Beneficiaries Rights and Personal Remedies Cameron Stewart

Beneficiaries: Rights and Personal Remedies Cameron Stewart

Beneficial interests • Fixed and discretionary • Gartside v Inland Revenue Commissioners [1968] AC 553 • CPT Custodian Pty Ltd v Commissioner of State Revenue of the State of Victoria (2005) 224 CLR 98 • Re Richstar Enterprises Pty Ltd; Australian Securities and Investments Commission v Carey (No 6) (2006) 153 FCR 509 • Kennon v Spry (2008) 238 CLR 366 • Liberty International Underwriters v The Salisbury Group Pty Ltd (in liq) [2014] QSC 240

The right to compel performance • The beneficiaries, both individually and as a whole, have a right to seek the aid of the court in compelling the performance of the trust: Bartlett v Bartlett (1845) 67 ER 800

The right to pursue third parties • Ordinarily, only the trustee can sue third parties who have caused damage to the trust property: Alexander v Perpetual Trustees WA Ltd (2003) 216 CLR 109; (2004) 204 ALR 417. • However, the right to compel performance also embraces a right for beneficiaries to sue third parties but only in ‘exceptional circumstances’ where trustees refuse to perform their duty to protect the estate or the interests of the beneficiaries: Hilliard v Eiffe (1874) LR 7 HL 39

The right to pursue third parties • This right also applies in favour of beneficiaries under a discretionary trust: Lewis v Condon (2013) 85 NSWLR 99 at [102]-[112]; El Sayed v El Hawach [2015] NSWCA 26 at [46][59]. • In such a case the beneficiary may sue third party and join the trustee as a defendant: Vandepitte v Preferred Accident Insurance Corporation of New York [1933] AC 70. • Earlier authority limited this right to equitable claims against third parties, but since the Judicature Act reforms courts have allowed beneficiaries to bring all claims that could have been brought by the trustee against third parties: Lidden v Composit Buyers Ltd (1996) 67 FCR 560 at 563– 4; Lamru Pty Ltd v Kation Pty Ltd (1998) 44 NSWLR 432 at 436– 7; Mercedes Holdings Pty Ltd v Waters (No 2) (2010) 186 FCR 450 at 474; Davey v Herbst (No 2) [2012] ACTCA 19 at [80].

Sharpe v San Paulo Railway Co (1873) LR 8 Ch App 597 • James LJ said: • [A] person interested in an estate or a trust fund could not sue a debtor to that trust fund, or sue for that trust fund, merely on the allegation that the trustee would not sue; but that if there was any difficulty of that kind, if the trustee would not take the proper steps to enforce the claim, the remedy of the cestui que trust was to file his bill against the trustee for the execution of the trust, or for the realization of the trust fund, and then to obtain the proper order for using the trustee’s name, or for obtaining a receiver to use the trustee’s name, who would, on behalf of the whole estate, institute the proper action, or the proper suit in this Court.

Hayim v Citibank NA [1987] AC 730 • Lord Templeman: • A beneficiary has no cause of action against a third party save in special circumstances which embrace a failure, excusable or inexcusable, by the trustees in the performance of the duty owed by the trustees to the beneficiary to protect the trust estate or to protect the interests of the beneficiary in the trust estate.

Chahwan v Euphoric Pty Ltd [2009] NSWSC 805 • Brereton J : • [R]elevant exceptional circumstances seem to involve no more than a failure by the trustee —excusable or inexcusable—to sue on a cause of action against the third party in performance of the duties owed by the trustee to the beneficiary to protect the trust estate or to protect the interests of the beneficiary in the trust estate.

Deutsch v Deutsch [2012] VSC 227 • Hargrave J: • Where a trustee refuses, fails or is unable to initiate proceedings involving the rights or property of the trust, beneficiaries of the trusts may in exceptional circumstances bring a claim in their own name to protect their beneficial interests in the property or right. For example, exceptional circumstances have been held to exist where: (1) the plaintiff is most materially interested in due enforcement of the claims, or would be most seriously prejudiced if they were abandoned or not duly prosecuted; (2) it is alleged that assets have been handed over to a third party ‘hastily, improvidently, and not in conformity with their duty’; (3) there exists a substantial impediment to the trustee prosecuting the proceedings; (4) it can be shown there exist recoverable assets which would ‘probably be lost to the estate’ but for such a suit; (5) the decision by the trustee not to institute proceedings was made by a party against whom the claim may lie; and (6) due to ‘the nature of the assets or the position of the personal representative, it would be either impossible, or, at least, seriously inconvenient for the representatives to take proceedings’

The right to restrain a breach of trust • Beneficiaries are entitled to injunctions to restrain threatened breaches of trust: Howden v Yorkshire Miners Assoc [1905] AC 256. • The right stems from the exclusive jurisdiction of equity.

