Supreme Court New South Wales

• Medium Neutral Citation: Parkes -Linnegar & Anor v Watson [2011] NSWSC 37
• Hearing dates: 31 January 2011, 1 February 2011
• Decision date: 11 February 2011
• Jurisdiction: Equity Division
• Before: Pembroke J

Decision

See paragraph 39 of the judgment

• Catchwords: TRUSTS & TRUSTEES - termination of trust - Rule in Saunders v Vautier - grounds for trustee withholding consent to termination; TRUSTEE - right of indemnity from trust assets - not available in respect of property that is the subject of a specific bequest to the executor on trust; MISLEADING CONDUCT - proper characterisation of conduct in totality of circumstances - not trade or commerce - not business or professional activity
• Legislation Cited: Trustee Act, 1925 (NSW); Fair Trading Act, 1987 (NSW)
• Cases Cited: Butcher v Lachlan Elder Realty Pty Ltd (2004) 218 CLR 592; Campbell v Backoffice Investments (2009) 238 CLR 304; Concrete Constructions (NSW) Pty Limited v Nelson (1990) 169 CLR 594; CPT Custodian Pty Ltd v Commissioner of State Revenue (2005) 79 ALJR; Saunders v Vautier (1841) Cr & Ph 240; Shahid v Australian College of Dermatologists (2008) 168 FCR 46
• Texts Cited: Heydon J D, Leeming M J, Jacobs' Law of Trusts (Butterworths, Sydney, 2006,7th Edition); Martyn J R, and Caddick N, Williams, Mortimer & Sunnucks, Executors, Administrators & Probate (Sweet & Maxwell, London 2007,19th Edition)
• Category: Principal judgment
• Parties: Gloria Joy Parkes-Linnegar - first plaintiff; Robert Parkes-Linnegar - second plaintiff; Michael Carl Watson - defendant
• Representation: Counsel: D Higgs SC with Vanessa Thomas - for the plaintiffs; N Cotman SC with David Williams - for the defendant; Solicitors: Jackson Lalic Lawyers - for the plaintiffs; Spencer Whitby & Co - for the defendant
• File Number(s): 2010/146970

Judgment

Introduction

1 This is an application by the plaintiffs to terminate a trust in accordance with the principle in Saunders v Vautier (1841) Cr & Ph 240; 49 ER 282. In CPT Custodian Pty Ltd v Commissioner of State Revenue (2005) 79 ALJR 1724 at [47] the modern formulation of that rule was enunciated by the High Court of Australia as follows:

Under the rule in Saunders v Vautier, an adult beneficiary (or a number of adult beneficiaries acting together) who has (or between them have) an absolute, vested and indefeasible interest in the capital and income of property may at any time require the transfer of the property to him (or them) and may terminate any accumulation.

2 The defendant is a co-trustee of a trust of which the plaintiffs are the beneficiaries (the Trust). He has refused to consent to the termination of the Trust. Some of the grounds on which he has done so reflect poorly on him. Others may give rise to legitimate concerns on which it is necessary for me to rule. After the proceedings were commenced against him, the defendant sought to regularise his position by filing a cross summons seeking judicial advice pursuant to Section 63 of the Trustee Act . I will set out my response to that application in these reasons.

3 A further, but legally unrelated, issue concerns a claim by the first plaintiff that a letter dated 23 February 2007 from the defendant to her contained representations as to the value of the defendant's shareholding in C R Linnegar (Investments) Pty Ltd (CRL) that were negligent, materially misleading and actionable.

4 For the reasons that follow I propose to make orders for the termination of the Trust subject to certain conditions and to dismiss the claim for damages based on the letter dated 23 February 2007.

Mrs Parkes-Linnegar

5 The first plaintiff (Mrs Parkes-Linnegar) is the widow of the late Charles Richard Linnegar. His will created the trust whose termination is in dispute. Mr Linnegar died on 3 October 1994. On 13 December 1991, his first wife (Eileen) died, after which he married the first plaintiff. Mr Linnegar and the first plaintiff had a son, Robert, who had been born in 1963. Robert is the second plaintiff and he and his mother are the beneficiaries of the Trust.

