CJ, Gaudron, Gummow, Hayne and Callinan JJ).
[52]Livingston v Commissioner of Stamp Duties (Q) (1960) 107 CLR 411, 450.
[53]Gartside [1968] AC 553, 617 (citations omitted).
It is subsequently necessary to construe the expression ‘beneficial interest’ as it is used in s 64 of the Act. This requires consideration of the context and purpose of the provision and entails ‘deciding what is the legal meaning of the relevant provision “by reference to the language of the instrument viewed as a whole”’.[54]
[54]Certain Lloyd’s Underwriters v Cross (2012) 248 CLR 378, 389 [24] (French CJ and Hayne J) (citations omitted).
Section 64, although limited to a specific class of persons, provides an express entitlement to approach the Court for an order appointing a new trustee or concerning property subject to a trust under the Act. In such a way it confers a benefit on people ‘beneficially interested’ in the property.
Division 3 of Part IV of the Act, within which s 64 is contained, gives the Court various powers, including to authorise dealings with trust property where the same cannot be effected under powers within the trust instrument and approving variations to trusts.[55] Generally, the division facilitates the administration of trusts by way of supplementing trust deeds and empowering the Court, as well as enhancing certain protections afforded to trustees. This is consistent with the overall scheme of the Act, which expressly provides trustees with powers, discretions and duties ‘in addition to’ and ‘so far only as a contrary intention is not expressed’ in the instrument.[56] It is also consistent with the Court’s inherent supervisory jurisdiction to see that ‘trusts are properly executed’,[57] and more fundamentally, equity’s remedial jurisdiction. The beneficial effect of the provision,[58] in addition to the scheme of Division 3 and the Act overall, all support a broad approach to the construction of s 64. It follows that to apply the section in a pedantic or technical manner would defeat the facilitative purposes of the Act.
[55]See Trustee Act 1958, ss 63 and 63A.
[56]Ibid, s 2(3).
[57]Letterstedt v Broers (1884) 9 App Cas 371, 386 (Lord Blackburn).
[58]See generally D C Pearse and R S Geddes, Statutory Interpretation in Australia (LexisNexis, 8th ed, 2014).
The text of s 64 can be traced to s 37 of the Trustee Act 1850 (UK). Despite this lengthy history, there is little authority specifically considering its application. In Ayles v Cox, a purchaser of property held on trust who had paid the purchase money into court was regarded as a ‘person beneficially interested in such lands’.[59] Creditors of a deceased debtor were deemed persons ‘beneficially interested’ in the deceased estate under the same provision in Re Wragg.[60] In Re Sheppard’s Trusts, the applicants successfully sought to distinguish a contingent interest from a mere possibility in contending that, by reason of their contingent interest in the trust property, they had standing to seek the appointment of a new trustee.[61] These authorities reflect a broad approach to the construction of s 64 of the Act.
Consideration
[59]Ayles v Cox; Ex parte Attwood (1853) 17 Beav 584; (1853) 51 ER 1161.
[60]Re Wragg (1863) 1 DEG J & S 356; (1863) 46 ER 143.
[61]Re Sheppard’s Trusts (1862) 4 DEG F & J 423; (1862) 45 ER 1247. See also Re Louis Contini Foundation Trust [2004] NSWSC 881 (15 September 2004) where, in the context of differing statutory language, Campbell J determined that plaintiffs who were takers of capital in default of appointment were ‘persons interested’ in the property such that they had standing to apply for a new trustee. Conversely, in the case of Thorne v Bettens [2006] SASC 59 (3 March 2006), Master Lunn of the Supreme Court of South Australia held that an applicant who had a moral interest in the affairs of the trust did not have standing to seek the appointment of a new trustee as a person with ‘a proper interest in the trust’. In that case the applicant was the grandmother of infant beneficiaries of the trust.
Leaving aside for the moment the construction of cl 22.6 of the trust deed and the impact of the sequestration order, at the time of the plaintiff’s appointment Mr Omer was the appointor of the trust. The trustee was OPG, of which Mr Omer was neither shareholder nor director. Although Mr Omer is described as the only ‘specified beneficiary’ under the trust deed, the trustee is not under a duty to appoint trust property to Mr Omer ahead of any of the general beneficiaries.
