Watson v Vaughan; Vaughan v Watson
[2011] TASSC 17
•20 April 2011
[2011] TASSC 17
COURT: SUPREME COURT OF TASMANIA
CITATION: Watson v Vaughan; Vaughan v Watson [2011] TASSC 17
PARTIES: IN THE MATTER OF SECTION 32 OF THE TRUSTEE FILE NO: 141/2011 ACT 1898 (Tas)
AND IN THE MATTER OF THE NORTH WEST DAIRIES UNIT TRUST
WATSON, Bradley James as trustee of the NORTH WEST DAIRIES UNIT TRUST and as trustee of the SQUAW CHOP 3 DISCRETIONARY TRUSTv
VAUGHAN, Gerald William as trustee of the NORTH WEST DAIRIES UNIT TRUST
GLENOMERA PTY LTD as trustee of the MARLINSPIKE TRUST
PARTIES: IN THE MATTER OF THE NORTH WEST DAIRIES FILE NO: 174/2011 UNIT TRUST
VAUGHAN, Gerald William as Trustee of the NORTH WEST DAIRIES UNIT TRUST
GLENOMERA PTY LTD as trustee of the MARLINSPIKE TRUST
v
WATSON, Bradley James as trustee of the NORTH WEST DAIRIES UNIT TRUST and as trustee of the SQUAW CHOP 3 DISCRETIONARY TRUST
FILE NO/S: 141/2011 and 174/2011
DELIVERED ON: 20 April 2011
DELIVERED AT: Hobart
HEARING DATE: 12 April 2011
JUDGMENT OF: Tennent J
CATCHWORDS:
Equity – Trusts and trustees – Appointment, removal and estate of trustees – Appointment of new trustees – By the court – Generally.
Trustee Act 1898 (Tas), s32.
Aust Dig Equity [1335]
REPRESENTATION:
Counsel:
Applicant: K J Stanton
First Respondent: J Tomlinson
Second Respondent: J Tomlinson
Solicitors:
Applicant: Arnold Bloch Leibler
First Respondent: Madgwicks
Second Respondent: Madgwicks
Counsel:
First Applicant: J Tomlinson
Second Applicant: J Tomlinson
Respondent: K J Stanton
Solicitors:
First Applicant: Madgwicks
Second Applicant: Madgwicks
Respondent: Arnold Bloch Leibler
Judgment Number: [2011] TASSC 17
Number of paragraphs: 25
Serial No 17/2011
File Nos 141/2011174/2011
IN THE MATTER OF SECTION 32 OF THE TRUSTEE ACT 1898 (Tas) AND IN THE MATTER OF THE NORTH WEST DAIRIES UNIT TRUST
BRADLEY JAMES WATSON AS TRUSTEE OF THE NORTH WEST DAIRIES UNIT TRUST AND AS TRUSTEE OF THE SQUAW CHOP 3 DISCRETIONARY TRUST v GERALD WILLIAM VAUGHAN AS TRUSTEE OF THE NORTH WEST DAIRIES UNIT TRUST and GLENOMERA PTY LTD AS TRUSTEE OF THE MARLINSPIKE TRUST
IN THE MATTER OF THE NORTH WEST DAIRIES UNIT TRUST
GERALD WILLIAM VAUGHAN AS TRUSTEE OF THE NORTH WEST DAIRIES UNIT TRUST and GLENOMERA PTY LTD AS TRUSTEE OF THE MARLINSPIKE TRUST v BRADLEY JAMES WATSON AS TRUSTEE OF THE NORTH WEST DAIRIES UNIT TRUST AND AS TRUSTEE OF THE SQUAW CHOP 3 DISCRETIONARY TRUST
REASONS FOR JUDGMENT TENNENT J
20 April 2011
The North West Dairies Unit Trust ("the Trust") was created in March 2008 by deed. The trustees of the Trust are Bradley James Watson ("Watson") and Gerald William Vaughan ("Vaughan"). The unit holders in the Trust are Watson as trustee of the Squaw Chop 3 Discretionary Trust and Glenomera Pty Ltd as trustee of the Marlinspike Trust. Vaughan is the sole director of Glenomera Pty Ltd.
