Sam Wardy v Gordon Salier; William Wardy v Gordon Salier; Hassiba Wardy v Estate of late Edmond Wadih Wardy, developer and Ch 3 of the Succession Act 2006
[2014] NSWSC 473
•30 April 2014
Supreme Court
New South Wales
- Amendment notes
Medium Neutral Citation: Sam Wardy v Gordon Salier & Anor; William Wardy v Gordon Salier & Anor; Hassiba Wardy v Estate of late Edmond Wadih Wardy, developer and Ch 3 of the Succession Act 2006 & Anor [2014] NSWSC 473 Hearing dates: 11-15; 18-20 February 2013; 13 June 2013; 25 July 2013 Decision date: 30 April 2014 Jurisdiction: Equity Division - Probate List Before: White J Decision: Stand over the proceedings to a convenient date for counsel to bring in short minutes of order consistent with these reasons.
Catchwords: WILLS, PROBATE AND ADMINISTRATION - will and estates - construction of will - determination of burden of debts, funeral, testamentary and administrative expenses - value of plaintiffs' entitlements under will - Probate and Administration Act 1898 (NSW) s 46C, Schedule 3 - Conveyancing Act 1919 (NSW) s 145
WILLS, PROBATE AND ADMINISTRATION - family provision claim - property in respect of which order may be made - whether assets of family trust are liable to be designated as notional estate - prescribed transactions - construction of provisions of Succession Act 2006 (NSW) - whether will made adequate provision for plaintiffs' maintenance and advancement in life - determination of burden of orders for provision - Succession Act 2006 (NSW) ss 55, 75-77, 80, 83, 87-89 - Family Provision Act 1982 (NSW) ss 21-23 - Interpretation Act 1987 (NSW) s 33Legislation Cited: Probate and Administration Act 1898
Conveyancing Act 1919 (NSW)
Succession Act 2006
Interpretation Act 1987 (NSW)
Family Provision Act 1982Cases Cited: Wardy v Wardy & Ors; Estate of Edmond Wadih Wardy [2013] NSWSC 244
Joyce v Cam [2004] NSWSC 621; (2004) 12 BPR 22, 231
Stewart v Denton (1785) 4 Doug 219; 99 ER 849
Springett v Jennings (1871) LR 6 Ch App 333
University of Western Australia v WA Trustee Executor and Agency Co Limited (1961) 105 CLR 71
Re Healey (deceased); Ebert v Healey [1968] 2 NSWR 35
Ebert v Healey [1969] 2 NSWR 68
Kavalee v Burbidge (1998) 43 NSWLR 422
The Estate of Webb; Molloy v Webb (28 August 1998, unreported)
Samsley v Barnes [1990] NSWCA 161
Wentworth v Wentworth (Bryson J, 14 June 1991)
Schaeffer v Schaeffer (1994) 36 NSWLR 315
Hitchcock v Pratt [2010] NSWSC 1508; (2010) 79 NSWLR 687
Commissioner of Taxation v Consolidated Media Holdings Ltd [2012] HCA 55; (2012) 293 ALR 257
Thiess v Collector of Customs [2014] HCA 12
Wentworth Securities Ltd v Jones [1980] AC 74
Inco Europe Ltd v First Choice Distribution (a firm) [2000] 1 WLR 586; [2000] 2 All ER 109
Taylor v The Owners - Strata Plan No. 11564 [2014] HCA 9
Galt v Compagnon (Einstein J, New South Wales Supreme Court, 24 February 1998)
Bellfield v Bellfield [2012] NSWSC 416
Taylor v The Owners - Strata Plan No. 11564 [2013] NSWCA 55; (2013) 83 NSWLR 1
Gorton v Parks (1989) 17 NSWLR 1
Lloyd-Williams v Mayfield [2005] NSWCA 189; (2005) 63 NSWLR 1
Wilcox v Wilcox [2012] NSWSC 1138
Mayfield v Lloyd-Williams [2004] NSWSC 419
Vigolo v Bostin [2005] HCA 11; (2005) 221 CLR 191
Alexander v Jansson [2010] NSWCA 176; (2010) 6 ASTLR 432
Re Buckland deceased [1966] VR 404
Singer v Berghouse (1994) 181 CLR 201
Slack v Rogan; Palffy v Rogan [2013] NSWSC 522
Aubrey v Kain [2014] NSWSC 15
Tchadovitch v Tchadovitch [2010] NSWCA 316; (2010) 79 NSWLR 491
Todorovic v Waller (1981) 150 CLR 402
Rosniak v Government Insurance Office (NSW) (1997) 41 NSWLR 608
McGrath v Eves [2005] NSWSC 1006
Baker v R [2004] HCA 45; (2004) 223 CLR 513
Cetojevic v Cetojevic [2006] NSWSC 431
Campbell v Chabert-McKay [2010] NSWSC 859Category: Principal judgment Parties: Sam Wardy (Plaintiff 2010/226874)
William Wardy (Plaintiff 2010/233072)
Hassiba Wardy (Plaintiff 2010/237742)
Gordon Salier (1st Defendant)
John Wardy (2nd Defendant)
Linevale Pty LtdRepresentation: Counsel:
JJ Loofs (Sam Wardy)
N Confos (William Wardy)
L Ellison SC with S Benson (Hassiba Wardy)
A Hill with M Pringle (1st Defendant)
P Blackburn-Hart SC with D C Price (2nd Defendant)
M W Sneddon (Linevale Pty Ltd)
Solicitors:
Teece Hodgson Ward (Sam Wardy)
Comino Prassas (William Wardy)
Ryan Walker Legal (Hassiba Wardy)
Gordon A Salier, Solicitor (1st Defendant)
Bartier Perry (2nd Defendant)
Lawson Plowes (Linevale Pty Ltd)
File Number(s): 2010/226874; 2010/233072; 2010/237742
Judgment
HIS HONOUR: The plaintiff in each of these proceedings claims an order for provision out of the estate or notional estate of the late Edmond Wadih Wardy who died on 19 July 2009. Hassiba Wardy is the deceased's widow. William and Sam Wardy are two of the sons of the deceased.
In related proceedings, 2009/321354, I found that a copy of a will of the deceased dated 7 November 1992 should be admitted to probate (Wardy v Wardy & Ors; Estate of Edmond Wadih Wardy [2013] NSWSC 244). Hassiba Wardy and all of the deceased's sons are beneficiaries under that will. The plaintiffs contend that the provision made for them is inadequate for their proper maintenance and advancement in life. The plaintiffs claim further provision out of the deceased's estate. They also contend that the assets of the trust known as the Edmond Wardy Family Trust are liable to be designated as notional estate and they seek provision out of the notional estate.
As noted in my reasons in Wardy v Wardy & Ors; Estate of Edmond Wadih Wardy, the Edmond Wardy Family Trust was established by a deed dated 1 July 1998. The deceased was a director of the trustee, Linevale Pty Ltd. He was the sole shareholder of Linevale and until 28 March 2008 he was the appointor of the trust with the power to replace the trustee. In those proceedings I found that another son of the deceased, John Wardy, was appointed appointor of the trust in his father's place on 28 March 2008. The trust has substantial assets. The net value of the trust estate is estimated to be in the order of $11.5 million.
On 24 June 2010 Slattery J appointed an experienced solicitor, Mr Gordon Salier, as administrator pendente lite of the estate.
The deceased had three sons by his first wife: John, William and Sam. Hassiba Wardy was the deceased's second wife. They had three sons: Anthony, Roger and Robert. None of John, Anthony, Roger or Robert Wardy brought proceedings for additional provision out of the deceased's estate or notional estate. However Hassiba Wardy's claim for provision relied substantially on the asserted needs of her sons.
The will includes the following provisions:
"3. I GIVE DEVISE AND BEQUEATH my real estate as follows:-
(i) To my wife HASSIBA WARDY for her own use and benefit absolutely:
[x] Milroy Street, Kensington
(ii) To my sons, WILLIAM WARDY, JOHN WARDY and SAM WARDY for their own use an [sic] benefit absolutely as tenants in common in equal shares.
[xxx-xxx] South Dowling Street, Surry Hills.
(iii) To my son, JOHN WARDY for his own use and benefit absolutely
[xxx] Canterbury Road, Dulwich Hill
(iv) To my wife HASSIBA WARDY for her life with remainder to my sons ANTHONY WARDY, ROGER WARDY, and ROBERT WARDY in equal shares as tenants in common:-
401-409 Cleveland Street, Redfern:
My wife shall be entitled to receive the rents and profits derived from the said property during her lifetime. My wife shall pay from the rents and profits all liabilities (such as rates, taxes, charges and other expenses) in connection with the said property. My wife must arrange and maintain an adequate fire insurance Policy with respect to the building and any contents belonging to her in the property and also arrange an adequate Public Liability Insurance cover.
Upon her death the said property is to be given to my sons, ANTHONY WARDY, ROGER WARDY and ROBERT WARDY for their own use and benefit absolutely as tenants in common in equal shares provided that the youngest shall have attained the age of 21 years.
NOTWITHSTANDING WHAT I HAVE STATED ABOVE IN THIS CLAUSE IN THE EVENT that any of my sons (that is ANTHONY, ROGER and ROBERT have not attained the age of 21 years at the time of my death I DIRECT that the property be held in TRUST by my TRUSTEE until the youngest [sic] of my said sons have attained the age of 21 years and immediately upon my youngest attaining the age of 21 years, if my wife is still living to deliver the said property to her for the rest of her life with reminder [sic] to my said sons for their own use and benefit absolutely.
IN THIS EVENT I further direct my Trustee to pay the income derived from the property to my wife after paying all liabilities (rates charges, taxes Insurance and the like) incurred in connection with the management and maintenance of the said property. IN THE EVENT that my said wife is not living at the time my youngest attains the age of 21 years then I DIRECT MY TRUSTEE to deliver the said property to my sons for their own use and benefit absolutely in equal shares as tenants in common.
(v) I DIRECT that the residue of my real estate property be delivered to all my children (namely, WILLIAM, JOHN, SAM, ANTHONY, ROGER and ROBERT) in equal shares as tenants in common for their own use and benefit absolutely. IN THE EVENT that any of my children have not attained the age of 21 years at the date of my death I DIRECT that the said properties be held IN TRUST by my TRUSTEE until the youngest has attained the age of 21 years. I FURTHER DIRECT IN THIS EVENT that my TRUSTEE manage and maintain the said properties and to pay all income after paying out all just debts, charges, rates, taxes, insurance and other expenses in connection thereto to all my children in equal shares for their own use and benefit absolutely and with respect to those children not yet 21 years their share of the income shall be paid to their guardian for the maintenance, education and well being of the said child not yet 21 years.
4. I GIVE DEVISE AND BEQUEATH all my personal property wheresoever situated and whatsoever nature UNTO MY WIFE for her own use and benefit absolutely.
IN THE EVENT that my wife shall not survive me then I DIRECT that my said personal property be delivered to all my children in equal shares as tenants in common."