To adopt the words of White J, if the terms of the trust deed are to ‘operate according to [their] tenor’,[62] on orthodox principles Mr Omer does not have a proprietary interest in the assets of the trust. As with the general beneficiaries, he has a mere expectancy, which would only become a proprietary interest upon the trustee exercising discretion in his favour. The issue is whether Mr Omer’s joint roles of appointor and beneficiary displace this orthodox position.
[62]Public Trustee v Smith [2008] NSWSC 397 (5 May 2008) [109].
Upon French J’s reasoning in Carey, if a beneficiary is capable of controlling the trustee, either because he or she is the trustee or has the power to appoint a new trustee, by way of analogy they have something that ‘approaches a general power and thus a proprietary interest’.[63] That proprietary interest is identifiable as at least a contingent interest if it is ‘as good as certain that the beneficiary will receive the benefits of distributions’.[64]
[63]Carey (2006) 153 FCR 509, 516 [19].
[64]Ibid 520 [36].
I agree with the reservations expressed by White J in Public Trustee vSmith as to the finding of French J that an individual who effectively controls a trustee has what approaches a ‘general power’. A general power exists where the power is exercisable ‘in favour of any person including the donee of the power’.[65] In such instances, the power may be considered ‘tantamount to ownership’ as described by Gummow J in Vegners, but the distinction between ownership and power remains.[66] A ‘power is an authority to take a step which affects rights and obligations’.[67] The characteristic feature of a general power is that the ‘donee is free to appoint to himself without considering the interests of anyone else’.[68] The following passage from Jacobs’ Law of Trusts is instructive:
A general power of appointment permits the donee to exercise it in favour of any person, including the donee. It is virtually indistinguishable from ownership, and there are no parties on whose behalf equity may intervene.[69]
[65]Ibid 515 [19], quoting Vegners (1989) 90 ALR 547, 552 (Gummow J).
[66]Re Armstrong; Ex parte Gilchrist (1886) 17 QBD 521.
[67]J D Heydon and M J Leeming, Jacobs’ Law of Trusts in Australia (LexisNexis, 7th ed, 2006) 36.
[68]L Tucker et al, Lewin on Trusts (Thomson Reuters, 19th ed, 2015) 1395 (emphasis added).
[69]Heydon and Leeming, above n 67, 36 (emphasis added).
However, where a trustee is vested with a power of which they are also an object according to the trust instrument, the mere fact ‘that they may lawfully benefit from the exercise of the power does not of itself make it a general power’.[70] Rather, the trustee’s fiduciary duties remain, specifically the duty to ‘consider and take into account the interests of all the objects’.[71] It is these principles that are reflected in the reasons of Davies J in Re Burton. Even if an object of a trustee’s power can effectively control the trustee, the trustee remains bound to give consideration to other objects of the power as defined in the trust instrument.
[70]Tucker et al, above n 68, 1395. See also Re Beatty [1990] 1 WLR 1503.
[71]Tucker et al, above n 68, 1395.
Despite these difficulties in principle, White J did not reject the possibility that something short of ‘beneficial ownership’ in the trust assets may be recognised in circumstances where an object exercises control over the trust. Vasiliades, Elliott and Clinica (No 2) all also appear to accept this general proposition. What the cases make clear, however, is the tantamount importance of statutory context.
In certain contexts, the flexibility afforded by identifying something as ‘approaching’ a general power that is ‘tantamount’ to ownership may be apt. Emphasis on property controlled by a party as encompassed within the expression property ‘of’ that party for the purposes of determining a just and equitable distribution of property under s 79 of the Family Law Act provides an example.[72] Similarly, where an investigation is being carried out under the Corporations Act and property ‘of’ a relevant person requires identification in order to protect the interests of an aggrieved person, a more flexible approach identifying generalised powers may be appropriate.[73] In other contexts, greater precision in the form of measurability of the interest may be necessary, as is seen particularly in revenue and pension legislation.[74]
[72]See, eg, Stephens v Stephens (2007) 38 Fam LR 149.