The Trust was created as an entity through which Watson and Vaughan could conduct a business running dairy farms. The Trust, primarily with bank funding, purchased farms. It then largely leased cows (some were owned by sharefarmers) and entered into share farming arrangements pursuant to which farmers maintained the day to day operation of the farms and milked the cows. The milk was then split between the share farmers and the Trust. Watson has for practical purposes been handling the business affairs of the Trust in the form of the overall management of the farming enterprises.
Disputes have arisen between Watson and Vaughan about the operation of the Trust's activities and the funding of them. Those disputes have reached a point where each acknowledges that they cannot co-operate as trustees of the Trust and that there is therefore a need for the appointment of an independent trustee. Negotiations were conducted between the parties for the purpose of attempting to agree upon an appropriate independent trustee and the terms upon which the trustee would operate. Those negotiations ultimately failed and resulted in the filing of an originating application in this Court on 1 March 2011 by Watson in his capacity as trustee of the Trust and Squaw Chop 3 Discretionary Trust. The respondents to the application were Vaughan and Glenomera Pty Ltd. By that application, made pursuant to the Trustee Act 1898, s32, Watson sought the appointment of an independent trustee for the Trust, and related orders. On 11 March 2011, Vaughan filed an originating application with the Court by which he also sought the appointment of an independent trustee for the Trust, and related orders. The applicants in those proceedings were the two respondents in the proceedings commenced by Watson, and Watson was the respondent to the application.
On 15 March 2011, the applications came before the Court for directions. Orders were made that the applications be heard together and for a timetable for the filing of affidavits. The matter was adjourned for hearing to 31 March 2011. On that day, the parties sought and were allowed time to enter into discussions which ultimately resulted in some detailed consent orders. I propose to set out in those orders because they provide a useful background to the manner in which the parties approached this matter. The orders as made on 31 March 2011 were in the following terms:
"1That upon Steven Allan Hernyk ('the Independent Trustee') providing his written consent to the parties within seven days of these orders, from that time he is appointed as trustee of the North West Dairies Unit Trust ('the Trust') in substitution for Bradley James Watson ('Watson') and Gerald William Vaughan ('Vaughan') who are thenceforth immediately replaced as trustees.
2The assets of the Trust vest with the Independent Trustee upon appointment, subject to 3 below.
3 Subject to:
a Paragraph 4 below; and
bThe Independent Trustee first determining that Watson and Vaughan have properly incurred expenses and liabilities in or about their execution of the Trust or in the valid exercise of their powers as trustees of the Trust,
Watson and Vaughan are entitled to be paid or reimbursed for such expenses and liabilities out of the Trust property.
4The Independent Trustee is entitled, as a priority to Watson's and Vaughan's right of indemnity as a former trustees of the Trust, to be paid from the balance of the proceeds of sale of any assets of the Trust (after satisfaction of the secured creditors of the Trust) all of his proper and reasonable costs and disbursements calculated on an indemnity basis associated with the carrying out of his obligations pursuant to these orders ('Hernyk's remuneration').
5The rates of remuneration of The Independent Trustee and his employees be fixed at the rates set out in the schedule to the Originating Application no. 141 of 2011 filed 1 March 2011.
6That the total amount of The Independent Trustee's remuneration be an amount as approved by the Court in default of agreement between the unit holders of the Trust and The Independent Trustee.
7Pursuant to Rule 604(3)(b)(iii) of Division 2 of Part 25 of the Supreme Court Rules 2000 (Tas) (the Rules), the independent trustee be directed, within 21 days of appointment or such further time as the parties agree or as ordered by the Court, to determine whether:
(a)(as provided in clause 21.1(b) of the Trust Deed) it is in the best interests of the unit holders of the Trust for the Trust to be wound-up and terminated; and
(b)in the event that the determination to 4(a) above is yes, it is in the best interests of unitholders to postpone the sale, calling in and conversion of any part of the investments and property of the Trust and if so, for what period of time.
8That the Independent Trustee provide written advice as to the making of the determinations as required in 7 above to the parties within 7 days of having made such determinations.
9That each of Vaughan and Watson provide to The Independent Trustee all the Trust's documents within their possession and control as soon as practicable upon, and in any event within 48 hours of, his appointment and that they provide from time to time as required by The Independent Trustee all other information in their possession or knowledge.
