Stuart v Kingston

[1924] UKPCHCA 3

34 CLR 394

[PRIVY COUNCIL.]

STUART AND ANOTHER

KINGSTON AND OTHERS

RESPONDENTS. DEFENDANTS, McCARTHY

STUART AND OTHERS

RESPONDENTS. PLAINTIFFS,

ON APPEAL FROM THE HIGH COURT. PRIVY

Trustee-Breach of trust-Trust for sale-Parting with trust property to beneficiary- COUNCIL.

Compromise-Order of Court-Registered proprietor of land-Protection on registration-Fraud-Bona fides-Constructive trustee--Real Property Act 1886 (S.A.) (No. 380), secs. 69-72, 249-Trustee Act 1893 (S.A.) (No. 586), sec. 21- Aug. 1.

Rules of the Supreme Court of South Australia 1893, Order LXIX.: Order LXXIII., r. 14.

By his will a testator who died in 1880 gave his real and personal property to his trustees upon trust to sell and (in the events that happened) to hold the proceeds upon trust for his five children (who survived him) in equal shares. Included in his real property were his town house, his seaside residence and a block of land. In 1899 one of the testator's sons, A, was in occupation of the town house under a lease from the trustees, and, as he was paying no rent or interest, they were desirous of obtaining possession of the house. A and his * Present-Viscount Cave, Lord Dunedin, Lord Carson, Lord Blanesburgh and Mr. Justice Duff.

34 CLR 395

wife were, at the same time, making charges of waste against the trustees in respect of the seaside residence, A's wife having by assignment acquired the interest of the testator's other son, B, in the estate. An agreement was in April 1899 made between A and his wife and the trustees, which was expressed to be for the purpose of settling family differences, whereby it was agreed (inter alia) that A's wife should take the seaside residence and the block of land and should pay a certain sum of money on transfer of those properties, that A and his wife should release the trustees from all claims and should give up possession of the town house, and that the trustees should release A from all claims. This agreement was prepared by the solicitor for A and by the solicitor for A's wife. A and his wife not having given up possession of the town house, an action was in July 1899 brought in the Supreme Court of South Australia by the trustees against A and his wife, claiming specific performance of the above agreement; A and his wife by their defence alleged that the agreement was a breach of trust and charged the trustees with waste. The Master, on an inquiry directed by a Judge, reported that the two infant children of B were interested in the agreement, being presumptively entitled under the will of a deceased daughter of the testator to her share in the testator's estate, and were benefited by the agreement, and that no parties were necessary to the action in respect of the share of that deceased daughter. The hearing of the action then took place, and the Judge, notwithstanding the opposition of A's wife, made an order for specific performance of the agreement. Pursuant to that order, the seaside residence, which had been brought under the Real Property Act 1886 (S.A.) in June 1899, was in April 1900 transferred to A's wife, and the transfer was registered in May 1900, and the block of land, which was under the general law, was conveyed to A's wife in the same month. In 1920 the two infant children of B, having then attained their majority, brought an action against the trustees and the representatives of A and of his wife (who had both died), claiming a declaration that the agreement of April 1899 was a breach of trust, and that the seaside residence and the block of land still formed part of the estate of the testator.

Held, that, although the agreement of 1899 was a breach of trust, the order made in that year for specific performance of it, even if not binding on the infant children of B, was binding on, and properly and necessarily accepted by, A's wife and was sufficient to satisfy any inquiry as to a breach of trust having been committed upon which her knowledge of the trust matters in 1899 might have put her that, consequently, A's wife was entitled in respect both of the seaside residence and of the block of land to the protection which is given to a purchaser for value taking without notice and, therefore, that the action was properly dismissed.

Decision of the High Court: Stuart v. Kingston, (1922-23) 32 C.L.R. 309, Decision of the Supreme Court of South Australia (Angas Parsons J.) restored

34 CLR 396

APPEALS from the High Court to the Privy Council.

These were an appeal by the plaintiffs and a cross-appeal by the defendant Charles Laurence McCarthy to the Privy Council from the decision of the High Court: Stuart v. Kingston 1.

The judgment, which was delivered by Viscount CAVE, was as follows :-

This is an appeal and cross-appeal from a judgment of the High Court of Australia varying an order of Angas Parsons J., and raises questions as to the effect of certain transactions of a somewhat complicated nature connected with the administration of the estate of the late Sir George Kingston.