Determining the value of the entitlements of the three plaintiffs under the will is a complex task. It does not just involve valuing the assets that pass under clauses 3 and 4. It also involves ascertaining the deceased's debts and the funeral, testamentary and administrative expenses and how their burden is to be borne between beneficiaries. There is a further complication arising from the sale of the Cleveland Street property the subject of specific gift in clause 3(iv) as well as one of the properties the subject of the gift in clause 3(v) to pay debts and administration expenses.
Issues of construction of the will
Pursuant to s 46C of the Probate and Administration Act 1898, subject to any contrary direction in the will, and subject relevantly to s 145 of the Conveyancing Act 1919 (NSW), the burden of funeral, testamentary and administration expenses, debts and liabilities are to be borne in the order mentioned in Pt 2 of the Third Schedule to the Probate and Administration Act. Part 2 of the Third Schedule prescribes the following order for the application of assets to pay funeral, testamentary and administration expenses, debts and liabilities for a solvent estate:
"...
2 Assets not specifically disposed of by will but included (either by a specific or general description) in a residuary gift, subject to the retention out of such property of a fund sufficient to meet any pecuniary legacies, so far as not provided for as aforesaid.
...
6 Assets specifically disposed of by will, rateably according to value."
Section 46C of the Probate and Administration Act does not direct the administrator as to the order in which assets should be sold to raise moneys for the payment of debts and testamentary expenses. Instead it directs how such liabilities are to be borne as between the beneficiaries entitled to the assets described in Pt 2 of the Third Schedule with adjustments to be made between beneficiaries if assets that are not primarily liable to bear the burden of debts and testamentary expenses are applied for that purpose or where some only of assets within a particular class have been applied to bear that burden. As Campbell J said in Joyce v Cam [2004] NSWSC 621; (2004) 12 BPR 22, 231 (at [48]-[49]):
"[48] Section 46C is not a provision which deals with the order in which an executor ought sell assets for the purpose of paying debts and other testamentary expenses. It is not a section which, in any final way, interferes with an executor's discretion concerning what property should be sold for the purpose of paying the debts and testamentary expenses which must be discharged in the course of administration. Rather it is a section which provides a default rule ('subject to the provisions of any Act as to charges on property of the deceased and to the provisions, if any, contained in the deceased person's will') for how the burden of debts and testamentary expenses is to be borne amongst different types of beneficiaries. In Re Tong; Hilton v Bradbury [1931] 1 Ch 202 at 212 Romer LJ said, of the corresponding provisions of the Administration of Estates Act 1925 (UK):
'... there is nothing in this Act which prevents or is intended to prevent executors from paying expenses, debts and liabilities out of the first assets coming to their hands available for the purpose; and Part II of the First Schedule really only deals with the ultimate adjustment of the burden as between the parties becoming entitled to the testator's estate.'
Those remarks were quoted with approval by Lord Hanworth MR in Re Worthington; Nichols v Hart [1933] 1 Ch 771 at 776, and affirmed in that case by Romer LJ at 778. They were quoted in The Roman Catholic Archbishop of Melbourne v Lawlor and Others (1934) 51 CLR 1 at 28-29 by Starke J, and at 43 by Dixon J.
[49] An illustration of the way in which the law about the order of application of assets does not affect the power of an executor to sell for purposes of administration whatever asset is most convenient, arises if an executor sells or retains, for purpose of administration, property which has been the subject of a specific legacy or devise. Property subject to a specific legacy or devise is a late class of property to be encroached upon for payment of debts, under the general law concerning administration of assets, when the will did not make that property available for payment of debts. It has long been established that if an executor sold property which was the subject of a specific legacy or devise, or kept such property in case it needed to be sold for payment of debts, then the legatee is entitled, by a process of adjustment of the rights of beneficiaries between one another, to be put into the position he would have been in if the property the subject of the specific legacy had not in fact been sold, or kept in case it needed to be sold. In Ewer v Corbett (1723) 2 P Wms 148; 24 ER 676 Sir Joseph Jekyll MR said (at 149 of P Wms; 676 of ER), of a situation where an executor had sold a specifically devised leasehold term:
'... an executor, where there are debts, may sell a term, and the devisee of the term has no other remedy, but against the executor, to recover the value thereof, if there be sufficient assets for the payment of debts.'"
The application of the Third Schedule is subject not only to any contrary indication in the will, but to the provisions of any Act as to charges on property of the deceased. Section 145(1) of the Conveyancing Act provides:
"(1) Where a person ... disposes of:
(a) property, which at the time of his or her death is charged with the payment of money ...
...
and the deceased has not by will, deed, or other document signified a contrary or other intention, the property so charged shall, as between the different persons claiming through the deceased, be primarily liable for the payment of the charge; and every part of the property, according to its value, shall bear a proportionate part of the charge on the whole thereof."
Subject to the operation of s 145(1) of the Conveyancing Act on the apportionment of a mortgage debt, the deceased's debts and testamentary expenses are to be borne by those entitled to the residuary gifts of realty and personalty, proportionately to the value of realty and personalty, in accordance with cl 2 of Pt 2 of the Third Schedule to the Probate and Administration Act. Prima facie, the burden of such liabilities is to be borne by Hassiba Wardy in respect of her entitlement to the personal estate under clause 4, and by the deceased's six children in respect of their entitlement to "the residue of my real estate property" under clause 3(v). This would mean that the gifts in clause 3(i), (ii), (iii) and (iv) would not bear the burden of debts, testamentary and administrative expenses and liabilities unless the residuary estate is insufficient.
Mr Loofs who appeared for Sam Wardy, submitted that the gift in clause 3(v) of the "residue of my real estate property" did not fall within clause 2 of the Third Schedule, but within clause 6. He submitted that clause 3(v) was a specific gift of such other pieces of real property as the deceased might own at his death. If so, according to the argument, the gift of personal estate in clause 4 of the will would bear the primary burden of debts, testamentary and administrative expenses and after it was exhausted, those debts and testamentary expenses would be borne between each of the gifts of real estate in clause 3(i)-(v) rateably according to value. Mr Loofs submitted that the gift in clause 3(v) was a specific gift, although described in general terms. He referred to Stewart v Denton (1785) 4 Doug 219; 99 ER 849 (at 850) where a bequest of "all his stock in trade of wines and spirit as liquors which he shall be possessed of at the time of his death" was held to be a specific bequest, and Springett v Jennings (1871) LR 6 Ch App 333 (at 335) where the gift was of "all the rest" of the deceased's property in a particular parish was held to be a specific gift and not a residuary gift.
I do not accept this argument. It is true that the use of the word "residue" does not necessarily preclude a gift from being specific. If a willmaker leaves a chair to A, the residue of his furniture to B, and the residue of his estate to C, the gift to B is specific. B is entitled to all of the rest of the deceased's furniture that he owns at death. Such furniture does not pass to C and is within clause 6 and not clause 2 of Pt 2 the Third Schedule. It is the hallmark of a specific gift that it is liable to ademption if the willmaker disposes the property the subject of the gift during his or her lifetime. That is why the gifts in clause 3(i), (ii), (iii) and (iv) are all specific gifts, but the gifts in clause 3(v) and 4 are not. The gift in clause 3(v) is not a specific gift of a particular class of goods or investments or property in specific locations otherwise identified by general words. In such a class of case of which Stewart v Denton and Springett v Jennings are examples, there is a sufficiently specific description of property that it can be seen that if the testator disposed of the property in his lifetime, the gift will fail. By contrast, the gift in clause 3(v) is wholly general.
Mr Loofs also argued that the testator intended that the recipients of the gift in clause 3(v) should not bear the primary burden of debts and testamentary expenses because the clause provided for those recipients to receive delivery of the residue of the testator's real estate property for their own use and benefit absolutely. This intention would be defeated if the property was primarily liable for the payment of debts and testamentary expenses.
This was a submission that by his will Edmond Wardy had given a contrary direction as to how the burden of debts and testamentary expenses was to be borne. I do not accept that submission. The phrase that a recipient of a gift would receive it for his or her "own use and benefit absolutely" was used to distinguish between an absolute gift on the one hand, and a gift of a limited estate on the other. Each of the gifts in clauses 3(i), (ii), (iii), (v) and 4 was said to be given to the recipient for his or her own use and benefit absolutely. In contrast, clause 3(iv) made a gift of the Cleveland Street property to Hassiba Wardy for her life with remainder to her sons. The clause then provided that after Hassiba Wardy's death, that property was to be given to Anthony, Roger and Robert Wardy for their own use and benefit absolutely. After Hassiba Wardy's death they become entitled to an estate in fee simple as distinct from an estate in remainder. The words relied on related to the extent of the estate each person was to receive, not to how the burden of debts and testamentary expenses should be borne between beneficiaries.
To displace the operation of Pt 2 of the Third Schedule it must appear that the willmaker intended to displace the statutory order and the will must indicate in what way the burden of debts and liabilities is to be borne or apportioned (University of Western Australia v WA Trustee Executor and Agency Co Limited (1961) 105 CLR 71 at 95; Re Healey (deceased); Ebert v Healey [1968] 2 NSWR 35 at 37-38; Ebert v Healey [1969] 2 NSWR 68 at 73-74). In this case the will does neither.
Accordingly, except to the extent that mortgage liabilities are apportioned, debts, liabilities, funeral and testamentary expenses are first to be borne rateably by those entitled to the residuary gift of real estate in clause 3(v) and by the residuary gift of personalty.
Contracts for the sale of the Cleveland Street, Redfern property and a property at Mitchell Road, Alexandria (which was part of the residuary realty the subject of clause 3(v)) were exchanged on 16 November 2012. Part of the proceeds of sale have been applied in paying a debt owed by the deceased to the ANZ Bank of $504,107.44. This was the amount owed at death. Interest was also paid up to the discharge of the debt. The debt has been described as being owed under an "Equity Management Account". The debt was secured by mortgages over the properties at Milroy Avenue, Kensington; South Dowling Street, Surry Hills; George Street, Redfern; Coogee Bay Road, Coogee; and Stanmore Road, Enmore, but not Cleveland Street, Redfern and Mitchell Road, Alexandria. Pursuant to s 145(1) of the Conveyancing Act the burden of the deceased's liability to the ANZ Bank in respect of this debt is to be borne proportionately by those entitled to the mortgaged properties according to their value.
Land tax is a charge on the real estate to which it relates and is to be borne by those entitled to the respective properties. Income tax and GST incurred in respect of the renting of real estate is to be borne by those entitled to the properties (or in the case of the Cleveland Street property, by Hassiba Wardy).
The estate's accountant estimated that capital gains tax of $378,170 was incurred on the sale of the Mitchell Road, Alexandria property and capital gains tax of $854,734 was incurred on the sale of the Cleveland Street property. Clearly the capital gains tax liability on the sale of the Mitchell Road property is to be borne by those entitled to the residue of realty. There is a question whether Hassiba Wardy and her sons should bear the burden of capital gains tax following the sale of the Cleveland Street property.