The right to possession of trust property • In cases where the trustee is passive (without active duties) and the beneficiaries are sui juris and absolutely entitled, the beneficiaries have a right to the possession of the property: Turner v Noyles (1903) 20 WN (NSW) 266. • However, if the trustee is active in the management of the property, the right to possession does not arise.

The right to approach the court • Beneficiaries have a statutory right to approach the court which is similar to the trustee’s right to seek directions. • Trustee Act 1925 (NSW) s 63

The right to information • Already discussed!

The right to extinguish the trust: the ‘rule’ in Saunders v Vautier • Saunders v Vautier concerned a beneficiary who was entitled to stock in the East India Company but the testator had directed the trustee to accumulate income until the beneficiary turned 25. The court held that he was vested and absolutely entitled to the stock and he was entitled to terminate the trust and have the stock transferred to him when he reached 21 (which was the age of majority at that time).

Beck v Henley [2014] NSWCA 201 • Leeming JA said at [33] • The ‘rule’ is best described as a power on the part of the beneficiaries, with a correlative liability on the part of the trustees. The exercise of the power does not involve the performance by the trustees of any part of their office as active trustees; instead, it brings their office to an end.

Vested interest • As long as beneficiaries have a vested interest they can terminate the trust prior to expiry of that term: Wharton v Masterman [1895] AC 186. • In Austin v Wells [2008] NSWSC 1266, the testator had created a trust for his niece for the balance of his estate which was conditional on her turning 30 years of age. The niece was 22 years of age and wished to take the trust funds. White J found that the gift had vested in interest and that the niece was entitled to exercise her rights to terminate the trust even though she was not yet 30 years of age. • In Arnott v Kiss [2014] NSWSC 1385 a trust had been created for the testatrix’s grandchildren on the condition that ‘each grandchild shall take this gift as they reach their 45 th birthday’. Hallen J found that the correct interpretation was the gift was not vested in any of the grandchildren as none of them had reach 45 years of age

Gosling v Gosling (1859) 70 ER 423 • Sir W Page Wood V-C said at 426: • The principle of this Court has always been to recognise the right of all persons who attain the age of twenty-one to enter upon the absolute use and enjoyment of the property given to them by a will, notwithstanding any directions by the testator to the effect that they are not to enjoy it until a later age— unless, during the interval, the property is given for the benefit of another. If the property is once theirs, it is useless for the testator to attempt to impose any fetter upon their enjoyment of it in full so soon as they attain 21.

Capacity • The beneficiary must be legally competent. • All adults are presumed to be competent but that capacity can be disproven with evidence that the beneficiary cannot understand the nature and effect of the transaction: Newton v The Public Trustee [1999] WASC 179 at [1]. • In Parkes-Linnegar v Watson [2011] NSWSC 37, a trustee failed to establish that the beneficiary was mentally incapacitated. While the beneficiary did have Parkinson’s disease there was no evidence that led to the conclusion that she did not understand the nature, quality and significance to her of the termination of the trust.

Contingent interests • The requirement for an absolute, vested interest means that the ‘rule’ is not applicable where the beneficial interests are contingent and there are other beneficial interests which might take the gift on the contingency who have not consented, or cannot consent, to the termination of the trust. • In Perpetual Trustee Co (Canberra) Ltd v Rasker (1986) 84 FLR 268, the testator’s son was given an interest which was contingent on the son surviving for 10 years after the death of the testator. If the son did not so survive there was a gift over to other beneficiaries. The court held that the son was not entitled to a transfer of the trust property prior to the expiration of the 10 -year period, because of the contingency that the son may not survive that period and that the gift over would take effect

Sir Moses Montefiore Jewish Home v Howell & Co (No 7) [1984] 2 NSWLR 406 • The beneficiaries were allowed to terminate a discretionary trust, but only after it was proven that all the beneficiaries were identified, the class of objects was closed and all the beneficiaries were in agreement. • The trustee in this case was obliged to distribute the entire income every year, which strengthened the beneficiaries’ claims regarding the application of the ‘rule’.