Sir George Kingston (who is hereafter called the testator) died on 26th November 1880, leaving five children, namely (1) Ludovina, (2) Hester, (3) Charlotte, (4) Strickland and (5) Charles. By his will he devised his real estates to his daughters Ludovina and Hester in trust at their discretion to sell them and to hold the proceeds (in the events which happened) in trust for his five children in equal shares. The testator's real estates included the following free- hold property: (a) a house and land in Grote Street in the City of Adelaide (b) a seaside residence and land in the County of Adelaide called "Marino," and (c) Sec. 489A, being about fifty-eight acres of land in the Hundred of Noarlunga in the same County.

In December 1882 the trustees of the testator's will agreed to sell the Grote Street property to the testator's son Charles for £11,000, to be payable in December 1887, with interest, and gave him possession of that property but he paid no part of the purchase- money or interest. In December 1888 Charles agreed to become the tenant of the Grote Street property at a monthly rent, and in January 1889 he mortgaged his share of the testator's estate to the trustees to secure payment of the purchase-money of Grote Street and the interest thereon, which then amounted to £12,375 but he failed to pay anything in respect of purchase-money, interest or rent, and in April 1899 (when the agreement to be hereafter mentioned was entered into) his debt to the trustees exceeded £21,000. Meanwhile the testator's daughter Hester had died (in 1893) having bequeathed her estate to her sisters Ludovina and Charlotte in trust for them successively for their lives and afterwards (in the events

1(1922-23) 32 C.L.R. 309. 34 CLR 397

which happened) in trust for the children of her brother Strickland who should attain twenty-one or marry; and Charlotte had been appointed a trustee of the testator's will in her place. Strickland had also died (in 1897), having executed a mortgage of his share of the testator's estate for £10,000, which mortgage had become vested in a Mr. Nathanial Alexander Knox in trust for Charles Kingston's McCARTHY wife Lucy. There were two children only of Strickland, namely, the present appellants Kathleen Molly Kingston (afterwards Stuart) and Dorothy Kingston, who in April 1899 were aged respectively eighteen and seventeen, and were living with their mother, the respondent Kathleen Pittar Kingston. At about the same date Charles Kingston--probably desiring to deter the trustees Ludovina and Charlotte from taking proceedings against him for his t-accused them of having committed waste by allowing 'Marino to get greatly out of repair. Charles Kingston was then Prime Minister of South Australia.

It was in these circumstances that the agreement was entered into which is in question in these proceedings. That agreement, which was dated 10th April 1899 and was signed by Charles Kingston and Lucy his wife, the two trustees of the testator's will (Ludovina and Charlotte) and Mr. Knox, was expressed to be entered into " in order to settle family differences." Its principal provisions were (1) that Mrs. Lucy Kingston should take over the "Marino' Estate (subject to an old mortgage for £500) and Sec. 489A and should pay to the trustees £270 in cash: (2) that Mrs. Lucy Kingston and her trustee, Mr. Knox, and Mr. Charles Kingston should release the trustees from all claims under the will of the testator or otherwise in respect of his estate; (3) that the trustees should release Charles Kingston from all claims, and (4) that Charles Kingston and his wife should give up possession of the Grote Street property to the trustees. It is evident that the effect of this agreement was to release Charles Kingston from his heavy debt to the trust estate in consideration of his surrendering his share and giving up possession of Grote Street; to appropriate "Marino" and Sec. 489A in satisfaction of Strickland's share, of which Lucy Kingston was practically the owner, subject to the payment by her of £270 cash; and to release the trustees from any personal liability to Charles or Lucy Kingston

34 CLR 398

in respect of waste. It is evident also that the agreement did not bind the share of Hester, in which the appellants (then under age) were interested, or any surplus of the share of Strickland which might remain after the payment of his mortgage but in view of the value of the testator's estate (which was then estimated at £5,400 only) the latter interest was negligible.

