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1 of 10 DOCUMENTS: CaseBase Cases

X v A

[2000] 1 All ER 490; [2000] 1 EGLR 19

Court: EWHCCh

Judges: Arden J

Judgment Date: 30/7/1999

Catchwords & Digest

Trusts -- Trustees -- Liability for future claims -- Application for direction in respect of potential

liabilities

Where life tenant died, entitling defendant widow and children to residuary estate.Where trustee concerned about potential liability for remediation costs of contaminated land under liabilityscheme to be introduced when Pt IIA Environmental Protection Act 1990 (UK) came into force.Whether trustee has lien over trust fund for such potential liabilities.Whether trustee should be at liberty to invest and vary investments in accordance with terms of testator'swill in relation to investments retained pursuant to lien.Whether trustee can charge for such actions in accordance with terms of will.Whether trustee can exercise powers of trustee of trust of land.Whether trustee should notify beneficiaries of exercise of its powers and give opportunity to comment.

Held: Lien exists.

Cases referring to this case

Annotations: All CasesSort by: Judgment Date (Latest First)

Annotation Case Name Citations Court Date Signal

CitedVertical Australia Pty Ltd v AirCompany Vertical-T LLC

[2012] NSWSC 719;BC201204818

NSWSC

27/6/2012

Cited Davis v Davis (No 2)[2012] NSWSC 523;BC201203269

NSWSC

18/5/2012

CitedRosenberg v Fifteenth EestinNominees Pty Ltd (No 2)

[2010] VSC 38;BC201001008

VSC24/2/2010

ConsideredLemery Holdings Pty Ltd vReliance Financial Services PtyLtd

(2008) 74 NSWLR 550;(2008) 1 ASTLR 225;[2008] NSWSC 1344;

BC200811095

NSWSC

11/11/2008

Considered

Agusta Pty Ltd as trustees forCavallino Unit Trust v OfficialTrustee in Bankruptcy as trusteeof bankrupt Estates of Ferella

[2008] NSWSC 685;BC200805311

NSWSC

8/7/2008

Journal articles referring to this case

Article Name Citations Signal

Trustees of Contaminated Land (2000) 74(5) ALJ 285


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Cases considered by this case

Annotations: All Cases Sort by: Judgment Date (Latest First)


Considered Brockbank, Re; Ward v Bates

[1948] Ch 206; [1948]

1 All ER 287

EWHCC

h 27/1/1948

ConsideredWhiteley, In re; Whiteley vLearoyd

(1886) 33 Ch D 347EWCACiv

29/7/1886

Distinguished

Pauling's Settlement Trusts(No2), In re

[1963] 1 All ER 857;[1963] 2 WLR 838

-

Legislation considered by this case

Legislation Name & Jurisdiction Provisions

Environmental Protection Act 1990 (UK) Pt IIA


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Balkin v Peck

(1998) 43 NSWLR 706; (1998) 98 ATC 4842; (1998) 40 ATR 15; BC9803370

Court:NSWCA

Judges: Mason P, Priestley JA and Sheppard AJA


Catchwords & Digest

Trusts -- Trustees -- Right of indemnity -- Right of trustees to personal indemnity from beneficiaries

Whether trustees entitled to indemnity from beneficiaries in respect of capital transfer tax paid by trustees.Where tax liability arose on death oflife tenant and was imposed on trustees and remaindermen(beneficiaries); trustees overlooked tax liability; trust came to end when property sold and gross proceedsdistributed to beneficiaries; tax subsequently paid by trustees personally without request by beneficiaries.

Held: Beneficiaries liable to indemnify trustees.

Taxation and revenue -- Tax planning -- Duty of care owed by legal practitioners -- Where solicitor

appointed as trustee of trust

Whether trustees who were solicitors breached duty of care by failing to advise beneficiaries of benefitsand disadvantages of transferring ownership of trust property located in London to offshore company.Where proposed scheme of doubtful effectiveness, may have involved trustees in breach of duty to

maintain control of trust assets, risked finding by United Kingdom revenue authorities that one beneficiarydomiciled in England with adverse consequences for her tax position and for financial position of otherbeneficiaries; highly improbable that beneficiaries would have adopted scheme.Held: No negligence.

Cases referring to this case

Annotations: All CasesSort by: Judgment Date (Latest First)


Considered Harpur v Levy[2011] VSC 653;BC201110000

VSC15/12/2011

Considered Grizonic v Suttor; Wade v Suttor[2011] NSWSC 471;BC201103427

NSWSC

23/5/2011

Cited Parkes-Linnegar v Watson (No 2)[2011] NSWSC 181;

BC201104913

NSW

SC

18/3/20

11

ConsideredToyama Pty Ltd v LandmarkBuilding Developments Pty Ltd(No 2)

[2007] NSWSC 55;BC200700496

NSWSC

9/2/2007

Cited Kendell v Carnegie(2006) 68 NSWLR 193;[2006] NSWCA 302;BC200608855

NSWCA

3/11/2006

ConsideredFitzwood Pty Ltd v Unique GoalPty Ltd (in liq)

[2002] FCAFC 285;BC200206793

FCA14/11/2002


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Applied Countryside (No 3) Pty Ltd v Best[2001] NSWSC 1152;BC200108033

NSWSC

14/12/2001

Journal articles referring to this case

Article Name Citations Signal

Failure to Restructure Trust for Tax Advantages not Negligence (1998) 36(8) LSJ 42Negligence: Actions against professional advisers (1999) 34(4) TIA 205

Women and the Law in Australia 2010 (book) ISBN: 9780409325959




CitedCausley v Countryside (No 3)Pty Ltd

BC9603947 NSWCA 2/9/1996

CitedMetcalfe v NZI SecuritiesAustralia Ltd

BC9600627 FCA 5/3/1996

Cited Bayer v Balkin

(1995) 95 ATC 4609;

(1995) 31 ATR 295;BC9505375 NSWSC 14/9/1995

Cited White v Jones

[1995] 2 AC 207;[1996] ANZ ConvR132; [1995] 1 All ER691; [1995] 2 WLR 187

UKHL 16/2/1995

CitedDavid Securities Pty Ltd vCommonwealth Bank ofAustralia

(1992) 175 CLR 353;(1992) 109 ALR 57;(1992) 66 ALJR 768;(1992) 92 ATC 4658;(1992) 24 ATR 125;(1992) Aust Contract R90-020; BC9202662

HCA 7/10/1992

CitedPavey & Matthews Pty Ltd vPaul

(1987) 162 CLR 221;(1987) 69 ALR 577;(1987) 61 ALJR 151;[1987] HCA 5;BC8701760

HCA 4/3/1987

CitedJW Broomhead (Vic) Pty Ltd(in liq) v JW Broomhead PtyLtd

[1985] VR 891; (1985)9 ACLR 593; (1985) 3ACLC 355

VSC 3/8/1985

CitedPaul A Davies (Australia) PtyLtd (in liq) v Davies

[1983] 1 NSWLR 440;(1983) 1 ACLC 1091

NSWCA 1/6/1983

Cited Mahoney v McManus

(1981) 180 CLR 370;(1981) 36 ALR 545;(1981) 55 ALJR 673;

(1981) 6 ACLR 437;[1981] HCA 54;BC8100107

HCA 8/10/1981

Cited Ross v Caunters[1980] Ch 297; [1979]3 All ER 580; [1979] 3WLR 605

- 15/6/1979

CitedCampbell (decd), Re; Rowe vMcMaster

[1973] 2 NSWLR 146 NSWSC 6/2/1973

Cited Wren v Mahony (1972) 126 CLR 212;[1972] ALR 307;

HCA 1/2/1972


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(1972) 46 ALJR 163;BC7200360

CitedAlbion Insurance Co Ltd vGovernment Insurance Officeof New South Wales

(1969) 121 CLR 342;[1970] ALR 441;(1969) 43 ALJR 389;

BC6900470

HCA 31/10/1969

CitedArmstrong v Commissionerof Stamp Duties

[1967] 2 NSWR 63;(1967) 69 SR (NSW)38; (1967) 86 WN (Pt2) (NSW) 259

NSWCA 5/5/1967

Cited

Zimpel (decd), Re; Morrisonv Perpetual ExecutorsTrustees & Agency Co &Sadler

[1963] WAR 171 WASC 20/12/1962

CitedBrook's Wharf & Bull WharfLtd v Goodman Brothers

[1936] 3 All ER 696;[1937] 1 KB 534;(1936) 106 LJKB 437;(1936) 156 LT 4;