Transfer of property • The right pursuant to the ‘rule’ in Saunders v Vautier has been taken as being a right to transfer the property in specie: Seagar v Seagar [1949] NZLR 812. • The fact that the trust may dictate that the property must be sold and converted into funds is no bar to the ‘rule’ applying to transfer the property in specie: Feeney v Feeney [2008] NSWSC 890; Re Horsnaill [1909] 1 Ch 631 at 635; In re Tweedie and Miles (1884) 27 Ch D 315 at 317. • However, if the interests of other beneficiaries will be prejudiced, the right will be displaced and the monetary value will be transferred after the sale of trust assets: Lloyd’s Bank v Duker [1987] 3 All ER 193.

Some of the beneficiaries but not all • If some, but not all of the beneficiaries are of capacity and sui juris, it may be possible for the trustee to allow those who are of age and capacity to take their beneficial interest, leaving what remains as trust property. • In Whakatane Paper Mills Ltd v Public Trustee (1939) SR (NSW) 426 at 440, Long Innes J recognised that the ‘rule’ allowed a beneficiary to take his or her aliquot (divisible or proportionate) share of the trust property.

Some of the beneficiaries but not all • The trust property must be divisible. • If the trust property consists of real property, mortgage debts, valuable personalty (such as a painting or a racehorse) or shares in a private company it may be difficult to divide up the beneficiaries’ shares until the property is converted: Stephenson (Inspector of Taxes) v Barclays Bank Trust Co Ltd [1975] 1 All ER 625 at 647; Wilson v Wilson (1951) 51 SR (NSW) 91; Beck v Henley [2014] NSWCA 201 at [38].

Some of the beneficiaries but not all • The proposed division must not have a detrimental effect on the remaining beneficial interests: In re Horsnaill; Womersley v Horsnaill [1909] 1 Ch 631. • Lloyd’s Bank v Duker [1987] 3 All ER 193, a beneficiary was denied the right to convert her share of the trust property (shares) even though it was easily divisible, on the grounds that the division would have created an imbalance of control over the company

Beck v Henley [2014] NSWCA 201 • Two beneficiaries where absolutely entitled to two of four voting shares in a private company. • One beneficiary sought to have half the shares transferred to him • The other objected to the transfer but failed to bring evidence of any special circumstances which would show that she was suffering any loss of value

Remedies for breach • Personal • Proprietary

Equitable compensation • Equitable compensation for breach of trust has its origins in orders for account which, were the primary approach adopted to breach of trust prior to the middle of the 19 th century. • There are three kinds of orders for account: a common account (sometimes called a ‘general account’ or ‘an account in common form’) and account for willful default. There is also an account of profits: Agricultural Land Management limited v Jackson [2014] WASC 102;

Common account • The common account is available as of right to beneficiaries and it requires the trustee to render accounts for the trust assets. Once rendered it was possible for the beneficiaries to either surcharge or falsify transactions.

Chong v Channell [2009] NSWSC 765 When the trustee provides an account in common form, the beneficiary is entitled to object to any of the entries in that account. If the beneficiary wishes to assert that the trustee has in fact received more than is shown in the accounts, the objection is traditionally called a surcharge; the beneficiary bears the onus of proof on a surcharge. But if the beneficiary alleges that an expense has not been incurred, or has improperly been incurred, that is traditionally called a falsification and in a general taking of accounts, the accounting party – relevantly, the trustee – bears the onus of proof in respect of falsifications

Value or in specie • Once the account had been made the court could then order the trustee to make good the loss to the trust, either by returning the value of the trust assets at the date of the judgment or restoring them in specie: Bilyak v Pesor [2012] NSWSC 193; Juul v Northey [2010] NSWCA 211 at [194]; Ex parte Adamson (1878) 8 Ch D 807 • ‘Substitutive compensation’: AIB Group (UK) Plc v Mark Redler & Co Solicitors [2015] 1 All ER 747 at 761; Agricultural Land Management Ltd v Jackson (No 2) [2014] WASC 102 at [349]

Libertarian Investments Ltd v Hall [2013] HKCFA 93 Lord Millet NSP explained at [168]: • [A]n order for an account does not in itself provide the plaintiff with a remedy; it is merely the first step in a process which enables him to identify and quantify any deficit in the trust fund and seek the appropriate means by which it may be made good. Once the plaintiff has been provided with an account he can falsify and surcharge it. If the account discloses an unauthorised disbursement the plaintiff may falsify it, that is to say ask for the disbursement to be disallowed. This will produce a deficit which the defendant must make good, either in specie or in money. Where the defendant is ordered to make good the deficit by the payment of money, the award is sometimes described as the payment of equitable compensation; but it is not compensation for loss but restitutionary or restorative. The amount of the award is measured by the objective value of the property lost determined at the date when the account is taken and with the full benefit of hindsight.

