Shepherd v Shepherd

[2010] NSWSC 167

CITATION:	Shepherd v Shepherd [2010] NSWSC 167
HEARING DATE(S):	17 February 2010 Further written submissions received 3 and 5 March 2010
JUDGMENT DATE :	12 March 2010
JURISDICTION:	Equity Division
JUDGMENT OF:	McDougall J at 1
DECISION:	Further provision ordered.
CATCHWORDS:	FAMILY PROVISION AND MAINTENANCE - claim by adult son - application for further provision out of estate - substantial estate - where testamentary trust provided for discretionary payment to plaintiff - where plaintiff had health problems preventing him from employment - where plaintiff's expenses exceeded net income - where plaintiff in debt - whether provision made for plaintiff in will inadequate - what provision should be made - no question of principle.
LEGISLATION CITED:	Conveyancing Act 1919 (NSW) Wills Probate and Administration Act 1898
CATEGORY:	Principal judgment
CASES CITED:	Singer v Berghouse (1994) 181 CLR 201
PARTIES:	Russell Kenneth Shepherd (Plaintiff) Stephen John Shepherd (First Defendant) Victoria Gay Lorna Vandenberg (Second Defendant)
FILE NUMBER(S):	SC 2009/288357
COUNSEL:	M K Minehan (Plaintiff) P P O’Loughlin (Defendants)
SOLICITORS:	Kenny Benjamin Pike (Plaintiffs) Mackenzie Russell & Co (Defendants)

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

McDOUGALL J

12 March 2010

2009/288357 RUSSELL SHEPHERD v STEPHEN SHEPHERD & ANOR

JUDGMENT

1 HIS HONOUR: This is an application for further provision out of the estate of the late Audrey Evelyn Shepherd. The plaintiff and the defendants are her three children. For convenience, and without wishing to be either familiar or condescending, I shall refer to the plaintiff as “Russell”, to the defendants as “Stephen” and “Victoria” respectively, and to the deceased as “the mother”.

Factual background

2 The mother died on 24 October 2007, survived by her three children. Russell was then aged 56. Stephen was then aged 52. Victoria was then aged 49. Russell was then single, and had no children. Stephen had four children. Victoria had three children.

3 The mother’s estate was substantial. The inventory disclosed pursuant to s 81A of the Wills Probate and Administration Act 1898 showed total assets in excess of $5.5 million. Those assets were comprised of real estate (said to have a value of a little in excess of $3 million), money at bank and listed and unlisted investments. No doubt, the value of the listed investments declined before they were dealt with in the course of administration.

4 The mother had made her will on 16 September 1993. She appointed Stephen and Victoria as executors and trustees. By that will (after a presently irrelevantly gift of jewellery and other items) the mother directed that her net estate be divided into three equal parts. In the events that have happened, one of those parts was to be held for Stephen, one for Victoria and (subject to cl 4(c) of the will) one for Russell.

5 By cl 4(c) of the mother’s will, Russell’s share (as it is convenient to call it) was to be held on trust:

(1) during Russell’s lifetime, to pay such part of the income as the trustees in their absolute discretion thought fit to him or his children;

(2) on Russell’s death, for such of his children as should attain the age of 25 years; and

(3) if there were no such children, then to be added equally to Stephen’s and Victoria’s shares.

6 One of the mother’s assets was a one-half interest, as tenant in common, in a holiday house known as “Negunya” at Coasters Retreat, Pittwater. The mother’s interest has not been realised. It has been transmitted into the names of Stephen and Victoria as executors.

7 There is some disagreement in the evidence as to the value of Negunya. A real estate agent retained by Stephen and Victoria fixed its value at about $1.1 million. A real estate agent retained by Russell fixed its value at about $1.5 to $1.6 million. Since neither agent was cross-examined, the safest course is to take a midpoint, and to assume that an equal one-sixth interest in Negunya is worth between $200,000.00 and $250,000.00. I note, in passing, that the inventory of the mother’s property disclosed an “[e]xecutors’ estimate of value” of $785,000.00 for her interest in Neguyna, which would value the whole at $1,570,000.00 (that is, towards the higher end of the range indicated by the real estate agent retained by Russell.)

8 Russell’s share comprises at present cash at bank totalling approximately $415,000.00, shares in listed public companies valued (a few days before the hearing) at about $912,000.00, and the unrealised interest in Negunya, apparently worth (as I have said) between $200,000.00 and $250,000.00. The money at bank and shares are held, by Stephen and Victoria as trustees, in a trust fund, on the relevant terms of the mother’s will, known as the Russell Shepherd Trust.

Russell’s circumstances in life

9 At the date of the mother’s death, Russell was single. He had been married for about three years early in his adult life. That marriage was dissolved. There were no children born of it.

10 In about 1982, Russell formed a relationship with Naomi Francis Broinowski. I shall refer to her, as did Russell in his affidavit, as “Naomi”. That relationship, which became one of marriage de facto, ended with Naomi’s death on 8 May 2007. There were no children born to that relationship.

11 On 24 December 2009, Russell married Kerrie Patricia Powell. I shall refer to her, as did Russell in his affidavit, as “Kerrie”. I think it is safe to proceed on the basis that there will be no children born to that marriage.