Cedray Pty Ltd

6 Mr Linnegar was a successful businessman. His business operations were conducted by Cedray Pty Limited (Cedray) which was and continues to be involved in the sale and distribution of supplies to the construction and engineering industry in New South Wales. Cedray commenced operations in 1949. The first plaintiff was one of the initial directors, as was Mr Linnegar, his first wife Eileen and Harold Johnston. The first plaintiff was also company secretary. She continues to hold the offices to which she was appointed in 1949.

CRL

7 At all material times 85% of the issued shares in Cedray was owned by CRL. CRL commenced operations in 1962. From the outset, the first plaintiff was one of its directors and its company secretary. She also continues to hold those offices. The other directors appointed in 1962 were Mr Linnegar, his first wife Eileen and Harold Johnston. The issued capital of CRL is and was 4,994 shares of which the majority was held by Mr Linnegar. By his will he gave 50 shares to the defendant, 2,446 shares (49%) to Harold Johnston and 2,446 shares (49%) to his trustees on trust to pay the income and dividends to the first plaintiff during her lifetime and after her death to their son, Robert.

Mr Watson

8 Mr Watson's involvement in Cedray and CRL postdates that of the first plaintiff. He is an accountant and registered auditor who commenced to provide accounting services to Mr Linnegar and Cedray in 1974. He and Mr Linnegar formed a close friendship. He also had many dealings with the first plaintiff in connection with the business and the companies. In 1990, when Mr Linnegar began to wind down his attendance at Cedray, he arranged for Mr Watson to join the board of both CRL and Cedray. Among many other indications of the closeness of their relationship, Mr Linnegar requested Mr Watson to give the eulogy at the funeral service for his first wife, Eileen.

The Will

9 Mr Linnegar's will is dated 17 February 1994. Probate was granted on 4 July 1995. By the will he appointed the first plaintiff and the defendant as his executors and trustees. They were collectively defined in Clause 2 as "my Trustee". I have already described in paragraph [7] above the gifts of shares in CRL. Clause 4 specifically provided:

I GIVE AND BEQUEATH 2,446 ordinary fully paid shares in CR Linnegar (Investments) Pty Limited to my Trustee UPON TRUST to pay all dividends and income arising therefrom to my Wife during her lifetime and after her death to transfer such shares to my son ROBERT PARKES-LINNEGAR of 613 King Street, Newtown absolutely.

10 By Clause 4, the will created a trust of specific property of which the first plaintiff and the defendant were appointed as the trustees. Each assented to the appointment. The will also contained a number of bequests and legacies and included the release of debts owing by Robert ($325,000) and the defendant ($43,000). The inventory attached to the grant of probate contained a statement of the known value of Mr Linnegar's 4,441 shares in CRL. That value was stated to be $3,469,746. The value of the parcel of 2,446 shares left on trust for the plaintiffs was therefore approximately $1.9 million. The defendant provided the value of the shares in CRL. One of the other assets recorded in the inventory was a loan of $67,499 to CRL.

The Transfer of Shares

11 Despite the clear language of Clauses 2 and 4 of the will, the defendant caused the parcel of 2,446 shares in CRL to be transferred solely into his own name rather than into the joint names of himself and the first plaintiff. The plaintiffs did not become aware of this fact until July 2008. When the defendant was confronted about this - with what I suspect was unnecessary aggression by Robert - his reasons in attempted justification for his conduct were logically unsustainable. Despite his protestations, they do not survive analysis. However no harm resulted from the shares being in the defendant's name. He otherwise complied with the terms of the Trust and ensured that the income and dividends were paid to the first plaintiff. There was however a loss of trust by the plaintiffs, particularly by Robert, who appears to have developed a heightened degree of suspicion and antipathy towards the defendant. On 29 September 2008, in recognition of his error, the defendant transferred the shares into the joint names of himself and the first plaintiff.

Termination of the Trust - Facts

12 In 2009 the first plaintiff was diagnosed with Parkinson's Disease. From the outset of her illness she decided that she wished to simplify her assets and financial affairs to the extent that it was possible to do so before her death. Her major objective was to transfer to Robert during her lifetime the legal interest in the 2,446 shares in CRL. She no longer wanted to have to deal with the defendant or be burdened with the responsibilities of being a shareholder. She wished her son to have unfettered ownership and control of the shares as soon as possible. This was both understandable and reasonable. She said that it would give her peace of mind. She added that the defendant's conduct had played a part in her decision.

