Spry v Kennon & Ors

[2008] HCATrans 130

[2008] HCATrans 130

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Melbourne  No M85 of 2007

B e t w e e n -

IAN CHARLES FOWELL SPRY

Applicant

and

EDWIN PHILIP KENNON AND IAN CHARLES FOWELL SPRY (IN THEIR CAPACITIES AS TRUSTEES OF THE CATHARINE SPRY TRUST, THE CAROLINE SPRY TRUST AND THE PENELOPE SPRY TRUST)

First Respondent

ELIZABETH ANNE FOWELL SPRY AND IAN CHARLES FOWELL SPRY (IN THEIR CAPACITY OF TRUSTEES OF THE ELIZABETH SPRY TRUST)

Second Respondent

HELEN MARIE SPRY

Third Respondent

ELIZABETH ANNE FOWELL SPRY

Fourth Respondent

CATHARINE SARAH FOWELL SPRY

Fifth Respondent

CAROLINE JANE FOWELL SPRY

Sixth Respondent

PENELOPE SARAH FOWELL SPRY

Seventh Respondent

Office of the Registry
  Melbourne  No M86 of 2007

B e t w e e n -

EDWIN PHILIP KENNON AND IAN CHARLES FOWELL SPRY IN THEIR CAPACITY AS THE TRUSTEES OF THE CATHARINE SPRY TRUST, THE CAROLINE SPRY TRUST AND THE PENELOPE SPRY TRUST)

First Applicants

ELIZABETH ANNE FOWELL SPRY AND IAN CHARLES FOWELL SPRY IN THEIR CAPACITY AS THE TRUSTEES OF THE ELIZABETH SPRY TRUST

Second Applicant

and

HELEN MARIE SPRY

First Respondent

IAN CHARLES FOWELL SPRY

Second Respondent

ELIZABETH ANNE FOWELL SPRY

Third Respondent

CATHARINE SARAH FOWELL SPRY

Fourth Respondent

CAROLINE JANE FOWELL SPRY

Fifth Respondent

PENELOPE SARAH FOWELL SPRY

Sixth Respondent

Applications for special leave to appeal

GLEESON CJ
KIEFEL J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 7 MARCH 2008, AT 10.08 AM

Copyright in the High Court of Australia

__________________

MR D.F. JACKSON, QC:   In this matter I appear with my learned friend, MR M.C. HINES, for the applicants in M86 of 2007 and the first and second respondents in M85 of 2007.  Your Honours, I presumed to jump to my feet first because the applicants agreed between themselves that I would go first in relation to the matter.  (instructed by McCracken & McCracken)

MR S.G.E. MCLEISH, SC:   If your Honours please, I appear for the applicant in matter M85 of 2007 with my learned friend, MR S.C. SMITH, and also for the second respondent in matter M86 of 2007.  (instructed by Nedovic & Co)

MR L. GLICK, SC:   Your Honours, in each of the matters I appear with MR M.C. HINES for the children of the marriage.  The respondents are 3, 4, 5 and 6.  (instructed by Marshalls & Dent)

MR J.T. GLEESON, SC:   May it please the Court, I appear with MR P. KULEVSKI for the former Mrs Spry in both matters.  (instructed by Kennedy Wisewoulds)

GLEESON CJ:   Yes, Mr Jackson.

MR JACKSON:   Your Honours, there are two bases on which we seek special leave.  The first is that the decision of the majority takes the concepts of property and financial resources in the Family Law Act a very long way further than it has previously been taken.  Your Honours, I will come to the detail of that, if I may, in a few moments.  The second is that the decision works a very significant injustice to the children via their trustees. 

Your Honours, I should have prefaced what I am about to say by saying, your Honours, I do need to go to the facts a little just before I come to the arguments we seek to advance.  We are the trustees of four trusts of which the beneficiary is in each case one of the four daughters of Dr and Mrs Spry, who have divorced.  In 2002 Dr Spry in his capacity as trustee of another trust distributed to us as trustees of each of those four trusts one quarter of the income and capital of the earlier trust. 