(1937) 53 TLR 126;(1936) 42 Com Cas 99

EWCACiv

18/11/1936

CitedConroy (as Executor ofKingsley) v Equitable TrustCompany of New York

(1924) 144 NE 903 - 3/6/1924

CitedEquitable Trust Company ofNew York v Kingsley

(1923) 201 NYS 900 - 2/11/1923

CitedEquitable Trust Company ofNew York v Kingsley

(1922) 197 NYS 267 - 12/12/1922

Cited Rankin v Palmer

(1912) 16 CLR 285;(1912) 19 ALR 240;(1912) 13 SR (NSW)583; BC1200010

HCA 12/12/1912

Cited Ramsay v Lowther (1912) 16 CLR 1;[1912] HCA 68;BC1215259

HCA 21/10/1912

Cited/Followed

Matthews v Ruggles-Brise [1911] 1 Ch 194EWHCCh

31/10/1910

Cited/Applied

Hardoon v Belilios

[1901] AC 118; (1900)70 LJPC 9; (1900) 83LT 573; (1900) 17 TLR126; (1900) 49 WR 209

UKPC 8/12/1900

CitedFraser or Robinson vMurdoch

(1881) 6 App Cas 855 UKHL 3/8/1881

Cited Moule v Garrett

(1872) LR7Exch 101;[1861-73] All ER Rep

135; (1872) 41 LJ Ex62; (1872) 26 LT 367;(1872) 20 WR 416

- 3/2/1872

Cited/Followed

Chippendale, Ex parte; ReGerman Mining Co

(1853) 4 De GM & G19; (1853) 43 ER 415

- 23/6/1854

Cited/Followed

Deering v Earl of Winchelsea [1775-1802] All ERRep 140; (1787) 2 Bos& P 270; (1787) 1 CoxEq Cas 318; (1787) 29

- 8/2/1787


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ER 1184

FollowedGerman Mining Company, Inre

4 DeM&G 19 -

Legislation considered by this case

Legislation Name & Jurisdiction ProvisionsCapital Transfer Act 1984 (UK) -


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3 of 10 DOCUMENTS: Unreported Judgments NSW

27 Pages

BALKIN and ANOR v PECK and ANOR - BC9803370; [1998] 43

NSWLR 706

SUPREME COURT OF NEW SOUTH WALES COURT OF APPEALMASON P, PRIESTLEY JA and SHEPPARD AJA

CA 40744/95

12 February 1998, 24 July 1998

Trusts and trustees -- right of trustees to personal indemnity from beneficiaries

Negligence -- duty of trustees in their capacity as solicitors of the trust

Trusts and trustees -- general principles -- right of trustees to personal indemnity from beneficiaries

-- tax liability arising from retention of assets by trustees -- trust assets distributed before tax liability

paid by trustees

Negligence -- duty of trustees in their capacity as solicitors of the trust -- whether failure to minimise

tax payable on settlement

Mr Rosenberg sought to provide income and a home in London for his sister, Mrs Urquhart. Inconsequence, Mr Rosenberg settled property on trustees by Deed of Settlement. The Trust Fund was settledupon trust to pay the income to Mrs Urquhart during her life and thereafter upon trust for the children of MrRosenberg, the Settlor. The Settlor had three daughters: Mrs Balkin, Mrs Blumberg and Mrs Smirin ("theremaindermen"). Mrs Balkin and Mrs Blumberg (the appellants) resided in Australia. The original trusteeswere Mr Rosenberg and Mr Bayer. When Mr Rosenberg died in 1975 he was replaced as trustee by MrPeck. Mr Bayer is now deceased leaving Mr Peck as the surviving respondent.

The fund settled upon the trust was used to purchase a flat in London which was the home of the life tenantbetween 1968 and her death on 2 February 1986. In July 1986 the trustees sold the flat for 320,000 poundsand distributed the net proceeds of sale to the remaindermen. Under the Capital Transfer Tax Act 1984(UK) there was a "chargeable transfer" in

BC9803370 at 2

relation to the London flat consequent upon the life tenant's death. This liability was entirely overlookedby the Trustees between 1986 and 1989, when the British Internal Revenue levied the tax upon the trustees.A request to the Settlor's daughters for funds to meet the tax was answered by Mrs Smirin but declined bythe appellants. The trustees were forced to pay two-thirds of the tax liability out of their own funds togetherwith interest.

Proceedings were commenced by the trustees against the appellants for reimbursement. In response, theappellants brought a cross-claim against the trustees for failure to re-structure the settlement in a manner"tax effective" to the beneficiaries. Cohen J found each of the appellants liable to pay a sum representing


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one-third of the tax and a proportion of the interest accruing on the tax liability. His Honour also dismisseda Cross Claim against the trustees for negligence in their capacity as solicitors.

HELD, dismissing the appeal:

(1) A trustee has a right of indemnity in respect of liabilities incurred in favour of third parties provided thatthese liabilities are properly incurred. This right of indemnity is of two types: a right of indemnity out of thetrust property itself, and an additional right to proceed against a beneficiary personally for recoupment.

Such rights, unless grounded in contract or statute, derive from the unfairness of a person who gets all orpart of the benefit of property or a legal transaction not bearing all or the proportionate part of the burdenassociated with it.

Hardoon v Belilios [1901] AC 118; Causly v Countryside (No 3) Pty Ltd, Court of Appeal, unreported, 2September 1996; J W Broomhead (Vic) Pty Ltd v J W Broomhead Pty Ltd [1985] VR 891; Armstrong vCommissioner of Stamp Duties (1967) 69 SR (NSW) 38, approved.

(2) It was no objection to the availability of the right of personal indemnity that:

(a) Indemnity was sought from more than one beneficiary.

(b) The beneficiaries did not request the trustees to make the payment in question.BC9803370 at 3

(c) There were successive interests in the trust, such as life interests followed by a remainder interest.

(d) The liability was a tax liability.

(e) The trust had come to an end when its corpus had been entirely distributed.

Re German Mining Co; Ex parte Chippendale (1853) 4 D M & G 19, 43 ER 415; Causly v Countryside (No3) Pty Ltd, Court of Appeal, unreported, 2 September 1996; J W Broomhead (Vic) Pty Ltd v J WBroomhead Pty Ltd [1985] VR 891, Hardoon v Belilios [1901] AC 118, applied.

(3) The trustees, in their capacity as solicitors, did not breach the duty of care owed to the beneficiaries.

Mason P

In Hardoon v Belilios [1901] AC 118 at 124 the right of trustees to a personal indemnity from a beneficiaryin respect of liabilities incurred by reason of retention of the trust property was described by Lord Lindleyas "well established" and "one as old as trusts themselves". As beneficiaries, the appellants contend that thisright was not available to the trustees of the Fritz Rosenberg Settlement for various reasons. If held liable,they seek damages for negligence from the trustees in their capacity as the Settlement's solicitors. Thenegligence is said to be the failure to re-structure the Settlement in a manner "tax effective" to thebeneficiaries.

FACTS

Mrs Clara Urquhart was South African by birth. She came to live in the United Kingdom in about 1955.

She had a substantial income from business interests in South Africa and Swaziland, but owned no propertyin nor received any income from the United Kingdom.

In 1968 Mrs Urquhart suffered a heart attack and required hospital treatment. Her brother Mr FritzRosenberg told his solicitor Mr Bayer that he wanted to buy a home in London for Mrs Urquhart to live in.He later gave Mr Bayer instructions to set up a trust which could provide Mrs Urquhart with a home inLondon during her lifetime. Mr Bayer was asked to be a trustee with Mr Rosenberg, and because of hisclose friendship with the family he agreed. Mr Rosenberg wanted the trust to be as simple as possible. Atthe same time he wished to avoid the imposition of tax or death duties on his estate arising out of it. He toldMr Bayer that he did not want to establish a trust outside England.


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In consequence, Mr Rosenberg settled property upon trustees by Deed of Settlement dated 13 March 1968.The Trust Fund was settled (in the events which happened) upon trust to pay the income to the Settlor'ssister Clara Urquhart ("the life tenant") during her life and thereafter upon trust for the children of theSettlor. The Settlor had three daughters: Mrs

Balkin, Mrs Blumberg and Mrs Smirin. The first two reside in Australia and they are the appellants. Theoriginal trustees were Mr Rosenberg and Mr Bayer. When Mr Rosenberg died in 1975 he was replaced astrustee by Mr Peck. Mr Bayer gave evidence at the trial but is now deceased. The respondent, Mr Peck, isthe surviving respondent.

The fund of 30,000 that was settled upon the trust was used to purchase a flat at London House, AvenueRoad, London. This was the home of the life tenant between 1968 and her death on 2 February 1986.Cl4(d) of the Deed of Settlement gave the trustees power to permit any beneficiary to reside in anydwelling house which was subject to the trusts thereof. All of this was known to the three daughters of theSettlor in whom the remainder interest was vested.

Under the Capital Transfer Tax Act 1984 (UK) ("the Act") (now known as the Inheritance Tax Act 1984)there was a "chargeable transfer" in relation to the London flat consequent upon the life tenant's death. Thistax was levied upon the trustees. A request to the Settlor's daughters for funds to meet the tax was answered

by Mrs Smirin but declined by the appellants. The trustees were forced to pay two-thirds of the tax liabilityout of their own funds together with interest. These proceedings were commenced for reimbursement.

BC9803370 at 4

Cohen J found each of the appellants liable to pay a sum representing one-third of the tax together withcertain interest accruing on the tax liability. He held that the trustees could not recoup so much of theinterest they had incurred as was attributable to delay flowing from their mistake. His Honour alsodismissed a Cross Claim against the trustees for negligence in their capacity as solicitors.

UNITED KINGDOM CAPITAL TRANSFER TAX

S1 of the Act provides that capital transfer tax ("CTT") shall be charged on the "value transferred" by a"chargeable transfer". A chargeable transfer is defined in s2 as "any transfer of value which is made by anindividual but is not ... an exempt transfer". A transfer of value can be actual or notional: see generally,

McCutcheon and Whitehouse, McCutcheon on Inheritance Tax 3rd ed, 1988, 1-03. One such notionaltransfer occurs in relation to settled property in which a person has an interest in possession. If a persondies entitled to an interest in settled property, the settled property in which the interest subsists is treated ashaving been comprised in the deceased's estate immediately before death: Id, p5.