12 Russell was educated at Sydney Church of England Grammar School. He left after completing the Higher School Certificate examination. He worked in various jobs from then until about age 22. He then bought a business at Gosford. He sold that business for a profit and bought another business, which installed amusement machines and similar devices in cafes, hotels and the like. He sold that business, again at a profit, and invested the proceeds in a business known as “Quick Fit Mufflers”. Although that business was initially successful, it failed in 1991 and Russell became bankrupt.

13 Before the muffler business failed, Russell and Naomi bought and renovated various terrace houses and other properties. They were forced to sell those properties when the muffler business collapsed.

14 In 1991, when Russell became bankrupt, he was diagnosed as suffering from epilepsy and, subsequently, unrelated chronic cluster headaches. His evidence, which on this point was unchallenged, was that “[t]his medical condition renders me incapable of earning income from practicably [sic] any employment and has rendered me eligible to receive a disability allowance from Centrelink”. For reasons that will become plain, he no longer receives any such allowance.

15 In 1996, Russell, Stephen and Victoria each received a legacy from a relative of about $250,000.00. Russell applied his legacy towards the purchase of what is still his present residence, known as “Alloway Bank” near Bathurst. The purchase was undertaken in Naomi’s name, because (Russell having only recently been discharged from bankruptcy) it was easier for Naomi to obtain a loan for the balance of the purchase price (about $330,000) than it would have been for Russell to do so. Naomi’s son by her former marriage, Mr Sam Broinowski, made a monthly provision to Naomi from a family trust which enabled her to service the loan.

16 The mother gave Russell substantial gifts of money from time to time. At least after Alloway Bank was purchased in March 1996, those gifts were applied towards the restoration of the property. Likewise, Russell’s uncle John Russell (who was the mother’s brother) gave Russell substantial gifts of money, which were applied to the same purpose. Russell said that the gifts from his uncle were “in excess of $200,000.00”. The unchallenged evidence of Stephen (obtained from the uncle) is that, over six years from 1999 to 2005, the gifts totalled $250,000.00.

17 When the mother died, Russell owned Alloway Bank, furniture and artworks in it, a motor vehicle and items of plant, equipment and tools. Alloway Bank was said to be worth $1.8 million and its contents were said to be worth (“at market value”) $600,000.00. Russell’s liabilities totalled something over $1 million (excluding accrued interest). Some of those liabilities have now been consolidated into a single loan from the Commonwealth Bank of Australia.

18 On Naomi’s death, Mr Sam Broinowski ceased to make payments on account of the mortgage.

19 As I have said, Russell at one stage received a disability support pension from Centrelink. That pension stopped on 7 October 2009, because of the income that Russell received from the testamentary trust in his favour. From shortly after the mother’s death until 31 December 2008, Stephen and Victoria (as trustees) paid him $5,000.00 per month. From 1 January 2009 to date, they have paid him $6,000.00 per month. It is apparent, from Stephen’s evidence, that the income of Russell’s share is at present insufficient to continue to support payments at the rate of $6,000.00 per month.

20 In addition, Russell receives rents from three cottages on Alloway Bank. Those rents total $2,346.00 per month gross, although one of the tenants is in arrears.

Russell’s financial situation at the date of the hearing

21 At the date of the hearing, Russell’s gross monthly income was $8,346.00, comprised of $6,000.00 per month from the testamentary trust and $2,346.00 in rents. As I have indicated, it is likely that monthly payments from the testamentary trust will have to be reduced. The gross figure takes no account of expenses referable to the gaining of rent, and makes no allowance for income tax.

22 Russell’s expenses, on a monthly basis, were agreed to be $7,556.00 per month. The bulk of that – about $5,340.00 – relates to interest on loans.

23 Russell’s assets are in substance Alloway Bank and the furniture: in total, about $2.4 million. The parties agreed that the other assets could be given a value of $25,000.00. As against that, he has liabilities (including for the costs of these proceedings) of $1,195,000.00. One of those liabilities is a $40,000.00 line of credit obtained from the Commonwealth Bank in recent times. Russell said that he was forced to take out this line of credit both to enable him to make some payments to his lawyers and to enable him to meet expenses.

24 In addition, Russell said that Alloway Bank needed a substantial amount of work to be done. He estimated the total cost of that work at about $38,150.00. In addition, he said, “the regular ongoing maintenance is in the range of about $10,000.00 - $20,000.00 per annum”. In cross-examination, Russell agreed that if he were to do some of the maintenance work himself, this annual maintenance cost could be substantially decreased. A schedule prepared by Mr P P O’Loughlin of counsel, who appeared for Stephen and Victoria, suggested that when Russell swore his first affidavit (on 4 June 2009), there was a monthly expense of about $420.00 for “repairs, paintings, furniture etc”. Although that figure was not repeated in later affidavits, it is logical to assume that there is an ongoing repair cost for the property Alloway Bank. In the absence of any evidence quantifying the extent to which Russell could carry out work himself, I propose to adopt that figure as an appropriate allowance for the cost of regular maintenance. That is not included in the figure of $7,556.00 referred to at [22] above. If it is added then monthly expenses will be seen to be, in round figures, $8,000.00: compared to a present monthly gross income of $8,346.00. When one takes into account the impact, on income, of both reductions in trust distributions and taxation, it is obvious that Russell’s expenses exceed his net income at the present time.