[73]See, eg, Carey (2006) 153 FCR 509.
[74]See, eg, Secretary, Department of Families, Housing, Community Services and Indigenous Affairs v Elliott (2009) 174 FCR 387.
The current application is brought within the Act. While it is clear that the expression ‘beneficially interested’ in s 64 should be interpreted broadly and a contingent interest is within its scope, in my opinion it does not encompass an interest based upon ‘effective control’. Being ‘beneficially interested’ in property implies something more direct than control of property being identified as ‘property of’ an individual. Beyond this, however, there are more fundamental difficulties in recognising an interest that relies upon the notion of ‘effective control’ within the Act’s structure.
The Act expressly refers to and is subject to any trust instrument. Additionally, it affords private rights that extend the powers within the trust instrument and empowers the Court to vary such instruments where specific limitations are encountered. It is axiomatic that in order for the Act to perform these functions effectively, the trust instrument needs to be read and applied ‘according to its tenor’. To find generalised powers within trust instruments by virtue of the same individual being identified as an appointor and a beneficiary, and for such powers to alter the property rights of the individual in a manner not otherwise reflected in the terms of the instrument, introduces an unnecessary element of uncertainty.
Such uncertainty can lead to apparent inconsistencies in the recognition and protection of equitable rights stemming from the trust instrument. To recognise effective control approaching a general power, where it is ‘as good as certain’ that an object will receive a distribution of trust property over which they have something ‘akin’ to a proprietary interest, is inconsistent with the fiduciary duties of the trustee to consider other objects of the trust. Those fiduciary duties protect the interests of the other objects of the trust, upon whose behalf equity may intervene. While in other contexts such issues may not be at the forefront of analysis, within the Act, which seeks to facilitate the application of trust instruments and the rights and duties contained therein, they are difficult to reconcile.
For these reasons, I am not persuaded that the ordinary approach to the interests of objects of discretionary trusts should be displaced and I do not accept the plaintiff’s submission that Mr Omer had a contingent interest in the assets of the Cooper Street trust that vested in the plaintiff for the purposes of s 64 of the Act. Accordingly, in my view, the plaintiff does not have standing to bring this application. That is not to say, however, that Mr Omer does not have an equitable chose in action upon which he could rely to seek the appointment of a new trustee.
In the event that the above consideration as to Mr Omer’s interest is incorrect, I will briefly consider whether a contingent interest in the Cooper Street trust is capable of vesting in the plaintiff and the question of appointing a new trustee under s 48 of the Act.
If Mr Omer does have a contingent interest in the Cooper Street trust by virtue of effective control, further difficulties arise in both the Act and the Bankruptcy Act which may limit the ability of a contingent interest to vest in the plaintiff.
First, s 64 of the Act requires ‘the application of any person beneficially interested in the property, whether under a disability or not’.[75] The ordinary meaning of the words suggest that, for the purposes of standing, the entitlement to apply to the Court may be considered a personal one intended to stay with the beneficially interested party, despite any disability.
[75]Trustee Act 1958, s 64(1) (emphasis added).
The second difficulty relates to the Bankruptcy Act. As the plaintiff submitted, the definition of property in s 5 of that Act is broad enough to encompass a contingent interest. Section 58 of the Bankruptcy Act refers to the ‘property of’ the bankrupt vesting in the trustee in bankruptcy and the meaning given to property by s 5 is similar to that considered by French J in Carey:
… real or personal property of every description, whether situate in Australia or elsewhere, and includes any estate, interest or profit, whether present or future, vested or contingent, arising out of or incident to any such real or personal property.[76]
[76]Bankruptcy Act 1966 (Cth), s 5.