The Cleveland Street property was sold to put the administrator in funds to pay debts. The Cleveland Street property and the property in Mitchell Road, Alexandria were sold with the approval of the Court. The reason those properties were sold was that they were the only properties that were unencumbered by a mortgage to the ANZ Bank. The mortgage to the ANZ Bank secured not only the debt under the equity manager account, but also a debt of approximately $3.5 million owed by the deceased and Linevale to the Bank. As between Linevale and the estate, Linevale is primarily liable for that debt. If one or more of the mortgaged properties had been sold, the ANZ Bank would have required the proceeds of sale to be applied in reduction or discharge of its mortgage. Not only would the administrator have needed the consent of the ANZ Bank to the sale of any one property if the proceeds of sale of that property were not sufficient to discharge the entirety of the mortgage debt, but the estate would then have needed to rely upon rights of subrogation to the ANZ Bank's mortgages over properties owned by Linevale which would further have complicated an already complicated administration.
Because the Cleveland Street property was sold rather than properties falling within residue that come within clause 2 of the Third Schedule being sold, it will be incumbent on the executor to acquire substitute property to be held on the trusts established by clause 3(iv) of the will (Joyce v Cam at [55]).
Tied up with the question of who should bear the burden of the capital gains tax payable on the sale of the Cleveland Street property is the question of how much need be spent from the sale of residuary assets to provide a substitute property or investments for the benefit of Hassiba Wardy for her life and thereafter for her sons.
Unless the will makes contrary provision, the capital gains tax payable following the sale of the Cleveland Street property was an administration expense, the burden of which is to be borne rateably by those entitled to the residual gifts of realty and personalty. No charge arises over any property to secure the payment of capital gains tax. Capital gains tax was payable on the disposal of the property by the administrator. It is true that if that asset had not been sold and the property had passed to the beneficiaries (Hassiba Wardy and her sons), capital gains tax would not have been payable until they disposed of the property (or until Hassiba Wardy's sons disposed of the property after her death if it had not been sold beforehand). On such a sale of the property by the beneficiaries the capital gain would be determined having regard to the initial cost incurred by Edmond Wardy when the property was purchased. Hence, the burden of capital gains tax would ultimately have fallen on the beneficiaries under clause 3(iv) when the property was eventually sold. Counsel for John Wardy submitted that for this reason the burden of capital gains tax arising from the sale of a property by the administrator should be borne by the beneficiaries under clause 3(iv). This would mean that instead of the executor's being required to acquire a substitute property or investments to the value of $5,150,000 using proceeds to be obtained from the realisation of property forming part of the residuary estate, only $4,295,266 (or $4,183,977 being the net proceeds of sale of the Cleveland Street property after selling costs less capital gains tax) would need to be applied in that way.
I do not accept that argument. It does not accord with the requirements of s 46C of the Probate and Administration Act. Capital gains tax is a testamentary or administration expense the burden of which is to be borne in the manner provided for by Pt 2 of the Third Schedule to that Act. The fact that there might be a financial benefit to Hassiba Wardy and her sons arising from the fact that the administrator sold the Cleveland Street property if they would otherwise have sold the property themselves after administration was complete does not alter the operation of s 46C. In any event, that financial benefit might be long delayed. There would never be such a financial benefit to Hassiba Wardy if the property were retained during her lifetime.
Counsel for John Wardy submitted that the will showed a contrary intention that displaced the operation of Pt 2 of the Third Schedule. Clause 3(iv) provided that Hassiba Wardy should pay from the rents and profits of the Cleveland Street property "all liabilities (such as rates, taxes, charges and other expenses) in connection with the said property". Counsel submitted that capital gains tax payable on the sale of the property by the administrator was a tax "in connection with the said property" and clause 3(iv) showed the testator's intention that the burden of that tax should be borne by Hassiba Wardy.
I do not agree with that construction of clause 3(iv). The liabilities referred to in that clause were amounts to be paid from rents and profits derived from the property. Read in context, the liabilities referred to were those which would arise from the holding of the property and the deriving of rents and profits from it. This would include income tax payable on the net rents derived from the property and land tax. Clause 3(iv) assumes that the property would remain part of the estate until delivered to the beneficiaries under that clause on the youngest of Anthony, Roger and Robert Wardy attaining the age of 21 years.
Value of assets
Gift in clause 3(i)
By clause 3(i) of the will Hassiba Wardy inherits the family home in Milroy Avenue, Kensington. Its estimated value is $1,500,000.
Gift in clause 3(ii)
By clause 3(ii) William, John and Sam Wardy inherit a property at South Dowling Street, Surry Hills. It has been appraised as having a value of between $3 million and $3.5 million. For the purposes of determining the value of the benefits that William and Sam Wardy will receive under the will, I take the midpoint of that appraisal of $3,250,000.
Rents collected on the South Dowling Street, Surry Hills property up to the time of hearing less expenses including land tax totalled $265,428 (Elwin, 2 August 2013, Annexure A, p 6). The amount of tax paid or payable in respect of this net income was $102,327. Each of John Wardy, William Wardy and Sam Wardy is entitled to approximately $54,367 in respect of the net rents collected after tax.
If the South Dowling Street property were sold for the mid-point of the range of values attributed to it, the estimated capital gains tax that would be payable on the sale is $649,425. It is unlikely that the property would need to be sold by the executor for purposes of administration. There is more than enough residuary estate to reinstate the gift in clause 3(iv) and pay outstanding debts and expenses. The adjustment of beneficial entitlements by reason of the estate's assets being applied in the payment of debts and expenses differently from the statutory order should not require the sale of the South Dowling Street property. Capital gains tax will not be payable on the transfer of the property by the executor to the beneficiaries. But it is clear that at least William and Sam Wardy will require the property to be sold. The beneficiaries will incur the liability for capital gains tax as well as selling expenses. I take the likely selling expenses (real estate agent's commission and legal fees) to be $80,250 in accordance with the estate accountant's estimate of commission at 2.5 per cent and $1,500 legal costs.
The gross value of the gift in clause 3(ii) to each of Sam, John and William Wardy is taken to be $894,475, (($3,250,000 + $265,428 - $102,327 - $649,425 - $80,250) ÷ 3 = $894,475). By gross value I mean the value before adjustments to reflect the burden of debts to be borne by this class of gift, i.e. the burden of the mortgage debt.
Gift in clause 3(iii)
By clause 3(iii) John Wardy inherits the deceased's interest in a property in New Canterbury Road, Dulwich Hill that has an estimated value of $550,000. John Wardy owned the other half interest in that property in co-ownership with his father.
Gift in clause 3(iv)
By clause 3(iv) the deceased gave Hassiba Wardy a life interest in a property in Cleveland Street, Redfern with the remainder to the sons of his second marriage, Anthony, Roger and Robert. That property was sold by the administrator to provide funds for the payment of debts. The property was sold at auction for $5,150,000. The net proceeds of sale that were received amounted to $5,038,711. Capital gains tax payable as a result of the sale of that property was estimated to be $854,734.
For the reasons in paras [28]-[34] above the capital gains tax payable in consequence of the sale of the Cleveland Street property is an administration expense to be borne by those entitled to the residuary estate. The expenses of sale are also an administration expense. The executor will be required to apply the residuary estate to acquire substitute property to provide income to Hassiba Wardy for her life with remainder to her sons. (The amount to be so expended would be reduced if the residuary estate were insufficient to meet all debts, funeral, testamentary and administration expenses. In that event the specific gifts in clauses 3(i)-(iv) would bear the burden proportionately. That will not be the case.)
Between 19 July 2009 and 2 April 2013 the Cleveland Street property generated a total net rental income of approximately $1,055,000. The tax paid or payable in respect of this income was approximately $415,000. The net amount to which Hassiba Wardy is entitled from the rents collected on the property after payment of tax is approximately $640,000.
In their submissions the parties assumed that the substitute gift should be an income-producing asset or assets to the value of either $5.1 million or that sum less capital gains tax and/or selling expenses incurred on the sale of the Cleveland Street property. On the assumption that the substitute gift should be to the value of the property sold then the residuary estate would bear the burden of a substitute gift of $5.1 million. It will be a matter for the executor to determine what is an appropriate substitute investment having regard to the interests of the life tenant and remaindermen. The pre-tax annual return on the Cleveland Street property over 3.7 years between July 2009 and April 2003 (assuming a stable capital value) was approximately 5.6 per cent, and there is no basis for assuming that a like return could not be had from a substitute investment to the same value.
Gift in clause 3(v)
By clause 3(v) the debt of the deceased's real estate was left to his six sons in equal shares. The estate included four such properties. One was a property in George and William Street, Redfern. Initially, widely differing estimates of the value of this property were provided. The property comprises a mixed residential retail and industrial building. It has now been valued at $4.5 million exclusive of GST.
A second property not specifically disposed of is situated in Coogee Bay Road, Coogee. It consists of two retail shops and four two-bedroom units at the rear of the property. It has been appraised as having a value of between $1.5 and 1.7 million. It is common ground that for current purposes, that property should be treated as having a value of $1.6 million.
A third property not specifically disposed of is in Stanmore Road, Enmore. It also consists of two retail shops with rear bedroom units and has been appraised as having a value of between $1.5 and $1.8 million. It is common ground that for present purposes it should be treated as having a value of $1,650,000.
A fourth property not specifically disposed of was in Mitchell Road, Alexandria. It was sold by the interim administrator, Mr Salier, for $1.9 million. The net proceeds of sale were $1,867,302. Capital gains tax was incurred on the sale of the Mitchell Road, Alexandria property that is estimated to be $378,170.
The other three properties included in the gift of residue of the deceased's real estate in clause 3(v) of the will are yet to be sold. The anticipated agent's commission and legal costs on the sale of those properties have been estimated by those parties who proffered estimates of approximately $200,000 to $220,000. I will assume such costs of $210,000. The real estate forming the residue will have to be sold to provide funds to reinstate the gift to Hassiba Wardy and her sons and to meet funeral, testamentary and administration expenses. Taking the estimated mid-point in the range of values attributed to the George Street, Redfern, Coogee Bay Road and Stanmore Road properties, the estimated capital gains tax that would be payable on the sale of those properties is $924,426, $215,549, and $274,794 respectively. Hence, the capital value of the gift of the residue of real estate that can be divided between the deceased's six children (subject to payment of debts and testamentary expenses) is taken to be $7,614,363 ($4,500,000 + $1,600,000 + $1,650,000 + $1,867,302 - $378,170 - $924,426 - $215,549 - $274,794 - $210,000 = $7,614,363).
The net rentals collected from the George Street, Redfern property, the Coogee Bay Road property, the Stanmore Road property, and the Mitchell Road, Alexandria property up to its sale totalled a little more than $1,239,000 before tax. The rate of tax paid by the estate was between 40 and 41 per cent in the financial years ended 30 June 2010 and 30 June 2011 and 30.23 per cent for the year ended 30 June 2012. The estimated rate of tax for the year ended 30 June 2013 was 44.42 per cent. Taking a rate of 40 per cent, the net rents after tax attributable to those taking the residue of realty would be in the order of approximately $743,000.