The position at the date of the mother’s death

25 In substance, the position at the present time can be taken as reflecting the position at the date of the mother’s death (applying the convenient fiction that the income from Russell’s share commenced to be paid on her death). Of course, at the date of death, Russell received a Centrelink disability support pension of $1,500.00 per month. However, at the date of the mother’s death, only two of the leases (with a combined rental of $320.00 per week, or approximately $1,387.00 per month), were in force. Thus, at the date of death, it is fair to conclude that Russell’s financial position was not in any significant way better than it is now: particularly when account is taken of tax on the distributions that would be made (and, fictionally, are being assumed to have been made) from the date of death.

The financial situations of Stephen and Victoria

26 Stephen and Victoria did not put details of their financial positions before the Court. That is because they did not put a case that their financial positions should be taken account in assessing the level of any further provision (they said there should be none) to be made for Russell out of the mother’s estate. Since Russell did not submit that any further provisions should be made for him beyond the capital value of his one-third “share”, it follows that, if further provision is to be made in Russell’s favour, it should be assessed without regard to the competing needs and claims of Stephen and Victoria.

Why the will was made as it was

27 The mother’s expressed reason (according to Russell) for making her will in the way she did was that she was “extremely worried about your bankruptcy”. According to Russell, she said to him “[i]f I die while you are bankrupt the Court will take your inheritance. I have to protect your interest. I have spoken to the lawyer. He has suggested this to me. He said the will should have a clause so that your share should go into trust and after the Bankruptcy is lifted, the clause will be taken out”. That evidence was neither disputed nor challenged. It was corroborated by a letter from the mother’s then solicitor, who said that to his recollection “the clause was inserted in the will at the request of Mrs Shepherd with particular reference to either actual or threatened bankruptcy proceedings against her son”.

Outline of the submissions put for Stephen and Victoria

28 Before moving to the two-stage analysis required by Singer v Berghouse (1994) 181 CLR 201, it is convenient to refer to the submissions put by Mr O’Loughlin, which were directed generally to the question of whether any order for further provision should be made (he submitted that it should not) rather than, specifically, to either of the Singer v Berghouse questions.

29 Mr O’Loughlin submitted that Russell had some “history, albeit an ancient history, of inadequate business management” (T2.34). There appeared to be an underlying concern that Russell might squander any further provision given to him. There is a number of answers to this submission. The first is that the “history… of inadequate business management” can relate only to the failure of the muffler business. Russell’s unchallenged evidence as to that was that after he acquired the business in 1988, he built it up substantially, expanding its turnover more than threefold. He said that it was successful for a number of years and that the profits derived from it enabled him and Naomi to acquire and renovate terrace houses. He said, further, that the business failed when interest rates rose rapidly in the recession that commenced in the early 1990s, and that the business debt became unsustainable; and that this problem was exacerbated by a loss of business “with the recession beginning to bite”.

30 It is a matter of notoriety that many small businesses collapsed in “the recession we had to have”. That Russell’s business was one of them does not necessarily bespeak bad financial management, let alone financial irresponsibility. It needs to be borne in mind that Russell gave unchallenged evidence that, before he bought the muffler business, he had bought, built up and sold at a profit two other businesses.

31 The second matter that could be said to afford some evidence of financial irresponsibility (although not “inadequate business management”) relates to a transaction that Russell undertook after Naomi died in May 2007. He decided that it would be beneficial for him to move away from the Bathurst region. Accordingly, he put Alloway Bank on the market. He saw a property at Burradoo, in the Southern Highlands, which he decided to buy. He entered into a contract to buy that property, with settlement deferred for six months. He said that he did so because he “believed the sale of “Alloway Bank” was quite attainable during the later part of 2007 (Spring and Summer seasons)”. However, he was unable to sell Alloway Bank, and could not get bridging finance. Accordingly, the vendors of the Burradoo property took steps that resulted in termination of the contract and judgment for the balance of the deposit (a small part of the deposit had been paid on exchange and the balance was to be paid one month prior to completion). In due course, the vendors took a mortgage over Alloway Bank to secure the amount owed to them; and that has since been refinanced into the loan from the Commonwealth Bank.

32 Russell now accepts that he exercised poor judgment in acting in the way outlined. He said that “at the time my judgment was clouded by the significant grief and depression I was experiencing after losing Naomi” (his relationship with Naomi had been, he said, “a close and loving relationship for 29 years”).

33 Clearly enough, it was at the least imprudent to act as he did, committing himself to buy the Burradoo property for a substantial amount of money without having secured either a binding contract for sale of Alloway Bank or an assurance of bridging finance. But Russell’s explanation of this imprudent decision is entirely understandable. It was not challenged, and I accept it. There is no reason to think that he would behave in a similarly imprudent way in the future.

34 In this context, it is worth noting that Russell has taken the advice of a firm of accountants who are assisting him in a “workout” to rationalise and ultimately discharge his various liabilities. The fact that he is prepared to seek (and, it would appear, act on) expert advice, to assist him to deal with his financial problems, indicates a responsible and appropriate attitude to his financial commitments.