Not raised by the plaintiff, however, are certain jurisdictional restrictions imposed by the Bankruptcy Act that this application touches upon. Specifically, s 27 of the Bankruptcy Act gives the Federal Court and Federal Circuit Court exclusive jurisdiction in bankruptcy, the content of which includes ‘applications to declare for or against the title of the trustee’ in bankruptcy to any property.[77] The application of s 27 was recently considered in Jakimowicz v Jacks[78] where the Court of Appeal distinguished cases in which parties other than the trustee in bankruptcy bring proceedings and the issue of whether property vested under s 58 and s 116 of the Bankruptcy Act is relevant for determining standing, which fall outside the exclusive jurisdiction of s 27, from proceedings in which the trustee in bankruptcy claims that property had vested:
Standing is a threshold issue … Courts must be in a position to determine whether parties before them have standing to bring any claim. Were it not so, courts would not be able to control their own processes and the proceedings before them. In this regard, if a plaintiff does not have standing in a State court because the property in question has vested in the trustee in bankruptcy, then the proceeding is liable to be dismissed or at least stayed. In such situations, a court is simply giving effect to the provisions of the Act when considering the question of standing.
…
The position is different when a trustee is a party to the litigation and claims that the property in dispute (which may be the chose in action itself) has vested in the trustee pursuant to s 58 of the Act and is divisible property under s 116. In that situation, the question is not just one of standing. Rather, there is also a question that requires a binding determination as to whether the property has vested in the trustee. In those cases, a court’s finding will necessarily have an effect on the trustee’s title.
…while it is necessary in determining the sole issue of standing to consider whether the property is divisible property and has vested in the trustee in bankruptcy, all that a court is doing in that situation is applying the Act. It is not determining for or against the title of the trustee to the property, as it must of necessity do if the trustee is a party and makes a claim to the property or if the trustee claims the right to bring the action instead of the bankrupt.[79]
[77]Ibid s 31(1)(f).
[78]Jakimowicz v Jacks (2016) 306 FLR 51; [2016] VSCA 42 (17 March 2016).
[79]Jakimowicz v Jacks (2016) 306 FLR 51, 65–6 [38]–[41] (Warren CJ, Tate and Ferguson JJA).
Although the central issue in the current application is standing, it is a proceeding brought by the plaintiff as trustee in bankruptcy asserting that property has vested in him pursuant to s 58 of the Bankruptcy Act. It may be that it does not fall within the exclusive jurisdiction of s 27 as it pertains to a contingent interest rather than ownership, and the property is not in dispute.[80] Without receiving submissions on the issue, however, the Court is reluctant to make any conclusive finding.
[80]Goggin v Majet [2016] 2 Qd R 401.
Despite the findings on the plaintiff’s lack of standing, including potential challenges associated with the vesting of any property interest in him, the Court has a supervisory role as to trusts and the welfare of beneficiaries. Accordingly, the next question is whether a trustee should be appointed pursuant to s 48, albeit keeping in mind that the plaintiff has no standing.
Should a new trustee be appointed pursuant to s 48(1) of the Act?
Section 48 of the Act empowers the Court to appoint a new trustee whenever it is expedient to do so and where it is found inexpedient difficult or impracticable to do so without the assistance of the court.[81] This statutory power is in addition to the inherent jurisdiction of the court,[82] and should only be relied upon where alternative avenues to appoint a new trustee have been exhausted.[83] The power reflects the general equitable principle that a trust will not fail for want of a trustee.[84]
[81]Trustee Act 1958, s 48(1).
[82]Sinnott v Hockin (1882) 8 VLR (E) 205; In the Will of Tunstall [1921] VLR 559.
[83]Re Lightbody’s Trusts (1884) 52 LT 40.
[84]Heydon and Leeming, above n 67, 315 [1502].
The plaintiff submitted that despite cl 22.6 of the trust deed, Mr Omer retains his power to appoint a new trustee. This submission is rejected as on the natural and ordinary meaning of the clause, the power no longer vests in Mr Omer. This is not altered by failure of the power to vest in another person, nor in my view by the specific language adopted in the schedule. A purpose of the clause appears to be to prevent individuals subject to bankruptcy from holding the power to appoint a new trustee, something which is not unusual within trust deeds.[85]
[85]Lewis v Condon (2013) 85 NSWLR 99, 120 (Leeming JA).
Although the trust deed provides for replacement of the appointor by the trustee or liquidator of a corporate trustee, these are not applicable in the circumstances. Deregistration of OPG has resulted in the company no longer existing.[86] Similarly, the statutory power in s 41(1) of the Act allowing ‘the surviving or continuing trustees or trustee for the time being, or the personal representatives of the last surviving or continuing trustee’ to appoint one or more trustees does not provide assistance.