Residuary personal estate
Under clause 4 of the will, Hassiba Wardy is entitled to all of the deceased's personal property. That property includes debts owed to the deceased by Linevale in the amount of $400,000 representing director's remuneration, payment of which had been deferred, and $62,500.57 being moneys that Linevale resolved be distributed to the estate for the financial years ended 30 June 2010 and 30 June 2011. In addition, Linevale owes the estate $634,781.88 in respect of payments made from an account in the name of the deceased towards an indebtedness of Linevale to the ANZ Bank. The total amount owed is $1,097,282.45.
There is a dispute as to whether the deceased also left a significant amount of cash. John Wardy deposed that it was his father's practice, after collecting rents on a Saturday, to store the cash in his secure lockable cabinet (the buffet). He deposed that in the first week of May 2009, he observed a larger amount of cash than he ordinarily saw. He asked his father how much was there and Edmond Wardy said, "about $305,000". Mrs Cassimatis deposed that Hassiba Wardy said to her that she, Hassiba, had searched and could not find the original will, that she thought that John had stolen her husband's keys and robbed the house, and also stolen her husband's money. Mrs Cassimatis deposed that when she asked what money Hassiba Wardy was talking about, Hassiba said, "There was a couple of hundred thousand dollars of cash and it is now missing." Hassiba Wardy denied making those statements, but I accept Mrs Cassimatis' evidence.
For the reasons given in my judgment in Wardy v Wardy & Ors; Estate of Edmond Wadih Wardy, I do not accept that Hassiba Wardy is a reliable witness. She had the keys to the buffet. For the reasons I there gave, I was satisfied to the requisite standard that the reason the deceased's original will could not be found was because it had been removed by Hassiba Wardy or by someone on her direction. I concluded there was a substantial amount of cash in the buffet. No such cash was provided to Mr Salier when he was appointed as an interim administrator. I conclude that Hassiba Wardy withdrew whatever was the amount of cash in the buffet. Based on her admission to Mrs Cassimatis, I conclude that she received at least $200,000 of cash. John Wardy's evidence of his father's conversation in the first week of May 2009 does not justify the conclusion that Hassiba Wardy received as much as $305,000. For the purpose of determining the value of the benefits Hassiba Wardy has received and to which she is entitled under the will, I conclude that she received cash of $200,000.
There was also evidence that the deceased owned some motor vehicles. However, no attempt was made to put any value on those vehicles.
There was some evidence that the deceased owned a bank account with a credit balance. John Wardy gave evidence that his father had cash in a bank account and that there were deposits in his father's name with the ANZ Bank (T310). Unless these were moneys in a superannuation fund of which Wardy SMSF Pty Ltd ("Wardy SMSF") was the trustee, any such credit balance or deposits would form part of the residuary personal estate. However, no other evidence was given about those assets and I cannot attribute a value to them.
The deceased owned the shares in Linevale and in Wardy SMSF. There is no evidence that he owned other shares which might form part of the personal estate. The shares in Linevale and Wardy SMSF would have only nominal value as both companies are trustees.
There is no substantial asset in the superannuation fund that could form part of the estate or be paid to Hassiba Wardy. The superannuation fund was established on 29 June 2007. On the same day Linevale entered into a deed with Wardy SMSF whereby it granted to Wardy SMSF an interest in a property at 461 Harris Street, Ultimo that was owned by Linevale. The interest was granted for the life of Edmund Wardy. Edmund Wardy signed a number of promissory notes promising to pay $1,350,000 on demand to the Wardy Superannuation Fund. The promissory notes were then endorsed back to Edmund Wardy. On Edmund Wardy's death the asset purportedly transferred to the superannuation fund ceased to exist. It seems that the whole structure was established to provide deductions to Edmund Wardy against assessable income. There is no asset of any value held for Edmund Wardy. Nor is the estate liable on any of the promissory notes. I doubt that the documents were ever intended to take effect according to their tenor, but in any event I am satisfied that the promissory notes were endorsed back to Edmund Wardy.
I think it likely that Hassiba Wardy has received, or is entitled to receive, property under the gift in clause 4 in excess of $1,300,000 (being the debt owed by Linevale and the cash I find she received). However, it is not possible to say how much more Hassiba Wardy received or is entitled to receive pursuant to clause 4 of the will. Accordingly, for the purpose of determining the value of her entitlements under the will and in attempting to ascertain how the burden of the deceased's debts and of funeral, testamentary and administration expenses should be borne, I assume that the value of the gift of personalty in clause 4 of the will is $1,300,000.
I therefore proceed on the basis that the value of the residuary estate (realty and personalty) is $9,657,363 ($7,614,363 + $743,000 + $1,300,000). Realty forms 86.5 per cent of the total residuary estate and personalty forms 13.5 per cent of the total residuary estate.
Liabilities of the deceased
The deceased owed a second debt to the ANZ Bank which as at 4 May 2012 amounted to $3,548,357. Whilst the deceased was the principal borrower this debt was used as financial accommodation for Linevale. Linevale acknowledges that as between it and the estate, it is primarily liable for that debt. Because Linevale acknowledges its liability to indemnify the estate in respect of the second debt to the ANZ Bank, and because Linevale is undoubtedly good for its indemnity, the estate's liability to the ANZ Bank in respect of the second loan can be disregarded in assessing the value of the plaintiffs' entitlements under the will.
John Wardy's solicitors advised Mr Salier that John Wardy claimed to be a creditor of the deceased in respect of a principal debt of $500,000 and interest. The interest that had allegedly accrued to 31 December 2011 was claimed to be $225,724. John Wardy's solicitor contended that he paid the deceased $1,800,000 in May 2006 of which $1,300,000 was applied as the purchase consideration of a property in Addison Road, Marrickville and the balance of $500,000 was retained by the deceased as a loan to maintain an ANZ Equity Manager account of the deceased's under its credit limit of $2 million. He contended that it was a term of the loan that the deceased pay interest at the rate charged to John Wardy by the ANZ Bank on the facility which was used to provide the loan. That claim has not been admitted by the administrator and its validity has not been determined.
No party, including the administrator and John Wardy, included this alleged debt as a liability of the deceased in their submissions. No evidence (except the tender of the letter) and no submission was addressed to this claimed debt. Although the claim has not been expressly abandoned, I do not think I should include it as a liability. Even if the facts are as contended for by John Wardy, it may well be that the claim is statute-barred in the absence of any written confirmation or payment of the alleged debt.
In his affidavit of 7 February 2013 Mr Salier deposed to having received notices of assessment from the Australian Taxation Office that indicated that on completion of the sale of the Alexandria and Cleveland Street properties, a total amount of $2,425,034.24 was to be paid to the Australian Taxation Office. This did not include estate returns for the years ended 30 June 2010 to 30 June 2012 (Salier 7 February, para 7, CB 4/1360). In his affidavit of 11 May 2012 Mr Salier deposed to having made a prepayment of tax in the sum of $500,000 on 3 and 16 January 2012.
Following the sale of the Alexandria property Mr Salier paid a further $1,089,270.70 to the Australian Taxation Office. This did not include any amount with regard to penalties and interest (Salier 11 June 2013, para 7). It does not include capital gains tax on the sale of the Alexandria and Cleveland Street properties.
The estate's accountant, Mr Elwin, estimated that the taxable income for the estate for the year ended 30 June 2013 would be $3,951,484. This included estimated total net rent of $343,717, capital gains on the sale of the Cleveland Street and Alexandria properties of $1,838,138 and $813,270 respectively, and income of $1,323,990 brought to account by reason of the remission of general interest charges. This last item arose because the Australian Taxation Office had raised a general interest charge as a result of the deceased's not having filed a tax return since the year 2000. The interest charged was included as a tax deduction in the income tax returns for the years ended 30 June 2010, 2011 and 2012, although it was not paid. As a result of representations made by the estate's accountant the ATO remitted general interest charges of $1,323,990.63 which became assessable income in the year ended 30 June 2013. There was a net deductible interest expense of $188,654 incurred in the year.
The estimated tax payable for the year ended 30 June 2013 of $1,755,147 included an amount of approximately $857,734 for capital gains tax on the sale of the Cleveland Street property and $504,316 in respect of net assessable interest income following the remission of the general interest charge.
I conclude that the administrator or the executor has paid or is liable to pay income tax in respect of the unpaid tax liability of the deceased of $2,093,587 ($500,000 + $1,089,271 + $504,316). This liability is to be borne by the residuary real and personal estate in the estimated proportions of 86.5 per cent and 13.5 per cent.
Funeral, testamentary and administrative expenses
As explained at paras [24]-[27] above the capital gains tax liability on the sale of the Cleveland Street property is an administration expense also to be borne by the totality of the residuary estate. The capital gains tax was estimated to be $854,734. (Capital Gains Tax ("CGT") payable on the sale of the Mitchell Street, Alexandria property and the CGT that will be payable on the sale of the balance of the residuary realty is to be classified as an expense of realising the real property and to be borne by those entitled to realty under clause 3(v). It has been allowed for in determining the value of the realty.)
The tax expense incurred from the collection of rental income has been allowed for in determining the value of the specific gifts of realty.
John Wardy's solicitors claimed that he had paid funeral expenses of $11,524.85 (GAS1, p 16). I assume this is correct, and that the expense has been paid.
Testamentary expenses have been incurred for the remuneration of Mr Salier as interim administrator, costs incurred by him and accountant's fees. The remuneration of Mr Salier was provided for by the orders made by Slattery J on 24 June 2010. He was empowered to charge remuneration in the amount of $400 per hour. On 18 February 2013 Mr Salier estimated that his costs in connection with his administration and involvement in the legal proceedings were in an amount of $186,000 plus GST. He estimated the total costs of the estate be $410,000 inclusive of GST. In his affidavit of 11 June 2013 Mr Salier deposed that he did not propose to charge any further administration fees for himself. Expenses in the form of counsel's fees would have been incurred after 18 February 2013, but I do not know their amount.
Further testamentary expenses will be incurred when the NSW Trustee and Guardian assumes office as executor. The NSW Trustee and Guardian will be entitled to commission on capital, whether the capital is realised by Mr Salier, or by it, or is transferred to a beneficiary in specie, of $9,000 plus one per cent of the capital to the extent it exceeds $300,000. It will also be entitled to commission on gross amounts of income received of 5.25 per cent or 2.5 per cent in the case of rent that is subject to an agency charge for collection (Regulation 19). I adopt the estimate of this expense made on behalf of William Wardy of $172,000.