10That there be liberty to apply including as to further consideration of any question arising out of the appointment of The Independent Trustee.
11That applications for costs by each party to the application and by Mr Kimber on behalf of Mr Hernyk be adjourned to Monday 18th of April 2011 at 2:15pm.
12That save and except as they have not otherwise been dealt with, the originating applications in both sets of proceedings are adjourned sine die."
Those consent orders unfortunately left open the possibility of an ongoing dispute, because the implementation of them depended on the nominated independent trustee obtaining from the parties an indemnity in particular terms. The proposed trustee was of course not a party to the proceedings and could not be bound by the orders without his consent to them. That proposed trustee, being initially a nominee of Watson, had in fact provided to Watson a written consent to act as trustee which was attached to Watson's affidavit filed in support of his originating application. However it became apparent when the matter was before the Court on 31 March that the proposed trustee's consent was conditional on his obtaining the indemnity he wanted.
The indemnity sought by that proposed trustee, Steven Alan Hernyk ("Hernyk"), was not forthcoming from the parties within the seven day period provided for in paragraph 1 of the consent orders. That seven day period was to expire on 7 April. Shortly after 5pm on 6 April, the solicitors for Watson wrote to the Court seeking an urgent listing of the matter the next day. The solicitors advised the Court that, because Hernyk had not consented to an appointment as the independent trustee, their client sought to vary the orders made on 31 March. The solicitors provided a revised form of orders and indicated that, were the orders to be varied accordingly, their client would alone provide to Hernyk the indemnity which he sought. Vaughan, not unsurprisingly having regard to the terms of the orders in the varied form which Watson was seeking, opposed the variation of the orders save and except as they provided for the appointment of Hernyk as the independent trustee. His solicitors proposed an alternative trustee, Mr Hamish McKinnon, and provided Mr McKinnon's consent to act. The solicitors also advised that Mr McKinnon was prepared to act on the basis of the orders otherwise made on 31 March.
The application to vary the orders made on 31 March came on for hearing on 12 April. It is necessary to set out the fresh orders proposed by Watson to understand why the ongoing dispute between the parties is not only as to the identity of any new trustee, but is also more particularly as to the terms of that trustee's appointment. The fresh orders proposed by Watson are set out below. Where they appear without underlining they are in the same form as the orders made on 31 March, even though the numbering has been altered to reflect additions. Where underlining appears, the proposed orders are different:
"1.That upon Steven Allan Hernyk ('the Independent Trustee') providing his written consent to the parties within seven days of these orders, from that time he is appointed as trustee of the North West Dairies Unit Trust ('the Trust') in substitution for Bradley James Watson ('Watson') and Gerald William Vaughan ('Vaughan') who are thenceforth immediately replaced as trustees.
2.The assets of the Trust vest with the Independent Trustee upon appointment, subject to 3 below.
3. Subject to:
a. Paragraphs 4 and 5 below; and
b. The Independent Trustee first determining that Watson and Vaughan have properly incurred expenses and liabilities in or about their execution of the Trust or in the valid exercise of their powers as trustees of the Trust,
Watson and Vaughan are entitled to be paid or reimbursed for such expenses and liabilities out of the Trust property.
4. The Independent Trustee is entitled, as a priority, to:
(a)the rights of indemnity of Watson and Vaughan as former trustees of the Trust; and
,(b)the right to payment of any debt owing to the existing unitholders of the Trust, or to their related entities,
to be paid from the balance of the proceeds of sale of any assets of the Trust (after satisfaction of the secured creditors of the Trust) all of his proper and reasonable costs and disbursements calculated on an indemnity basis associated with the carrying out of his obligations pursuant to these orders ('Hernyk's remuneration').
5. As between Watson of the one part, and Vaughan of the other part, Watson shall be entitled to be paid any debt or other amount owing to him or to his related entities out of the Trust property in priority to any debt or other amount owing to Vaughan or his related entities.
6. The rates of remuneration of The Independent Trustee and his employees be fixed at the rates set out in the schedule to the Originating Application no. 141 of 2011 filed 1 March 2011.
7.That the total amount of The Independent Trustee's remuneration be an amount as approved by the Court in default of agreement between the unit holders of the Trust and The Independent Trustee.