The charging provisions relating to settlements subsequent to their creation are to be found in PtIII of theAct (s43-s93). A person

BC9803370 at 5

beneficially entitled to an interest in possession in settled property is treated for the purposes of the Act asbeneficially entitled to the whole of the property in which the interest subsists (s49(1)). S52(1) provides ineffect that a deemed transfer of value occurs upon the coming to an end of an interest in possession duringthe lifetime of a beneficiary. This includes the death of the beneficiary, because A treats the interest inpossession as having been disposed of immediately prior to the death. S4(1) provides:

"On the death of any person tax shall be charged as if, immediately before his death, he had made a transferof value and the value transferred by it had been equal to the value of his estate immediately before hisdeath."

It was common ground that a tax liability arose by reason of the "value transferred" consequent upon thedeath of the life tenant (albeit that the transfer was deemed by s4(1) to have, occurred immediately beforedeath). In this event the persons that became liable for the tax were both the trustees at the time of deathand the three daughters of the Settlor. This is because s200 relevantly provided:

"Transfer on Death200(1) The persons liable for the tax on the value transferred by a chargeable transfer


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made (under s4 above) on the death of any person are -

(a) ...BC9803370 at 6

(b) so far as the tax is attributable to the value of property which, immediately before the death, wascomprised in a settlement, the trustees of the settlement;

(c) ...

(d) so far as the tax is attributable to the value of any property which, immediately before the death, wascomprised in a settlement, any person for whose benefit any of the property or income from it is appliedafter the death."

S237(1) effectively imposed a statutory charge over the property in favour of the Inland Revenue forunpaid tax.

As indicated, it was common ground at the trial that CTT was payable in accordance with the provisionswhich I have summarised. Unfortunately, this liability was entirely overlooked by the Trustees between1986 and 1989, and disputed by the appellants between 1989 and the trial of these proceedings in 1995.

In July 1986 the trustees sold the flat for 320,000. In October 1986 the whole of the net proceeds of salewere distributed to the life tenant's three nieces as remaindermen under the Settlement. Before doing thisMr Bayer, who was the active trustee at the time, took the advice of counsel in London. Counsel was askedto advise whether the trustees would be liable for tax on the sale of the flat. Counsel confined himself

BC9803370 at 7

to the precise question asked. He noted that a capital gain would arise on the sale of the flat and that thisrendered the trustees prima facie liable to UK capital gains tax in the hands of the trustees. He concludednevertheless that the sale transaction was exempt from capital gains tax because there was in effect adisposal of a private residence. In so concluding, counsel addressed only the provisions of the CapitalGains Tax Act 1979 (UK). He did not discuss the issue of liability for CTT under the Capital Transfer TaxAct 1984. His conclusion that "the gain on the disposalof the flat will be exempt from capital gains tax,and not liable to any other tax "(emphasis added) was literally correct. Unfortunately, it appears to havecontributed to Mr Bayer overlooking the question of liability to CTT which, as previously indicated, aroseupon the death of the life tenant as distinct from the sale of her former residence. In his evidence at trial MrBayer made it clear that he was aware of the CTT regime at all times since its commencement in 1975.CTT was introduced pursuant to the Finance Act 1975 (UK) which was later replaced by the CapitalTransfer Tax Act 1984. Mr Bayer made no bones about the fact that he had been careless in overlooking thequestion of CTT both before and after distributing the net proceeds of sale of the flat to the remaindermen.

BC9803370 at 8

It was in 1989 that Mr Bayer's attention was drawn to this oversight. His entreaties to the British InternalRevenue that he and his fellow trustee should be relieved of their personal liability f6r tax fell upon deafears.

ISSUES IN THE APPEAL

Neither at trial nor on appeal did the trustees base their claim upon the principles relating to payment ofmoney under mistake. Such a claim would have focussed upon the beneficiaries' receipt of what would beregarded prima facie as an unjust enrichment, at least according to Australian law since David SecuritiesPty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353. Rather, the case was conducted on thebasis that any right of reimbursement to the trustees stemmed from the payment which they later made tothe Inland Revenue (UK). The trustees argued that, since this payment had been properly made in responseto a lawful demand and since it related to the trust, the trustees had a right of personal indemnity from theappellants.

A trustee has an established right of indemnity in respect of liabilities incurred in favour of third partiesprovided that these liabilities are properly incurred. This right of indemnity is of two types: a right of


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indemnity out of the trust property itself, and an additional right to proceed against a beneficiary personallyfor recoupment. (I have stated

BC9803370 at 9

these propositions baldly.) When the trustees exhausted the trust assets by distributing them to the three

sisters in October 1986 there ceased to be any trust property against which the former right could beexercised. Hence reliance upon the latter.

The authority usually cited in support of the right of personal indemnity is the Privy Council decision inHardoon v Belilios [1901] AC 118. Hardoon was an appeal to the Privy Council from a judgment of theFull Court of the Supreme Court of Hong Kong which affirmed a judgment of non-suit in favour of therespondent. The appellant was the registered holder of shares in a company. He held them on trust for therespondent, who was the sole beneficial owner of the shares. The circumstances giving rise to the trustrelationship were complicated, but it is sufficient for present purposes to note that they did not arise out ofany dealings between the appellant and the respondent and that the respondent had not been the party whohad initiated the steps which led to the creation of the trust. The shares were not fully paid up when thecompany went into liquidation. Judgment had been entered in favour of the liquidator against the appellantfor calls made on him in respect of the shares. It was against this judgment that the appellant soughtindemnity. His claim had failed in the courts below because there was no evidence of any contract

BC9803370 at 10

by the respondent to indemnify. However, the appellant succeeded in the Privy Council.

It will be necessary to consider exactly what Hardoon decided and the principles lying behind it. For themoment it is appropriate to note that the appellants contended that personal indemnity was unavailable forone or more of the following reasons:

1. Indemnity was sought from more than one beneficiary.

2. The beneficiaries against whom indemnity was sought had not "requested" the trustees to make thepayment in question. (The appellants were not the Settlor of the trust and were ignorant of the tax paymentby the trustees before it was made.)

3. There were successive interests in the trust, being a life interest followed by a remainder interest.

4. The tax liability in question was not a trust expenditure in the sense required by the principle in Hardoon.

5. The trust had come to an end when the net proceeds of sale of the flat were distributed in October 1986.

6. The appellants had special defences to the trustees' claim, based upon the trustees' failure:BC9803370 at 11

(a) to "take the Trust offshore" before the death of the life tenant, thereby avoiding the tax liability whichfell due on the deceased's death; and

(b) to advise the appellants of the tax liability at the time when the trust assets were distributed.

(There was no suggestion on the evidence that either appellant had acted to her detriment on the faith of thepayment to her. Such a defence had been pleaded but it was not pressed.)

The appellants also challenged the trial judge's dismissal of the Cross Claim against the solicitors. And, by

a Supplementary Notice of Appeal they disputed the costs order made below.

The concept underlying Hardoon

Lord Lindley commenced his analysis of the legal issues in Hardoon by considering "on what principle anabsolute beneficial owner of Trust property can throw upon his trustee the burdens incidental to itsownership". His response (at 123) was that:

"the plainest principles of justice require that the cestui que trust who gets all the benefit of the propertyshould bear its burden unless he can shew some good reason why his trustee should bear them himself The


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obligation is equitable and not legal, and the legal decisions negativing it, unless there is some contract orBC9803370 at 12

custom imposing the obligation, are wholly irrelevant and beside the mark. Even where trust property issettled on tenants for life and children, the right of their trustee to be indemnified out of the whole trust

estate against any liabilities arising out of any part of it is clear and indisputable; although, if that whichwas once one large trust estate has been converted b the trustees into several smaller distinct trust estates,the liabilities incidental to one of them cannot be thrown on the beneficial owners of the others. This wasdecided in Fraser v Murdoch (6 App Cas 855), which was referred to in argument. But where the onlycestui que trust is a person sui juris, the right of the trustee to indemnity by him against liabilities incurredby the trustee by his retention of the trust property has never been limited to the trust property; it extendsfurther, and imposes upon the cestui que trust a personal obligation enforceable in equity to indemnify histrustee. This is no new principle, but is as old as trusts themselves."

It was considered "quite immaterial " that there was no contractual relationship or that the respondent hadnever requested the appellant to become his trustee (ibid).