13 However, the defendant put obstacles in her path. He would not consent or co-operate. On 11June 2010, the plaintiffs commenced proceedings in this court. The summons sought a declaration that the plaintiffs had validly terminated the Trust and an order that the defendant sign the share transfer form that had been submitted to him in respect of the 2,446 shares in CRL.

14 By his defence, and in his application for judicial advice, the defendant raises four potential difficulties. He says that they justified the withholding of his consent until they had been resolved by judicial advice given pursuant to Section 63 of the Trustee Act, 1925 (NSW) . Those difficulties are as follows:

(a) A "concern" about the first plaintiff's capacity and therefore whether she is sui juris;

(b) An issue as to the existence of a debt owed by Mr Linnegar's estate (the Estate) to CRL. This debt is recorded in Mr Linnegar's loan account with CRL but has never been called up by the company;

(c) An issue as to moneys said to be owing to Spencer Whitby for legal expenses pursuant to an invoice issued only after commencement of these proceedings;

(d) An issue as to moneys said to be owing to the defendant for professional and other charges, which he has never previously claimed and which are the subject of an invoice which he created in September 2010 without any supporting documents.

15 I should observe that once the proceedings were commenced, the defendant also caused CRL to cease paying to the first plaintiff any dividends on the 2,446 shares. He arranged for the moneys to be held in a controlled moneys account with CRL's solicitors "pending determination of the effectiveness of the share transfer and the repayment of the loan account due to CRL of $136,535.52".

Termination of Trust - Legal Principle

16 The Estate has been administered. The only asset remaining is the parcel of 2,446 shares that is the subject of the Trust. Those shares are not however an asset of the Estate. It is well established that if there is a specific bequest to an executor on trust, and the executor assents to the trust, the property bequeathed ceases to be part of the testator's assets. The executor becomes a trustee of it for those who are beneficially interested. The executor is then precluded from dealing with the property as executor: Martyn J R, and Caddick N, Williams, Mortimer & Sunnucks, Executors, Administrators & Probate , 19 th Edition at [78-21]. The principle is well explained in Jacobs' Law of Trusts in Australia , 7 th Edition, Heydon & Leeming at [240]:

Further, if the executor carries out an instruction in the will to set aside a fund and hold it on trust for certain beneficiaries, he or she will become a trustee in respect of that property. An important result of this is that the subject matter of that fund will thereupon cease to be part of the general estate of the testator, and therefore if there is any loss to the subject matter of the fund, that loss will fall on the beneficiaries of the fund, and not upon any other beneficiaries in the testator's estate. This is part of the principle that an executor on assenting to a legacy holds the subject matter of the legacy as trustee for the legatee.

17 At all material times the defendant has been a director of CRL. He has also been the executor who attended to the day to day administration of the estate of Mr Linnegar. In that role he has knowingly brought about a situation where, if there are any genuine debts now due by the Estate, there are no assets of the Estate from which he can be indemnified for the legal liability to which he may be exposed. That is because, in my opinion, he never expected or intended that the loan account due to CRL would be called up. He never intended to charge professional fees and other charges. And the legal expenses due to Spencer Whitby, which are not substantial, were incurred by him substantially, perhaps wholly, in connection with the disputation over his own role in opposing the termination of the Trust.

18 Significantly, all of these supposed debts on which the defendant now relies have materialised since the commencement of the proceedings against him. I have grave doubts about whether they would have been raised if the plaintiffs had not sought to terminate the Trust of which they are the sole beneficiaries. However the parties did not conduct the case, or lead evidence, in a way which enables me to make conclusive findings of fact about the existence, validity and amount of those debts.

19 All I can say is that some moneys may well be due to the legal firm of Spencer Whitby and the accounting firm of Watson & Proud. While I have no reason to doubt the accuracy or validity of the invoices issued by Spencer Whitby, the claim by the defendant for $99,661.50 due to Watson & Proud deserves searching scrutiny. As I have mentioned, the defendant had never previously charged for his services in connection with the Estate or the trust, despite his legal entitlement to do so. He performed his role largely because of his friendship with Mr Linnegar and the first plaintiff, and because of his sense of loyalty to both of them.