Your Honours, that earlier trust was the ICF Spry Trust.  It was formed in 1968 and was set out in written form in 1981.  Its terms appear, your Honours, in the application book.  I am referring in each of these references to the application book in M86 at pages 137 and 138.  Your Honours will see that its terms commence at the bottom of page 137 and go through to about line 28 on that page.  I will come to those a little later, if I may.  Your Honours, the terms of that trust were altered by deed in 1983 and the terms of that deed appear at the bottom of page 138 going through most of page 139. 

May I say a couple of things about the deed, your Honours.  Your Honours will see at the bottom of page 138 in Clause 1 there was a release of the trust from all moneys it owed to Dr Spry.  That is Clause 1.  The second thing was that by Clause 2 he – and he was described as “the settlor”:

releases and abandons all and any beneficial interest or rights held by him or which may hereafter be held by him under the trust instrument or under the said trust or in the trust fund or income thereof –

and that was a removal of himself from the list of potential beneficiaries and, your Honours, by Clause 3 two things occurred.  One was that the term “issue” which had been used in Clause 4 of the original deed at page 138 was explained, as it were, but your Honours will also see at the last four lines of Clause 3 at page 139, by that it was declared that a variation could not be made which directly or indirectly conferred any right or benefit upon him, the power to vary having been given by Clause 2 of the original document at page 138. 

Now, your Honours, if the 1983 deed was operative, the result was that the property of the trust or the assets of the trust could not be taken into account as property of the parties to the marriage for the purposes of the property settlement between them, rather, they were property which belonged beneficially to the four children and was held by the applicants in trusts for those children, yet they were treated by the majority as property of Dr Spry which could be taken into account for the purpose of determining what property settlement should be made in favour of his former wife.  That situation, your Honours, was arrived at in the following way.

First of all, all members of the Full Court appeared to accept that the property of the trust could not be treated as the property of Dr Spry merely because he had the powers of the trustee under the deed.  There had to be some lawful right in him to benefit from the assets.  Your Honours, that is put most clearly by Justice Finn at page 170, paragraph 137.  Your Honours, I will not read out the whole of that paragraph but your Honours will see the first line and then your Honours will see that at about line 13 she said:

He only had control, and I accept that no earlier authority in this court has gone so far as to hold that control alone without some lawful right to benefit from the assets of the trust, is sufficient to permit the assets of the trust to be treated as property of the party who has that control.

It appeared to be accepted by Chief Justice Bryant at page 117, paragraph 7 – I do not think I need to go to it in detail – and also by Justice Warnick at page 204, paragraph 259 but the majority were able to, in a sense, get around that in other ways.  May I go first to Justice Warnick’s reasons at page 201, paragraphs 247 to 248.  He said in paragraph 248:

To reverse his election –

meaning what had been done by the 1983 deed –

no variation of the Trust was required.  He would not be so much reinstating himself as beneficiary, as declaring himself again available as an object of an exercise of discretion.  All the trustee had to do in the exercise of his discretion was again consider the husband among the beneficiaries.

This is, your Honours, if I could pause, is without any amendment of the trust at all.  Your Honours will see the argument the other way at paragraph 251 which was not accepted.  Your Honours, this, in our submission, which amounts to saying that notwithstanding the 1983 deed it could be completely disregarded and Dr Spry simply nominated as a beneficiary, is, in our submission, with respect, rather extraordinary.  If one goes back to the documents which are set out at pages 137 to 139, the 1983 document was a deed under seal. 

Clause 2 of that document at page 139 really could not be more broadly expressed.  It meant that, in effect, there was a proviso to Clause 4 of the original deed – or perhaps clause 6, it would not matter very much which – saying that Dr Spry could not be the subject of a disposition under those provisions and, your Honours, if one looks at the last three lines of Clause 3 on page 139, they would appear to make apparent that there was indeed a variation to the power to vary at the top of page 138 which had the effect that the power to vary could not be utilised in the way which purported to confer directly or indirectly any right or benefit on Dr Spry.

