Segelov v Ernst and Young Services Pty Ltd
[2014] NSWSC 283
•21 March 2014
Supreme Court
New South Wales
Medium Neutral Citation: Segelov v Ernst & Young Services Pty Ltd [2014] NSWSC 283 Hearing dates: 20 and 21 February 2014 Decision date: 21 March 2014 Jurisdiction: Equity Division Before: Nicholas AJ Decision: (1) The statement of claim be dismissed.
(2) The plaintiff pay the defendant's costs.
Catchwords: TRUSTS - Trustees - Duty to beneficiary - Discretionary trust - Whether trustee had a duty to inform beneficiary of entitlement once determined - Whether trustee had a duty to ensure beneficiary received the benefit of any distribution Legislation Cited: Trustee Act 1925 (NSW) Cases Cited: Federal Commissioner of Taxation v Clendon Investments (1977) 7 ADR 493
Federal Commissioner of Taxation v Cornell (1946) 73 CLR 394
Federal Commissioner of Taxation v Vegners (1989) 89 ATC 5274
Hartigan Nominees Pty Ltd v Rydge (1992) 29 NSWLR 405
Hawkins v Clayton (1987-1988) 164 CLR 539
Hawkesley v May (1956) 1 QB 304
J W Broomhead (Vic) Pty Ltd (In Liq) v J W Broomhead Pty Ltd (1985) VR 891
Kennon v Spry (2008) 238 CLR 366
Russell v Scott (1936) 55 CLR 440
SAS Trustee Corporation v Cox [2011] NSWCA 408
Vegners v Federal Commissioner of Taxation (1991) 91 ATC 4213
Youyang Pty Ltd v Minter Ellison Morris Fletcher (2003) 212 CLR 484Texts Cited: JD Heydon and MJ Leeming (eds), Jacobs' Law of Trusts in Australia (Lexis Nexis Butterworths, Australia, 7th ed, 2006) Category: Principal judgment Parties: Dana Segelov (Plaintiff)
Ernst & Young Services Pty Ltd (Defendant)Representation: Counsel:
M K Meek SC/D Barlin (Plaintiff)
I M Jackman SC/D F C Thomas (Defendant)
Solicitors:
Turner Freeman Lawyers (Plaintiff)
Kind & Wood Mallesons (Defendant)
File Number(s): 2012/346052 Publication restriction: Nil
Judgment
By statement of claim filed 6 November 2012 the plaintiff (Segelov) claims equitable compensation from the defendant (EYS) in the sum of $439,119.68 for loss suffered arising from breaches of fiduciary duties owed to her as a beneficiary under a discretionary trust.
The relevant background is contained in the following agreed factual narrative provided by the parties to the Court, which I gratefully adopt. It is set out in paras [3]-[27] below.
The parties and the Ernst & Young Services Trust
EYS is a service company associated with the firm of Ernst & Young ("E&Y"). E&Y is a partnership with over 400 partners in Australia. It is a member of the global network of firms which does business under the "Ernst & Young" brand. It provides assurance, tax, transaction and advisory services to its clients. EYS employs staff and owns certain assets which it contracts to provide to E&Y in return for payment from E&Y.
EYS is also the trustee of the Ernst & Young Services Trust ("Trust"). It was appointed as trustee of the Trust on 20 May 1988 (at which time EYS was known as E and W Secretariat Pty Ltd). The Trust is a discretionary trust. The discretionary objects of the Trust include the spouses, widows, children and other descendants of the partners of Ernst & Whinney (which includes its successors in business, such as E&Y).
Segelov is the wife of a partner of E&Y (Mr Joseph). She has brought a claim against EYS alleging various breaches in connection with payments it made between 18 August 2006 and 15 April 2012 ("Relevant Period"), to two bank accounts, which she held jointly with her now-estranged husband.
Relevant terms of the Trust Deed
It is convenient, in the first instance, to refer to the terms of the constituent documents of the Trust. The Trust (originally known as "The Second Meritable Trust") was settled on EYS by Ronald Jessel Sicree on 20 May 1988. The Deed of Settlement executed on that date ("Trust Deed") was subsequently amended by deed on 30 April 1998, 19 May 2004, 1 March 2005 and 27 April 2006 (all such amendments occurring prior to the Relevant Period).
Clause 2.1(a) of the Trust Deed provides that:
"Subject to sub-clauses 5.1 and 5.2 the Trustee shall during the Income Period hold the Trust Fund upon trust as follows:
2.1 To apply in any Financial Year, prior to the 30th day of June in that Financial Year, so much of the income arising from the Trust Fund in that Financial Year, between the Beneficiaries in all respects as the Trustee thinks fit as follows:
(a) by paying so much of the income as the Trustee thinks fit to any beneficiary or to a bank account in the name of any Beneficiary (whether solely or jointly with that of any other person including the Trustee) or in the name of a parent or guardian as trustee for any Beneficiary and any such payment shall with or without the execution of a receipt by such Beneficiary or any person on his behalf constitute a full and final discharge therefor to the Trustee in relation to the trusts of this Deed".