Notwithstanding the above agreement, Charles Kingston and his wife still refused to give up possession of the Grote Street property and in July 1899 the trustees brought an action in the Supreme Court of South Australia against Charles and Lucy Kingston and Mr. Knox for specific performance of the agreement. Charles Kingston, by his defence, pleaded that the agreement sued upon was a breach of trust in that it provided for a release of the trustees from their personal liability for the waste of the Marino property and for other defaults which he alleged against them, and that the trustees could not make a good title to "Marino" and Sec. 489A without the consent of all the beneficiaries, including the children of Strickland Kingston, which consent had not been obtained. The plaintiffs having applied, by summons under Order LXIX. of the Rules of Court 1893, for summary judgment for the relief which they claimed, Boucaut J. on 1st August 1899 ordered that it be referred to the Master of the Court to inquire and report whether the infant children of Strickland Kingston were interested in the agreement for compromise sought to be enforced in that action, and, if so, whether they were benefited or prejudiced thereby and how, and whether any and what other persons were necessary parties to the action in respect of Hester Kingston's share in the testator's estate, and whether in any event the interests of the infants required that possession of the Grote Street property should be given up by the defendants Charles and Lucy Kingston to the plaintiffs. No direction was given for adding the present appellants as parties to the action or for giving notice of the inquiry to their guardian, or to anyone on their behalf. The Master, after taking evidence, certified, in answer to the inquiry, as follows (1) Molly and Dorothy, the infant children of Strickland Gough Kingston deceased, are interested in the agreement for compromise sought to be enforced in this action, they being presumptively interested

34 CLR 399

in the estate of the late Sir George Strickland Kingston deceased by virtue of the will of the late Hester Holland Kingston deceased: (2) the said infants are benefited by the said agreement (3) no parties are necessary to this action in respect of the said Hester Holland Kingston's share in the said estate: (4) in any event the interests of the said infants require that possession of the Grote Street property in the claim referred to should be given up by the defendants Charles Cameron Kingston and Lucy Kingston to the plaintiffs. The application for immediate relief was thereupon adjourned into Court, and upon the hearing of that application before Boucaut J. Mrs. Lucy Kingston appeared in person and strenuously resisted the making of any order for specific performance but after considerable argument the learned Judge held that the compromise of April 1899 was beneficial to all parties, including the infants concerned, and made a decree for specific performance of that agreement. The decree contained directions that the defendant Charles Kingston and his wife should give up possession of the Grote Street property, and that they and Mr. Knox should release the plaintiffs from all claims, and that the defendant Lucy Kingston should pay to the plaintiffs £270 in cash on transfer to her of the "Marino" property and Sec. 489A.

This decree was duly carried out. Charles Kingston and his wife gave up the Grote Street property to the trustees, though not until a writ of possession had been issued against him. On 27th April 1900 the trustees, who in June 1899 had been registered under the Real Property Act 1886 as the owners of "Marino," transferred that property to Mrs. Kingston; and on 29th May 1900 the transfer was duly registered under the Act. On 3rd May 1900 the trustees conveyed Sec. 489A to Mrs. Kingston on payment of £270 and on 5th May 1900 a mutual deed of release was executed by which Charles and Lucy Kingston and Mr. Knox released the trustees of the testator's estate from all claims, and the trustees in like manner released Charles and Lucy Kingston.

After these events the matter slept for a long time. Ludovina died on 6th May 1908 Charles on 11th May 1908 Charlotte on 20th May 1913, and Lucy on 1st August 1919 and it was not until after the death of Mrs. Lucy Kingston on the last-mentioned date

34 CLR 400

that the appellants and their mother, as the executrix of Charlotte and the representative of the testator, raised a question as to the validity of the compromise of 1899 and claimed to have "Marino" and Sec. 489A retransferred to the testator's estate. It is noticeable that during or shortly after the War, "Marino," which in 1899 had

McCARTHY been valued at £1,500 only, rose greatly in value, SO that it is said

now to be worth £30,000 or more; but this circumstance, although it may throw light on the institution of this litigation, can have no effect on the rights of the parties.

The appellants' claim being resisted, they, on 12th November 1919, commenced this action against their mother as the executrix of Charlotte and the sole trustee of the testator's estate, and against the Public Trustee as the administrator of Lucy and Charles Kingston, claiming that the agreement of 1899 should be declared to be a breach of trust and void, and consequential relief. The respondent Charles Laurence McCarthy, who is one of the persons beneficially interested in the estate of Lucy Kingston, was, on his application, added as a defendant to the action, and authorized to defend it on behalf of all the persons SO interested.