Your Honours will appreciate that the document was executed, as is said on page 138, by Dr Spry as settlor, also as trustee, and by Mrs Spry.  Your Honours, we would ask how consistently with his duties as a trustee could Dr Spry, or any other trustee appointed in lieu, make a distribution to himself in the light of the document which had been the variation?  How that could be done is by no means clear and just to say it had no effect is, in our submission, completely incorrect. 

Your Honours, Chief Justice Bryant adopted a different approach.  It commences at page 121.  She at paragraph 27 said that she differed from Justice Warnick in that she did not consider that he can simply “reverse his election” but she thought it “remained open to the husband and wife as parties to the Deed to cancel it”.  Your Honours, what she meant by that, if one goes to paragraphs 28 and 29, was that she was saying that the husband and wife could agree to cancel the deed.

Your Honours, the last thing she said in relation to this can be seen at page 133, paragraph 54.  She said “Once it is accepted the effects of the 1983 Deed can be reversed”, then your Honours will see that he  “has ‘control’ as trustee and is capable of having the capital and income distributed to him as a beneficiary”.  Your Honours, there are, in our submission, real difficulties with that reasoning. 

Your Honours will have seen at paragraph 29 it was said that the husband and the wife might arrive at an agreement but, your Honours, how could a trustee of a trust – because the document was executed in that capacity as well – the possible beneficiaries of which were persons other than himself, agree consistently with his duties as trustee towards the existing possible beneficiaries, to add himself as a beneficiary with a view – and this is the whole point of the case – to getting his hands on the money?  Your Honours, how, we would submit, looking at it from Dr Spry’s position as settlor, could he agree – and he was a party to it as settlor also – to vary a trust where the power of variation excludes the power to do that very thing? 

Your Honours, on these issues the dissenting reasons were those of Justice Finn and they seem in this respect, and if we may say so with respect, a model of orthodoxy.  Your Honours will see at page 167, paragraph 127, she sets out a summary of the reasons advanced by the wife about how the 1983 deed or its effect could be got rid of.  Your Honours will see in the first place at paragraph 128 she rejected the proposition that it could be relevantly varied.  That accords, in our submission, with what had been said by Justice Plowman in, to put it shortly, In re Gulbenkian (No.2) [1970] 1 Ch 408 at page 418. It should be among the bundle that your Honours have.

GLEESON CJ:   In your submission is what she said at paragraph 142 correct?

MR JACKSON:   Your Honour, yes and no.  Can I say why?  The first thing is, your Honours, that is something as between Dr Spry and Mrs Spry and I will leave it to their counsel.  That is the first thing.  The second thing I would like to say about her, it is very difficult to see, with respect, how the fact that under a trust which for more than 20 years had enabled there to be distributions made by the trustee to children of the parties that the amounts paid for housing and payment of the children’s education should be seen as indirect benefits to the husband rather than to the wife or rather than to both of them. 

The second thing about it, your Honours, is that in relation to the family home, if that is owned by a trust under which the wife and the children are potential beneficiaries and if the parties live in a house, why should it be treated as a financial resource of the husband’s when those events are over?  But, however, your Honour, that is a point about it. 

The only other thing I would say about paragraph 142, your Honours, is that it is apparent from the other reasoning in relation to it that she was not intending there to be a very big adjustment because of it.  Your Honours, that is so if I could just mention that, your Honours, because one can see that at paragraph 148 at page 173 and also Justice Warnick at page 204, paragraph 258.  So, your Honours, it may or may not be right, but, in any event, it is not a huge amount that is being spoken of, one would think. 

Could I just say, your Honours, if I could go back to paragraph 129 at page 167, she correctly, in our submission, regarded the prospect of agreement as not having been explored in any event factually and as being “fanciful”.  Your Honours, at paragraphs 131 and 132 she rejected, again correctly in our view, that the submission that these trusts could be re-varied in relevant respects and, your Honours, having said that, she referred then at paragraph 136 to the other issue that I dealt with earlier.