As amended, the Trust Deed defines certain capitalised words or phrases appearing in clause 2.1(a) relevantly as follows:
(a) "'Income Period' means the period from the execution hereof until the Day of Distribution or the first earlier day upon which the Trustee has in fact distributed the whole of the Trust Fund in accordance with this Deed whichever shall first occur": clause 1.7. In other words, the Income Period is the period of time between execution and determination of the Trust;
(b) "'Trust Fund' means the settled property and any additional property real or personal which may hereafter be vested in the Trustee upon the trusts of this Deed and all investments and property into which such property may be converted or which by the exercise of any of the powers contained in this Deed may accrue to or otherwise become subject to the trusts of this Deed": clause 1.16;
(c) "'Financial Year' means any period of twelve (12) months which commences on the 1st day of July in any year and ends on the next succeeding 30th day of June...": clause 1.5;
(d) "'Income' or 'Income of the Trust Fund' means accounting income as set out in the annual accounts of the Trust Fund": clause 1.6 as amended by an Amending Deed dated 1 March 2005.
As alluded to above, the Trust Deed defines the discretionary objects of the Trust (whom it describes as "Beneficiaries"). These are:
(a) "the spouses for the time being of the partners of Ernst & Whinney or a widow of any such partner";
(b) the children or other descendants of partners;
(c) the trustee of any trust or settlement or will of which any one or more of the persons mentioned in (a) and (b) above are named as a beneficiary or a person in whose favour a discretion vested in such trustee may be exercised;
(d) any corporation of which any of the persons referred to in paragraphs (a) and (b) are members (other than EYS itself);
(e) any institution, body or organisation from time to time established in Australia and whose objects are charitable at law;
(f) any object or purpose in Australia which is charitable at law;
(g) any institution or body whose income is exempt from taxation by virtue of the provisions of the Income Tax Assessment Act 1936 or any amendment thereof from time to time in force; and
(h) any other person, corporation, trust or object from time to time nominated by a partner of Ernst & Whinney with the consent of the Trustee.
Clause 6 of the Trust Deed sets out the "absolute powers and discretions" which the Trustee "may exercise either alone or jointly with any other person or persons". To the list of 25 such absolute powers and discretions, an Amending Deed dated 30 April 1998 added a twenty-sixth in the following terms:
"Pursuant to the powers expressly conferred on it by clause 5.2 of the Trust Deed, the Trustee hereby varies and adds to clause 6 of the Trust Deed by inserting a new clause 6.26 as follows:
6.26 Without limiting its powers under clause 2.1, to make interim distributions of the income arising from the Trust Fund in the then current Financial Year, at any time determined by the Trustee, in the same manner and to the same extent as the income arising from the Trust Fund for the whole of that Financial Year may be paid, applied or invested or may be the subject of a resolution of the kind referred to in paragraph 2.1(d)."
A separate Amending Deed dated 27 April 2006 provided as follows:
"Pursuant to the powers expressly conferred on the Trustee by clause 5.2 of the Trust Deed, the Trustee varies clause 6 of the Trust Deed ("Powers of the Trustee") as from the date of this deed by inserting a new clause 6.26 as follows:
6.26 To enter into and perform any derivative transaction (as defined in the Corporations Act), including but not limited to a transaction which is:
(i) an interest rate swap transaction, swap option, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap, equity or equity index option, bond option, interest rate option, foreign exchange transaction, cap transaction, floor transaction, collar transaction, currency swap transaction, cross-currency rate swap transaction, currency option, credit protection transaction, credit swap, credit default swap, credit default option, total return swap, credit spread transaction, repurchase transaction, reverse repurchase transaction, buy/sell-back transaction, securities lending transaction, weather index transaction or forward purchase or sale of a security, commodity or other financial instrument or interest (including any option with respect to any of these transactions); or
(ii) a type of transaction that is similar to any transaction referred to in clause (i) above that is currently, or in the future becomes, recurrently entered into in the financial markets and which is a forward, swap, future, option or other derivative on one or more rates, currencies, commodities, equity securities or other equity instruments, debt securities or other debt instruments, economic indices or measures of economic risk or value, or other benchmarks against which payments or deliveries are to be made, and any combination of these transactions."
An issue in the proceedings is whether this clause replaced the clause 6.26 inserted on 30 April 1998.
Finally, clause 7.1 of the Trust Deed provides that:
"While acting or purporting to act in the execution of the trusts or to exercise any of the powers in this Deed hereof a Trustee shall not be liable for any loss neglect default or breach of trust unless the same is attributable to its his or her own wilful neglect or dishonesty it being the intention of the Settlor that the Trustee shall have the widest possible powers and discretions in the administration investment and management of the Trust Fund and the execution of the trusts contained in this Deed without being liable for the consequences of exercise those powers and discretions or executing or administering any of those trusts."
Payments made to Segelov: St George Account
On 1 July 2006, Mr Joseph became a partner of E&Y. In advance of this, he completed a form entitled "Nomination of Beneficiary - The Ernst & Young Services Trust" and dated 8 June 2006 ("Nomination Form"). The Nomination Form lists Segelov's name, date of birth and tax file number beneath the words "Pursuant to the Trust Deed, I wish to nominate the following beneficiaries". The Nomination Form includes a declaration (to be signed by the nominating partner, and, in this case, in fact appearing to have been signed by Mr Joseph) as follows: "I hereby declare that I hold the authority of the beneficiary to quote the above TFN". The next section of the Nomination Form is headed "Recommendation of % of EYST allocation to be advanced" and this is followed by a space for the inclusion of payment details, being a bank account number and BSB code, as well as the corresponding bank account name.