35 Mr O’Loughlin submitted, correctly, that it would be open to Russell to sell Alloway Bank, discharge his indebtedness and use the proceeds to purchase a more modest residence in the Bathurst area. There was no evidence of what it would cost to purchase a more modest residence. Indeed, Mr O’Loughlin relied on this in submitting that Russell had not seen fit to put all relevant matters before the Court (there were other matters on which Mr O’Loughlin relied on this context, and I shall return to them). But it is legitimate to ask: why, when the mother’s estate is ample for the claims upon it, Russell should be forced so to act? He has invested not only time but effort and substantial sums of money into the acquisition and improvement of Alloway Bank. It has been his home since 1996. For eleven of the 14 years that have elapsed since the property was purchased, he occupied it with Naomi and they worked on it together. If indulging Russell’s desire to remain at Alloway Bank caused hardship to other beneficiaries, then Mr O’Loughlin’s submission would have force. But on the facts of this case, it would not do so; and the force of the submission diminishes accordingly.

36 Of course, Russell may be forced to sell Alloway Bank in any event. But that decision should be one that he takes in his own interest, not one that is forced upon him because he cannot afford to retain it notwithstanding the fact that there is a substantial sum of money available (should the Court so order) to assist him to retain it.

37 Mr O’Loughlin submitted that Russell had made unsatisfactory disclosure of his financial affairs. Indeed, Mr O’Loughlin submitted, Russell’s attempts at disclosure were such that the Court could not be confident even now that he had made full disclosure of all relevant matters. Mr O’Loughlin pointed to the following matters:

(1) Russell had not disclosed the leases, nor the income derived from them, in his first affidavit (sworn 4 June 2009) or his second affidavit (in reply, sworn 6 October 2009), even though all three leases were in place before (and in two cases well before) June 2009. It was not until Russell swore his “updating affidavit” of 10 February 2010 that the existence and terms of the leases were disclosed;

(2) the failure to disclose was exacerbated because, in the first affidavit, Russell had explicitly disclosed his income from the estate and his Centrelink disability support pension, and in his second affidavit had referred to “rentals” of $870.00 monthly, instead of the correct figure (from the leases) of about $2,340.00 monthly;

(3) although Russell disclosed the fact of his marriage to Kerrie in his affidavit of 10 February 2010 (and the marriage took place after his affidavit in reply was sworn on 6 October 2009), he did not make full disclosure of Kerrie’s income and expenses or assets and liabilities;

(4) Russell had not filed any income tax returns in recent years, although clearly, for at least the last two financial years, he should have done so; and

(5) Russell had made an inaccurate declaration of his income to Centrelink, in connection with his disability support pension.

38 The first and second of those matters are of concern. It was at the very least misleading for Russell to depose to his income in the way he did, in his first two affidavits, in circumstances where:

(1) in the first affidavit, he made no reference at all to rentals received; and

(2) perhaps more seriously, in the second affidavit, he understated significantly the amount of rentals received.

39 However, the question is not so much whether Russell made slow, incomplete, or initially inadequate disclosure of his financial position, but whether, on balance, the Court could be satisfied that he has now accurately disclosed details of his financial position. There was no evidence to suggest that Russell had any concealed assets or sources of income. Indeed, he said frankly, in his third affidavit, that his present financial circumstances were such that “Kerrie sometimes assists me with living expenses so that I am able to make ends meet”. The assistance provided includes “paying for meals, groceries and provisions of small amounts of cash from time to time”. It is difficult to see why it would be necessary for Kerrie to assist in this way if Russell had other, undisclosed, sources of income. Likewise, it is difficult to see why Russell needed the line of credit referred to at [23] above, for the purpose that he gave, if his financial position was substantially better than he represented it to be.

40 It was not shown that Kerrie had any income or assets other than those summarised briefly by Russell in his affidavit of 10 February 2010. No doubt, Kerrie could have sworn an affidavit. But one could understand that Russell would not wish to embroil her in what is in essence a family dispute. I do not think that there is anything to the submission of inadequate disclosure at the time of the hearing.

41 The fourth matter does not speak well for Russell’s sense of responsibility, or respect for the law. But it does not follow, because he has failed to file income tax returns, that he has made inadequate or incomplete disclosure of his financial affairs in this case.

42 The fifth matter can be put to one side. The question of Russell’s income arose, so far as Centrelink was concerned, because it needed to assess whether he was entitled to receive any benefit at all. It is clear that his income from the trust alone was sufficient, of itself, to lead to the cancellation of his disability support pension. The annual income disclosed to Centrelink was said to have been $78,000.00. Mr O’Loughlin submitted that it should have been considerably higher, because Russell was receiving annually $72,000.00 from the estate, together with $28,000.00 gross in rents. Those figures do not allow for deductions legitimately available in respect of rental income. For all I know, $78,000.00 may have been an accurate reflection of Russell’s likely taxable income. But the precise amount is irrelevant. Russell made sufficient disclosure for Centrelink’s purposes: namely, to consider and decide whether to act as it did, and cancel his disability support pension. A disclosure of a higher income (assuming such disclosure to have been justified) would not have changed that position. In any event, Russell said (and I accept) that he gave the raw material to Centrelink, who derived an income figure from it. If Centrelink got it wrong, it does not follow that Russell should carry any responsibility.