It is understandable why Lord Lindley emphasised the equitable basis of the right in a trustee context.However, the notion of a right to contribution, recoupment or indemnity is not peculiar to equitable

relationships. Such rights, unless grounded in contract or statute, derive from the unfairness of a personwho gets all or part of the benefit of property or a legal transaction not bearing all or the proportionate partof the burden associated with it. Lord Lindley described this concept of correlative benefit/burden as "theplainest principle of justice" in

BC9803370 at 13

Hardoon (at 123). In Causly v Countryside (No 3) Pty Ltd, Court of Appeal, unreported, 2 September 1996this Court approved the statement of McGarvie J in J W Broomhead (Vic) Pty Ltd v J W Broomhead PtyLtd [1985] VR 891 at 936 that "the basis of the principle is that the beneficiary who gets the benefit of thetrust should bear its burdens unless he can show some good reasons why the trustee should bear theburdens himself". See also Mahoney v McManus (1981) 180 CLR 370 at 388; Paul A Davies (Australia)Pty Ltd v Davies [1983] 1 NSWLR 440 at 450. Many later authorities have preferred to use the concept ofunjust enrichment to describe the same basal principle: cf Pavey & Matthews Pty Ltd v Paul (1987) 162CLR 221 at 256-7. Whatever its label, it is a concept that informs doctrines of equitable and legalcontribution (Dering v Earl of Winchelsea (1787) 1 Cox 318, 29 ER 1184; Albion Insurance Co Ltd vGovernment Insurance Office (NSW), (1969) 121 CLR 342 at 350-2, marshalling (Ramsay v Lowther(1912) 16 CLR 1 at 23-4) and recoupment by varieties of sureties against those principally liable (Moule vGarrett (1872) LR 7 Ex 101 at 104).

This concept has been applied to tax liabilities, where the person made liable to pay the impost did notenjoy any or all of the beneficial interest in the property attracting the tax: Brook's Wharf and Bull WharfLtd v Goodman Brothers [1937] 1 KB 534; Armstrong v Commissioner of

BC9803370 at 14

Stamp Duties (1967) 69 SR (NSW) 38. In Armstrong (which involved contribution) Walsh JA applied theprinciple deriving from Brook's Wharf (an indemnity case), which he stated (at 45) as:

"Where complete indemnity is sought on the ground that, although both plaintiff and defendant were liable

to pay the debt, the defendant was, as between himself and the plaintiff, primarily liable, such a claim canbe sustained where the debt is created by a revenue law."

This principle has direct application in the present appeal, insofar as the liability to pay United Kingdomcapital transfer tax was imposed upon both the trustees and remaindermen of the Trust by s200(1)(b) ands200(1)(d) of the Capital, Transfer Tax Act (UK) (supra).

THE APPELLANTS' SUGGESTED LIMITATIONS ON HARDOON v BELILIOS

I return to the way in which the case was argued here and below, by reference to Hardoon as a principle ofthe law of trusts. I have endeavoured to demonstrate the underlying rationale for the specific right declared


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by Lord Lindley. To understand that rationale is to reject the appellants' attempt to preclude application ofHardoon to multiple beneficiaries, beneficiaries who had not requested the payment in question, orbeneficiaries who are remaindermen: see generally Hughes, "The Right of a Trustee to a PersonalIndemnity from Beneficiaries" (1990) 64 ALJ 567.

BC9803370 at 15The principle in Hardoon has been applied to multiple beneficiaries on several occasions: see Re GermanMining Co; Ex parte Chippendale (1853) 4 D M & G 19, 43 ER 4 15 (cited in Hardoon at 125); Matthews vRuggles-Brise [1911] 1 Ch 194; J W Broomhead; Metcalfe v NZI Securities Australia Ltd, Federal Court ofAustralia, Full Court, unreported, 5 March 1996; Causley v Countryside (No 3) Pty Ltd, Court of Appeal,unreported, 2 September 1996. The requirement of a requested payment was rejected as long ago as Deringv Earl of Winchelsea (1787) 1 Cox 318, 29 ER 1184 and was regarded as "quite immaterial" in Hardoon (at123). And there is an express statement justifying the application of the principle in relation to propertysettled on tenants for life and children in the passage set out above from Hardoon (at 123-4). The presentcase does not involve beneficiaries who are not sui juris, or entitled to a limited interest in the trustproperty, such as a life estate. (Whether that should be determinative can be left until a proper case arises.)It is true that a statement of Lord Lindley (at 127) reserves the situation touching shares held "for tenantsfor life", but I read this as addressing the issue of indemnity against life tenants; and certainly not casting

doubt upon the application of Hardoon to a situation such as the present where the remainder interest hasvested in possession by the very act giving rise to the liability sought to be recouped.

BC9803370 at 16

The submission that the CTT tax liability incurred by the trustees fell outside Hardoon must also berejected. It was argued that Hardoon only applies to trustee liabilities arising from the "mere fact ofownership" (per Lord Lindley at 125); and that the tax liability here arose as a consequence of the trustee'srelationship with the life tenant imposed by the settlor. I confess to having difficulty in reading thisexpression of Lord Lindley as indicating some limitation on the right earlier expounded as deriving fromthe benefit/burden (or unjust enrichment) concept. See also Armstrong. Be that as it may, the liabilityimposed on the trustees here was a direct incident of an inevitable aspect of the settled property vested inthem, ie the death of the life tenant. And an "ownership-based" liability is underscored by the statutorycharge over the property for the unpaid tax (s237).

Similar reasoning disposes of the submission that the liability was not incurred for the appellants' benefit. Itis difficult to pinpoint the nub of the submission. After all, the property was at all times held on trust for theappellants. And it was the very transfer of "value" to the remaindermen, consequent upon the death of thelife tenant, that attracted the tax liability. Had the tax not been paid, the statutory charge would havesubsisted, as would the beneficiaries' personal liability to pay the tax. The fact that the appellants did notrequest the trustees to pay the tax

BC9803370 at 17

is quite irrelevant, so long as the liability is a proper trust expense. A trustee's right of personal indemnity isnot confined to cases where there is request or implied contract.

Nor is it to the point that the flat was sold and the net assets distributed in late 1986. The trustee's liabilityto pay the tax arose earlier, upon the death of the life tenant. In July 1989 the appellants were approachedby the trustees seeking indemnity, but were met with a prompt refusal based upon denial of any tax liability.

But it is no longer in dispute that the trustees were obliged to pay the tax if the British revenue authoritiespressed them to meet it. It is interesting that, while United States trust law does not recognise a generalright equivalent to that established in Hardoon, a trustee there will have a claim to indemnity from abeneficiary personally if the trust estate has been conveyed to that beneficiary overlooking an obligation(such as a tax obligation) which the trustee was later required to pay: see Scott on Trusts 4th ed 249,249.1; Equitable Trust Co v Kingsley 197 NY Supp 267 (1922), affd 201 NY Supp 900 (1923), affd 144NE 903 (1924).

It is no answer to the trustees' personal right of indemnity with respect to a proper trust expense to say thatthe trustees could have or even should have recouped the liability out of the trust property when it was in


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theirBC9803370 at 18

hands. The personal right is distinct from the right of indemnity out of trust assets. It is not necessary to listall of the special defences to the right of indemnity to be able to say that nothing in the present case attracts

any such special defence. The trustees might have pursued the beneficiaries before settling with the Britishrevenue authorities: cf Rankin v Palmer (1912) 16 CLR 285 at 290-1; Wren v Mahony (1972) 126 CLR212 at 225-6. But they were not bound to do so on pain of loss of their right. There was demand beforeproceedings were commenced, and absence of change of position. The distribution of what were believedto be the net trust assets in 1986 involved, in all probability, a payment made under mistake of law whichwas received by the appellants in Australia. However the law in Australia or England is to be regarded inthe period prior to the High Court's decision in David Securities in 1992, the distribution certainly raised noequity against the trustees. It did not represent a breach of trust. Nor did it represent an accord andsatisfaction.

The alleged failure of the trustees to "take the trust offshore" before the death of the life tenant, therebyavoiding the tax liability which fell due on the deceased's death, represented no breach of trust causative ofloss to the trust estate or the appellants. I strongly doubt whether it involved any breach of trust, in the lightof the "absolute and uncontrolled discretion"

BC9803370 at 19

vested in the trustees as to retention of trust investments in their original form: see cl4(a) and cl5 ofSettlement. It certainly was not causative of any loss in the light of the findings on causation referred tobelow. Indeed it was entirely appropriate conduct on the trustees' part, for reasons addressed in the nextportion of this judgment. It cannot operate to preclude the trustees' right of indemnity otherwise arising.

THE APPELLANTS' CROSS CLAIM FOR DAMAGES AGAINST THE SOLICITORS

The Settlor was domiciled outside the United Kingdom, which meant that, had the property in thesettlement been situated outside the United Kingdom, no capital transfer tax would have been payable.However, the settlor's original instructions were to establish the trust in England. Evidence was given by atax expert that, following the Finance Act 1975 (UK), it would have been possible to avoid ultimate CTT

liability on the death of the life tenant by transferring the flat to the ownership of a company incorporatedin, say, one of the Channel Islands or the Isle of Man. On the basis of this evidence the appellants claimedthat the solicitors were in breach of their duty of care and were liable in damages for the amount of tax forwhich they sought recoupment.

BC9803370 at 20

I am in entire agreement with what Cohen J has written on the issue of the appellants' Cross Claim againstthe trustees in their capacity as solicitors. I respectfully adopt it. It may be summarised as follows.

Cohen J assumed that the solicitors owed a duty of care to the beneficiaries of the trust and that this dutyextended to one of advice as to benefits and possible disadvantages, if any, which might arise fromtransferring ownership of the flat to an offshore company. Reference was made to Ross v Caunters [1980]Ch 297 and White v Jones [1995] 2 AC 207.