There is also no dispute that Segelov was not contacted by the trustee as to the bank account where the payments should be paid.
There is no dispute as to the fact that these details correctly identified a joint bank account in the name of Segelov and her husband, held with St George Bank ("St George Account"). It is not contested that Segelov jointly opened the St George Account and was legally entitled to operate that account at all relevant times. The Nomination Form concludes with the statement that: "This recommendation is to remain in place until revoked in writing".
It is not contested that, from 11 July 2006 to 8 June 2007, EYS made payments in the amount of $51,625 into the St George Account and that those payments were in fact received into the St George Account. This is supported by bank statements pertaining to the St George Account, which Segelov tendered and which show that these payments were made.
When served with a Notice to Admit Facts (which was tendered by EYS at final hearing), Segelov admitted that certain transactions (24 over a 14 month period totalling $2,464.73) recorded on those bank statements were entered into by her. Segelov also admitted that monies credited to the St George Account were: (a) used to reduce indebtedness in her name; (b) employed at her direction; (c) applied to her living expenses; (d) applied to support her dependent children; and (e) employed for personal expenditure. Thus, it is not disputed that Segelov had access to, and transacted upon, the St George Account.
Payments made to Segelov: Westpac Account
When a partner wishes to request that EYS pay distributions into a different bank account, the partner can either complete a new Nomination Form identifying the new bank account details, or send another form of written communication (such as an email) requesting that moneys be paid into that different account. On 9 July 2007, an employee of EYS (who fulfils the role of Manager - Partnership Services) received an email from Mr Joseph in the following terms:
"starting this month and going forward can you pls (sic) pay my services trust distribution to the following account".
He then set out the BSB code, account number and name of an account held with the Westpac Bank ("Westpac Account"). It is not contested that Segelov did not advise nor was aware of the request by her husband to change the bank account where payments were to be paid.
It is not contested that this was an account held jointly in the name of Segelov and Mr Joseph, and that EYS made payments in the amount of $417,370.39 into that account between 26 July 2007 and 12 March 2012. It is not contested that those payments were in fact received into the Westpac Account.
It is not contested that Segelov jointly opened the Westpac Account and was legally entitled to operate that account at all relevant times. This is supported by bank statements pertaining to the Westpac Account, which Segelov tendered and which show that these payments were made. It is not contested that Segelov did not transact on the Westpac Account during the relevant period. It is not contested that Segelov was unaware during the relevant period that the account was open and that she believed the account had been closed prior to the relevant period.
Segelov's knowledge of the Trust and distributions paid into the St George Account and Westpac Account for her benefit
Segelov read two affidavits at the final hearing of these proceedings, sworn by her on 7 March 2013 ("First Segelov Affidavit") and 1 June 2013 ("Second Segelov Affidavit"). Segelov was not cross-examined on these affidavits.
In the First Segelov Affidavit, Segelov deposed that:
(a) she did not know that she was a beneficiary of the Trust until on or about 23 January 2012, when her then-current accountant obtained copies of her tax returns from her previous accountant. Segelov had not seen or signed her tax returns prepared by her previous accountant;
(b) she did not receive any communication or correspondence from EYS with respect to the Trust, including communication or correspondence with respect to any distributions from the Trust;
(c) during the Relevant Period she did not give any instructions to EYS as to where any distributions from the Trust to her should be paid;
(d) she did not authorise her husband to give any directions to EYS on her behalf;
(e) during the Relevant Period, she did not authorise anyone, either directly or indirectly, to communicate on her behalf with EYS with respect to any matter whatsoever including any distributions from the Trust;
(f) during the Relevant Period, she did not request that EYS pay any distributions from the Trust to her into either the St George Account or the Westpac Account;
(g) she did not know until on or about 13 March 2012, when she obtained copies of bank statements from Westpac, that EYS had made distributions to her from the Trust, during the Relevant Period, into either the St George Account or the Westpac Account; and
(h) she did not know that the Westpac Account was still open when EYS paid amounts into it.
Segelov then deposed to certain correspondence between her accountant and EYS concerning the ceasing of distributions to her. That correspondence post-dates the Relevant Period. Segelov has not pleaded any allegations as to the payment of distributions to her after the end of the Relevant Period.
In the Second Segelov Affidavit, Segelov deposed that:
(a) her husband left their marital home on 25 November 2011;
(b) from on or about July 2002, Segelov's husband engaged a friend of his to be their accountant and complete their tax returns. From that time, Segelov did not sign or receive copies of her tax returns, nor did she instruct her accountant in relation to her tax returns or provide him information for her tax returns. This was done by her husband and, during the time they engaged that accountant, she thought she had little taxable income;
(c) on or about 23 January 2012, Segelov engaged different accountants and, upon receiving her file from her former accountant, she received copies of her tax returns for the income tax years ended 30 June 2007 to 30 June 2010;
(d) on 23 January 2012, Segelov knew for the first time that such taxation returns were lodged on her behalf for those income tax years. It is uncontested that such tax returns were not lodged with her authority, that she did not review them prior to lodgement and that they were not disclosed to her until 23 January 2012. She did not give any instructions for the preparation or lodgement of those returns;
(e) after the receipt of the tax returns by her accountants, she became aware that she was a beneficiary of the Trust and that payments made by EYS into the St George Account, which she held jointly with her husband, "were purported to be payments to" her;
(f) after January 2012, Segelov obtained copies of the bank statements of the St George Account, which she had not previously seen;
(g) after her estrangement from her husband, Segelov became aware that during the period 11 July 2007 to 15 April 2012, payments were made to by EYS "apparently for [her] benefit" into the Westpac Account, which was a joint account. She was not aware during that period that the Westpac Account was open; she believed it was closed in around 2003, when she and her husband sold a property that they jointly owned in Woollahra, New South Wales, or at least by the time her husband became a partner of E&Y. She did not transact on the account at any time while her husband was a partner of E&Y, prior to becoming aware that it was still open on 11 March 2012. She obtained bank statements for the Westpac Account after January 2012; and
(h) Segelov believes that the funds in the Westpac Account was used by her husband for various purposes. At no time between 11 July 2007 to 12 March 2012 did she have knowledge of, or transact upon, that account.