43 Mr O’Loughlin submitted, again correctly, that the mother had made substantial gifts of money to Russell during his lifetime. Russell acknowledged that this was so, although his evidence did not enable the value of those gifts to be quantified. According to schedules prepared by Stephen from the mother’s records, Russell received, over the period from 1981 to 2007, gifts totalling about $246,000.00. Over the same period, Stephen received gifts totalling about $139,000.00 and Victoria received gifts totalling about $188,000.00. In addition, the mother made payments for or on account of school fees for the children of Stephen and Victoria. Those payments totalled about $66,000.00 in the case of Stephen’s three children, and about $132,000.00 in the case of Victoria’s children. In short, Stephen’s evidence shows that the mother was liberal, but that her liberality did not favour Russell in particular. He received more than did his siblings by way of gift; but they received further benefits, through the payment of school fees for their children.

44 In addition, of course, Russell received gifts from his uncle John Russell totalling $250,000.00.

45 No doubt, gifts made by the mother during her lifetime frittered are relevant. However, there is no evidence that the gifts were frittered away, or dissipated on worthless purposes. On the contrary, as I have noted at [16], Russell’s essentially unchallenged evidence was that the substantial gifts that he received were, at least after the purchase of Alloway Bank in March 1996, applied to the acquisition and improvement of that property.

46 Again, if the mother’s estate were insufficient to meet the legitimate claims upon it, it would be necessary to take into account the fact and amount of gifts made by the mother during her lifetime. But in circumstances where the estate is ample, the significance of gifts diminishes. At the end of the day, the assessment of Russell’s claim directs attention to what I have called the Singer v Berghouse questions:

(1) in all the circumstances, was the provision made for Russell by his mother’s will inadequate? and

(2) if it were, what is the proper amount of provision to be made?

47 It is to those questions that I now turn.

First question: was the provision made for Russell in all the circumstances inadequate?

48 In my view, for reasons that are probably apparent from what I have said already, this question should be answered “yes”. Having set out already most of the material facts, I shall indicate in summary form why this is so:

(1) Russell’s health was such that he was, at the date of the mother’s date, and would likely continue to be, unable to earn income from most forms of paid employment;

(2) whilst Naomi was alive, she had been able to make the payments due monthly pursuant to the mortgage over Alloway Bank only because of payments made to her for that purpose by her son;

(3) those payments ceased on Naomi’s death;

(4) Russell’s income, from rents and from the Centrelink disability support pension, was insufficient to enable him to meet those payments;

(5) indeed, whilst Russell’s income might have been sufficient for him to meet day to day living expenses, it was insufficient to enable him to make necessary repairs to Alloway Bank, or to provide for proper regular maintenance;

(6) once Russell started to receive payments out of the estate of his mother, or more accurately from the testamentary trust in his favour, whilst his gross income (including payments from the trust, rents and the Centrelink disability support pension) may have been in total roughly equivalent to his monthly expenses (including payments due under the mortgage), once some allowance is made (as it should have been) for income tax, Russell’s true or net income was less than his monthly expenses;

(7) in any event, Russell’s income after the death of his mother remained insufficient to enable him to carry out necessary repairs to Alloway Bank and to provide for proper maintenance, and this was so whether the income is assessed on a gross or a net basis;

(8) Russell had no assets of substance other than Alloway Bank and its furniture and contents;

(9) thus, to enable Russell to meet all of his commitments, it was inevitable that he would have to sell Alloway Bank; and

(10) the mother’s ability, or capacity, to make more ample provision for Russell was not constrained by the inadequacy of her estate or the extent of other claims upon her bounty.

49 In my view, those facts – essentially uncontroversial – demonstrate that provision by way of discretionary income only was inadequate for Russell’s needs at the time that his mother died.

50 It is correct to say, as Mr O’Loughlin submitted, that the provision of a capital sum would diminish, proportionately according to the amount provided, the income available from the testamentary trust. But the cash value of the assets of the testamentary trust (excluding the one-sixth interest in Negunya) is approximately $1,327,000.00 at the time of the hearing. It is at present sufficient (and certainly at the date of the mother’s death would have been sufficient) to afford a capital sum that would enable Russell to discharge all of his debts, leaving a modest residue for contingencies, from which income could be derived until the capital was spent in response to contingencies if they were realised.

51 In my view, the provision of a gift of income (leaving aside its discretionary character – a matter to which I shall return), although generous in amount, failed to pay adequate attention to the real nature of Russell’s needs. He had then (and has now) a real need for a capital sum to enable him to repay his debts. The inadequacy of the gift of income is made plain when the gross amount of the income available to Russell, from the testamentary trust and from rents, is compared to his level of expenses (adjusted in the manner set out at [24] above). Once allowance is made for income tax, the total income available to Russell was and is inadequate for his fixed commitments; and the principal reason for this is the substantial monthly interest burden.

52 Accepting as I do that the provision of a capital sum would diminish the amount of income available, it remains the fact that the discharge of Russell’s indebtedness would effect a major amelioration of his straitened financial position. Of course, at present, interest rates are relatively low, and there is no reason to think that they will remain at their present levels. The recent (March 2010) increase of 25 basis points (0.25%), if it flowed through into the interest rate charged on Russell’s loans, would have increased his monthly interest payments by approximately $210.00. No doubt, as interest rates increase, then the interest component of the income available from Russell’s share of the estate will increase also. But any increased income would be taxable; and some at least, if not most, of any increased interest payment would be non-deductible.