The learned judge posed the question whether the failure to tell the beneficiaries of the effect of the

statutory changes in 1975 or thereafter could amount to negligence from which any damages could flow.This question was answered in the negative, having regard to (1) expert evidence about the doubtfuleffectiveness of the proposed tax-avoidance scheme, including problems for the trustees in relation to theirobligation to maintain ultimate control over trust assets; and (2) the serious risk that the scheme would haveprovoked close scrutiny by the United Kingdom revenue authorities of the increasingly debatableproposition that the life tenant retained a domicile outside the United Kingdom. Mr Bayer had actuallyturned his mind to this risk, and it was a real one. If the revenue

BC9803370 at 21

authorities had determined that the life tenant acquired an English domicile, there would have been very


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serious adverse consequences to the life tenant's income tax position and in relation to the tax or dutypayable upon her death. Had these risks come home, the appellants and their sister would have suffered.because they were the ultimate beneficiaries of the life tenant's estate. These risks meant that it was highlyimprobable that the beneficiaries and the life tenant would have opted to take the trust offshore had they

been offered the prospect of doing so. Indeed it was held likely that the life tenant would have opposed this,with the probable consequence (whatever the views of the nieces) that the trustees would have exercisedtheir very broad discretions under the trust instrument by adhering to the status quo.

The solicitor trustees had to act impartially in considering whether to exercise any power to restructure theSettlement: see Re Zimpel [1963] WAR 171 at 174; Re Campbell [1973] 2 NSWLR 146. Of necessity, thismeant that they did not have to prefer the interests of the residuary beneficiaries over that of the life tenant.And they were entitled to have regard to their express powers. It was also highly relevant that the threesisters were the residuary beneficiaries of the life tenant and, as such, their financial interests were vitallylinked with those of the life tenant.

BC9803370 at 22

COSTS BELOW

The trial judge ordered the defendants to pay the costs of the plaintiffs of the claim and the cross-claim. Isee no error in this. The appellants submit that some offset should have been made in relation to theirsuccess in limiting the trustees' claim to interest. Given the comparatively small amount of time apparentlydevoted to this issue, no appealable error is shown.

ORDERS

During the argument in the appeal it was noticed that the judgment entered does not reflect the trial judge'sreasons in one obvious respect. The parties agreed that it should be amended by adding "each of" before thewords "the defendants" in para1 of the judgment.

I would therefore propose the following orders:

1. (By consent) amend the Minute of Judgment by adding "each of' before "the defendants " in para1.

2. Appeal dismissed with costs.

Priestley JA

For the reasons given by Mason P I agree that the facts of the present case fall in the area of trust law andequitable concepts of which Hardoon v Belilios [1901] AC 118 is a leading example. That means that theappeal against the order made by Cohen J in the proceedings commenced by the trustees must fail.

I also agree, again for the reasons given by Mason P that Cohen J was right in dismissing the appellant'scross claim against the trustees.

I agree with the orders proposed by Mason P.

Sheppard AJA

In this matter I have had the advantage of reading the judgment to be delivered by Mason P. I am inagreement with his Honour's reasons and conclusions, and with the order which he proposes.

Order

1. Amend the Minute of Judgment by adding "each of" before "the defendants" in para1.


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2. Appeal dismissed with costs.

Counsel for the appellant: D J Hammerschlag; H S Packer

Solicitors for the appellant: Rosenblum & Partners

Counsel for the respondent: M A Pembroke SC; A Leopold

Solicitors for the respondent: Malleson Stephen Jaques


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4 of 10 DOCUMENTS: Victorian Reports/Judgments/1998 4 VR/QUINTON and Others v PROCTOR -1998 4 VR 469 - 25 May 1998

8 pages

QUINTON and Others v PROCTOR - [1998] 4 VR 469

SUPREME COURT OF VICTORIAKellam J

5 March, 25 May 1998

Trusts and trustees -- Distribution of aliquot share of trust property -- Whether life tenant and

remaindermen can require distribution -- Trustees -- Trustee refusing to agree to distribution --Vesting order to give effect to distribution -- Application to remove trustee -- Trustee Act 1958 (No.

6401) ss. 51(1), 52(2)(i).

A life tenant and three remaindermen of a trust estate, all sui juris, agreed with one of the two trustees(who was also one of the remaindermen) that the proceeds of one of the trust's two remaining investmentswhich had matured be paid to them. The other trustee refused to agree to the proposed distribution. Thebeneficiaries applied for a vesting order to give effect to the proposed distribution, and for an orderremoving the trustee who refused to agree to the distribution.

Held, allowing the application for a vesting order: (1) The rule that a beneficiary absolutelyentitled to an aliquot share of a trust fund is, unless a contrary intention appears, entitled to call for a

transfer of that share extends to enable beneficiaries entitled in succession to combine to require paymentor transfer of part of their interests in the fund, subject to the court retaining a discretion to refuse to orderan inappropriate payment or transfer.

Re Marshall; Marshall v Marshall[1914] 1 Ch. 192;Re Sandeman's Will Trusts; Sandeman v Hayne[1937] 1 All E.R. 368; Stephenson v Barclays Bank Trust Co. Ltd. [1975] 1 All E.R. 625 considered

Smith v Snow (1818) 3 Madd. 10; 56 E.R. 413;In re Brockbank; Ward v Bates [1948] 1 Ch. 206referred to

(2) Since the defendant's refusal to agree to the proposed transfer reflected his genuinely heldconcerns as to the best interests of the trust and he had not placed himself in a position antagonistic to hisduty as a trustee, the grounds for the exercise of the inherent jurisdiction to remove a trustee were not

established.Miller v Cameron (1936) 54 C.L.R. 572 applied

Originating motion

This was an application by originating motion pursuant to s. 52(2)(i) of the Trustee Act 1958 for a vestingorder to effect a distribution of part of a trust estate to the life tenant and remaindermen and an applicationfor removal of one of the two trustees. The facts are stated in the judgment.


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S. P. Newton for the plaintiffs.

J. K. Arthur for the defendant.

Kellam J

The testator, Mervyn Hector Southwell, made his will on 6 April 1974 and thereby appointed his wife's son,the first plaintiff, and his

1998 4 VR 469 at 470

brother-in-law, the defendant, as his executors and trustees. The trust of his residuary estate was of theincome to his wife for life and after her death as to both capital and income to her three children as tenantsin common in equal shares. Each of the beneficiaries is now of full age and capacity. The testator died on19 December 1985 and probate of his will was granted to the first plaintiff and the defendant on 14 April1986. Since that time the estate has been administered and the residuary estate has been and is held by thefirst plaintiff and the defendant as trustees in accordance with the terms of the will. The assets of the estatenow consist of two investments. The first is an amount of $190,000 invested in Telstra bonds at an interest

rate of 11.75% and due to mature in 2001. This investment earns approximately $400 per week, which ispaid to the wife. The second asset is the sum of $39,000 which is held in a trust account in consequence ofanother investment having now matured. Upon the latter investment maturing, the wife and the childrenagreed that they did not desire that the sum of $39,000 should be reinvested, but rather should be paid outto them in full in equal shares. Solicitors acting on their behalf prepared an agreement, which was signedby each of them and was forwarded to the defendant in April 1997 with a request that he sign it. Theproposed agreement provided for payment to the wife and children of the sum of $39,000 by four equalportions of $9750. The defendant has refused to sign the agreement. These proceedings were thencommenced by the wife and children as plaintiffs against the defendant. The plaintiffs seek orders pursuantto s. 51(2)(i) of the Trustee Act vesting the sum of $39,000 in them as tenants in common in equal shares.They seek a further order removing the defendant as trustee and an order that he pay the costs of theproceeding as between solicitor and client.

The issue between the parties is of a relatively limited compass. The defendant contends that the plaintiffs

are not entitled to require the trustees to transfer only part of the trust estate to them. He contends that theplaintiffs must either permit the trusts in the will to be kept on foot, in which case the trusts must continueto be executed by the trustees without interference or direction by the beneficiaries, or they must, byagreement, extinguish and put an end to the trust. The plaintiffs do not seek to extinguish and put an end tothe trust. They contend, however, that they are entitled to call upon the trustees to transfer the sum of$39,000 to them and that the defendant's failure to join with the first plaintiff, his co-trustee, in doing so iswrongful and that in consequence he should be removed as a trustee.

Under s. 51(1) of the Trustee Act 1958 the court may make a vesting order on the grounds set out in s.51(2). In particular s. 51(2)(i) provides that such an order may be made:

Where a trustee neglects or refuses to convey any property ... according to the direction of the person absolutelyentitled to the same for twenty-eight days next after a request in writing has been made to him by the person soentitled.

According to the learned authors ofPrinciples of the Law of Trusts, Ford and Lee, Law Book Company, 3rded., (1996) at para. 840.8:

This provision envisages a situation where the active duties of the trustee have come to an end because all thebeneficiaries under the trust are of full age and capacity. The duty of the trustee in such case is to vest the title to thetrust property in the beneficiaries so clothing the equitable title with the legal estate. If the trustee fails to performthis duty recourse may be had to this provision. It should be shown that the trustee has failed to perform her or hisduty and if this is not shown a vesting order may be refused, although the Court may direct the trustee to take stepsto ensure the vesting.