20 In the events that occurred, the defendant's claim for $99,61.50 was in my view, simply reactive to the position in which he found himself as the defendant in the proceedings, and to which he contributed by his own conduct. His invoice was issued on 20 September 2010, more than three months after the proceedings were commenced against him. It contains no reasonable detail, merely recording large amounts of time (rounded out) said to have been spent by him. No reasonable attempt has been made to identify with particularity time spent in his role as an executor of the Estate and time spent in his role as a trustee of the Trust. Nor is it possible to discern whether there is a proper basis for concluding that the time was an authorised responsibility of the executorship or trusteeship. It is not possible to identify from the invoice whether, and if so how much, time may have been spent by the defendant on matters for which he is legally entitled to be indemnified.

21 The plaintiffs advanced the following submission. I regard it as orthodox and I accept it:

The plaintiffs do not dispute that Mr Watson has a right to an indemnity from the assets of the trust for expenses and liabilities he has incurred in the administration of the trust estate. He also had, as executor, a right to indemnify himself from the assets of the Estate for expenses and liabilities he has incurred in the administration of the Estate and liabilities of the Estate. However, no authority cited by the defendant supports his claim that he has a right of indemnity or a charge over the assets or income of the Trust in respect of the liabilities of the Estate.

22 The issue in this case is concerned with the Trust not with Mr Linnegar's Estate. In particular the question is whether the defendant is justified in withholding consent to the termination of the Trust because of the outstanding invoices issued by Spencer Whitby and Watson & Proud. I can put to one side the loan account in the sum of $136,535.52 recording a debt owing to CRL. If this is a valid debt, it is a debt owing by the Estate. The defendant can have no right of indemnity or charge over the assets or income of the Trust in respect of this liability.

23 As to the outstanding invoices of Spencer Whitby and Watson & Proud, it seems probable that, at least in part, those invoices represent liabilities for which the defendant may have a right of indemnity from the assets or income of the Trust. There is however a legitimate issue as to whether some or all of those liabilities were incurred by the defendant in the authorised conduct of the Trust. The fact that I cannot identify the precise amount for which the defendant is entitled to be indemnified is in part the defendant's own fault. There appeared to be a failure on the defendant's part to recognise the distinction between the Estate and the Trust; and a failure to appreciate the correlative limitations on his right of indemnity from the assets or income of the Trust. The appropriate forum for the resolution of these issues is by the taking of accounts of the Trust.

24 I have mentioned that since July 2010 the defendant has unilaterally withheld from the first plaintiff the income from the Trust to which he is entitled. I was informed that the sum is currently approximately $70,000. As I have mentioned, it is held in a controlled moneys account. I do not think that the termination of the Trust and the transfer of the 2,446 shares in CRL to Robert should be further held up. I have reached that view because of the matters which I have already explained. I have also taken into account the adverse view that I have formed about the opposition to the termination of the Trust taken by the defendant; my doubts about the reasonableness, authority and legitimate recoverability of the whole of the invoice for $99,661.52; and the absence of satisfactory proof of the precise amount for which the defendant is entitled to be indemnified from the Trust.

25 In all of the circumstances, the defendant will be adequately safeguarded in the first instance if he has a charge over the moneys currently standing to the credit of the controlled moneys account to secure the authorised Trust liabilities that have been incurred in favour of Spencer Whitby and Watson & Proud, whatever they may be.

26 I will order the transfer of the 2,446 shares to the second plaintiff but suspend the operation of that order for 28 days. The parties should agree within 21 days on the precise amount for which the defendant is entitled to be indemnified from the assets or income of the Trust for any authorised liabilities incurred in favour of Spencer Whitby and Watson & Proud. If they do not agree, I will order the taking of accounts or direct that there be a mediation of that question. I will make the same order in relation to the amount of costs of these proceedings if any, for which the defendant is entitled to be indemnified. If, after 28 days, there has been no agreement or resolution of the precise amount for which the defendant is entitled to be indemnified, I will consider what further orders should be made, if any, to protect the legitimate interests of the defendant.