Re Dawson (dec’d) [1966] 2 NSWR 211 • A trustee improperly dealt with trust funds and was ordered to pay equitable compensation to the trust to restore the trust to the position it would have been in had there been no default on his part. • The exchange rate had significantly worsened since the breach of trust with the result that restoration would now be far more expensive. • Nevertheless, the court found that trustee’s obligation to account was not affected by the change, and the trustee was ordered to restore the value to the trust, as assessed at the date of the judgment.

Defence to common account • the trustee could prove that the assets were discharged to an appropriate person in accordance with the trust: Re Windsor Steam Co (1901) Ltd [1929 Ch 151; • the assets were lost or destroyed through no fault of the trustee: Re Gasquoine [1894] 1 Ch 470; Clough v Bond (1838) 40 ER 1016; or • the assets had since been restored by the trustee so as to completely satisfy liability: Scott v Scott (1936) 109 CLR 649 at 663.

Account for willful default • The account for willful default is not available as of right but becomes available only after the beneficiaries have proved an instance of a willful default that has caused loss to the estate: Meehan v Glazier Holdings Pty Ltd (2002) 54 NSWLR 146. • The phrase willful default is misleading as it refers to passive breaches such as omissions to do things which ought to have been done: AIB Group (UK) Plc v Mark Redler & Co Solicitors. • It does not require any intention or recklessness: In Re Ellis [2015] WASC 77 at [133]; Gava v Grljusich [1999] WASC 13; Bartlett v Barclays Bank Trust Co Ltd (No 2) [1980] Ch 515 at 546. • Active breaches of trust should therefore be dealt with under the common accounting principles instead of willful default.

Account for willful default • Once an order to account has been made the trustee must account for all the assets of the trust but also must account for the all of the assets that would have been received into the trust had there not been a default: Re Tebbs; Redfern v Tebbs [1976] 2 All ER 1054; Bartlett v Barclays Bank Trust Co Ltd (No 2) [1980] Ch 515 at 546. • This has been referred to as ‘reparative compensation’.

Libertarian Investments Ltd v Hall [2013] HKCFA 93 • Lord Millet NSP said at [170]: • [If] the account is shown to be defective because it does not include property which the defendant in breach of his duty failed to obtain for the benefit of the trust, the plaintiff can surcharge the account by asking for it to be taken on the basis of 'wilful default', that is to say on the basis that the property should be treated as if the defendant had performed his duty and obtained it for the benefit of the trust. Since ex hypothesi the property has not been acquired, the defendant will be ordered to make good the deficiency by the payment of money, and in this case the payment of 'equitable compensation' is akin to the payment of damages as compensation for loss. 5

Defence to wilful default • Because equitable compensation in cases of willful default are more akin to common law damages, it is possible for a trustee to argue that they had not been negligent in the performance of their duties and/or that they did not cause any harm that may have resulted. This contrasts with cases of breaches under common account where such arguments are far less likely to succeed. The onus of disproving negligence lies with the trustee, once a breach and resulting harm have been established: Re Brogden (1888) 38 Ch D 546

Equitable compensation apart from account By the middle of the 19 th century it became possible to sue a trustee directly for default without using the accounting process. This has proved to be a more popular option than orders for account, although it is still possible for beneficiaries to elect for accounts to be ordered.

Causation • In claims for breach of trust, the plaintiff must prove that a breach occurred and caused the loss suffered. • The approach to causation is similar to the strict causation approach of common account. Once the breach has been established, the onus on disproving that loss occurred, or proving that the loss has already been made good, falls on the trustee.

Youyang Pty Ltd v Minter Ellison Morris Fletcher (2003) 212 CLR 484 • Solicitors held funds under a bare trust that were to be used to invest in a scheme, but payment was only to be made after a bearer certificate had been provided as security. • The solicitors provided the funds without having received the bearer certificate and breached the trust. • The investment went poorly and the funds were lost. • The High Court found that equitable compensation was payable for the lost funds. The fact that many other factors had contributed to the loss were irrelevant. It was up to the trustees to disprove the connection between the breach and the loss and this they failed to do.