8.Pursuant to Rule 604(3)(b)(iii) of Division 2 of Part 25 of the Supreme Court Rules 2000 (Tas) (the Rules), the independent trustee be directed, within 21 days of appointment or such further time as the parties agree or as ordered by the Court, to determine whether:
(a) (as provided in clause 21.1(b) of the Trust Deed) it is in the best interests of the unit holders of the Trust for the Trust to be wound-up and terminated; and
(b)in the event that the determination to 4(a) above is yes, it is in the best interests of unitholders to postpone the sale, calling in and conversion of any part of the investments and property of the Trust and if so, for what period of time.
9.That the Independent Trustee provide written advice as to the making of the determinations as required in 7 above to the parties within 7 days of having made such determinations.
10.That each of Vaughan and Watson provide to The Independent Trustee all the Trust's documents within their possession and control as soon as practicable upon, and in any event within 48 hours of, his appointment and that they provide from time to time as required by The Independent Trustee all other information in their possession or knowledge.
11.There be liberty to apply including as to further consideration of any question arising out of the appointment of The Independent Trustee."
The essential differences between the orders made on 31 March and those now proposed by Watson are that:
- the independent trustee's right to payment of his proper and reasonable expenses would also have priority over payment of debts owing to existing unitholders of the Trust or their related entities, and
- as between Watson and Vaughan, Watson and his related entities would be entitled to payment of their debts first from Trust property.
The identity of proposed independent trustees
Both Hernyk and McKinnon are registered liquidators whose names appear on the list maintained by ASIC. Hernyk is based in Launceston. McKinnon is based in Melbourne. Geographically, Hernyk is closer to the dairy operations of the Trust which are conducted on the north west coast of Tasmania. Watson lives in Launceston. Vaughan lives in Victoria. Given that the accountants for the Trust's operations were a Launceston firm where Watson is based, I infer that the books of account and records for the Trust are probably held in Launceston. Both Watson and Vaughan use solicitors in Victoria.
It was submitted by counsel for Watson that the rates proposed to be charged by McKinnon were significantly higher than those proposed by Hernyk and that, were McKinnon appointed, there would be extra costs involved in having McKinnon travel to Tasmania. Such costs would also include accommodation costs and travel costs to the north west. On the face of the rates proposed by each of Hernyk and McKinnon, McKinnon's hourly rate is indeed significantly higher. There seemed no dispute this might reflect the obvious, that is, the greater operational costs for a business operating in Melbourne as opposed to Launceston. While there was no formal evidence to this effect, counsel for Vaughan noted that an enquiry had revealed that the rates charged by another liquidator in Hobart, Mr Paul Cook, were only about 5 per cent less than McKinnon's. Counsel for Watson did not take issue with that information.
As to travel costs, there was no evidence about the extent to which either of the proposed trustees would need to be on the ground on the north west coast. However, it must be inferred the time would be similar as between Hernyk and McKinnon and that each would have travel and related costs relating to visits there. A significant part of either proposed trustee's work would involve the study of documents which, I infer, could as easily be done in Victoria as Tasmania. McKinnon's firm is prepared to absorb the costs of travel between Victoria and Tasmania.
Taking all those matters into account I accept that the costs involved in the appointment of McKinnon, as opposed to Hernyk, are likely to be higher although it is impossible to determine by precisely how much. The impact on the Trust of that differential in costs is a factor to be considered.
The other factor raised about the proposed trustees was their level of experience in farming entities. Criticism was levelled at McKinnon by counsel for Watson about his level of experience with dairy farms. His experience with farms consisted of his involvement with his family farm on which a vineyard was operated, and cattle run. He had no experience in dairy farms. No comment was actually made about Hernyk's experience. His curriculum vitae made no reference to any experience with farms at all. I would, in the circumstances, consider this issue as a relatively neutral factor.
It should also be noted that Hernyk will not consent to act in this matter unless orders are made in terms of those now sought by Watson which will result in his having from Watson the indemnity he seeks. McKinnon, on the other hand, will act on the basis of the orders made on 31 March without any underlying indemnities. It is acknowledged that McKinnon will look to unitholders to provide funding and will not put himself in the position where he will be liable for debts that he is not certain will be met from readily available assets of the Trust. Counsel for Watson submits that is no different from the stance that Hernyk has taken. With respect, it is. McKinnon's position does not result in a benefit necessarily being obtained for Vaughan, whereas Hernyk's position results in a benefit for Watson, potentially to the detriment of the other unit holder.