The Capacity of Mrs Parkes-Linnegar

27 I have focused on the amounts due to Spencer Whitby and Watson & Proud because they are the only matters which, in my opinion, may be genuine obstacles in the way of the termination of the Trust. I have already explained that the loan account in the books of CRL recording a debt of $136,535.52 owing by the Estate is not a liability for which the defendant is entitled to be indemnified from the assets or income of the Trust. Equally, the supposed "concern" as to whether the first plaintiff is sui juris is not a valid reason for the defendant withholding his consent to the termination of the Trust. There was never a proper factual basis for this defence and no adequate grounds for seeking judicial advice on this issue.

28 Admittedly, the first plaintiff was handicapped in her ability to speak and answer questions during the hearing because of the progress of her Parkinson's Disease. But I formed the view from her affidavits, my observations of her and from the evidence of the events during the period prior to the hearing that she was astute, intelligent and fully conversant with the legal and factual issues. This is consistent with the uncontroverted medical evidence. In June 2010 her score on a Mini-Mental test was 30/30 and on Addenbrooke's Cognitive Examination, it was 91/100. It has decreased marginally, but not materially, in recent months. She appeared to follow the evidence and submissions closely. She has been involved in her late husband's business a long time - from its inception in 1949. She still holds office in CRL and Cedray. She understands, in my view, not only what she wants to achieve, but also the consequences to her of doing so. She will, of course, give up the legal entitlement to the income from the 2,446 shares during her remaining life. That is her choice. As I have said however, her desire to transfer the 2,446 shares to Robert is entirely understandable.

29 The defendant's case on this issue was unedifying. It was advanced with the diffidence which it deserved. It was put no higher than a non-admission in the pleaded defence. But it depended on speculation and inference from facts that, by themselves, were benign. Those facts were that the first plaintiff:

(a) is presently aged 80 years;

(b) suffers from Stage 2, Parkinson's Disease;

(c) lives with her son, the only child.

30 From that foundation, the defence went on to contend that "in all the circumstances, the first plaintiff may not be able to give proper consideration to, or consent to, the purported termination of trust". None of the above facts, either alone or in conjunction with each other, or having regard to the overall evidence, leads to an inference that the first plaintiff did not understand the nature, quality and significance to her of the termination of the Trust. In my view, the defendant knew this, or should have known this. Furthermore, the credibility of his defence (by non-admission), and his application for judicial advice, was weakened by an underlying suggestion - perhaps it was no more than a lingering questioning - that there was a relationship of undue influence between the first plaintiff and her son Robert. This was inappropriate and unsustainable. It was hinted at, but never squarely put or pleaded.

Letter Dated 23 February 2007

31 An entirely separate issue arises because of a letter dated 23 February 2007 from the defendant to the first plaintiff. At this time, there was no difficulty whatsoever in the relationship between the defendant and the first plaintiff. They liked and respected each other and the first plaintiff was entirely confident in the trust she reposed in the defendant. The letter opened with a plaintive statement of the defendant's then dire financial position:

Dear Gloria

As you know, I have had an ongoing cash crisis since my divorce. The withdrawal of Westpac's overdraft facility of $115,000 did not help. Then the litigation with Simon, where I finally had an outcome that he paid part of my legal fees and I recover all my records.

I was a director of a company that went into liquidation. The Australian Taxation Office has proceeded against me and has judgment, and is now at the stage of bankrupting me.

All I have left are my shares in C R Linnegar Investments Pty Ltd ..."

32 He then made a proposal:

I propose to sell 49 shares to Harold, 49 shares to you, 1 share to Paul Johnston and 1 share to Stephen Bottomley. Of course you, and Harold may decide differently. But Harold has informed me that he will buy as many shares as others don't want. If that was the case, then Harold, and ultimately Anthony, would control 51% of the company. I don't think that is a desired outcome."

33 He then set out some rudimentary calculations and opinions. They included that Cedray had earned certain profits; that a prudent investor would want a return of 8.5%; that on the basis of those matters "that values Cedray at $12 million" of which $3.5 million was in hard assets and the balance in goodwill; and that CRL owns "about $10.3 million of that". He then made some other observations and ventured some opinions on the basis of the revaluation of the Cedray shares and the revaluation of the real estate. This took the assets of CRL, he considered, to $14.5 million. On the basis of those matters he said that, "in his opinion", his 100 shares out of the 4,994 issued shares, were worth $290,000. He then offered to sell them for $275,000 if he participated in an extraordinary dividend before he sold his shares.