EYS' resolutions in respect of distributions
It is not contested that the functions of EYS as trustee of the Trust are formally carried out by the board of directors of EYS. During the Relevant Period, shortly before the end of each Financial Year, the board of directors resolved to make distributions to certain discretionary objects, including Segelov. Those resolutions were in evidence before the Court.
Taxable income statements
It was not contested that, after the end of each financial year, EYS and E&Y prepare and provide to each partner of E&Y a document which sets out all the financial information concerning payments made to that partner in connection with his or her role as a partner of E&Y which is required for the purpose of completing income tax returns for the corresponding financial year. These documents also include a separate section setting out the payments made by EYS to the beneficiaries of the Trust associated with that partner. EYS and E&Y provided this material to each partner in the expectation that relevant portions of the documents will be provided to the partner's spouse where appropriate. Statements in this form were provided to Segelov's husband in each of the Financial Years ended 30 June 2007 to 30 June 2012.
Family Court proceedings
In late 2011 (and before the end of the Relevant Period), Segelov's marriage broke down. Mr Joseph left the marital home on 25 November 2011. In 2012, Segelov brought proceedings in the Family Court of Australia seeking orders as to the dissolution of her marriage and in relation to property and financial matters.
The Claim
Segelov alleged that EYS, as trustee, owed her a duty to inform her upon becoming entitled to a distribution that she was a beneficiary under the trust. It was also alleged that EYS owed her a duty to ensure that she received the benefit of any distribution to her. It is claimed that the failure of EYS to notify her that she was a beneficiary, and to notify her of the payments made into the bank accounts, constituted breaches of these duties. Segelov says she remained ignorant of the payments into the bank accounts made by EYS, and that she derived no use or benefit from them. Her claim for equitable compensation is for the loss of the amount of the payments, which, it may be inferred, were withdrawn by her then husband for his use.
EYS denied it owed the duties alleged, and/or any breach thereof, alternatively it seeks exemption from liability for any loss. Further, it is denied that any loss was attributable to the conduct of EYS.
Clause 6.26 and Clause 2.1(a) of the Trust Deed
At the outset it is convenient to determine preliminary questions which concerned the effect of amendments to clause 6.26, and the construction of clause 2.1(a).
As earlier noted (para 6) the Trust Deed executed on 20 May 1988 was amended by deed on several occasions. Clause 6(1)-(25) of the Trust Deed lists the powers and discretions exercisable by the trustee.
By the amending deed dated 30 April 1998, clause 6.26 was added in accordance with the following:
"Pursuant to the powers expressly conferred on it by clause 5.2 of the Trust Deed, the Trustee hereby varies and adds to clause 6 of the Trust Deed by inserting a new clause 6.26 as follows:..."
The amending deed dated 27 April 2006 varied clause 6 in accordance with the following:
"Pursuant to the powers expressly conferred on the Trustee by clause 5.2 of the Trust Deed, the Trustee varies clause 6 of the Trust Deed ("Powers of the Trustee") as from the date of this date by inserting a new clause 6.26 as follows:..."
Segelov raised the question whether, on its proper construction, the effect of the amendment of 27 April 2006 was to delete and replace clause 6.26 as inserted by the amendment of 30 April 1998. Support for this proposition was said to derive from the identification of the new provision as "6.26".
In my opinion the issue is to be resolved with a common sense regard to the ordinary language of the terms of each amendment in the overall context of clause 6. In context, the word "inserting" in each amendment should be taken to mean "adding". I do not read the amendment of 27 April 2006 as intended to delete the power specified in existing clause 6.26, and to replace it with a new and different power. In my opinion, the later amendment should be understood as effecting a variation of clause 6 by the addition of a new clause which provides the Trustee with a power substantially different from, and additional to, the other powers specified in the clause 6. Absent some other explanation, I am satisfied that the reference to clause 6.26 was mistaken, and was not intended to indicate the deletion and replacement of existing clause 6.26. Had the intention been to replace existing 6.26, it would have been simple enough to employ appropriate language to express it. In the context of earlier amendments it is probable it would be read as clause 6.28.
Support for this conclusion is to be found in the words of the amending deed of 19 May 2004 which effected the deletion and replacement of clause 11. Its intention was expressed in plain language, relevantly, as follows:
"Pursuant to the powers expressly conferred on the Trustee by clause 6.27 of the Trust Deed, the Trustee varies clause 11 of the Trust Deed (Name) as from the Effective Date by deleting the name 'The Second Meritable Trust' and replacing it with the name 'Ernst and Young Services Trust'".