53 I referred at [51] above to the discretionary character of the testamentary trust for Russell. Mr O’Loughlin’s submissions appeared to treat Russell’s interest under the will as fixed, or in the nature of a life estate (T46.30). He submitted further that Stephen and Victoria had a power of advancement (T47.36). However the terms of the trust are clear. Stephen and Victoria are to pay, from the one-third share of residue held on trust for Russell, such of the income as they in their absolute discretion think fit, and they are not liable to account for their exercise of that discretion. Russell has no vested interest in income, for his life or otherwise.

54 Nor do the trustees have any power of advancement of capital, so far as Russell is concerned. Clause 5(b) of the will, on which Mr O’Loughlin relied, authorises Stephen and Victoria “to pay or apply the whole or any part of the capital or income of that part of my estate to which a beneficiary is or may in future be entitled for or towards the maintenance, education, advancement or benefit of that beneficiary”. Russell has no vested or contingent interest in capital, and thus the power to advance capital could not be exercised in his favour. Whether or not cl 5(b) authorises in effect prepayment of, or on account of, future income (which itself is contingent on the exercise of discretion under cl 4(c)) is a matter that was not argued, and on which it is unnecessary to express an opinion.

55 It follows, as a matter of construction, that Russell has no vested entitlement to income, and is entirely dependent upon Stephen and Victoria exercising their discretion in his favour from time to time. Stephen has said that he and Victoria propose to do this, and I have no doubt that this is their intention. Nonetheless, a vested interest in income is one thing, and an entitlement depending on goodwill or discretion is another.

56 It should be noted too that what I have called “Russell’s share” is not limited to the cash and listed investments presently held in the Russell Shepherd Trust. It extends to a one-sixth interest in Negunya. The mother’s one-half interest in Negunya was not specifically devised, and therefore fell into residue. Stephen and Victoria have transmitted to themselves as executors the mother’s interest in Negunya. It does not appear that they have taken steps to realise it. Presumably, it suits them to keep it as a retreat for them and their families to enjoy. They were entitled by cl 5(c) of the will to retain the mother’s interest in Negunya in specie, and not to convert it. No submission was put that their duty as trustees, taking Russell’s interests into account, required them to act otherwise. Nonetheless, the effect of the retention of the mother’s interest in Negunya is that the value of Russell’s share, and therefore the assets of the Russell Shepherd Trust, are less than they could be by perhaps $200,000.00 to $250,000.00. Put another way, if the mother’s interest in Negunya were realised even at the value put on it by Stephen and Victoria, the value of Russell’s share might be at least $1,500,000.00.

57 I accept that the notional value of a one-sixth interest is one thing, and the realisable value quite possibly another. Realisation would not be straightforward. It would require either the consent of all others interested in Negunya or an application under s 66G of the Conveyancing Act 1919 (NSW). In the latter case, the costs of realisation could be substantial.

58 It is also necessary to bear in mind that, in talking of the value of Russell’s share, it is likely that at least part of that value would consist of unrealised capital gains (or “paper profits”) on the investments in listed securities. If those investments were to be realised, it is likely that some amount of capital gains tax would be payable.

59 The assessment of the adequacy of the provision made requires attention to, among other things, “the totality of the relationship between the applicant and the deceased, and the relationship between the deceased and other persons who have legitimate claims upon his or her bounty” (see Mason CJ, Deane and McHugh JJ in Singer at 210). With perhaps one exception, there was no submission put that the relationship between Russell and the mother was such as to have any relevant impact (or, at least, any negative impact) on the assessment of the adequacy of the provision made in his favour. Nor was it put that the relationship between the mother and Stephen and Victoria had any relevant impact on that process of assessment.

60 The possible exception to which I have referred relates to a letter written by Russell to “[m]y dearest Mother” on 10 February 1997. The terms of that letter were intemperate, and I have no doubt that the mother was hurt when she read it. In essence, Russell reproached her for her attitude towards his requests for financial assistance, and said in no uncertain terms that she did not understand his particular health and other problems. Russell suggested that she ignored the seriousness of his health complaints, and was not prepared to face up to how ill he was.

61 The letter was written about three months before Naomi died, and within a month of her having been diagnosed as suffering from terminal cancer. Russell said that Naomi suffered “a long and difficult illness spending many months confined to bed receiving palliative care”. It was he, he said, who provided that care. In those circumstances, it is hardly to be wondered that Russell (as he said in his affidavit in reply) was experiencing “deep grief” at this time, and that he entertained, and committed to writing, thoughts that in happier circumstances might not have troubled him.

62 It is uncertain whether the letter in question was relied on as evidence of some conduct on Russell’s part justifying any inadequacy in the provision that was made. If that submission were made, I would not accept it. As I have said, I accept that the letter was intemperate, and that it must have distressed the mother when she read it. But there is no evidence to suggest that it forms part of a pattern of behaviour of Russell towards his mother, or that it affords acceptable evidence of the real state of the overall relationship between them. In particular, there is no evidence that Russell expressed similar sentiments to his mother on any other occasion, or that (particularly once he had recovered from the shock of Naomi’s death) he was anything other than a loving son. No doubt, the extent of Russell’s contact with his mother was limited by the fact that he lived near Bathurst, whereas she lived in Sydney; and no doubt, in consequence, Stephen and Victoria (both of whom lived, and I assume still live, in Sydney) saw her more regularly and were able to assist her more often on a day to day basis. But that is an accident of geography, not a necessary incident of the various relationships.