34 Importantly, he explained that he had until Tuesday to come up with the money or it would be too late. He said that "Harold can do it by that time". Finally, and more significantly, he concluded in language that reflects the desperate position in which he was placed and indicates, I think, the true character of his proposal and the legal and factual significance that should be attributed to the statements and opinions set out in the letter:

It will save me from bankruptcy. I also understand that you may not consider this prudent. The world does not revolve around me and my circumstances do not dictate what happens at Cedray.

35 The letter made explicitly clear that it was a cry for help from a loyal friend in desperate straits. It was obvious that it contained opinions arrived at hurriedly at a time of potential financial crisis for the defendant. Mr Bottomley's evidence made clear that the first plaintiff's attitude was that she was committed to helping out the defendant with his financial problems and was happy to do so. I would have reached the same view even without Mr Bottomley's evidence. The value that the letter placed on the defendant's 100 shares was an asking price, in a transaction which, if accepted, would result in the sale of 49 shares to each of Harold Johnston and the first plaintiff, and 1 share to each of Paul Johnston and Stephen Bottomley - all on the same basis of calculation. It is significant that if the first plaintiff did not purchase 49 shares from the defendant, Harold Johnston would then control 51% of CRL. The defendant did not think this was a desirable outcome. I infer that the first plaintiff agreed.

36 In the particular context, I do not think that there should be implied any representation or warranty that the defendant's opinion, and each of the components in the reasoning process that he specified, were necessarily accurate or necessarily sound. They were certainly honestly held. But it is notorious that the valuation of shares is an inexact science - one that is all the more prone to vagary in the case of small proprietary companies whose shares are tightly held and infrequently traded. This would have been well known and understood by the first plaintiff. The transaction proposed in the letter was primarily between fellow directors who trusted each other and had served the company together for decades. Harold Johnston and the first plaintiff had just as much access to information, (if they wished it), as the defendant. Both chose to accept the price which the defendant proposed. Only the first plaintiff now complains.

37 Having regard to the true complexion of the facts, the defendant's conduct in writing the letter and setting out its contents for the first plaintiff's consideration, was not conduct in trade or commerce within the meaning of the Fair Trading Act, 1987 (NSW) . It was not, on any reasonable view, business or professional activity. It does not bear a trading or commercial character: Concrete Constructions (NSW) Pty Limited v Nelson (1990) 169 CLR 594 at 604. Nor is it necessarily characteristic of the carrying on of a profession: Shahid v Australian College of Dermatologists (2008) 168 FCR 46 at [191] - [194]. Even if it was, it was not in my view misleading. Nor was there a duty of care. Nor was anything in the letter negligently erroneous.

38 In its true context, the representation which the letter primarily conveyed rose no higher than that the observations and opinions in it were honestly held. I have reached that conclusion by considering the alleged conduct in the light of all the relevant surrounding facts and circumstances, by deduction from the whole of the course of conduct. I have refrained from considering the letter in isolation. It would invite error if I were to do so: Butcher v Lachlan Elder Realty Pty Ltd (2004) 218 CLR 592 at [109]; Campbell v Backoffice Investments (2009) 238 CLR 304 at [102]. Taken in context, and bearing mind the factual considerations that I have explained in paragraphs [31] - [37] above, I am unable to conclude that the statements in the letter are actionable at the suit of the first plaintiff.

Conclusion

39 For those reasons, I have concluded that the plaintiff should succeed on the termination of trust issue but fail on the misleading conduct issue. I have explained in paragraph [26] the conditions on which I propose to order the transfer of the 2,446 shares to the second plaintiff. The parties should bring in short minutes of order to reflect these reasons. I propose that the plaintiff should not recover her costs of the misleading conduct claim. The short minutes should include an order authorising the defendant to seek judicial advice and should set out my answers (as reflected in these reasons) to the questions posed.

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Decision last updated: 14 February 2011