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1998 4 VR 469 at 471

It is clear law that if all the beneficiaries of a trust are of full age and capacity and between them entitled tothe entire beneficial interest under the trust, the rule is that they may terminate the trust by requesting thetrustee to transfer the trust assets to them or by their direction: see Ford and Lee at para. 16,090 and theauthorities there cited. It appears to be clear that the rule operates to override an intention of the testatordesigned to prevent the beneficiaries from taking their shares until reaching an age beyond majority. Thus adirection in the will to the trustees to accumulate income for beneficiaries until after majority will notprevent the operation of the rule. This branch of the rule has come to be associated with the well knowndecision in Saunders v Vautier(1841) 4 Beav. 115; 49 E.R. 282. It appears to be clear also that the fact thatthe property is settled on trust for a life tenant and remainderman does not prevent the operation of the rule.As soon as the life tenant and remainderman are of full age and capacity the trust can be terminated and thelife tenant may commute the life interest in return for a capital sum, with the remaindermen sharing thebalance of the estate. (See Jacobs, The Law of Trusts, Law Book Company, 6th ed., (1997), at pp. 695-8;Anson v Potter(1879) 13 Ch. D. 141;Re White [1901] 1 Ch. 570 and Stephenson v Barclays Bank TrustCo. Ltd. [1975] 1 W.L.R. 882; 1 All E.R. 625.)

However, it appears to be clear that apart from terminating the trust, the beneficiaries of a trust have nopower to direct the trustee as to what he or she should or should not do in the exercise of his or her powersas a trustee. InIn re Brockbank; Ward v Bates [1948] 1 Ch. 206 at 209 Vaisey J. said in a case where thebeneficiaries submitted that they were entitled to force a trustee to retire, and to direct him (he having thepower to nominate his successor), to appoint such person or persons as the beneficiaries desired:

It seems to me that the beneficiaries must choose between two alternatives: either they must keep the trust of thewill on foot, in which case those trusts must continue to be executed by trustees duly appointed pursuant either tothe original instrument or to the powers of s. 36 of the Trustee Act 1925 and not by trustees arbitrarily selected bythemselves; or they must, by mutual agreement, extinguish and put an end to the trusts with the consequenceswhich I have just indicated.

The defendant has submitted that the effect of the present application is that the plaintiffs do not seek toterminate the trust, but do seek to direct the defendant, as a trustee, to join in the transfer to them of the sum

of $39,000 and in this manner the plaintiffs are directing the trustee as to the manner in which the trust is tobe executed. Whilst the submission has an initial attractiveness, upon analysis it does not really address thecritical issue. It is true that the plaintiffs seek to have the sum in question transferred to them by thetrustees. But, in this, they do not seek to direct the trustees as to the exercise of their powers. This isbecause the trustees have no power under the will to effect the transfer. If the transfer is to be effected theauthority for it must be found elsewhere.

As I understand the position, the plaintiffs rely upon, or at least appear to be in a position to rely upon, adistinct rule but one related to the rule which permits termination of the trust. The further rule is that whereone beneficiary is entitled absolutely to an aliquot share of a trust fund, unless a contrary intention appears,that beneficiary is entitled to call for payment or transfer of that share to him. The effect of this is toterminate the trust, but only in relation to that share. Otherwise the trust is unaffected: see Ford and Lee atpara. 16,170.

1998 4 VR 469 at 472

The principles under consideration were reviewed and summarised in Stephenson v Barclays Bank TrustCo. Ltd. at W.L.R. 889; All E.R. 637 where Walton J. said:

Now it is trite law that the persons who between them hold the entirety of the beneficial interests in any particulartrust fund are as a body entitled to direct the trustees how that trust fund is to be dealt with, and this is obviously thelegal territory from which that definition derives. However, in view of the arguments advanced to me by [counselfor the respondents], and more particularly that advanced by him on the basis of the decision of Vaisey J. in Re

BrockbankI think it may be desirable to state what I conceive to be certain elementary principles.

(1) In a case where the persons who between them hold the entirety of the beneficial interest in any particular trustfund are all sui juris and acting together ("the beneficial interest holders") they are entitled to direct the trustees howthe trust fund may be dealt with. (2) This does not mean, however, that they can at one and the same time override


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the pre-existing trusts and keep them in existence. Thus, in Re Brockbankitself the beneficial interest holders wereentitled to override the pre-existing trusts by, for example, directing the trustees to transfer the trust fund to X andY, whether X and Y were the trustees of some other trust or not, but they were not entitled to direct the existingtrustees to appoint their own nominee as a new trustee of the existing trust. By so doing, they would be pursuinginconsistent rights. (3) Nor, I think, are the beneficial interest holders entitled to direct the trustees as to the

particular investment they should make of the trust fund. I think this follows for the same reasons as the above.Moreover, it appears to me that once the beneficial interest holders have determined to end the trust they are notentitled, unless by agreement, to the further services of the trustees. Those trustees can of course be compelled tohand over the entire trust assets to any person or persons selected by the beneficiaries against a proper discharge,

but they cannot be compelled, unless they are in fact willing to comply with the directions, to do anything else withthe trust fund which they are not in fact willing to do ...

So much for the rights of the beneficial interest holders collectively. When the situation is that a single person whois sui juris has an absolutely vested beneficial interest in a share of the trust fund, his rights are not, I think, quite asextensive as those of the beneficial interest holders as a body. In general, he is entitled to have transferred to him(subject, of course, always to the same rights of the trustees as I have already mentioned above) an aliquot share ofeach and every asset of the trust fund which presents no difficulty so far as division is concerned. This will apply tosuch items as cash, money at the bank or an unsecured loan, stock exchange securities and the like.

The case before me is not a case where a single person who is sui juris seeks transfer of his or her aliquotshare of each and every asset of the trust fund. Rather this is a case where the beneficial interest holders

combine to seek payment to them by the trustees of part of their interests in the trust fund. They assert thatthey have the right to require the trustee to pay to them that part of the fund held in trust and which ispresently held by the trustee in cash deposit. Otherwise they desire the administration of the trust tocontinue in so far as the other part of the trust fund invested in Telstra bonds is concerned. It will be seenthat the critical issue for determination is whether the rule that a beneficiary who is entitled to call for atransfer of his or her share extends to enable beneficiaries who are entitled in succession to combine torequire transfer of part of a share, (specifically one asset in the trust fund).

Neither counsel who appeared before me was able to direct my attention to any authority relating preciselyto a situation such as is presently before the court. This is somewhat surprising, as one would haveimagined the question presently before the court is one which would have arisen previously. Perhaps thereason is that generally, beneficiaries are unlikely to be attracted to piecemeal

1998 4 VR 469 at 473

distribution. Whatever the reason, my own researches have also been to no avail. Accordingly, I havefound the issue to be not without difficulty.

However,Lewin on Trusts, 16th ed., (1964), appears to support the contention of the plaintiffs. At p. 621the following extract appears:

The beneficiary absolutely entitled may call upon the trustee to execute conveyances of the legal estate as he, thebeneficiary, may direct, and of course the same principle applies in the case of other property, such as stock orshares, which passes by transfer ... Lord Eldon was of the opinion that a beneficiary could not require the trustee todivest himself from time to time of different parcels of the trust estate on the ground that the trustee had the right tosay "If you mean to divest me of my trust, divest me of it altogether and then make your conveyance as you think

proper" (Goodson v Ellison 3 Russ. 594) but that view appears erroneous. Smith v Snow (1818) 3 Madd 10.

In Smith v Snow (1818) 3 Madd. 10; 56 E.R. 413, Leach V.-C. said in relation to the question of whether aparty who is entitled to a certain aliquot proportion of an ascertained sum could file a bill to have it

transferred to him without joining in the proceeding the other persons who were entitled to other aliquotshares of the trust fund:

My only difficulty is whether trustees can be called upon to act in the execution of their trust, by parts, as in thatcase seven different bills might be filed against them; but that I think is not so great an inconvenience as theallowing of such a bill as this would be.

InRe Sandeman's Will Trusts; Sandeman v Hayne [1937] 1 All E.R. 368, the court held that twobeneficiaries who were absolutely entitled had a prima facie right to have their interest in a half of theestate, which consisted principally of shares, transferred to them. Clauson J. said at 371:


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There is no difficulty in dividing the preferred ordinary and the preferred shares into two halves, leaving one half inthe hands of the trustee upon trust for [the beneficiaries other than the plaintiffs], the other half of the shares goingto the plaintiffs, who are absolutely entitled to it. In those circumstances, it is settled law that, prima facie, the

plaintiffs are entitled to have those shares transferred to them.Prima facie, that is so. But the court will not orderthat transfer to be made if there is some good ground to the contrary.

The court has, I think, been rather careful never to define in precise terms exactly what would be good ground tothe contrary. All I have to do in this case is to ascertain whether, on the facts now before me, there is some goodground for ignoring the plaintiffs'prima facie right to have half of the shares transferred to them.

In reaching this conclusion Clauson J. relied uponRe Marshall; Marshall v Marshall[1914] 1 Ch. 192. Inthat case the testator had left a large estate, the greater proportion of which was represented by shares in apublic company. The plaintiffs had an absolute entitlement to one-quarter of the residue. However, the otherthree-quarters of the estate was settled upon trusts which were likely to last for many years. The Court ofAppeal held, in accordance with established principle, that a person who is entitled indefeasably to analiquot share of property, is entitled to have that share transferred to him. Phillimore L.J. said at 202-3:

The case of the trustees and the beneficiaries who oppose the claim ... has been rested on the power to retain givenby the will. I think that this power cannot, per se, be relied upon as an answer to the appellants' request; the right torefuse to transfer is not given by this power. If there is such a right it rests upon the duty of the trustees to do their

best for all the beneficiaries, it being their consequential duty to keep as large1998 4 VR 469 at 474

a block of shares as possible together so as to have large voting power ... In certain cases I think this would be atrue and sound reason for refusing the appellants' request, but in this case I agree that upon the balance ofconflicting rights and interests there is not enough to deprive the appellants of their "prima facie" right.