63 In short, as I have said, I conclude that in all the circumstances the provision made for Russell by his mother’s will was inadequate.

Second question: what provision should be made?

64 Mr M K Minehan of counsel, who appeared for Russell, submitted that he should receive, in lieu of the provision made for him by the mother’s will, a capital sum equal to the net realisable value of his one-third “share” in her estate, excluding therefrom any interest in Negunya. Mr Minehan submitted that Russell did not want to become a co-owner of Negunya, and would be satisfied if provision to the extent just indicated were made in lieu of Russell’s entitlements under the will.

65 As I have noted, Mr O’Loughlin’s primary submission was that no further provision should be made for Russell, and that Russell’s claim should be dismissed with costs. In the alternative, and without concession, Mr O’Loughlin put two different submissions. Those submissions had in common three elements:

(1) any further provision made for Russell should be structured so as to effect in substance the surrender by Russell of any interest in Negunya;

(2) Russell, Stephen and Victoria should share equally (i.e. per capita) the remaining costs of administration; and

(3) Stephen and Victoria should pay Russell’s costs on the ordinary basis.

66 The first alternative proposed by Mr O’Loughlin was that Russell should receive a substantial cash legacy “to be determined by the court” on the basis that the remainder of Russell’s share (excluding any interest in Negunya) should remain the subject of the testamentary trust created by cl 4(c) of the mother’s will. Any such legacy should be applied, Mr O’Loughlin submitted, to the reduction of Russell’s indebtedness.

67 Mr O’Loughlin submitted that further provision thus structured would alleviate Russell’s interest burden, but provide him nonetheless with an ongoing source of income. Mr O’Loughlin submitted that to structure the provision in this way would satisfy in part “the concern that if the plaintiff receives all of his share [sic] he will spend it imprudently”.

68 I am not sure who it is holds this concern: presumably, Stephen and Victoria. It does not appear that the mother held such a concern. The expressed reason for making her will in the form she did was to alleviate the possibility, which evidently she entertained, that if she died whilst Russell was bankrupt, any capital interest would go to his trustee in bankruptcy. Nor am I satisfied that there is a substantial evidentiary basis for such a fear. I have dealt with this to some extent at [29] to [34] above. To the extent that the mother was concerned at Russell’s frequent requests for money, it is necessary to bear in mind his unchallenged evidence that his state of health was such as to prevent him from holding down gainful employment. It is possible to infer, from the terms of the letter to which I have referred at [60] and following, above, that the mother did not accept that Russell was incapacitated to the extent that, he said, he was. (It is certainly open to infer that Russell thought that this was the mother’s state of mind.) But if the mother did harbour those thoughts, it would appear that they were based on a misunderstanding of Russell’s health and capacity to work.

69 In any event, I would not think it appropriate to leave any amount in the Russell Shepherd Trust on the terms of cl 4(c). As I have pointed out, that is a discretionary trust and gives Russell no vested interest in income. If there were to be some ongoing trust, it should be, at the very least, in the nature of a life estate. But since I think it is better to give Russell access to the net capital value of his share (excluding any interest in Negunya), it is unnecessary to pursue this.

70 The second alternative proposed by Mr O’Loughlin was that Russell should receive a legacy equal to the net value of the bank account and listed investments held in the Russell Shepherd trust. The net value assumes that Stephen and Victoria will realise the listed investments in the usual way, and receive the proceeds clear of brokerage. It assumes also that they will retain whatever is needed to pay capital gains tax properly assessed as a result of the sale of those investments.

71 There was evidence that there were unpaid costs of administration of (in round figures) $75,000.00. Mr O’Loughlin submitted, and Mr Minehan accepted, that $25,000.00 should be deducted from any capital payment made to Russell on account of his share of those outstanding costs. If that proved to be excessive, any surplus would be refunded to him.

72 Mr O’Loughlin submitted further that there should be deducted, from the amount of any legacy, the sum of $136,000.00, being the total of the payment made from the Russell Shepherd Trust to Russell to date. (That total figure was agreed.) I have to say that I do not understand the justification for this. Those payments represent in effect the income derived on Russell’s share. If Russell had received the value of his share by way of a pecuniary legacy, he would have had the benefit of that income. There is no suggestion that, if provision is made in the way indicated but without allowing any set-off for payments of income made to date, Stephen’s or Victoria’s shares might be inadequate for their needs. To put it another way: the payments made to date were not advances of capital, but payments of income. Although there was some basis in Stephen’s evidence for thinking that the payments made exhausted all income available, and that the present income derived on Russell’s share is insufficient to maintain payments at the rate of $6,000.00 per month, there was no evidence to show that Stephen and Victoria had, notionally or otherwise, dipped into capital, or subsidised Russell out of their own pockets.

73 In any event, on the agreed basis that any provision made will be (at least in so far as Negunya is concerned) in lieu of Russell’s entitlements under the will, the surrender of those entitlements provides at least a notional counterpoise to any capital reduction, or subsidy, that might have occurred, and enures for the benefit of Stephen and Victoria.