The factors I have discussed in the foregoing paragraphs about the identity of the proposed trustee are clearly relevant to the Court's decision but are not determinative. It should also be noted that, save for the issue of associated costs, no issue was taken with the appointment of a new trustee from outside Tasmania.
The positions of the parties
What has become obvious in these proceedings is that each party has a view about where the operations of the Trust should be going, and each is concerned to ensure that view has the best chance of success. The respective views of the parties are not necessarily in the best interest of the Trust and all unitholders. Watson would prefer to effectively try to trade out of the difficulties the Trust is experiencing, while Vaughan wants to see the Trust wound up and its assets realised, and, in effect, to prevent further, what he perceives as unnecessary, and ultimately useless, expenditure.
Counsel for Watson submitted to the Court that what his client's indemnity to Hernyk would ensure is that Hernyk's costs would have priority, and that he would also be indemnified in respect of any liability he might incur in obtaining funding to keep the Trust's operations going. He submitted that it was important to keep the farms operating and that funding was required for this purpose.
Counsel for Vaughan submitted that the orders proposed by Watson were not in the interests of the Trust. The debts he sought to obtain priority for were disputed as was his general financial management of the Trust's affairs. Further the orders sought by Watson would in effect amend the terms upon which the Trust was initially intended to operate.
Conclusion
This is an application for the appointment of an independent trustee for the Trust by reference to the Trustee Act 1898, s32. The application is made in circumstances where the existing trustees are incapable of working together to any degree at all to ensure that the Trust's operations are dealt with in accordance with the trust deed pursuant to which the Trust was set up. It is not an opportunity for either Watson or Vaughan to alter the terms of the trust deed to promote their own views or to obtain a benefit for themselves and related entities to which they might otherwise not be entitled under the terms of the deed. Each party has sought the assistance of the Court. It is clearly expedient for the Court to appoint a new trustee in place of the existing ones given the circumstances.
The difficulty in this case is that neither party is able to say with precision what the financial position of the Trust is. There are allegations of financial mismanagement by Vaughan against Watson which are the subject of separate proceedings between them. Clearly Vaughan does not want the Trust's activities to continue if that will result in losses for the Trust or further financial input from him. Watson does not want to see some irrevocable step taken which might force the winding-up of the Trust and, to that end, is willing to see further funds put into the Trust to keep its operations going.
With respect, it seems obvious that the first essential step is for some independent person to examine the Trust's financial position and to report to the unitholders as to what is in the best interests of the Trust. With that information both Watson and Vaughan may be in a better position to assess their respective positions. At the moment, neither is able to do that and each is being guided in a vacuum by what appears to be self-interest.
While the appointment of McKinnon may not ultimately facilitate a smooth future for the Trust, it would allow an independent assessment of the Trust's position, and recommendations to be made in the context of the terms of the trust deed and not in the context of a varied financial framework not contemplated by the original deed, but now proposed by Watson.
Neither party has sought to suggest that the basic framework of the orders entered by consent on 31 March 2011, save and except as it was sought to specifically vary those orders, was not an appropriate one.
In all the circumstances, the orders of the Court will be in the terms of those made on 31 March 2011 as between the parties, numbered 1 to 10, subject to the following:
(a) Paragraph 1 as it appears is deleted and is replaced by the following:
"That Hamish McKinnon, having given his consent in writing to be appointed as trustee of the North West Dairies Unit Trust ('the Trust') is appointed as trustee of the Trust in substitution for Bradley James Watson ('Watson') and Gerald William Vaughan ('Vaughan') who are immediately replaced as trustees thereof.";
(b)In paragraph 4 in the last line, the words "Hernyk's remuneration" are deleted and are replaced by the words "the Independent Trustee's remuneration";
(c)Paragraph 5 as it appears is deleted and is replaced by the following:
"That the rates of remuneration of the Independent Trustee and his employees be fixed at the rates set out in the document attached to the form of consent signed by Hamish McKinnon dated 6 April 2011."
The further hearing of the applications for costs by each party and Hernyk arising out of these proceedings to date is adjourned to a date to be fixed.
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