Your Honours, could we just say this, that it is a case, in our submission, where the decision – and this is the first basis on which we seek special leave – takes the concepts of property and financial resources under the Family Law Act a very long way.  The term “property” is defined in section 4 in this way:

“property” , in relation to the parties to a marriage or either of them, means property to which those parties are, or that party is, as the case may be, entitled, whether in possession or reversion.

That is the first thing, your Honours.  The second thing is that the term “financial resources” is not a term which is defined but it is a term which is used in section 75(2)(b) of the Act where it is said:

The matters to be so taken into account are . . . 

(b)the income, property and financial resources of each of the parties and the physical and mental capacity of each of them for appropriate gainful employment –

That provision in relation to settlement of property is picked up by section 79 of that Act and it is picked up by section 79(1) which allows the court to make property settlement orders.  Then section 79(4)(e) that says

that the matters to be taken into account are those “in subsection 75(2) so far as they are relevant”.  Your Honours, the reasons of the majority appear to require parties to take steps, as it were, to create or acquire property or financial resources.  Your Honours, as Justice Gibbs said giving the principal judgment in Ascot Investment Pty Ltd v Harper 148 CLR 337 at p 355:

Except in the case of shams, and companies that are mere puppets of a party to the marriage, the Family Court must take the property of a party to the marriage as it finds it.  The Family Court cannot ignore the interests of third parties in the property, nor the existence of conditions or covenants that limit the rights of the party who owns it.

Your Honours, the second thing is that, we would submit, the decision works a very significant injustice to the children via, of course they are trustees for whom we appear.  For 20 years their father, with the agreement of their mother because she was a party to that deed, was not a potential beneficiary under the trust, yet the majority’s reasons would have that situation reversed and the trust fund made available to satisfy the claims of the mother against the father because under the evidence concerning the financial situation, if the father sold up all the assets he had, he still would not have the money to pay the amount that was ordered and at least half a million dollars would have to come out of the trust.

GLEESON CJ:   Mr Jackson, it is probably convenient to hear from Mr Gleeson at this stage.

MR GLEESON:   Your Honours, there are three topics we wish to address.  The first is that the jurisprudence within the Family Court is well settled but where parties to a marriage accumulate assets of the marriage into a discretionary trust which one party controls, the court will very closely scrutinise attempts by the party once the marriage breaks down to say that those marital assets are beyond the reach of the Family Court.  There are two techniques the court has used.  The first is the technique of property and the second is the technique of financial resource.  The present case involves no more than an application of that second principal to a specific fact situation. 

Your Honours will see in the judgment of Chief Justice Bryant at page 131 that she identifies the well settled principle in paragraphs 43 and 44 and quotes the supporting authority.  On page 133 she returns to that at paragraph 55.  We submit her comments are absolutely apposite to this case.

GLEESON CJ:   It is the words “who has the capacity to become a beneficiary”.

MR GLEESON:   Yes, subject to that factual question.  Then in 56 identifies that in this case the other technique of financial resources could have been used and it was part of a judge’s discretion which technique to use.  All three judges in the Full Court agreed that the financial resource technique was available.  The adjustment would have been a substantial one.  The trial judge indicated that at page 99.  Can I come then to the second matter, the capacity question.

The facts can be dealt with in three stages in the light of this trust.  The first stage is the period of 1978 to 1983.  In that period the husband was the settlor, the trustee.  He had a power to vary and he was one of the class of discretionary objects along with this wife and the children.  There were two specific fact findings made about the purpose and use of the trust I would wish to direct your Honours to, firstly at page 52.   In the last paragraph the trial judge found – and this was not reversed on appeal – this trust:

was set up and maintained to allow the parties to accumulate assets for the benefit of the family in the most tax effective way.

Secondly, at page 43 in the second paragraph the trial judge found that the husband:

had the benefit of the Trust assets.  For example, he has resided in the Toorak property owned by the Trust and he has both directly and indirectly benefited from the distribution of income to meet what can be described as family expenses. 