Target Holdings Ltd v Redferns [1996] 1 AC 421 • Solicitors were holding funds on trust with instructions to advance the funds as part of a loan, but only once the solicitors had received specific securities in land. • The solicitors breached trust by releasing the money early but later they did receive the securities that had been requested (and it is at this point that the facts differ from those in Youyang). • When the investment failed the beneficiary argued that solicitors had breached that trust and that the funds should be restored. The House of Lords disagreed and found that there was no causal connection between the breach and the loss. Lord Brown Wilkinson found that a loss is not recoverable if it would have been suffered without the breach occurring. His Lordship said that a trustee ‘is not responsible for damage not caused by his wrong or to pay by way of compensation more than the loss suffered from such wrong. ’

Target Holdings Ltd v Redferns [1996] 1 AC 421 • The decision in Target Holdings makes ‘but for’ arguments also available to active breaches, essentially creating a new defence of ‘lack of causation’ which is available to both active and passive breaches of trust

AIB Group (UK) Plc v Mark Redler & Co Solicitors [2015] 1 All ER 747 • AIB Group provided a couple (Mr and Mrs Sondhi) with a £ 3. 3 m business loan. The loan was intended to be secured with a mortgage over the Sondhi’s home which was valued at £ 4. 25 m. The home had an existing first mortgage on it in favour of Barclays Bank securing £ 1. 5 m. As a condition of AIB’s offer AIB required Barclays’ mortgage to be redeemed so that AIB could take the position of first mortgagee. • Mark Redler & Co was a firm of solicitors working for AIB and the Sondhi’s. When settlement of the conveyancing was taking place they mistakenly undercalculated the mortgage discharge owed to Barclays by £ 300, 000. When this was discovered Barclays would not surrender its mortgage and AIB had to register as second mortgagee.

AIB Group (UK) Plc v Mark Redler & Co Solicitors [2015] 1 All ER 747 • The Sondhi’s later defaulted and the property was sold for £ 1. 2 m. After the first mortgage to Barclays was paid only £ 867, 697 was left for AIB, leaving it short of funds by about £ 2. 5 m. • AIB claimed that the funds have been provided to the Sondhi’s in breach of trust as the solicitors had failed to follow instructions and released the funds without discharging the first mortgage. AIB claimed compensation for £ 2. 5 m. The solicitors argued that the correct amount for compensation was £ 300, 000.

AIB Group (UK) Plc v Mark Redler & Co Solicitors [2015] 1 All ER 747 • The Supreme Court (led by Lord Toulson) followed Lord Browne Wilkinson’s decision in Target Holdings and found that the loss of £ 2. 5 m (minus the £ 300, 000) was not caused by the breach as it would have been suffered had the breach not accured.

Account of profits • In the context of breach of trust, an account of profits is ordered where the trustee has made an unauthorised profit from his or her office or where a breach of trust has allowed the trustee to make personal gain. • Just allowance

The effect of exclusion clauses • A trust instrument may exclude a trustee from liability but there are limits to the extent to which liability can be excluded. • In Armitage v Nurse at Ch 254; All ER 713, Millett LJ said: • [T]here is an irreducible core of obligations owed by the trustees to the beneficiaries and enforceable by them which is fundamental to the concept of a trust. If the beneficiaries have no rights enforceable against the trustees there are no trusts. But I do not accept the further submission that these core obligations include the duties of skill and care, prudence and diligence. The duty of the trustees to perform the trusts honestly and in good faith for the benefit of the beneficiaries is the minimum necessary to give substance to the trusts, but in my opinion it is sufficient.

Actual fraud • A trust cannot exclude a trustee’s liability for actual fraud. In Plan B Trustees Ltd v Parker [2013] WASC 216 at [232], Edelman J noted that ‘[it] is not possible to exclude liability for actual fraud or dishonesty, which has been described as part of the irreducible core of the trust obligation’. • In Rinehart v Welker [2012] NSWCA 95 at [139] Bathurst CJ observed that an exclusion clause in a trust instrument that ‘would in effect render the trustee immune from any liability for breach of trust, whenever or however occurring … would in effect destroy the trust’.