[86]Corporation Act 2001 (Cth), s 601AD(1).
In considering the Court’s power of appointment under s 48, ‘expedient’ has been interpreted as:
… conducive to advantage in general, or to a definite purpose; fit, proper, or suitable to the circumstances of the case … In the context of appointing a new trustee in substitution for an existing one, I take it to mean then conducive to, or fit or proper or suitable having regard to, ‘the interests of the beneficiaries, to the security of the trust property and to an efficient and satisfactory execution of the trusts and a faithful and sound exercise of the powers conferred upon the trustee’.[87]
[87]Porteous v Rinehart (1998) 19 WAR 495, 507 (White J), quoting Re Estate of Roberts (1983) 20 NTR 13, 17 (O’Leary J).
The Act expressly states that the Court may appoint a new trustee in substitution for a trustee who is a corporation which ‘is in liquidation or has been dissolved’.[88] It is accepted that the term ‘dissolved’ within s 48(1) should be construed as including deregistration of a trustee company for the reasons given in Thorne Developments Pty Ltd v Thorne.[89]
[88]Trustee Act 1958, s 48(1).
[89]Thorne Developments Pty Ltd v Thorne (2015) 106 ACSR 481; [2015] QSC 156 (11 June 2015).
As to whether the Court should exercise its discretion, in Mutsica Holdings Pty Ltd v Lotus Almonds Pty Ltd, Sifris J recently cited the relevant general principles, as identified in Hancock v Rinehart:
The dominant consideration in appointing (and removing) a trustee is the welfare of the beneficiaries.
Three main considerations inform the court in appointing a new trustee, although these are “general guidelines“, or “rules of practice“, rather than “hard and fast rules“.
The first is the wishes of the persons by whom the trust was created, if expressed or implicit in the trust instrument. Such wishes need not be express, and may be inferred from the terms of the trust, or the identity or description of the original trustee.
The second is that a trustee should not be appointed with a view to promoting the interests of some beneficiaries in opposition either to the wishes of the settlor or the interests of other beneficiaries. This is concerned with avoiding conflict of interest, and is reflected in the court’s preference not to appoint a beneficiary, or a relative of a beneficiary, as trustee … However this general preference is not an absolute rule…
The third [consideration] is that in appointing a trustee regard should be had to whether the appointment would promote or impede the execution of the trust.[90]
[90]Mustica Holdings Pty Ltd v Lotus Almonds Pty Ltd [2015] VSC 531 (8 October 2015) [7] (‘Mustica Holdings’), quoting Hancock v Rinehart (2015) 106 ACSR 207, 241–2 [120]–[124] (Brereton J); [2015] NSWSC 646 (28 May 2015).
In Global Funds Management (NSW) Ltd v Burns Philp Trustee Co Ltd (in prov liq), Rolfe J determined that in circumstances where the corporate trustee was in liquidation it was ‘positively detrimental’ to leave it in the office of trustee and in the interests of all the beneficiaries a new trustee was appointed.[91] Similarly, a new trustee was appointed in Re Gradfan Pty Ltd (in liq), where the corporate trustee was in liquidation but had a possible claim against certain debtors.[92]
[91]Global Funds Management (NSW) Ltd v Burns Philp Trustee Co Ltd (in prov liq) (1990) 3 ACSR 183, 185.
[92]Re Gradfan Pty Ltd (in liq); Nilant v Miling Nominees Pty Ltd (1996) 20 ACSR 689.
Deutsch v Deutsch is an example of circumstances that were not expedient. In the context of long running and divisive proceedings, corporate trustees were unable to act due to an ongoing deadlock between their management. John Dixon J stated that it was plain that where the ‘trustee is not attentive to the trust or performing its office, considerations of the need for preservation of the trust property and regard for the welfare of the beneficiaries may arise’.[93] His Honour went on to determine, however, that there was no present risk to the trust property to justify summarily replacing the trustees.
[93]Deutsch v Deutsch [2011] VSC 345 (28 July 2011) [13].