Segelov also raised an issue whether the payments made into the joint bank accounts were payments of income under clause 2.1(a) which attracted the benefit of the discharge therein provided.
Clause 1.6 of the Trust Deed defines the terms "Income" and "Income of the Trust Fund" as follows:
"'Income' or 'Income of the Trust Fund' means accounting income as set out in the annual accounts of the Trust Fund".
It was submitted that, for the purposes of clause 2.1(a), the term "income" means "accounting income as set out in the annual accounts of the Trust Fund". It was put that until the annual accounts of the Trust Fund had been finalised prior interim payments were not payments of income and, accordingly, the discharge did not apply. Thus it was put that payments made prior to 30 June each year might be described as advances of expected income, but not as income. Support for the argument required acceptance of the proposition that EYS has no power to make interim payments because clause 6.26 under the amending deed of 27 April 2006 replaced clause 6.26 under the amending deed of 30 April 1998 which empowered EYS "...to make interim distributions of income arising from the Trust Fund in the then current Financial Year, at any time determined by the Trustee...".
EYS submitted that, upon its proper construction, clause 2.1 expressly contemplated that distribution of income may be made "prior to the 30th day of June" in the relevant financial year. It was put that clause 6.26 under amending deed of 30 April 1998, assuming not replaced under the amending deed of 27 April 2006, expressly permitted the making of interim distributions of income "in the then current Financial Year at any time determined by" EYS. It was put that, contrary to Segelov's interpretation, clause 6.26 expressly empowered EYS to distribute income prior to the end of a financial year. Furthermore, it was put that the definition of "income" is to be understood as identifying the maximum amount of money available for distribution i.e.: the accounting income as set out in the annual accounts of the Trust Fund.
In any event, so it was put, even if the interim payments were not of income at the times they were made, they were properly categorised as such once EYS resolved that the distributions constituted income of the trust. Thus it was said that the effect of the relevant resolutions passed at the end of each financial year was confirmatory rather than dispositive, and established the propriety of the payments. Reliance was placed on the principles considered in Federal Commissioner of Taxation v Vegners (1989) 89 ATC 5274 at 5279; (1991) 91 ATC 4213 at 4215.
In my opinion, Segelov's construction of clause 2.1 must be rejected. I have held that clause 6.26 of the amending deed of 30 April 1998 was not replaced by the new clause under the amending deed of 27 April 2006. I hold, upon the proper construction of clause 2.1 and clause 6.26 under the earlier amending deed, with regard to the definition of income, that the distributions to the bank accounts prior to 30 June of each year were payments of income which attracted the benefit of the discharge.
Consideration
The duty postulated in this case is a positive duty requiring the trustee to inform a beneficiary of his or her entitlement to a distribution under the trust. It was put that the duty to inform arises on an occasion-by-occasion basis once it has been determined to make a distribution to that person. It was also argued that, either as an extension of this duty, or as a separate duty, the trustee was required to ensure that the beneficiary received the moneys paid by way of distribution for his or her use and benefit. In this case the Court is not concerned with the question whether a beneficiary has a right, on request, to disclosure of documents or information in relation to the trust.
The issue of duty must be resolved by reference to the obligations imposed upon EYS as trustee by the terms of the Trust Deed. Its most important duty is to obey the terms of the trust (Youyang Pty Ltd v Minter Ellison Morris Fletcher (2003) 212 CLR 484 para 32) so as to carry out the wishes of the settlor (Jacobs' Law of Trusts in Australia, 7th Ed, para 1704).
In this case the trust is a discretionary trust. The class of beneficiaries under clause 1.1 of the Trust Deed is open, and extends (clause 1.1(a)) to the spouses for the time being of the partners of Ernst & Winney. Absent the specification of trust capital or income to one of the objects of the trust there is no equitable interest in its assets held by anyone (Kennon v Spry (2008) 238 CLR 366 para 49).
By recital E of the Trust Deed EYS has "the most absolute discretion possible in relation to the administration of the Trust Fund" and in the distribution of its capital and income. The scope of the discretion is similarly described in various other provisions, including clause 6 which specifies the "absolute powers and discretions" which may be exercised, and clause 7.1 which, in limiting liability to acts of wilful neglect or dishonesty, states that it is the settlor's intention that:
"the Trustee shall have the widest possible powers and discretions in the administration investment and management of the Trust Fund and the execution of the trusts contained in this Deed without being liable for the consequences of exercising those powers and discretions or executing or administering any of those trusts".
Clause 2.1 provides:
"To apply in any Financial year, prior to the 30th day of June in that Financial Year, so much of the income arising from the Trust Fund in that Financial Year, between the Beneficiaries in all respects as the Trustee thinks fit as follows:
(a) by paying so much of the income as the Trustee thinks fit to any Beneficiary or to a bank account in the name of any Beneficiary (whether solely or jointly with that of any other person including the Trustee) or in the name of a parent or guardian as trustee for any Beneficiary and any such payment shall with or without the execution of a receipt by such Beneficiary or any person on his behalf constitute a full and final discharge therefore to the Trustee in relation to the trusts of this Deed,"
By amending deed 30 April 1998, clause 6.26 provides:
"Without limiting its powers under clause 2.1, to make interim distributions of the income arising from the Trust Fund in the then current Financial Year, at any time determined by the Trustee, in the same manner and to the same extent as the income arising from the Trust Fund for the whole of that Financial Year may be paid, applied or invested or may be the subject of a resolution of the kind referred to in paragraph 2.1(d)."