Expenses have also been incurred for accountancy fees. On 11 June 2013 Mr Salier deposed to having paid the accountant's current account of $3,267. The accountant has billed the estate for a success fee of $134,561 in respect of the remission of the ATO's general interest charges. I assume that there was an agreement for payment of the success fee and that this is a further expense of the administration. Mr Salier did not give any evidence to provide a basis for disputing the amount claimed. I think a further allowance of $137,828 needs to be made for unpaid accountancy fees.
I assume there would also have been earlier accountancy expenses that have been paid. I do not have the information as to what those expenses were.
Slattery J ordered that the costs of the parties to the application for the appointment of an administrator pendente lite be paid out of the estate. Pursuant to that order the administrator has paid $223,897 to Hassiba, John, William and Sam Wardy. This is substantially less than the amount claimed (which totalled $542,215). Some of those parties may seek further payment from the estate by having their costs assessed. I have no means of knowing whether there may be any further payments that have to be made pursuant to the costs order made by Slattery J. The sum of $223,897 is a further administration expense to be borne out of the residuary real and personal estate in proportion to their values.
Prima facie to calculate the value of the gifts under the will it is sufficient to allocate the burden of reinstating the gift in clause 3(iv) and the burden of unpaid liabilities and expenses to the residuary real and personal estate without regard to what assets were used to pay the deceased's liabilities and to pay the administrator's expenses. It is likely that debts and expenses were paid from the collection of rents. This does not matter because the parties' entitlements to net rental income are calculated without reference to the disbursement of the rents received. All paid debts and expenses can notionally be taken to have been paid from the proceeds of the Cleveland Street property. It is sufficient for residuary estate to reinstate that gift in the proportions realty bears to personalty. In that way the paid liabilities and expenses will be borne by the residuary real and personal estate.
In deciding how much the residuary realty and personalty may have to contribute, there would be a double counting if there were a deduction for debts and expenses already paid as well as for the cost of reinstating the gift in clause 3(iv). The debts already paid include income tax of $1,589,271, the administrator's costs and expenses of $410,000, legal costs pursuant to the orders of Slattery J of $223,897, and, I assume, funeral expenses of $11,525.
Approximately $6,796,878 will need to be paid to reinstate the gift under clause 3(iv) ($5,100,000), to pay the outstanding tax liabilities that are to be borne out of the residue of both realty and personalty (viz. income tax on the net assessable income with respect to the remission of the general interest charge ($504,316) and capital gains tax on the sale of the Cleveland Street property ($854,734)), to pay $200,000 for outstanding costs of the administrator and charges that can be made by the NSW Trustee and Guardian, and to pay $137,828 in respect of outstanding accountancy fees. This reduces the available residuary estate (real and personal) to $2,860,485.
However, this is before the deduction of any further amount for legal costs of the proceedings that may be payable out of the estate. John Wardy assumed the primary burden of defending the claims for family provision orders and was made a defendant to these proceedings. He is be entitled to his costs of defending the proceedings on the indemnity basis as if he were an executor. John Wardy's solicitors estimate costs of approximately $65,000 were incurred in defending the family provision claims. This further reduces the estimated value of the residuary estate to approximately $2,795,485, being approximately $2,418,095 of residual realty and $377,390 of residuary personalty.
The extent to which other parties will be entitled to costs out of the estate prima facie depends upon whether they are successful in the proceedings.
Mortgage debt
As noted at para [18] the deceased owed a debt to the ANZ Bank under what was called the Equity Management Account that was secured over the properties at Milroy Avenue, Kensington; South Dowling Street, Surry Hills; George Street, Redfern; Coogee Bay Road, Coogee; and Stanmore Road, Enmore, but not by the properties at Cleveland Street, Redfern and Mitchell Road, Alexandria. The burden of the deceased's liability to the ANZ Bank in respect of that debt is to be borne proportionately, according to their values, by those entitled to the mortgaged properties. That is, by Hassiba Wardy in relation to the Milroy Avenue, Kensington property valued at $1.5 million, William, John and Sam Wardy as to the South Dowling Street property valued at $3,250,000 and by all of the deceased's children in relation to the remaining three properties passing under clause 3(v) of the will, having a value of $7,750,000. The debt was discharged out of the proceeds of sale of the Mitchell Road, Alexandria property. On a final determination of the parties' entitlements it will be necessary for there to be an accounting. This will reduce the value of Hassiba Wardy's gifts under the will by 12 per cent ($1,250,000 ÷ $12,500,000) of the principal and interest of that debt in favour of the beneficiaries under clause 3(v). The debt as at 4 May 2012 was $534,455. This reduces the value of Hassiba Wardy's entitlements by approximately $64,000. I do not know what additional adjustment there might need to be in respect of interest. The value of the entitlements of each of the beneficiaries entitled to the residuary real estate is increased by one-sixth of Hassiba Wardy's contribution to the mortgage debt (i.e. at least $64,000 ÷6 = $10,667).
Similarly, the value of the gifts under clause 3(ii) will be reduced by 26 per cent ($3,250,000 ÷ $12,500,000) of the mortgage debt and interest. The adjustment will be at least $138,958. Again, the adjustment will be in favour of the beneficiaries under clause 3(v). The calculation of the value of the entitlements under clause 3(ii) of the will should reflect an adjustment of half that sum; being at least $69,480 or $23,160 each. (The adjustment is only an half because the beneficiaries of clause 3(ii) are half of the beneficiaries of clause 3(v) entitled to the benefit of the adjustments.
It is arguable that the contribution to the mortgage debt by those entitled to the specifically charged properties should enure for the benefit of the whole of the residuary estate on the basis that the mortgage debt can also notionally be taken to have been paid from the proceeds of the Cleveland Street property. The consequential adjustments to the parties' entitlements under the will are immaterial.
I therefore assess the value of the respective plaintiffs' entitlements under the will as follows:
(a) Hassiba Wardy is entitled to the family home valued at $1,500,000. She is entitled to the income for life from a substitute property or investments having a value of $5.1 million. She is entitled to the net rents collected on the Cleveland Street property which after tax amount to approximately $640,000. She is also entitled to personal estate which after bearing the burden of debts, funeral and testamentary expenses and after a further adjustment for her share of the ANZ mortgage debt is estimated to be worth approximately $313,390 ($377,390 - $64,000).
(b) William and Sam Wardy is each entitled to a third share of the South Dowling Street property which when realised should provide them each with funds of approximately $894,475. He is each entitled to net rents collected on that property that after tax and up to the hearing amounted to $54,367. He is each entitled to one-sixth of the residuary real estate which after the burden of debts, funeral and testamentary expenses, is estimated to be worth approximately $413,682 (($2,418,095 + $64,000) ÷ 6) = $413,683. There should be a net deduction of $23,160 each for his contribution to the payment of the ANZ mortgage debt. The resulting calculation is that their entitlements are each estimated to be worth $1,339,365 ($894,475+$54,367 + $413,683 - $23,160).
These estimates are subject to a determination as to what further legal costs if any should be paid from the estate.
These estimates are only that. There is considerable uncertainty about their reliability. They depend on estimates as to the value of assets. Information as to the deceased's bank accounts at death is lacking. Information required to make accurate determination as to how debt and administration and testamentary expenses should be borne is incomplete. That determination is complex.
Notional estate
The plaintiffs contend that the assets of the Wardy family trust are liable to be designated as notional estate. At the time of hearing, Linevale in its capacity as trustee of the Wardy family trust, held parcels of land in five suburbs which were valued at approximately $16,580,000. It had liabilities in the order of $5,024,000. The net assets of the trust were in the order of approximately $11.5 million.
The Wardy family trust was established by a trust deed made on 1 July 1998. As noted earlier, Linevale is the trustee. It had one issued share. The deceased was the sole shareholder. From 1 July 1998 until his death the deceased was a director of Linevale. John Wardy was appointed as a director on 18 December 2007.
The trust deed has the usual features of a discretionary trust. Prior to the Vesting Day none of the "General and Remainder Beneficiaries" has any right to income or capital. The trustee has a discretion to pay any income of the Trust Fund in an Accounting Period for the benefit of all or such one or more, exclusive of the others, of the General Beneficiaries in such proportions and in such manner as the trustee in its absolute discretion may determine (clause 3.1). It is not required to pay income, but can allow income to accumulate. Any part of the income of the Trust Fund may be effectually applied for the benefit of any beneficiary by a resolution of the trustee that a sum out of, or a portion of, the income of the Trust Fund for the Accounting Period be allocated to that beneficiary (clause 3.3). By clause 5 the trustee may in its absolute discretion at any time and from time to time before the Vesting Day transfer any part of the Trust Fund or pay out of the corpus of the Trust Fund to any beneficiary for the beneficiary's own use and benefit. On the Vesting Day the trustee is to hold the Trust Fund in trust for those of the General and Remainder Beneficiaries or for charitable purposes as the trustee might in its absolute discretion appoint on or before the Vesting Day (clause 4.1). The Vesting Day is 1 July 2078. The trustee may with the consent of the Appointor appoint an earlier Vesting Day (definition of "Vesting Day"). By clause 2.2 the trustee stands possessed of the Trust Fund and the income from it in trust for all or such one or more exclusively of the others or other of the general beneficiaries in such proportions as the trustee in its uncontrolled discretion revocably or irrevocably from time to time before the Vesting Day appoints. There is no requirement in clause 2.2 that the trustee obtain the consent of the Appointor to an appointment of the Trust Fund to any one or more of the General Beneficiaries. Nor is the Appointor's consent required to a payment of income or capital pursuant to clauses 3 and 5. "Trust Fund" includes any property held from time to time by the trustee under the deed.
Clause 14 of the trust deed provides:
"14. POWERS OF APPOINTOR TO REPLACE TRUSTEE
The Appointor may at any time and from time to time by deed or by notice in writing delivered to the Trustee remove any Trustee hereof in its absolute and unfettered discretion and the right to remove any Trustee hereof and to appoint new or additional Trustees hereof by deed or notice in writing is hereby vested in the Appointor PROVIDED HOWEVER that the Settlor shall not be eligible to be appointed Trustee. Such removal or appointment shall take effect from the date of such notice. The expression the 'Appointor' shall include:
(a) the Appointor's legal personal representatives as from its death; or
(b) any other person or company to whom the powers hereby given may be delegated in writing by the Appointor or its legal personal representatives; or
(c) in the event of the resignation of the Appointor fro the time being (which shall be ineffectual unless given in writing to the Trustee) the person or company nominated by notice in writing to the Trustee by the Appointor to be the Appointor's successor in that role; or
(d) if the resigning Appointor fails to make any such nomination or the position is otherwise vacant, the Trustee."
The "General Beneficiaries" include:
"(a) Edmond Wardy and Hassiba Wardy and the persons related to Edmond Wardy and Hassiba Wardy as follows, namely:
(i) spouse;
(ii) children;
(iii) children and more remote descendants of such children;
(iv) brothers, sisters, parents and grandparents;
(v) children and more remote descendants of brothers and sisters; and
(vi) spouses of any of the foregoing;
(b) any corporation of which any one or more of the foregoing beneficiaries is a member."