Re Dobrotwir was a case in which a Liberian corporate trustee was deregistered and beneficiaries of the trust sought to have a beneficiary appointed as the new trustee for the purposes of termination of the trust. Limited evidence was before the Court as to both the terms of trust and the effect of deregistration in Liberian law. In circumstances where the Court was being asked to put the issues of evidence and foreign law to one side and ‘simply vest the trust estate land’ in the plaintiffs, Mukhtar AsJ refused to draw upon the Court’s inherent and statutory jurisdiction and appoint a new trustee.[94] Rather, his Honour suspended his adjudication until further order or application and the plaintiffs were provided with the opportunity to re-open the application by adducing further evidence.
[94]Re Dobrotwir [2011] VSC 402 (31 August 2011) [41].
Finally, in Mustica Holdings, corporate trustees for unit holders of a trust sought the appointment of a new trustee. They proposed that the new trustee be an entity that they had specifically incorporated for the role. The manager of the trustee opposed the appointment on grounds of conflict. Sifris J allowed the appointment in circumstances where 62 per cent of unitholders were in support of the appointment and there were doubts as to the ability of the trust to finance an external trustee as there was only $422 cash at its disposal.[95]
Consideration
[95]Mustica Holdings [2015] VSC 531 (8 October 2015) [19].
The purpose of the Cooper Street trust is to administer and distribute the trust assets for the benefit of Mr Omer and his relatives, both present and future, as provided for in cl 1.9.1 of the trust deed. OPG has been deregistered and due to Mr Omer’s bankruptcy, the trust deed does not assist in effecting the appointment of a new trustee. Nor do the statutory provisions in s 41 of the Act.
According to the plaintiff, the only asset of the Cooper Street trust was the property, which has been sold by DNP Constructions as sole proprietor. Although the prospect of paying the proceeds of the sale into court has been raised, the plaintiff cannot confirm that this has, in fact, occurred. The plaintiff submitted that a new trustee could make a claim for half the proceeds of sale on the grounds of a constructive trust. As such, the current asset of the trust is perhaps more properly described as a potential claim in the form of an equitable chose in action.
It is clear that the welfare of the beneficiaries is best served by the appointment of an independent trustee capable of assessing the merits of the any claim. In such a way, the appointment has the potential to reclaim funds and promote the execution of the Cooper Street trust. It may be that if the funds were recovered, a prudent trustee would direct them away from Mr Omer as a result of his bankruptcy and instead toward the other general beneficiaries.[96] In my view, risk to the security of the claim of the sale proceeds meets the requirement of expediency and it is in the interests of the beneficiaries to have the merits of the claim assessed as efficiently as possible.
[96]Dwyer v Ross (1992) 34 FCR 463, 467–8 (Davies J).
There are, however, difficulties with the current application. In submitting potential avenues for the appointment of a trustee, the plaintiff raised s 601AH of the Corporations Act. That section falls within Part 5A.1 of that Act which governs deregistration of companies. As noted by the plaintiff, upon deregistration, property that a company holds as trustee vests in the Commonwealth.[97] What was not raised by the plaintiff, however, was that in accordance with s 601AE, the Commonwealth ‘may continue to act as trustee’ in relation to the vested property, or ‘apply to the court for the appointment of a trustee’.[98] When considering s 601AE in Re Cenco Holdings Pty Ltd, Barrett J suggested that the office of trustee would remain vacant until ASIC, who was the entity vested with the trust property under s 601AE as at that time, positively exercised its powers as trustee.[99] In contrast, other authority suggests that by virtue of s 601AE, upon deregistration of the trustee company, the Commonwealth is regarded as trustee of the trust property for the benefit of the beneficiaries under the trust instrument, although this position is defeasible.[100] In my view, this interpretation reflects the language and purpose of the section. As stated by Mullins J in Thorne Developments Pty Ltd v Thorne:
The idea of the scheme set up by ss 601AD and 601AE of the Act is to ensure that there is an entity to deal with the property owned by a deregistered company upon its ceasing to exist.[101]
[97]Corporations Act 2001 (Cth), s 601AD(1A).