True it is that in bothRe Sandeman andRe Marshallthe transfer of the share of the trust estate to whicheach of the beneficiaries was absolutely entitled extinguished each one's interest in the estate. However, Ido not perceive any issue of principle that distinguishes such cases from the present case. In the case beforeme beneficiaries who are absolutely entitled have reached agreement between them to the effect that theydesire a part of the property held on trust to be transferred to them. They do not, however, agree that thewhole of the trust property should be transferred to them. They desire that the trust should continue for theirbenefit (and particularly for the benefit of the life tenant), as to the balance of such property. In my viewthere is no reason of principle why they should be precluded from achieving that result, just as there wasnone in the different circumstances before the courts inRe MarshallandRe Sandeman. If beneficiariesentitled in succession may combine to terminate a trust in its entirety, I can see no reason in principle whythey should not be entitled to combine to terminate a trust in respect of aliquot shares or parts thereof. Ofcourse one can readily envisage circumstances where, in a particular case, it may be inappropriate to permittransfer of a share or part of a share, e.g., where it requires sale of an asset. In such circumstances, theauthorities establish that the court retains a discretion not to allow the transfer despite the prima facie rightto it. In the present case, no grounds have been established by the defendant for refusing the plaintiffs'request. Accordingly there should be an order that, subject to any costs ordered to be paid in consequenceof this application, the sum of $39,000 held on trust be transferred, in equal shares, to each of thebeneficiaries absolutely entitled.

The second issue raised by this application is the submission by three of the plaintiffs that the defendanttrustee should be removed. This application is not joined by one of the plaintiff beneficiaries, Margaret

Barnsley, who has consented only to the present application being made in respect of the payment to thebeneficiaries of their shares of the sum of $39,000. The application is made by the other beneficiaries onthe basis that it is submitted that there are serious doubts as to whether the defendant has acted in a bonafide manner in the interests of the beneficiaries. This submission is based upon the fact that the defendantinitially resisted this application on the ground that the life tenant lacked capacity. The defendant laterconceded that the life tenant did not lack capacity. It is submitted that the issue which has concerned thecourt (i.e., the issue of whether or not part only of the estate could be transferred to the beneficiariesleaving the balance on trust) was an issue raised at the last moment and that the defendant trustee wasdetermined to hold all of the assets of the estate on trust irrespective of any obligation that he might have todo otherwise. Mr. Newton of counsel for the plaintiffs relies upon the fact that the defendant had threatened


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to leave all of the plaintiffs out of his own will in consequence of their application to make payment tothem of the sum of $39,000. He relies also upon the statement of the defendant in the course of cross-examination that he would not transfer the whole of the estate to the beneficiaries if so requested becausehe said (at 37 of the transcript):

I promised Mr Southwell [i.e. the testator] that I would never let Mrs Southwell get the -- have the money. It was adiscussion he and I had, and I promised I would never

1998 4 VR 469 at 475

give the money up to Mrs Southwell because of different things that we had, we were very friendly, and this iswhere it was, and it was and it's still my attitude.

However, he said further that if the court made an order he would accept the order because it "relieved hisconscience". In a case such as the present one a court will be slow to remove a trustee from the officebestowed upon him by a testator and will do so only when it is satisfied that there are in existencecircumstances which afford grounds upon which the jurisdiction will be exercised. InMiller v Cameron(1936) 54 C.L.R. 572 Dixon J. (as he then was) said at 580:

The jurisdiction to remove a trustee is exercised with a view to the interests of the beneficiaries, to the security ofthe trust property and to an efficient and satisfactory execution of the trusts and a faithful and sound exercise of the

powers conferred upon the trustee. In deciding to remove a trustee the Court forms a judgment based uponconsiderations, possibly large in number and varied in character, which combine to show that the welfare of thebeneficiaries is opposed to his continued occupation of the office. Such a judgment must be largely discretionary. Atrustee is not to be removed unless circumstances exist which afford ground upon which the jurisdiction may beexercised.

InMonty Financial Services Ltd. v Delmo [1996] 1 V.R. 65 Ashley J. reviewed the authorities relating tothe issue of removal of a trustee. There is no doubt that courts of equity have asserted and applied, overmany years, an inherent jurisdiction to remove a trustee. In my view the grounds for the exercise of theinherent jurisdiction of the court to remove the defendant trustee in this case are not established. It is truethat at an early stage after the request was made for payment out of the trust funds to the beneficiaries thedefendant trustee expressed concern about whether or not the life tenant had capacity. I am not satisfied thatthis concern was not bona fide. It is also true that the defendant trustee in the course of giving evidencebefore me placed great weight on what he clearly perceived to be his moral obligations to the promise he

had made to the testator to protect the trust funds in the interests of the life tenant. This, however, does notprovide a ground for his removal. I do not accept that the trustee will in the future not comply with hisobligations as a trustee. It is suggested that the fact that he has defended these proceedings renders himunsuitable to act as trustee. The fact that litigation has ensued with co-trustees on opposite sides of therecord is a matter of serious concern. However, I am satisfied that the defendant's views and concerns weregenuinely held in what he sees as the interests of the trust. I note also that the first plaintiff co-trustee is alsoa beneficiary and, as such stood to gain. Furthermore, in my view, notwithstanding that I have come to adifferent conclusion, the submissions made on behalf of the defendant are tenable and arguablesubmissions. It does not appear to me that the obligation of a trustee to pay out part of the total trust assetsto beneficiaries when required by them is so obvious as a matter of law that the trustee should havecomplied with such obligation. I take it into account that the defendant stated he would accept the order ofthe court. Nor am I satisfied that it can be said that the trustee has placed himself in a position which isantagonistic to his duty as a trustee. Although it is true that the defendant trustee has failed to agree with his

plaintiff co-trustee and possibly that a degree of antipathy and lack of co-operation has developed betweenthem, that in my opinion is insufficient to justify an order for the removal of the defendant trustee. Once theasset which is the subject of this court order is distributed only one other asset will remain to beadministered in the trust. I see no basis upon which it can be said that the defendant trustee will not

1998 4 VR 469 at 476

administer properly the trusts reposed in him. Accordingly, it does not appear to me to be appropriate toorder in the discretion of the court that he be removed as trustee.

I turn now to the issue of costs. The fundamental rule is that costs follow the event. However, where anexecutor, administrator or trustee is sued the following principles also apply. The trustee ordinarily has a


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right to be paid or to be indemnified for his costs out of the trust fund on a solicitor and client basis. SeeRenfrew v Birmingham [1937] V.L.R. 180 at 190. However, a trustee may lose this right of indemnity if hehas neglected his duty or is guilty of some culpability or if in defending the proceeding he is, in reality,acting in his own interests. SeeNowell v Palmer(1993) 32 N.S.W.L.R. 574. I have found the question of

costs to be also a difficult one. The plaintiffs have succeeded on the issue of the payment of the $39,000,but have failed on the issue of the removal of the trustee. On the issue on which the plaintiffs weresuccessful, I note that it was preceded by a requirement by them that the defendant sign the documentwhich was proffered by their solicitor. That document provided that the defendant agreed to the payment.The plaintiffs were not entitled to require the defendant to sign the document or to agree to the payment ofthe $39,000, whatever their entitlement to payment. I take into account that the defendant's opposition topayment was motivated by the views expressed to him by the testator and of his concern for the integrity ofthe trust. In my view the appropriate order in all of the circumstances of this case is that the costs of theplaintiffs and the cost of the defendant be taxed as between solicitor and client and paid out of the estate.

Accordingly, I order:

(1) That, subject to the payment of any costs to be paid out of the estate in consequence of orders made inthis proceeding, the trustee transfer the sum of $39,000 held on trust in equal shares to each beneficiarywho is absolutely entitled.

(2) That the costs of the plaintiffs and the costs of the defendant be taxed as between solicitor and client andbe paid out of the estate.

(3) That the summons otherwise be dismissed.

Orders accordingly.

Solicitors for the plaintiffs:Kee & Coutts.

Solicitors for the defendant:MacKinnon Jacobs Horton & Irving Pty.

P. H. BARTON

BARRISTER-AT-LAW


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Trust Company of Australia Ltd v Braid & Simmons

BC9800422

Court: VSC

Judges: Eames J


Catchwords & Digest

Trusts -- Express trusts -- Distribution of proceeds to beneficiaries -- Rights oflife tenants and

remaindermen

Apportionment of proceeds of realisation of property by mortgagee selling under power of sale.Where trustee of express trust lent trust money secured by mortgage, mortgagor defaulted and trusteeentered into possession.Treatment of capital expenditure made by trustee after foreclosure in order to preserve mortgaged property.Whether capital expenditure should be deducted from sums available for distribution.Whether losses as between life tenants and remaindermen should be fairly apportioned and shared.Whether expenses relating to production of income to be deducted from amounts due to incomebeneficiaries, while capital beneficiaries to receive whole of capital.Whether in calculating sums to be taken into account in application of Re Atkinson, life tenants should beregarded as having been entitled to interest on capital sums applied by trustee for purpose of preservation ofsecurity.Whether allowance to be made in favour of life beneficiaries for loss of interest suffered by application ofcapital funds to preservation of security.Whether, in calculating sums due by way of income to life tenants, that sum should be calculated as netsum, after deduction of outgoings, or on basis that it is gross income, which was due to life tenants undermortgage, which is to be calculated.