On 28 March 2008 Edmund Wardy resigned as appointor of the Edmund Wardy family trust and nominated John Wardy as the appointor of the trust. He appointed John Wardy as managing director of Linevale. Edmund Wardy remained the sole shareholder of Linevale. In my judgment of 22 March 2013 I rejected the challenge by William and Sam Wardy to the validity of the assignment of the office of appointor to the trust. As appointor of the trust John Wardy could remove Linevale as trustee by deed or by notice in writing and could appoint a new trustee by deed or notice in writing.
The removal of a trustee would not affect a prior appointment of capital or income by the trustee under clause 2.2. Nor would it affect the validity of any resolution of a trustee to pay income or capital under clauses 3 or 5.
Part 3.3 of the Succession Act 2006 enables the Court to make orders in limited circumstances designating property as notional estate that the deceased disposed of before death, or property that could have formed the deceased's estate had the deceased exercised a power to deal with the property before death, or property that has been distributed from the estate.
Section 80 provides:
"80 Notional estate order may be made where estate affected by relevant property transaction
(cf FPA 23)
(1) The Court may, on application by an applicant for a family provision order or on its own motion, make a notional estate order designating property specified in the order as notional estate of a deceased person if the Court is satisfied that the deceased person entered into a relevant property transaction before his or her death and that the transaction is a transaction to which this section applies.
Note. The kinds of transactions that constitute relevant property transactions are set out in sections 75 and 76.
(2) This section applies to the following relevant property transactions:
(a) a transaction that took effect within 3 years before the date of the death of the deceased person and was entered into with the intention, wholly or partly, of denying or limiting provision being made out of the estate of the deceased person for the maintenance, education or advancement in life of any person who is entitled to apply for a family provision order,
(b) a transaction that took effect within one year before the date of the death of the deceased person and was entered into when the deceased person had a moral obligation to make adequate provision, by will or otherwise, for the proper maintenance, education or advancement in life of any person who is entitled to apply for a family provision order which was substantially greater than any moral obligation of the deceased person to enter into the transaction,
(c) a transaction that took effect or is to take effect on or after the deceased person's death.
(3) Property may be designated as notional estate by a notional estate order under this section if it is property that is held by, or on trust for:
(a) a person by whom property became held (whether or not as trustee) as the result of a relevant property transaction, or
(b) the object of a trust for which property became held on trust as the result of a relevant property transaction,
whether or not the property was the subject of the relevant property transaction."
"Property" is defined by s 21 of the Interpretation Act 1987 (NSW) as meaning any legal or equitable estate or interest (whether present or future and whether vested or contingent) in real or personal property of any description, including money, and as including things in action. Section 3 of the Succession Act extends that meaning by providing that property includes "any valuable benefit".
As reflected in the note to subs 80(1) a "relevant property transaction" means a transaction or circumstance affecting property described in s 75 or s 76. Those sections relevantly provide:
"75 Transactions that are relevant property transactions
(cf FPA 22 (1), (3) and (7))
(1) A person enters into a relevant property transaction if the person does, directly or indirectly, or does not do, any act that (immediately or at some later time) results in property being:
(a) held by another person (whether or not as trustee), or
(b) subject to a trust,
and full valuable consideration is not given to the person for doing or not doing the act.
...
76 Examples of relevant property transactions
(cf FPA 22 (4))
(1) The circumstances set out in subsection (2), subject to full valuable consideration not being given, constitute the basis of a relevant property transaction for the purposes of section 75.
(2) The circumstances are as follows:
(a) if a person is entitled to exercise a power to appoint, or dispose of, property that is not in the person's estate and does not exercise that power before ceasing (because of death or the occurrence of any other event) to be entitled to do so, with the result that the property becomes held by another person (whether or not as trustee) or subject to a trust or another person (immediately or at some later time) becomes, or continues to be, entitled to exercise the power,
(b) if a person holds an interest in property as a joint tenant and the person does not sever that interest before ceasing (because of death or the occurrence of any other event) to be entitled to do so, with the result that, on the person's death, the property becomes, by operation of the right of survivorship, held by another person (whether or not as trustee) or subject to a trust,
(c) if a person holds an interest in property in which another interest is held by another person (whether or not as trustee) or is subject to a trust, and the person is entitled to exercise a power to extinguish the other interest in the property and the power is not exercised before the person ceases (because of death or the occurrence of any other event) to be so entitled with the result that the other interest in the property continues to be so held or subject to the trust,
(d) if a person is entitled, in relation to a life assurance policy on the person's life under which money is payable on the person's death or if some other event occurs to a person other than the legal representative of the person's estate, to exercise a power:
(i) to substitute a person or a trust for the person to whom, or trust subject to which, money is payable under the policy, or
(ii) to surrender or otherwise deal with the policy,
and the person does not exercise that power before ceasing (because of death or the occurrence of any other event) to be entitled to do so,
(e) if a person who is a member of, or a participant in, a body (corporate or unincorporate), association, scheme, fund or plan, dies and property (immediately or at some later time) becomes held by another person (whether or not as trustee) or subject to a trust because of the person's membership or participation and the person's death or the occurrence of any other event,
(f) if a person enters into a contract disposing of property out of the person's estate, whether or not the disposition is to take effect before, on or after the person's death or under the person's will or otherwise.
(3) Nothing in this section prevents any other act or omission from constituting the basis of a relevant property transaction for the purposes of section 75."
Section 55(3) provides:
"55 Interpretation
...
(3) A reference in this Chapter to a person entitled to exercise a power means a person entitled to exercise a power, whether or not the power:
(a) is absolute or conditional, or
(b) arises under a trust or in some other manner, or
(c) is to be exercised solely by the person or by the person together with one or more other persons (whether jointly or severally)."
Sections 75 and 76 are found in the same chapter as s 55 (Chapter 3).
Before making an order under s 80, the matters in ss 83, 87, 88 and 89 must be satisfied or taken into account. I will deal with those matters after deciding whether there is a power to designate any of the assets of the Edmund Wardy Family Trust as notional estate.
Mr Ellison SC who appeared for Hassiba Wardy contended that the relevant property transaction that enabled the making of an order designating the assets of the trust as notional estate was the appointment by Edmund Wardy of John Wardy as the appointor of the trust on 28 March 2008. I do not accept that argument. The appointment took place more than 12 months before Edmund Wardy's death. Whether or not the appointment was a relevant property transaction within the meaning of s 75 or s 76, s 80 would not entitle the court to make a notional estate order unless the appointment were made with the intention of denying or limiting provision being made out of Edmund Wardy's estate for the maintenance, education or advancement in life of any person entitled to apply for a family provision order. There is no reason to think that that was Edmund Wardy's intention. John Wardy said that his father was concerned that if anything happened to him (that is, his father) and he was incapacitated in some way that the other director (John Wardy) could be removed and power could shift away from the person he had chosen to administer the trust. His father was concerned to ensure that did not happen. I accept that evidence. There is no reason to think that the deceased intended to deny or limit the provision that could be made for any eligible applicant. He considered that he had provided for each of them in his will.
Mr Loofs who appeared for Sam Wardy, supported by Mr Confos who appeared for William Wardy, submitted that the deceased entered into a relevant property transaction by omission and that omission extended up to the time of death. The omission was Edmund Wardy's failure to exercise his power as director of Linevale to cause Linevale to appoint the assets of the trust to his estate. The exercise of that power would have required the concurrence of John Wardy for so long as John Wardy was a director, but, it was submitted, it was no answer that the power might have to be exercised concurrently with another person (s 55(3)(c)). Alternatively, counsel submitted that John Wardy failed to exercise his power both as a shareholder and director of Linevale to the same end. As the sole shareholder of Linevale he could at any time have passed a resolution removing John Wardy as a director of the company and then as the sole director of Linevale he could have resolved that the trust property be appointed to himself. Mr Loofs relied on the decision of the Court of Appeal in Kavalee v Burbidge (1998) 43 NSWLR 422 and that of Bryson J (as his Honour then was) in The Estate of Webb; Molloy v Webb (28 August 1998, unreported).
Mr Loofs submitted that John Wardy's power as appointor to remove Linevale as trustee was not an answer to the plaintiffs' claims based on the deceased's failure to exercise his power as a shareholder and director. That was so for two reasons. First, no evidence was led from John Wardy that he would have objected to the exercise of such a power by his father and taken steps to remove Linevale as trustee and to appoint a different trustee whom his father did not control. It should be inferred, so it was submitted, that John Wardy would not have so acted. In any event, Edmund Wardy could have exercised his power as sole shareholder of Linevale to remove John Wardy as a director and then resolved to appoint the trust property without prior notice, so that John Wardy would not have had the opportunity to prepare the necessary notice for the removal of Linevale as trustee and the appointment of a new trustee.
Mr Loofs submitted that there was another way of engaging s 75(1). By reason of the omission of the deceased to exercise his power as a shareholder and director of Linevale to appoint property of the trust to himself, the other discretionary objects of the trust received a valuable benefit, which is itself property within the extended definition of s 3 for the purposes of ss 75 and 76. That valuable benefit was that there was still the potential for Linevale to appoint the trust property to them which there would not have been had the property been appointed by Linevale acting on the resolution of Edmund Wardy during his lifetime.
Mr Loofs also submitted that the relevant property transaction came within s 76(2)(a) (being an example of a relevant property transaction under s 75(1)). He submitted that Edmund Wardy was indirectly entitled to exercise a power to appoint (and thereby dispose of) property that was not in his estate; namely the assets of the trust. He did not exercise that power before ceasing because of his death to be entitled to do so. The result was that another person (either Linevale or John Wardy) continued to be entitled to exercise that power. No consideration was given for Edmund Wardy's omission to exercise the power.
Section 75(1) is engaged only if the omission of the deceased to exercise his power as shareholder and director of Linevale resulted in property being held by another person, or being subject to a trust, and full valuable consideration not having been given to him for not exercising those powers. The ownership of the assets of Linevale remained unchanged. Counsel for John Wardy submitted that the omission of John Wardy to exercise such powers did not result in property being held by Linevale and subject to a trust. Counsel submitted that there was a significant change in the drafting of s 75 of the Succession Act which replaced s 22(1)(3) and (7) of the Family Provision Act 1982 and that a higher standard of causation is required under the Succession Act than was held to be required under s 22 of the Family Provision Act.
These arguments raise similar issues to those raised in Kavalee v Burbidge. There the deceased, Mr Hyland, had transferred his assets to a Liechtenstein stiftung called the Gartner Foundation. The stiftung was managed by a board of directors, but its effective control rested with the founder of the stiftung. The founder had the power under the articles of the foundation to designate the beneficiaries of the foundation and to determine on the founder's discretion if and when a distribution of income or assets of the foundation was to be made to the beneficiaries. The founder could make such distribution at any time and from time to time to any one or more of the beneficiaries who were to be designated by the founder in a special by-law. The founder's rights were transferable. A by-law was made stipulating a list of beneficiaries that was amended from time to time. The Court of Appeal held that the founder was legally obliged to act in accordance with Mr Hyland's directions (at 440.B) and Mr Hyland had the legal right to give those directions or to remove the founder and appoint a founder of his own choosing (at 440.B, 447.C, 451.F, 452.E, 457.G-458.C).