The action was tried by Angas Parsons J., who held that the plaintiffs had failed to prove any breach of trust, and dismissed the action with costs. The plaintiffs having appealed to the High Court of Australia, that Court held unanimously that the agreement of 1899 was a breach of trust and not binding on the plaintiffs, and accordingly that the Public Trustee held Sec. 489A on the trusts of the testator's will and must be ordered to convey it to the defendant Kathleen Pittar Kingston as the trustee of that will. But the majority of the Court (Knox C.J. and Starke J.) held that, as to 'Marino," the Public Trustee as representative of Lucy Kingston was protected by the provisions of the Real Property Act 1886, relating to titles registered under that Act, and accordingly that "Marino" was free from the trusts of the testator's will from this view Higgins J. dissented, holding that, having regard to Lucy Kingston's knowledge of the circumstances in 1899, she was not protected by registration under the Act, and that Marino" also should be retransferred to the testator's estate. No order was made as to the costs of the action and appeal, except that the

34 CLR 401

plaintiffs should have their costs out of the testator's estate. It against this order that the present appeal is brought.

From the above statement it will appear that the first question to be determined is whether there was in fact a breach of trust and upon this question their Lordships are not disposed to differ from the decision of the High Court. Figures were put before the Board by counsel for the respondents showing that, having regard to the estimated values which were put upon the several properties at the date of the arrangement of 1899, and upon the assumption that Charles Kingston was at that time (as he alleged) without funds to pay his debt, the arrangement was not unfavourable to the testator's estate; and this may well have appeared to the trustees to be the case, especially as, without some inducement, Charles would probably have persisted in his obstinate refusal to give up possession of the Grote Street property. But, however that may be, it remains true that it was a term of the agreement that the trustees should be released (so far as Charles and Lucy Kingston were concerned) from all personal liability for their alleged waste in connection with " Marino" and from other charges in respect of alleged breaches of trust; and it appears plainly from contemporaneous documents, and especially from a case which was put by the trustees before counsel at or about that time, that this release was at least one of the inducements which led the trustees to enter into and enforce the agreement. Knox C.J., in his judgment, put this point as follows 1: - Part of the consideration for the agreement consisted of a release of the trustees from their personal liability in respect of this claim SO far as the shares of Charles Cameron Kingston and Strickland Gough Kingston were concerned. It follows that the consideration for the disposition of the trust property included a personal benefit or advantage to the trustees, and this fact alone is, in my opinion, sufficient to dispose of the contention that the transaction was authorized either by the trust for sale contained in the will, or by the power of the trustees to appropriate trust property in satisfaction of the share of a beneficiary, or by the power conferred by the Trustee Act to compromise claims relating to the trust estate." Their Lordships agree with this view, and are satisfied that if the

1(1922-23) 32 C.L.R., at p. 324. 34 CLR 402

transaction had been impeached at the time it could not have been held to be binding upon the appellants.

But the case does not end there. In order that the decision of the High Court as to Sec. 489A may be supported, it is necessary to hold that Lucy Kingston, who in the year 1900 obtained McCARTHY

conveyances for value of the legal estate in both Sec. 489A and 'Marino," and became the registered owner of the latter property, took that legal estate with notice that the properties were conveyed to her in breach of trust: and upon this question their Lordships find themselves unable to agree with the decision of the High Court. No doubt it may be assumed that at the date of the agreement of 10th April 1899 Mrs. Lucy Kingston was acquainted with the trusts of the testator's will and with the fact that the trustees were being charged by her husband with waste and breach of trust; and if nothing more had happened except a conveyance of the properties to her in pursuance of the agreement, it may well be that her title would have been open to serious attack. But between the date of the agreement and the execution of the conveyances in her favour there had intervened the action of 1899 and in that action, the question of breach of trust having been clearly raised and having been considered both by the Master and by Boucaut J.. the Court had held in effect that the agreement could not be impeached on the ground of breach of trust, and notwithstanding the vigorous opposition of Mrs. Lucy Kingston had ordered that it should be carried into effect. Whether, as a matter of law, the decree for specific performance should have been granted in the absence of the present appellants or of some person appointed to represent them, may be doubtful. It is true that Ludovina Kingston, one of the plaintiffs in that action, was at that time executrix and trustee of the will of Hester, through whom the infants claimed; but she did not sue in that capacity and, having regard to her adverse interest as'a trustee against whom a charge of breach of trust was being made, she cannot be held to have represented her beneficiaries in the transaction. It is true also that the South Australian Rules of Court provide (by Order LXXIII., rule 14) that where a compromise is proposed between some of the beneficiaries in a trust and a trustee sought to be charged, a Court or a Judge may, if they or he consider