For the avoidance of any doubt as to the scope of EYS' discretion in undertaking its obligation under clause 2.1(a), clause 1.11 provides:
"The expressions "as the Trustee thinks fit" and "the Trustee as it thinks fit" shall give the Trustee the widest possible discretion including where applicable the power to prefer one or other Beneficiary to the total exclusion of any other or others of them".
With regard to Segelov, EYS carried out its task under clause 2.1(a) and clause 6.26 in the following way.
EYS received from Mr Joseph the Nomination Form dated 8 June 2006 in which Segelov was nominated as a beneficiary. The Nomination Form provided details of the joint bank account in the name of Mr Joseph and Segelov (the St George Account) into which it was recommended that distributions should be paid. From 11 July 2006 to 8 June 2007 EYS made payments including interim distributions in the total amount of $51,625 into the St George Account.
On 9 July 2007 EYS was requested in an email from Mr Joseph to thereafter pay the distributions into a joint bank account in the name of himself and Segelov (the Westpac Account). From 26 July 2007 to 12 March 2012 EYS made payments including interim distributions in the total amount of $417,370.39 into the Westpac Account.
During the Relevant Period, shortly before the end of each Financial Year, EYS resolved to make distributions to certain discretionary objects, including Segelov. After the end of each Financial Year, EYS and E&Y prepared and provided a document with the financial information concerning payments made to each partner of E&Y which was required for the purpose of completing income tax returns for the corresponding Financial Year. The documents also included a section setting out payments made by EYS to the beneficiaries of the Trust associated with that partner. This material was provided to each partner in the expectation that relevant portions of the documents would be provided to the partner's spouse where appropriate. Statements in this form were provided to Mr Joseph in each of the Financial Years 30 June 2007 to 30 June 2012.
It is common ground that each payment involved an exercise of discretion. In compliance with clause 2.1(a) each payment was made into a bank account in the name of Segelov jointly with Mr Joseph. As a consequence, the right and title to the amount deposited vested immediately in Segelov and Mr Joseph. The effect of a deposit into a joint account was described in Russell v Scott (1936) 55 CLR 440 at 448 by Starke J as follows:
"A person who deposits money in a bank on a joint account vests the right to the debt or the chose in action in the persons in whose names it is deposited, and it carries with it the legal right to title by survivorship (Standing v Bowring (9); In re Shields; Corbould-Ellis v Dales (10); Re Reid (11); Lindley on Partnership, 7th ed. (1905), p380). The vesting of the right and title to the debt or chose in action takes effect immediately, and is not dependent upon the death of either of the persons in whose names the money has been deposited. In short it is not a testamentary disposition. There is nothing in the law to forbid a person depositing moneys in the joint names of himself and his family, or strangers: it is a form of gift, the effect of which has already been stated".
...
and by Dixon, Evatt JJ (p 450):
"...The relation between the bank and its customers is that of debtor and creditor. The aunt and the nephew upon opening the joint account became jointly entitled at common law to a chose in action. The chose in action consisted in the contractual right against the bank, i.e., in a debt but a debt fluctuating in amount as moneys might be deposited and withdrawn".
The vesting of the right in the holders of the account takes place when the deposit is made, irrespective of knowledge that it has been made. In Federal Commissioner of Taxation v Cornell (1946) 73 CLR 394 at 402 Latham CJ referred, with approval, to Standing v Bowring (1885) 31 Ch. D. 282 (p 288):
"...where it was held that, when there is a transfer of property to a person, it vests in him even before he knows of the transfer, "subject to his right when informed of it to say, if he pleases, 'I will not take it'. When informed of it, he may repudiate it, but it vests in him until he so repudiates it"".
An entitlement under a trust is valid notwithstanding that the beneficiary has had no knowledge of it (Vegners v Federal Commissioner of Taxation (1991) 91 ATC 4213 at 4215).
Acceptance of a gift is presumed until disclaimer has been signified, even when the donee is unaware that a gift has been made (Federal Commissioner of Taxation v Clendon Investments (1977) 7 ADR 493 at 500). In J W Broomhead (Vic) Pty Ltd (In Liq) v J W Broomhead Pty Ltd (1985) VR 891 at 930 McGarvie J held:
"The general principles which apply to the making and acceptance of gifts, apply where the gift is of a beneficial interest made by way of declaration of trust. Thus in Federal Commissioner of Taxation v Cornell (1946) 73 CLR 394, at pp. 401-2 Latham CJ applied to the alleged provision of a benefit under a trust, principles which had been held to apply to a devise of land. See also Jacobs, Law of Trusts in Australia, 4th ed., pp. 289-90, para. 1539. Positive acceptance by the words or conduct of a donee is not necessary to complete a gift. Acceptance may be presumed unless the donee disclaims the gift. The strength of the presumption is illustrated by Demar v Demar (1975) 1 W.L.R. 1532 and Federal Commission of Taxation v Clendon Investments Pty. Ltd. (1977) 7 A.T.R. 493, at pp. 500-1. Knowing of the gift, the donee, unless he disclaims it, is ordinarily treated as tacitly accepting it: Standing v Bowring (1885) 31 Ch D 282. During the period that the donee remains entitled to disclaim, the gift is treated as vested in the donee subject to repudiation: Standing v Bowring. See generally Halsbury's Laws of England, 4th ed., vol. 20, pp. 28-9, paras 47-8 and the note by MC Cullity in (1978) 56 Canadian Bar Review 317.