On Mr Hyland's direction the founder made a special by-law which designated as beneficiaries of the foundation persons referred to in an earlier document of Mr Hyland's described as a memorandum of wishes. The memorandum of wishes was merely precatory, but the by-law designated those to whom the foundation's assets could be appointed. They were in the same position as objects of a discretionary trust. (See per Handley JA at 461.F). After Mr Hyland's death some moneys were paid from the assets of the Gartner Foundation to persons named in the memorandum of wishes. The issues in the case were whether the moneys so distributed and the remaining assets of the Gartner Foundation were liable to be designated as notional estate. Those questions arose under ss 22 and 23 of the Family Provision Act. Sections 75 and 76 of the Succession Act are modelled on the earlier provisions but contain differences of expression that are said to give rise to substantive differences. Sections 22 and 23 of the Family Provision Act provided:
"22 Prescribed transactions
(1) A person shall be deemed to enter into a prescribed transaction if:
(a) on or after the appointed day the person does, directly or indirectly, or omits to do, any act, as a result of which:
(i) property becomes held by another person (whether or not as trustee), or
(ii) property becomes subject to a trust,
whether or not the property becomes in either case so held immediately, and
(b) full valuable consideration in money or money's worth for the firstmentioned person's doing, or omitting to do, that act is not given.
...
(4) In particular and without limiting the generality of subsection (1), a person shall, for the purposes of subsection (1) (a), be deemed to do, or omit to do, an act, as a result of which property becomes held by another person or subject to a trust if:
(a) the person is entitled, on or after the appointed day, to exercise a power to appoint, or dispose of, property which is not in the person's estate but the power is not exercised before the person ceases (by reason of death or the occurrence of any other event) to be so entitled and, as a result of the omission to exercise the power and of the person's death or the occurrence of the other event:
(i) the property becomes held by another person (whether or not as trustee) or subject to a trust (whether or not the property becomes in either case so held immediately), or
(ii) another person becomes (whether or not immediately) or, if the person was previously entitled, continues to be, entitled to exercise the power,
...
(5) Except as provided in subsection (6), a prescribed transaction involving the doing of, or omitting to do, an act as referred to in subsection (4) (paragraph (f) excepted) shall be deemed to be entered into immediately before, and to take effect on, the death or the occurrence of the other event referred to in that subsection in relation to that act or omission.
...
23 Notional estate-prescribed transactions
On an application in relation to a deceased person made by or on behalf of an eligible person, if the Court is satisfied:
(a) that an order for provision ought to be made on the application, and
(b) that, at any time before death, the deceased person entered into a prescribed transaction:
(i) which took effect within the period of 3 years before death and was entered into with the intention, wholly or in part, of denying or limiting, wholly or in part, provision for the maintenance, education or advancement in life of that or any other eligible person out of the deceased person's estate or otherwise,
(ii) which took effect within the period of 1 year before death, and was entered into at a time when the deceased person had a moral obligation to make adequate provision, by will or otherwise, for the proper maintenance, education and advancement in life of that or any other eligible person which was substantially greater than any moral obligation of the deceased person to enter into the prescribed transaction, or
(iii) which took effect or is to take effect on or after the death of the deceased person,
Sam Wardy worked on a full-time basis until 2010. That work included working as a site manager for major building companies in Sydney. He did not work on a full-time basis after 2010, although he looked for work. From about 2010 he obtained only casual employment as a labourer.
Sam Wardy has superannuation of approximately $275,000. He and his wife Leanne are joint owners of the property in Frogmore Street, Mascot that was purchased in 2004 for approximately $630,000. Sam Wardy estimated the current value of that property to be about $800,000. It is subject to a mortgage of about $690,000. He owns a car. Otherwise, his assets consisted of cash remaining after the making of interim distributions from the estate. As in the case of William Wardy, it is unlikely that he would receive a distribution from the trust in the foreseeable future.
Sam Wardy gave evidence that he expected that his wife would bring property settlement proceedings once these proceedings were concluded and that he had been advised that on a property settlement his wife would get their house and an amount of $300,000-$500,000 if his assets permitted such a distribution. His son is now in Year 12 and hopes to study law at university after school.
Whilst the evidence of the advice provided to Sam Wardy as to the likely outcome of Family Court proceedings was read without objection, it can carry no weight. The expertise of the adviser to predict the likely outcome of the Family Court proceeding was not established and no reasons for the view expressed were provided. Undoubtedly the Family Court would have power to adjust the property interests of Sam Wardy and his wife, including Sam Wardy's interest in property obtained from the estate or pursuant to a family provision order. However, I do not consider that I should speculate on whether such a power would be exercised if proceedings in the Family Court were commenced or, if so, how they would be exercised.
Under s 59 of the Succession Act provision can only be made for the applicant's maintenance, education or advancement in life. In Lloyd-Williams v Mayfield Bryson JA observed (at [39], 11) that:
"There is no explicit limit in the terms of the Family Provision Act 1982 which prevents a provision from being made with the indirect effect of benefiting a third party. Limits arise in the application of the concept of adequate provision for proper maintenance and the interdependence of such provision with available resources and competing claims."
I do not think that the possibility or even likelihood of a claim being made on Sam Wardy's property by his wife is a factor warranting an increase in the provision otherwise regarded as adequate for Sam Wardy's maintenance and advancement in life. In McGrath v Eves [2005] NSWSC 1006 Gzell J said (at [75]) that a parent's testamentary bounty should not be expected to cover the consequences of an adult child's divorce. Moreover, in this case there is no way of properly assessing the likelihood of such a claim succeeding. For example, there is no evidence of the wife's assets (except that she is a joint owner of the Mascot property), or of their respective financial and non-financial contributions.
Sam Wardy deposed, and his counsel submitted, that he had a need for new accommodation as well as for a sum of money that would extinguish the mortgage. This was because he is not living in the main house in the Frogmore Street property with his wife and son. He lives in a granny flat. He wants to be able to have a home where he can live with a partner and where his son could come and stay. His wife will expect to continue to live in the Frogmore Street property with her son at least until her son leaves home. In effect, he claims a need for provision which would provide two unencumbered residences: one for his wife from whom he is separated, and one for himself. In addition, Sam Wardy deposed that he regarded his need "as including the need to be free from the need to work". He sought an income of $50,000-$60,000 per year which he said would let him live well. His counsel submitted that a capital sum of $2 million should be provided to provide such a source of income. Counsel submitted that such a sum could be expected to be invested at a conservative rate of three per cent per annum (which would yield $60,000 per year before tax) and that the capital value would substantially erode over time due to inflation.
I do not consider that adequate provision for Sam Wardy's proper maintenance and advancement in life requires him to be provided with an income which would entirely free him from the need to work. Until 2010 he had well-paid work in responsible positions. Although he deposed to having made serious and repeated attempts to find work, his apparent inability to obtain other than occasional casual work as a labourer may be due to his attitude that since his father's death he should not need to work. However, I do not conclude on the balance of probabilities that that is so. I accept that adequate provision for his future maintenance and advancement in life should include a provision that can provide an adequate sum to provide an income for periods when he is out of work or to supplement a salary as well as to provide a buffer against adverse contingencies.
Sam Wardy also contended that his needs included provision that would pay off the balance of his debts, that augmented his superannuation by $725,000, that provided him with a new car (for which he sought $50,000), new white goods, television, computer and sound system ($40,000), furniture ($30,000), and furnishings or dinnerware ($10,000), clothes ($10,000), and a sum to pay the cost of his son's living expenses for a further three years ($100,000) and his likely HECS fees ($80,000-$90,000), and to provide his son with a deposit for a house (reduced in submissions to $40,000-$50,000). With this wishlist of items counsel for Sam Wardy submitted that his needs that should be met should be valued at in excess of $5 million.
I regard these claims as manifestly excessive. I must guard against using the claim as a subconscious anchor against which to assess what is adequate provision for Sam Wardy's proper maintenance and advancement in life.
In my view, such adequate provision, having regard to the size of the estate and notional estate, requires provision of a sum that would discharge Sam Wardy's debts including the mortgage over his house, provide a capital sum capable of being used to supplement his income or to provide an income for periods when he is unable to obtain work, and to provide a sum as a buffer against adverse contingencies. I do not consider that there was any moral obligation on the deceased to provide Sam Wardy with funds for another house because he is not occupying the house he jointly owns due to marital difficulties. The provision should be sufficiently ample to recognise the moral duty of Sam Wardy to continue to support his son during his university studies.
Sam Wardy's principal debt is the debt secured by mortgage over the house of about $690,000. His former solicitor claims he owes a debt of about $47,000. Those costs are to be assessed. His current solicitors claim he owes them about $183,000. A substantial portion of the latter claim should be met by an order for costs in these proceedings. Sam Wardy received interim distributions from the estate of $400,000 that were applied towards payment of debts, including legal costs. The debts incurred also included credit card debt and a loan from a friend to meet legal costs and living expenses.
Sam Wardy has a liability estimated to be approximately $110,000 in respect of the costs he was ordered to pay in respect of his unsuccessful cross-claim. For the reasons I have given I consider that his liability to pay such costs is something to be taken into account in assessing his need for provision as the cross-claim, although unsuccessful, was brought reasonably.
The order for provision in favour of Sam Wardy should be in lieu of his entitlements under the will. The assessment of his needs is made after the interim distributions he has received. The provision is to be in addition to the interim distributions received.
In my view a provision of $900,000 is adequate as a sum to be applied towards discharge of his debts.
It would be artificial, and suggestive of greater precision than can in fact be applied, to seek to calculate separate amounts for a fund to be used to pay income and a fund to provide a buffer against adverse contingencies. When working, Sam Wardy was capable of earning an income of about $160,000 in 2010. I do not know what he could be expected to earn in the future. Therefore, any calculation of a separate capital sum to provide a source of income would be speculative. This is the point at which attempts to reason to a final conclusion break down and the court can do no more than make a value judgment or intuitive assessment of what provision is appropriate. In doing so I take into account Sam Wardy's superannuation.
In my view further provision of $1 million will be adequate to provide a capital sum which can be invested to earn income that would supplement Sam Wardy's income or provide him with a buffer for periods he is unable to earn an income, and which would also provide him with a sum to meet contingencies and to provide support.
Accordingly, a sum of $1.9 million in addition to the distributions already received from the estate would be an adequate provision for Sam Wardy's proper maintenance and advancement in life.
Succession Act, ss 87, 88 and 89.
Section 88(b) and (c) of the Succession Act provides:
"88 Estate must not be sufficient for provision or order as to costs
(cf FPA 28 (1))
The Court must not make a notional estate order unless it is satisfied that:
...