[98]Ibid, s 601AE(1).
[99]Re Cenco Holdings Pty Ltd (2005) 53 ACSR 484; [2005] NSWSC 293 (8 April 2005).
[100]Thorne Developments Pty Ltd v Thorne (2015) 106 ACSR 481, 490–1 [37] (Mullins J); [2015] QSC 156 (11 June 2015); Chalker v Barwon Coast Committee of Management Inc [2003] VSC 286 (7 August 2003) [30] (Gillard J). See also Re Dobrotwir [2011] VSC 402 (31 August 2011) [28] (Mukhtar AsJ).
[101]Thorne Developments Pty Ltd v Thorne (2015) 106 ACSR 481, 490 [37].
As such, at present, the Commonwealth is trustee of the property of the Cooper Street trust, vested with a potential claim against DNP Constructions for one half of the net proceeds from the sale of the property.
In circumstances where there is no contradictor in this application, the only evidence before the Court in relation to the Cooper Street trust is that of the plaintiff, whom I have determined has no statutory standing. The evidence as to the current financial circumstances of the Cooper Street trust is relatively sparse, relying upon limited financial statements and title searches. The views of any beneficiaries of the Cooper Street trust regarding the current application, in addition to those of the Commonwealth as trustee of the trust property and potential applicant to the Court, are unknown. It is also not clear whether there are any other general beneficiaries presently in existence. Although it is not necessary for the Court to obtain such views to proceed with the application, it would be of assistance in circumstances where the plaintiff lacks standing. While I am not suggesting that the Commonwealth necessarily commence a separate application, in my view, it is prudent if consideration is given to the Commonwealth being joined as a party or evidence as to its views on the circumstances of the Cooper Street trust being adduced. Similarly, although Mr Omer has been difficult to contact, he remains capable of approaching the Court for due administration of the Cooper Street trust.
A further complication is the apparent lack of funds to finance a new trustee. Mr Carrafa has been nominated by the plaintiff as a potential new trustee, but the evidence does not disclose how his fees are to be paid. Additionally, Mr Carrafa’s affidavit does not contain the usual undertakings deposing that he will adhere to the duties of trustee. In order to minimise the risk of conflict for any new trustee, it is desirable that he or she be independent of the plaintiff and beneficiaries. Although in Mustica Holdings the sparse financial circumstances of the trust meant that a degree of conflict was tolerated, this was with the support of a majority of the beneficiaries.
Despite these difficulties, the equitable duty of the court to ensure that the Cooper Street trust is properly exercised remains.[102] Dismissing the application when a potential claim said to be around $300,000 exists is not protecting the welfare of the beneficiaries. There is one case from the High Court of New Zealand in which the standing of an applicant seeking the appointment of a new trustee of a charitable trust was doubted yet because possible breaches of trust may have occurred, the Court was willing to proceed with the application based upon either its statutory power to appoint or inherent jurisdiction.[103] The same submission has been raised and rejected in the Supreme Court of Western Australia.[104] In my view, in the factual circumstances of this proceeding, I am not persuaded that recourse to the inherent jurisdiction of the Court justifies the appointment of a new trustee. Instead, it is appropriate to adjourn the further hearing of the proceeding to allow the filing of further evidence to address the difficulties referred to in these reasons, namely:
[102]Letterstedt v Broers (1884) 9 App Cas 371.
[103]Eden Refuge Trust v Hohepa [2008] NZHC 280 (7 March 2008) [15] (Duffy J).
[104]Ngarluma Aboriginal Corporation RNTBC v A-G of Western Australia [2014] WASC 245 (7 July 2014) [52]–[53] (Allanson J).
(a) the views and/or joinder of the Commonwealth as trustee of the property of the Cooper Street trust and potential applicant to the Court;
(b) the existence of and views of any beneficiaries; and
(c) the financing of a new trustee.
Accordingly, I will order that:
(a) Leave be granted to the plaintiff to adduce any further evidence upon which he wishes to rely, with any affidavits to be filed on or before 10 February 2017.
(b) The further hearing of the proceeding be adjourned to 17 February 2017.
(c) Liberty to apply be reserved to the plaintiff.
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