So the short point is, in every sense of the word, property of the parties to the marriage was being accumulated within this trust and it was being used for that purpose.  As a footnote, your Honours will know that the husband ran a separate case, that he had an agreement with the wife which overlay the trust whereby the assets would have been accumulated solely for the children.  Had he succeeded on that, his case may have fallen out differently.  He failed on that case.  So to conclude that first period, up until 1983, in every sense of the word, the assets in the trust were property of, to use the language of section 79, “the parties to the marriage or either of them”.  There is no doubt about that.

The question then is to look at the second stage which is 1983 to 1998.  The husband executes the deed of release, as it is called.  Quite specifically, the husband did not exercise his power to remove himself as a beneficiary of the deed.  Your Honours will see that by comparing page 138 of the original deed whereas settlor he had power at any time vary the terms of this trust subject to a proviso that it did not increase his rights.  Then, under Clause 4 he fell within the definition of “beneficiaries”. 

Just pausing on Clause 2, because we have put in our submission that it is yet another route by which the decision of the majority is correct, the purpose of Clause 2 of the original deed is to say that as settlor he has a complete power of variation subject only to this proviso that he not increase his rights above what are provided for in the deed.  That is specifically a reference down to Clauses 6A and 7 which is that he cannot participate in those particular matters referred to in those clauses. 

One of the reasons why the majority’s decision is correct is that the 1983 deed could be overcome by the husband exercising his power under Clause 2 to simply bring himself back to the full position contemplated in the original deed.  Leaving that matter aside, when we come to the 1983 deed itself, what the husband says – and this is page 139 – in Clause 2 is he says he “releases and abandons” his beneficial interest.  If we think for a moment about that, this is the trustee saying to himself, “I will not make claims on my own bounty”. 

The question which we submit was correctly answered by the majority could be put in terms of equity in this sense.  Would equity have restrained the husband from later withdrawing that self‑denying ordinance if it were necessary to do justice between the parties to the marriage in the context of the Family Law Act?  That is the question which we submit would be correctly answered in the negative for a number of reasons.  The authorities were addressed by the majority in a little more attention than Mr Jackson has taken you to.

Firstly, Justice Warnick relied upon the decision of the Full Federal Court in Ramsden found at page 195 of the book.  Ramsden is an important decision discussing the nature of the interest of a beneficiary under a discretionary trust.  It followed what this Court said in MSP Nominees and correctly identified – this is on the top of page 196 – that unless and until the trustee makes an appointment of income to a discretionary object, the object:

has only a hope that the Trustee’s discretion will be exercised in his or her favour, and a right to apply to a court to secure due administration –

The consequence is, as was held in Ramsden, disclaimer operates only as and when a distribution is declared by the trustee to a discretionary object.  Therefore, applying that here, at any time looking to the future the husband was entitled to say, “I now wish to have myself reconsidered”.  So that is the first principle we invoke.

The second, your Honours, is a very powerful one, that the children and the other beneficiaries never had a vested interest in the 1983 trust deed, never gave any consideration to the husband, did not even know about the 1983 amendment, generated no reliance interest.  The question in equity would be, why would the husband be restrained from resuming his full position as discretionary object if that was necessary to do justice in the context of the Family Law Act when there was no such vested interest, consideration or reliance interest? 

Now, that again was dealt with by the majority.  We have supplemented what they said by a reference to Scott and Fratcher, The Law of Trusts, 4th edition, which is in a bundle we have given your Honours.  It is the very last tab.  The proposition expressed by Scott, admittedly not in absolute terms, is that:

It would seem that a disclaimer by a beneficiary is not necessarily irrevocable and that it may be withdrawn if in the meantime there has been no change of position making it inequitable to permit him to withdraw the disclaimer.

The reference is In re Cranstoun.  So that second ground that there was no consideration reliance interest or vested interest being defeated is one which would produce the result in equity that the majority spoke of. 