(b) the deceased person's estate is insufficient for the making of the family provision order, or any order as to costs, that the Court is of the opinion should be made, or
(c) provision should not be made wholly out of the deceased person's estate because there are other persons entitled to apply for family provision orders or because there are special circumstances."
Before a notional estate order can be made, I need to be satisfied that the estate is insufficient for the making of the family provision order or any order as to costs that I am of the opinion should be made, or there are special circumstances by reason of which provision should not be made wholly out of the deceased's estate (s 88(b) and (c)). For the purpose of s 88(b) the court must assume that the property in respect of which a family provision order can be made includes the notional estate as well as the actual estate. Were it otherwise no notional estate order could ever be made, except perhaps as to costs, because the question of what provision for an eligible applicant's maintenance, education or advancement in life is proper, and whether the provision, if any, made is adequate, can only be assessed having regard to the assets available.
It is difficult to make an affirmative finding that the deceased's estate is insufficient for the making of the family provision orders that I consider should be made. I do not know how the remainder interests of Hassiba Wardy's sons would be valued. There is considerable uncertainty about the valuations and the debts and the full administration expenses of the estate. It is possible that the additional provision of $300,000 for Hassiba Wardy and the provision I consider that should be made for William and Sam Wardy in lieu of their entitlements under the will could be met out of the shares of John Wardy and Hassiba Wardy's sons. Nonetheless, I am satisfied that there are special circumstances that warrant an order that provision not be made wholly out of the deceased's estate that satisfy the requirement of s 88(c). In Baker v R [2004] HCA 45; (2004) 223 CLR 513, Gleeson CJ said (at [13]):
"[13] There is nothing unusual about legislation that requires courts to find 'special reasons' or 'special circumstances' as a condition of the exercise of a power. This is a verbal formula that is commonly used where it is intended that judicial discretion should not be confined by precise definition, or where the circumstances of potential relevance are so various as to defy precise definition. That which makes reasons or circumstances special in a particular case might flow from their weight as well as their quality, and from a combination of factors." (Footnotes omitted.)
In other words, a circumstance may be special by reason of degree as well as of kind.
Circumstances need not be unique to be special, but they will be unusual (Cetojevic v Cetojevic [2006] NSWSC 431 at [77]; and Campbell v Chabert-McKay [2010] NSWSC 859 at [90]-[92]).
There are "special circumstances" in the present case. In particular, the complexity of the estate, the uncertainty as to the value of the gifts under the will, and the fact that the deceased had built up assets in the Edmund Wardy family trust that could have been used to discharge the debts of the estate, in particular his debts for income tax, are special circumstances enabling the making of notional estate orders.
Before such orders can be made, the court is required by s 87 of the Succession Act to consider the importance of not interfering with reasonable expectations in relation to property, the substantial justice and merits involved in making or refusing to make an order, and any other relevant matter.
No discretionary object of the Edmund Wardy family trust has any reasonable expectation that the assets of the trust will not be interfered with by the making of a notional estate order. Whilst the discretionary objects of the trust have a reasonable expectation of being considered in relation to any decision for the appointment of the assets or income of the trust, they do not have a reasonable expectation of receiving any particular distribution of trust income or trust property. After a notional estate order is made and after costs are paid out of the notional estate, there will still be millions of dollars available for distribution to the discretionary objects of the trust. There is substantial justice and merits in making notional estate orders. But for the decision of Edmund Wardy to place some of the commercial properties he acquired in the trust, the properties would have formed part of his estate. It appears from his instructions to Ms Klonis in 2005 that he did not clearly distinguish between properties which he personally owned and properties which were assets of the trust. As a matter of substantial justice and merit, there is every reason to treat the assets of the trust as assets of the deceased.
Section 89(1) does not require any additional matter to be taken into account that has not already been addressed in the course of these reasons.
Burden of orders for provision
To the extent it is just to do so, the provision to be made for Hassiba, William and Sam Wardy should be made out of the deceased's actual estate. I do not think it just to require that the burden of the order for provision be borne out of the shares of Anthony, Roger or Robert Wardy. They have not established themselves independently in life. For the moment they remain dependent on their mother. Their interests in the residuary real estate will provide them with funds that will be no more than sufficient for their immediate maintenance and advancement in life. Their interests in remainder in the substitute gift for the Cleveland Street property may not be realised for decades.
The other beneficiary who could bear the burden of an order for provision is John Wardy. John Wardy adduced no evidence as to his financial position. There is no evidence that he would suffer any hardship if the burden of the orders for provision falls on his share of the estate. As the sole director of Linevale and as the appointor of the Edmund Wardy family trust he is in the position to control the disposition of the trust assets, subject of course to his fiduciary obligations to the beneficiaries of the trust. He was able to purchase the Cleveland Street property. (It was purchased at auction.)
The burden of the orders for provision so far as they are to be met out of the estate should be borne by John Wardy's share of the estate. That share will be adjusted to accommodate the fact that provision in favour of William Wardy and Sam Wardy is to be made in lieu of their entitlements under the will. There is power under ss 65(2)(f) and 66(2) of the Succession Act to adjust the interests of persons affected by the family provision orders in a means which is just and equitable to all persons affected by the order. Those powers should be exercised to provide for the burden of the family provision orders to be borne in the first instance out of John Wardy's share of the estate adjusted by his being entitled to William and Sam Wardy's shares in the estate. To the extent that John Wardy's share of the estate as so adjusted is insufficient to meet the burden of the family provision orders, assets of the Edmund Wardy family trust are to be designated as notional estate of the deceased. Linevale should nominate an asset or assets of the Edmund Wardy family trust to be designated as notional estate to meet the orders for provision and costs.
Position if no notional estate
But for my conclusion that the assets of the Edmund Wardy Family Trust are liable to be designated as notional estate, I would not have considered that a family provision order should have been made for any of the plaintiffs.
Costs
In my view the plaintiffs' costs of the family provision proceedings should be paid out of the notional estate. But the costs of Mr Salier as administrator of the estate and the costs incurred by John Wardy in defending the family provision claims should be paid out of the actual estate. Mr Salier and John Wardy performed the functions that in a usual family provision case would be performed by the named executor, whose proper expenses should be indemnified out of the estate. I have allowed an estimate of such expenses in estimating the value of the residuary estate.
Counsel for John Wardy submitted that Mr Salier should not receive all of his costs out of the estate. John Wardy submitted that Mr Salier was at fault in not providing timely information about the South Dowling Street rents, in failing to obtain a timely valuation of the property at George Street, Redfern, and in obtaining advice from Morgan Stanley that was unnecessary on the amount that would be required to be set aside to replace the income that Hassiba Wardy would have received had the property been retained. No such advice was tendered. It was submitted for John Wardy that it was inappropriate for the administrator to have been represented by two counsel and that inadequate assistance was provided in relation to the assessment of the estate's value. It was submitted that the administrator should not be entitled to recover his costs out of the estate for the preparation of submissions dated 2 August 2013 for advice sought from Morgan Stanely and for the fees of Morgan Stanley (if any).
It is a serious thing to deprive an administrator of his right to be indemnified out of the estate in respect of expenses incurred in the administration. I do not think that the administrator was guilty of a dereliction of his duty in his conduct of the administration and the provision of information to the court, albeit that the information was provided in a piecemeal fashion. Due allowance must be made for the complexity of the administration. The foreshadowed report from Morgan Stanley as to what capital sum would be required to reinstate the same income stream as was generated from the Cleveland Street property could have been important information. I did not hear argument as to whether an appropriate substitute gift to the Cleveland Street property should be measured having regard to the required amount of capital to reinvest ($5.1 million) or whatever sum would be required to reinstate the income stream. If it is not possible to find an asset with a similar risk profile that generates similar income, questions may arise as to the selection of the appropriate substitute gift. It is unlikely that any dispute in relation to that can be decided in the abstract. There is no evidence that any party asked Mr Salier to conduct such inquiries. I do not think he can be criticised for not providing such evidence. If he has incurred expense in obtaining such evidence that was not deployed then it will be a matter for a costs assessor in assessing costs on the indemnity basis to determine whether the costs were reasonably and properly incurred.
Mr Salier did not take any active part in defending the family provision claims other than providing information to the court in relation to the estate. Cross-examination of the plaintiffs as to their financial needs and other matters relevant to their claims was left to counsel for John Wardy. I joined John Wardy as a defendant to the family provision proceedings because he took the running in defending the claims. He carried out the tasks that would otherwise have been carried out by an executor and is entitled to his costs of defending the family provision proceedings on the indemnity basis out of the estate.
Conclusions
For these reasons I have reached the following conclusions:
1. The assets of the Edmund Wardy family trust are liable to be designated as notional estate and the net assets of the trust are to be taken into account in determining what is adequate provision for the proper maintenance and advancement in life of Hassiba Wardy, William Wardy and Sam Wardy.
2. Provision of a sum of $300,000 in addition to her entitlements under the will is required for there to be adequate provision for Hassiba Wardy's proper maintenance and advancement in life.
3. A legacy of $1,560,000 in addition to the distributions he has received from the estate, but otherwise in lieu of his entitlements under the will, is adequate provision that should be made for William Wardy's proper maintenance and advancement in life.
4. A legacy of $1,900,000 in addition to the distributions he has received from the estate but otherwise in lieu of his entitlements under the will is adequate provision that should be made for Sam Wardy's proper maintenance and advancement in life.
5. The burden of the orders for provision are to be borne out of John Wardy's entitlements under the will so far as it extends and otherwise out of the notional estate. John Wardy's entitlements under the will are to be augmented by the shares that William Wardy and Sam Wardy would otherwise have received under the will, but for the orders for provision in their favour, but without disturbing the interim distributions made.
6. The costs of Mr Salier and of John Wardy in relation to the three family provision proceedings are to be paid out of the estate and assessed on the indemnity basis.
7. The costs of Hassiba Wardy, William Wardy and Sam Wardy of the family provision proceedings are to be paid out of the notional estate and are to be assessed on the ordinary basis.
8. There should be no order as to Linevale's costs to the intent that it bear its own costs, but be indemnified in respect of such costs out of the assets of the Edmund Wardy family trust.
9. Linevale is to designate a particular asset or assets of the Edmund Wardy family trust to be designated as notional estate to bear the burden of the family provision orders that is not met from the estate, and the burden of the costs to be paid out of the notional estate.
My conclusion as to costs have been arrived at subject to any question that might arise concerning particular costs orders that have not been the subject of submissions, such as might arise from the making of an offer of compromise or a Calderbank offer. If any party seeks any different costs orders I will hear submissions and receive any relevant evidence on such questions.
I stand over the proceedings to a convenient date for counsel to bring in short minutes of order consistent with these reasons.
Amendments
01 May 2014 - Amendments made to coversheet:Details for parties added: John Wardy as 2nd Defendant; Linevale Pty Ltd; Counsel appearing and solicitors acting for those parties added.
Amended paragraphs: 0
Decision last updated: 01 May 2014
53
9
5