There are statements which indicate that, to be effective, a disclaimer should be made within a reasonable period having regard to the circumstances of the particular case.
...
In the absence of positive conduct by which the donee indicates acceptance, the right to disclaim is lost because the court makes a presumption of fact or draws an inference. The presumption or inference is that by remaining silent beyond the time when he would be expected to decline the gift if not accepting it, the donee has tacitly accepted. The inference in the case of a donee is easy to draw because it is human nature to accept gifts. With a gift such as one under a trust deed or a will it is not normally considered necessary to indicate acceptance, but a beneficiary who desires not to receive what is given would commonly indicate that desire. Inaction by the beneficiary is consistent with acceptance...
The test for whether a beneficiary is entitled to disclaim is whether in the circumstances he has accepted by words or other conduct or has remained silent for so long that the proper inference is that he has determined to accept the interest".
On 2 May 2012, Segelov's solicitors wrote to EYS disclaiming beneficial interest in further trust distribution for the year ending 30 June 2012 and for future tax years.
In my opinion, it follows from the above that by making the payments into the St George Account, and subsequently into the Westpac Account, EYS fulfilled its obligations under clause 2.1(a) of the Trust Deed. Furthermore, the rights in respect of each payment immediately vested jointly in Segelov and Mr Joseph as joint holders of the accounts, whereupon Segelov received her beneficial interest under the trust, just as the settlor intended. Until such time as it was disclaimed EYS was entitled to rely on the presumption that Segelov accepted the payment. Necessarily, upon payment, EYS relinquished its rights over the amount deposited.
Nevertheless, the question remains whether EYS owed Segelov a duty to inform her of her entitlement to a distribution.
The rights of a beneficiary to have information about a trust were considered by the Court of Appeal in Hartigan Nominees Pty Ltd v Rydge (1992) 29 NSWLR 405. Mahoney JA (p 431) expressed the view that, in general, a trustee is not obliged to volunteer documents or information to beneficiaries or possible beneficiaries. (See also, Jacobs' Law of Trusts in Australia, para 1715). He doubted whether one of a large number of possible beneficiaries was entitled to request documents or information in relation to a discretionary trust (p 432). He said (p 432):
"For myself, I doubt whether it is the duty of a trustee to inform all persons who may possibly take under a discretionary power of the nature and extent of that possibility. As I have indicated, a class of possible beneficiaries under a discretionary trust may be wide and may be capable, as in this case, of significant extension. I doubt that it is the duty of a trustee to seek out such persons and inform them of the possibility that, in certain circumstances, they may acquire rights under the trust. I do not think that, for example, where property may be appointed among a group of employees, past, present and future, of a company, the trustee has a duty to seek out and convey information of this kind".
...
and (p 436):
"In deciding questions of disclosure, it is important in my opinion to have regard to the essential nature of such discretionary trusts. Such a trust is not a mere commercial document in which the public may have an interest. It is a private transaction, a disposition by the settlor of his own property, ordinarily voluntarily, in the manner which he is entitled to choose. Special cases apart, it is proper that his wishes and his privacy be respected".
In SAS Trustee Corporation v Cox [2011] NSWCA 408 the Court of Appeal addressed the issue whether a trustee had a duty to advise beneficiaries of potential rights. McColl JA (Campbell JA agreeing) held (para 103) that regard must be had to the nature of the fund in seeking to identify the duties which devolved on the trustee, a principle which I take to be of general application. Campbell JA (McColl, Sackville JJA agreeing) said:
"148. As I have endeavoured to explain elsewhere, the duty of any particular trustee depends on what is involved in faithfully carrying out the office of being trustee of that particular trust (JC Campbell, "Should the 'Rule in Hastings-Bass ' Be Followed in Australia? - Trustees' Duties to Enquire and Trustees' Mistakes" (2011) 34 Australian Bar Review 259 at 270-277). There may be a core of duties that would always, or nearly always, be involved in faithfully carrying out a trust, regardless of its individual peculiarities. Beyond that, any additional duties of a particular trustee come to be understood through considering the practical exigencies of the types of decision that that particular trustee has to make, in the particular social or business environment in which that trustee is operating. To those factual matters one applies the standards of faithful performance of those duties that are laid down in the trust instrument, and of faithfully attempting to achieve the objectives articulated in the trust instrument. Because that is the way in which trustees' duties arise, one cannot say that trustees always are, or always are not, under a duty to inform a potential beneficiary of his or her entitlements under the trust.
149. ... There was no positive duty to provide information in the trust instrument. Absent such a positive duty, I cannot see how a trustee is in breach of a duty it owes to a beneficiary by failing to give the beneficiary information that the trustee has no reason to believe will be of the slightest practical use to the beneficiary".
Segelov argues that EYS was under a positive duty to inform her of her entitlement upon determination, in the exercise of its discretion, of the amount for payment. If such a duty exists, presumably it is, and was, owed to all beneficiaries who become entitled to a distribution.
Analysis of the Trust Deed demonstrates that no duty of the kind claimed is expressed or implied by its terms. If Segelov's claim is to be accepted EYS would be obliged to undertake an additional duty not required of it under the Trust Deed. Similarly, it may be observed that there is no requirement to inform or consult a possible beneficiary prior to the exercise of discretion under clause 2.1(a).