Your Honours, the third matter is the deed.  That was dealt with at page 192 of the book by Justice Warnick and his Honour correctly noted, following the decision of Justice Mason in this Court in Banque Nationalle that “A deed may be cancelled with the consent of all parties” and therefore will cease to have future operation.  That proposition we have supplemented with a decision which is in our bundle.  It is the last case.  It is behind tab 4, a decision of Smith v Smith where the relevant passages on pages 1940 to 1941 deal with the proposition of a disclaimer created by a deed being withdrawn. 

In paragraph 15 the judge relies upon In re Cranstoun and in paragraph 16 at letter D expressly deals with the existence of a seal as adding no more “than a firm indication of the intention” and indicates the deed can become undone.  So, your Honours, for those three and other reasons, in that intermediate period, as I will call it, 1983 to 1998, it remained open to the husband to withdraw his self-denying ordinance. 

Can I briefly mention the final period of the facts, which is 1998 to 2002, and are of some significance.  If we stop the frame in 1998, this is a trust which has now been operated for close to 20 years and it has about half of the property of the marriage in it.  On any view, the wife is still a discretionary object.  The husband, we say, can restore himself.  The husband in 1998 engaged in a transaction designed to defeat the Family Law Court in a marriage that was by then in trouble.  He executed a deed without telling his wife removing him and her as capital beneficiaries.  He followed that up in 2002 by transferring half of the assets of the marriage, about $4 million, out of the original trust into the new trusts without telling the wife at a time when the marriage was having difficulty.

Those were transactions which fell squarely within section 106B of the Act, the anti-avoidance provision which has long been there.  Your Honours have section 106B.  They were transactions which were designed to defeat and certainly were likely to defeat an order.  At each of those dates 1998 and 2002, irrespective of the trust question, the Family Law Court could have made an order distributing property from the trust in favour of the wife as she was a discretionary object.  So that has remained the position and it is the reason why each of those transactions were properly set aside. 

Your Honours, that brings me to our final proposition, which is the interest of justice.  Stepping back a little, the essential justice and equity of the trial judge’s order was well explained by him at pages 104 to 105, especially the top of 105.  The trial judge effectively said that at the end of a long marriage, if a substantial part of the assets had been accumulated in a discretionary trust, ordinarily that will be property which the court can deal with, will allocate between husband and wife and they can then make their own arrangements with the children for the rest of their lives. 

What Dr Spry has achieved, if his argument be correct, is that he has placed in his own control for the balance of his life 50 per cent of the assets of this marriage for him to deal with with the children as and when he chooses.  Viewed in capital terms, he has effectively diverted that 50 per cent of assets to his own control and his own benefit.  He is the one who has said, “I want to be able to be the trustee of that money for them for the rest of my life”.  The justice and equity that Justice Warnick speaks of at page 105 is that ordinarily everyday of the week in this situation in the Family Law Court the marital assets will be split between husband and wife and they will make their arrangements with their adult children as they wish. 

What Dr Spry seeks to achieve is to subvert that ordinary rule so that he controls 50 per cent of the assets for the children for the rest of his life.  In effect, his agreement case which failed, the alleged agreement with the wife to accumulate assets in the trust only for the children, is being brought back to life through an invocation of trust law.  We submit that the majority

very properly, very correctly, recognised that equity would not restrain Dr Spry from doing what was necessary to ensure that the justice under the Family Law Act can be achieved. 

We say to your Honours that in the context of a piece of litigation that has now being going for over six years where an appeal could never of itself resolve the matter because at the very least the financial resources need to be looked at, the broader approach to property needs to be looked at, Part VIIIAA, which is the new anti-avoidance provision which only came in in the course of these proceedings, may well again be looked at.  At the end of the day, there is no significant prospect that a fair and just order by the Family Court would produce a significantly different result in this case.

GLEESON CJ:   We do not need to hear you, Mr McLeish and Mr Glick.

In these matters there will be a grant of special leave to appeal.

AT 11.47 AM THE MATTER WAS CONCLUDED