Court of Appeal Supreme Court New South Wales

• Medium Neutral Citation: Lewis v Condon; Condon v Lewis [2013] NSWCA 204
• Hearing dates: 19 June 2013
• Decision date: 04 July 2013
• Before: McColl JA at [1]; Leeming JA at [2]; Sackville AJA at [118]

Decision

Orders in 2013/66225

; 1. Grant leave to appeal.

; 2. Appeal allowed.

; 3. Set aside the orders made on 22 February 2013, and in lieu thereof, declare that the Property is an asset of the Kenthurst Investments Trust.

; 4. Order that the respondent pay the appellant’s costs at first instance and on appeal.

; 5. Dismiss the notice of contention.

; 6. Remit the proceedings, including the motion dated 7 June 2013, to the primary judge to consider what further relief (if any) is appropriate.; Orders in 2013/71832; 1. Dismiss the summons seeking leave to appeal.

; 2. Order that Mr Condon pay the costs of the summons.

• Catchwords: TRUSTS AND TRUSTEES – creation of trust – property settled on trust in order to deceive former husband and to evade taxation – whether trust a sham – improper purpose not sufficient for trust to be a sham – creation of discretionary trust consistent with improper purpose – subsequent conduct inconsistent with trust would amount to breach of trust, not “emerging sham”; TRUSTS AND TRUSTEES – powers, duties, rights and liabilities – power of variation – purported replacement of trustee and appointor – purported exercise of power of appointment; TRUSTS AND TRUSTEES – beneficiaries – standing of beneficiary to bring proceedings – special circumstances; BANKRUPTCY – effect of bankruptcy on property – effect on trust property – effect on power of appointment; JUDGMENTS AND ORDERS – declaration in related caveat proceedings involving trustee – whether gives rise to res judicata; APPEAL – when appeal lies – no appeal from findings
• Legislation Cited: Bankruptcy Act 1966 (Cth); Corporations Act 2001 (Cth); Real Property Act 1900 (NSW); Supreme Court Act 1970 (NSW); Trustee Act 1925 (NSW)
• Cases Cited: A v A [2007] EWHC 99 (Fam); [2007] 2 FLR 467; AG Securities v Vaughan [1990] 1 AC 417; Alexander v Perpetual Trustees WA Ltd [2004] HCA 7; (2004) 216 CLR 109; Austec Wagga Wagga Pty Ltd v Rarebreed Wagga Pty Ltd [2012] NSWSC 343; Bahr v Nicolay (No 2) [1988] HCA 16; 164 CLR 604; Barendse v Comptroller-General of Customs (1996) 136 FLR 243; Briginshaw v Briginshaw (1938) 60 CLR 336; Calverley v Green [1984] HCA 81; (1984) 155 CLR 242; Chase Manhattan Equities Ltd v Goodman [1991] BCLC 897; Commonwealth v Bank of New South Wales [1950] AC 235; Customs v Tower MCashback LLPI v Revenue and Customs Commissioners [2011] UKSC 19; [2011] 2 AC 457; Equuscorp Pty Ltd v Glengallan Investments Pty Ltd [2004] HCA 55; (2004) 218 CLR 471; Ex parte Gilchrist; Re Armstrong (1886) LR 17 QBD 521; Fletcher v Federal Commissioner of Taxation [1991] HCA 42; (1991)173 CLR 1; Fonu v Merrill Lynch Bank and Trust Company (Cayman) Ltd [2011] UKPC 17; [2012] 1 WLR 1721; Franklins Pty Ltd v Metcash Pty Ltd [2009] NSWCA 407; (2009) 76 NSWLR 603; Hillcrest (Ilford) Pty Ltd v Kingsford (Ilford) Pty Ltd (No 2) [2010] NSWSC 285; Hillpalm Pty Ltd v Heaven’s Door Pty Ltd [2004] HCA 59; (2004) 220 CLR 472; Hitch v Stone [2001] STC 214; HP Mercantile Pty Ltd v Commissioner of Taxation [2005] FCAFC 126; (2005) 143 FCR 553; In the matter of Idylic Solutions Pty Ltd; Australian Securities and Investments Commission v Hobbs [2012] NSWSC 1276; Kearns v Hill (1990) 