74 Mr O’Loughlin submitted further that any order for a lump sum payment should be made on condition that it be applied, so far as it extended or to the extent necessary, to the discharge of Russell’s debts. Mr Minehan appeared to accept (T43.11-.15) that an order for a legacy should be conditioned that the legacy be applied, to the extent necessary, in payment of Russell’s debts.

75 I return to the question of the amount of the legacy. In essence, the question for decision is whether it should be limited to an amount sufficient to reduce Russell’s debt, leaving an amount in trust from which he can derive income, or whether it should be in effect the net value of Russell’s share excluding any interest in Negunya.

76 In my view, appropriate provision requires an order that Russell receive a legacy equal to the net capital value of the assets of the Russell Shepherd Trust, apart from an amount representing a one-sixth interest in Negunya.

77 I accept, as Mr O’Loughlin submitted, that it would be inappropriate to specify a capital sum in a way that would cast upon his clients rather than Russell the risk of depreciation in the value of the Trust’s investments in listed companies. Further, I accept that the order should be made on condition that the legacy be applied first, and to the extent necessary, to the discharge of Russell’s indebtedness to the Commonwealth Bank of Australia (including under his Viridian line of credit) and to Australian Country Credit Union Ltd (which I think is the formal name of what has been referred to as Reliance Credit Union).

78 In circumstances where there are no relevant competing claims on the mother’s bounty (because her estate is sufficient to support all claims), the appropriate provision should include both an amount sufficient to discharge Russell’s debts and an amount to provide for contingencies. I accept that such an order will have the effect of limiting severely the income that Russell receives; but, on the other hand, repayment of his debts will limit substantially the drains on that income. I accept also that at some stage in the future Russell may be forced to sell Alloway Bank, to acquire in its place more modest accommodation, and to use part of the capital liberated thereby to provide a source of income. But as I have said already, that is a decision that he should make (if at all) in his own time and for his own reasons, not one that should be forced upon him by the inadequacy of the provision made for him under the mother’s will.

79 One of the needs to which Russell pointed in his affidavit evidence was a need for some form of superannuation to provide an income during the remaining years of his life. I accept, as Mr O’Loughlin submitted, that the income payable to Russell under the testamentary trust in his favour would be, to the extent that it was paid, equivalent to superannuation. I accept also, and again as Mr O’Loughlin submitted, that the making of orders of the kind that I have indicated will reduce very substantially the potential for Russell to have available a source of income other than the rents from Alloway Bank (at least, unless and until Alloway Bank is sold). But those circumstances do not mean that the provision indicated should not be made. It would be possible to order a greater sum to be paid, by entrenching upon the provision made for Stephen and Victoria. But no submission was made that the provision that Russell should receive should extend beyond what I have called his share in the estate.

80 In my view, there is no real foundation for any submission that Russell will act imprudently and dissipate the legacy. In any event, as I have said, there should be a condition that the legacy be applied in reduction or discharge of Russell’s debts. Although that would not of itself stop him from re-borrowing, the consequences of doing so would be on his own head.

81 I do not think that a precise monetary sum should be specified. What Russell should get is the cash value of the bank accounts and the net value, allowing for realisation costs and any capital gains tax that may be payable, of the listed investments. That provision should be ordered in lieu of the provision made for Russell by his mother’s will. It should be made, further, on condition that Stephen and Victoria are at liberty to retain, out of the legacy otherwise payable, $25,000.00 on account of further costs of administration of the estate.

82 For the reasons that I have given in dealing with Mr O’Loughlin’s submissions, I do not think that any allowance should be made for income already paid to Russell out of the Russell Shepherd Trust.

Costs

83 The parties asked that I should refrain from making any costs order until after they had had an opportunity of considering these reasons, and accordingly I shall reserve costs.

Orders

84 I make the following orders:

(1) On the conditions set out in orders (3) and (4), order that, in lieu of the provision made for him by the will of Audrey Evelyn Shepherd deceased, the plaintiff receive a legacy equal to the net capital value, at the time of payment, of the assets of the “Russell Shepherd Trust” identified in paragraph 13 of the affidavit of Stephen John Shepherd sworn 10 July 2009, excluding therefrom any interest in the property “Negunya” at Coasters Retreat, Pittwater.

(2) The net capital value of the assets referred to in order (1) is to be ascertained, in the case of shares in listed public companies, by deducting, from the proceeds of sale of those shares, the costs of sale and any capital gains tax payable by the defendants in consequence of that sale.

(3) Order (subject to order (4)) that the said legacy be applied first, and to the extent required, to discharge the plaintiff’s indebtedness to the Commonwealth Bank of Australia and Australian Country Credit Union Limited; second, in payment of the plaintiff’s indebtedness to his solicitors; and thereafter by payment to the plaintiff.

(4) Direct that the defendants be at liberty to retain, from the amount of the said legacy, the amount of $25,000.00 on account of the further costs of administration of the estate of the deceased.

(5) Order that interest on the said legacy not run if it be paid within 28 days of the date of judgment.

(6) Reserve liberty to apply on seven days’ notice in respect of both the form and the implementation of orders (1), (2), (3) and (4).

(7) Reserve costs.

(8) Stand proceedings over to 9:30am on 19 March 2010 for the making of costs orders.

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