34 CLR 403

the compromise to be for the benefit of all such beneficiaries, order that the compromise shall be binding upon any of such beneficiaries who are not before the Court and it may be that Boucaut J. had that provision in mind when he referred the matter to the Master and acted on the Master's certificate. But, however that may be, the rule was not in fact applicable to the case, and the order did not follow the terms of the rule. But assuming that the order was not binding on the infant beneficiaries, the present appellants, it was undoubtedly binding upon the parties to the action, including Mrs. Lucy Kingston, and was a sufficient assurance to her that the conveyances which the Court directed to be made and accepted would be free from objection. In these circumstances Mrs. Lucy Kingston, who merely obeyed the order of the Court, cannot possibly be held to have been guilty of wilful participation in a breach of trust, still less of fraud; and it appears to their Lordships that the transaction did not give rise to any equity against the properties in her hands. No doubt the decree for specific performance was founded on the agreement which Mrs. Lucy Kingston had made, but Boucaut J. in granting the decree did not treat the agreement as sufficient to conclude the case. He rightly assumed that, if the agreement had been made in breach of trust, it could not be enforced against the defendants and his decision that there had been no breach of trust, and that the agreement was therefore binding upon Mrs. Lucy Kingston, was properly and necessarily accepted by her. In short, if her knowledge of the trust matters in 1899 was sufficient to put her upon inquiry as to a breach of trust having been committed, the decree in the action of 1899 was sufficient to satisfy that inquiry.

Upon the above view of the facts Mrs. Lucy Kingston was entitled in respect both of Sec. 489A and of "Marino" to the protection given by the Courts to a purchaser for value taking the legal estate without notice of any equity in favour of other persons and, this being so, it is unnecessary to consider the questions which have been raised as to the effect of the plaintiffs' delay in taking proceedings and as to the construction and effect (as regards "Marino' of secs. 69 to 72 and 249 of the South Australian Real Property Act 1886. Their Lordships, therefore, express no opinion upon these questions.

34 CLR 404

For the above reasons their Lordships will humbly advise His Majesty that the appeal of the plaintiffs fails and should be dismissed, and that the cross-appeal should be allowed and the order of Angas Parsons J. restored. The appellants will pay the costs of all parties (other than Kathleen Pittar Kingston) of the appeal to the High

McCARTHY Court and of the present appeal and cross-appeal, except that, as it

was unnecessary that the Public Trustee should be represented on the hearing before the Board, no order will be made as to the costs of his appearance on these appeals. The respondent Kathleen Pittar Kingston will take her costs as between solicitor and client out of the trust estate.

[HIGH COURT OF AUSTRALIA.] JAMES THE

COMMISSIONER TAXATION Income Tax-Assessment-Income- Profits or bonus credited or paid to shareholder

of company-Capitalization of profits-Bonus declared-Shares issued in satis- faction of bonus-Value of shares-Income Tax Assessment Act 1915-1921 MELBOURNE,

(No. 34 of 1915-No. 32 of 1921), secs. 10, 14 (b), 15. June 2, 3.

A company, which had a large sum of accumulated profits, by extraordinary SYDNEY,

resolution resolved that it was desirable to capitalize those profits, and Aug. 13.

accordingly that such sum should be distributed as a bonus amongst the shareholders in proportion to the shares held by them respectively, and that the directors should be authorized to distribute amongst the shareholders in like proportion such number of unissued shares of £1 each paid up to 10s. as should be equivalent to the amount to be capitalized in satisfaction of such bonus. Pursuant to that resolution and to a resolution of the directors, an agreement was entered into between the company and a trustee on behalf of the shareholders that the company should allot and issue to each share- holder his respective proportion of the unissued £1 shares each credited as paid up to 10s., that the shares should be credited as paid up to 10s., and that the shares SO credited should be accepted in satisfaction of the bonus. In the books of the company each shareholder was credited with his proportion of the bonus in payment of 10s. in respect of each of the shares SO allotted and