In my opinion, whether EYS is subject to such an additional duty is to be considered with regard to "...the practical exigencies of the types of decision (EYS) has to make in the particular social or business environment in which that trustee is operating" (SAS Trustee Ltd para 148). The practical exigencies of notification of entitlement raise many questions as to what would be required of EYS to discharge the duty if owed to all beneficiaries whose entitlement arises on an occasion by occasion basis e.g. when, and by what means, is the information to be conveyed to the beneficiaries? must EYS locate the beneficiaries each time in order to provide each with the information? should the beneficiaries be consulted for instructions as to payment of the distribution? In my opinion, these considerations tell firmly against such an additional duty which, in any event, was one beyond the settlor's contemplation.
The settlor requires no more of EYS than it should it pay the amount of distribution either to any beneficiary or to a bank account in the beneficiary's name, and such payment shall constitute a full and final discharge of its obligation to do so. I would accept that the underlying rationale is that the rights in respect of the payment immediately vest in the beneficiary. Entitlement to it is valid notwithstanding that the beneficiary is ignorant of it. Furthermore, that no receipt by or on behalf of any beneficiary is required indicates that it is not necessary for EYS to seek or obtain some acknowledgement of payment. This is a consideration which, in my opinion, also tells against a duty to inform.
In any event, the question whether to provide information to any beneficiary concerns the administration of the trust, in respect of which EYS has the most absolute discretion possible. Assuming consideration was given to the practicalities of providing information and, in the exercise of discretion, EYS decided that notification of the beneficiary was unnecessary because payment is to be made to an account in the beneficiary's name, it is difficult to see any plausible basis of criticism for so deciding.
The question whether EYS has a duty to ensure that a beneficiary received the benefit of any distribution may be answered as follows. Clause 2.1(a) imposes a duty to pay, as EYS thinks fit, any beneficiary or into a bank account in the beneficiary's name. When payment is made into the bank account the rights in respect of it vest in the beneficiary. There was nothing more to be done by EYS to ensure that Segelov received her entitlement. EYS was not to be accountable in respect of the payment thereafter. Upon making the payment EYS was discharged from liability in relation to the trusts.
For these reasons I reject Segelov's claims that EYS owed her a duty to inform her upon becoming entitled to a distribution that she was beneficiary under the trust, and that EYS also owed her a duty to ensure that she received the benefit of any distribution to her.
During argument attention was given to the decision of Havers J in Hawkesley v May (1956) 1 QB 304. In my opinion it affords no support for Segelov's claim in this case. Havers J held (p 322) that the trustees of the settlement were under a duty to inform the plaintiff on attaining 21 that he had an interest in the trust funds. He also held, "A fortiori, if the trustees did not hand over to the plaintiff on attaining 21 income to which he was entitled, it would be their duty to explain to him that he was entitled to call for and have the interest paid to him".
The decision has been the subject of judicial analysis of varying extent (e.g. SAS Trustee para 98, 99 per McColl JA; Hawkins v Clayton (1987-1988) 164 CLR 539 pp 553, 554 per Brennan J; Hartigan Nominees p 432 per Mahoney JA). However, I am unaware of any authoritative statement that Hawkesley states a principle of general application that a trustee has an obligation to explain to a beneficiary what his rights are, and that such duty arises irrespective of the terms of the trust deed in a particular case. In my opinion, in this case, the operation of clause 2.1(a) negates such a duty. In the present case a possible beneficiary has no entitlement until a determination to make a payment to him has been made. Once determined, EYS is required to make the payment to the beneficiary or to a bank account in his name, the effect of which is to transfer the property in it to him. Without more, I think that payment to an account in the name of a beneficiary would be a reasonable ground for the trustees' assumption that the beneficiary became aware of the payments. Unlike the situation in Hawkesley, EYS does not continue to hold the property of the beneficiary after entitlement has been determined. It then has a positive duty to hand it over to the beneficiary. In the circumstances it is difficult to see the basis of a duty to inform of the kind identified in Hawkesley. I also fail to see that a failure to inform a beneficiary that a payment under clause 2.1(a) has been made infringes any right the beneficiary has.
Segelov also attacked EYS for making payments into the joint bank accounts, being accounts the details of which were provided by Mr Joseph in the Nomination Form and his email of 9 July 2007. The criticism should not be sustained. The information provided by Mr Joseph identified genuine joint accounts in the name of Segelov and himself. It was within the discretion of EYS to make the payments into the joint accounts. It was within its discretion to act upon the information provided by Mr Joseph; indeed, as he was a partner and the husband of a possible beneficiary, it would be curious had it not done so.
Conclusion
I propose to order that Segelov's claim be dismissed. In light of this conclusion I find it unnecessary to determine the questions which would have arisen had it been found that EYS owed the duties claimed, and had been in breach of them. However, without deciding, my preliminary view is that the evidence fell short of establishing wilful neglect on the part of EYS with the result that it would be entitled to the exemption from liability under clause 7.1 of the Trust Deed, alternatively, it would be excused pursuant to section 85 of the Trustee Act 1925 (NSW).
Orders
It is ordered that:
(1) The statement of claim be dismissed.
(2) The plaintiff pay the defendant's costs.
Decision last updated: 21 March 2014
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