Held: Capital expended to preserve capital to be deducted from proceeds of sale before distribution.Interest foregone by life tenants not to be taken into account.Determination of quantum of interest due to life tenants based on gross interest.




NotFollowed/Distinguished

Permanent Trustee Co ofNSW Ltd v MacPhillamy

(1938) 38 SR (NSW)541; (1938) 55 WN(NSW) 212b

NSWSC 17/6/1938

FollowedKnott, In re; The TrusteesExecutors and Agency Co Ltdv Knott

[1937] VLR 244;[1937] ALR 456

VSC 25/6/1937

Followed Smart's Settlement, In re(1933) 33 SR (NSW)412

NSWSC 25/5/1933

Not Farmer v Chard (1905) 5 SR (NSW) NSWSC 19/5/1905


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Followed342; (1905) 22 WN(NSW) 110a

AppliedAtkinson, In re; Barbers' Co vGrose-Smith

[1904] 2 Ch 160EWCACiv

1/6/1904

Considered Cooper v Cooper (1902) 8 ALR 212 VSC 30/6/1902

Considered Equity Trustees Co Ltd vMacMeikan

(1900) 25 VLR 593;(1900) 6 ALR 171

VSC 2/4/1900

Considered Moore, Re; Moore v Johnson (1885) 52 LT 510 - 22/1/1885


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6 of 10 DOCUMENTS: Unreported Judgments Vic

22 Pages

TRUST COMPANY OF AUSTRALIA LTD v BRAID and ANOR -

BC9800422

SUPREME COURT OF VICTORIA CAUSES JURISDICTIONEAMES J

4733 of 1997

11 December 1997, 20 February 1998

Trusts -- investment secured by mortgage -- default by mortgagor leads to foreclosure and sale --

proceeds of sale insufficient to meet losses to life tenants and remaindermen -- application of

principles in In Re Atkinson (1904) 2 Ch 160 for apportionment of dividends from proceeds of sale.

Eames J

The plaintiff is a company which has carried on business as a trustee company since 1885. It waspreviously known as Union-Fidelity Trustee Company of Australia Ltd. The plaintiff acts as trustee of alarge number of deceased estates and inter vivos trusts and in that capacity invests the assets of the trustsand distributes the income and capital according to the terms either of the will of a testator or testatrix (inthe case of deceased estates) or the Deed of Settlement (in the case of inter vivos trusts). In many of thedeceased estates there are tenants for life who receive the income each year and there are also beneficiarieswho have an entitlement to annual income in the case of the inter vivos trusts.

On 23 February 1982 the plaintiff established under PtVII of the Trustee Companies Act (Queensland) andkept in its books a common fund known as the Common Fund No 2 ("the Mortgage Fund"). This commonfund comprised three separate common funds known as MQ6, SQ6, and BQ6. The MQ6 Fund wasconducted separately from the two others. By establishing each of the three common funds the plaintiff wasable to pool cash assets of the trusts and invest the pooled amounts in various mortgage and other securityinvestments.

On or about 14 October 1988 the plaintiff, as trustee of the Mortgage Fund, lent $6.5M to Avram VentureCapital Pty Ltd ("Avram") out of the assets of the MQ6 Fund. The Avram loan was secured by a mortgageover a property at 1 Collins Street, Melbourne (hereafter referred to as "the premises"). On or about 31October 1989 Avram defaulted in payment of interest due under the loan and on 17 November 1989 the

plaintiff served Avram with a notice to pay the principle and outstanding interest. On 29 May 1990 theplaintiff decided to isolate the Avram loan from the other investments in the MQ6 Fund and thereforecreated a new Mortgage Realisation Common Fund MR1 ("the Realisation Fund") under the TrusteeCompanies Act 1984 (Vic), to which it transferred the Avram loan. The reason it did this was to facilitatethe exercise of the rights of the plaintiff as mortgagee in respect of the Avram loan and to allow thecontinuation of the MQ6 Fund as an investment vehicle allowing both

BC9800422 at 2

deposits and withdrawals without the need to freeze the whole MQ6 Fund. Each of the trusts andindividuals who had an interest in the MQ6 Fund had the same proportionate interest in the Realisation


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Fund. This interest represented 26.4% of their investment in the MQ6 Fund.

The plaintiff had entered into possession of the premises in 1989, and had attempted to auction the premisesin March 1990 but the auction was unsuccessful. On 11 October 1991 the premises were let to No 1 LittleCollins Street Pty Ltd for 12 years, commencing 1 January 1992. Due to the prevailing commercial

difficulties in letting premises the plaintiff granted the lessee a rent free period for car parking until 31December 1994 and for net office rental (but not outgoings) until 30 June 1995. The plaintiff alsocontributed $700,000 to capital works as inducements for the lessee to enter into the lease.

On 4 February 1993 the plaintiff obtained an order for foreclosure under the mortgage over the premises at1 Little Collins Street, Melbourne. The premises were put for sale by auction on 14 November 1996, butlittle interest was shown and the property was passed in. On 22 July 1997 the property was sold for$5,800,000. Settlement occurred on 5 August 1997. There is some debate as to the amount now availablefor distribution. On one view, the sum is $2,949,938, but if certain deductions are not permitted then thesum available is $3,036,880. I am not asked to resolve that debate. The sum obtained at the sale isinsufficient, by many millions of dollars, to satisfy both the sums which was due under the mortgage to theincome beneficiaries by way of interest on the investment, and to allow repayment in full of the capital tothe remaindermen.

From the time when it entered into possession of the premises in 1989 until 30 June 1996 the plaintiff dealtwith the income received by deducting expenses (other than interest) and has distributed the balance of thefunds received ($175,432) to the unitholders of the Realisation Fund. Since 1990 the Realisation Fund hasincurred capital expenditure of $1,679,813 in relation to the premises.

BC9800422 at 3

The firstnamed defendant represents all life tenants and income beneficiaries (or their estates) of the trusts(as defined in para3 of the affidavit of B G Barker sworn 19 March 1997) whose interests were terminatedafter 21 October 1989 and before 4 February 1993. The secondnamed defendant represents all theremaindermen of the trust.

The plaintiff has applied to the Court by originating motion seeking:

"The determination without administration of the following questions in relation to each of the estates andsettlements ('the trusts') of which it is trustee and which have an interest in the Common Fund establishedby the plaintiff and known as the Mortgage Realisation Common Fund MR1:

1. Whether in the events which have happened, in the case of each of the Trusts the plaintiff should pay orapply any part of the funds to which it is entitled as Trustee out of the net proceeds of sale of the propertyknown as 1 Little Collins Street Melbourne to or for the benefit of the life tenants or income beneficiaries(collectively 'the beneficiaries') of that Trust.

2. If yes to question 1, on what basis ought the amount to be paid to each of the beneficiaries becalculated?"

The matter came before Master Evans who made an order on 31 July 1997 referring the followingpreliminary question to a judge:

"In this proceeding, should the proceeds of realisation of the subject property be apportioned between lifetenants and remaindermen for the said trusts pursuant to a rule in Re Atkinson (1904) 2 Ch 160 as at:

(a) the date of foreclosure;

(b) the date it first became apparent to the trustee as a matter of business certainty that the trust investmentwould be realised at a loss;

(c) some other and, if so which date."

On 17 October 1997 Smith, J delivered a judgment on the question of the appropriate date forapportionment of the losses pursuant to the question asked by Master Evans. His Honour held that theappropriate date was the date of foreclosure, namely, 4 February 1993. I gratefully acknowledge that I have


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drawn on his Honour'sBC9800422 at 4

judgment, generally, and, in particular, for my opening description of the background information andhistory of this dispute.

The issues now before me are threefold: first, as to the treatment of the capital expenditure which was madeby the trustee after foreclosure in order to preserve the capital asset; secondly, whether, in calculating thesums to be taken into account in application of Re Atkinson the life tenants should be regarded as havingbeen entitled to interest on the capital sums applied by the trustee for the purpose of preservation of thesecurity; and, finally, whether in calculating the sums which were due by way of income to the life tenants,that sum should be calculated as a net sum, after deduction of outgoings, or on the basis that it is the grossincome, which was due to the life tenants under the mortgage, which is to be calculated.

As was made clear in the written outlines of arguments submitted on behalf of the defendants, and in thecourse of argument, there are a number of matters relevant to the calculation of and distribution from theavailable pool upon which there is no dispute between the parties. I note, for example, that there wasapparent agreement with the proposition stated in Dr Hardingham's outline of arguments on behalf of theremaindermen (para9) that sums actually received by the life tenants in reduction of interest payable to

them must be deducted from their entitlement.

TREATMENT OF THE EXPENDITURE OF CAPITAL FUNDS USED TO PRESERVE THE

SECURITY

Interestingly, the difference in the respective positions of the parties as to the first issue does not involveany disagreement as to the state

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