21 NSWLR 107; Kuhl v Zurich Financial Services Australia Ltd [2011] HCA 11; (2011) 243 CLR 361; Lamru Pty Ltd v Kation Pty Ltd (1998) 44 NSWLR 432; Lemery Holdings Pty Ltd v Reliance Financial Services Pty Ltd [2008] NSWSC 1344; (2008) 74 NSWLR 550; Marac Finance Ltd v Virtue [1981] 1 NZLR 586; Mercantile Mutual Life Insurance Co Ltd v Gosper (1991) 25 NSWLR 32; Miles v Bull [1969] 1 QB 258; National Westminster Bank plc v Jones [2001] 1 BCLC 98; Official Assignee v Wilson [2007] NZCA 122; [2008] 3 NZLR 45; Paradise Constructors & Co Pty Ltd v Poyser [2007] VSCA 316; (2007) 20 VR 294; Paris King Investments Pty Ltd v Rayhill [2006] NSWSC 578; Perpetual Trustee Co (Ltd) v Bligh (1940) 38 SR NSW 33; Petelin v Cullen (1975) 132 CLR 355; Pittwater Council v Moore Development Group Pty Ltd [2004] NSWCA 278; Prest v Petrodel Resources Ltd [2013] UKSC 34; Raftland Pty Ltd v Federal Commissioner of Taxation [2008] HCA 21; (2008) 238 CLR 516; Ramage v Waclaw (1988) 12 NSWLR 84; Re Burton; Wily v Burton (1994) 126 ALR 557; Re French Caledonia Travel Service Pty Ltd v Elatri [1992] FCA 227; Re Louis Contini Foundation Trust [2004] NSWSC 881; Rippon v Chilcotin Pty Ltd [2001] NSWCA 142; (2001) 53 NSWLR 198; Roberts v Gill & Co [2010] UKSC 22; [2011] 1 AC 240; Robinson v Western Australian Museum (1977) 138 CLR 283; Sapphire (SA) Pty Ltd v Ewens Glen Pty Ltd [2011] FCA 600; Saunders v Vautier (1841) Cr & Ph 240; 49 ER 282; Scott v Commissioner of Taxation (Cth) (No 2) (1966) 40 ALJR 265; Shalson v Russo [2003] EWHC 1637 (Ch); [2005] Ch 281; Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) 18 FCR 449; Sheahan v Londish [2010] NSWCA 270; 80 ACSR 337; Simmons v Henwood [2013] NSWCA 184; Synergy Concepts Pty Ltd v Rylegrove Pty Ltd (in liq) (1997) 8 BPR 15,555; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165; WT Ramsay v Inland Revenue Commissioners [1982] AC 300; Young v Murphy [1996] 1 VR 279
• Texts Cited: G Pagone, “Sham trusts” [2012] VicJSchol 5; G Thomas and A Hudson, The Law of Trusts (2nd ed 2010); J Palmer, “Dealing with the Emerging Popularity of Sham Trusts” [2007] NZ Law Rev 81; J Edelman, “Two Fundamental Questions for the Law of Trusts” (2013) 129 LQR 66; Lewin on Trusts (18th ed 2008); Matthew Conaglen, “Sham Trusts” (2008) 67 CLJ 176; Waters’ Law of Trusts in Canada (4th ed 2012)
• Category: Principal judgment
• Parties: Louise Lewis (Applicant for leave in 2013/66225 and respondent in 2013/71832); Schon Gregory Condon as Trustee of the Bankrupt Estate of Colleen Anne Rayhill (Respondent in 2013/66225 and applicant for leave in 2013/71832)
• Representation: Counsel: P Finch (Ms Lewis); DE Grieve QC (Mr Condon); Solicitors: DC Legal Pty Ltd (Ms Lewis); Gillis Delany Lawyers (Mr Condon)
• File Number(s): 2013/66225; 2013/71832

Decision under appeal

• Court or tribunal: Supreme Court of NSW
• Citation: [2013] NSWSC 126
• Date of Decision: 13 February 2013
• Before: Rein J
• File Number(s): 2012/359743

HeadNOTE

[This headnote is not to be read as part of the judgment]

In 2001 Colleen caused Appinville, a company controlled by her accountant, to acquire title to land at Kenthurst ("Property") as trustee of the Kenthurst Investments Trust, a discretionary trust in favour of herself, her daughters Louise and Melissa, and her grandchildren, and of which she was the appointor. The primary judge found that her purpose was to deceive her former husband, the Family Court and to avoid tax.

In 2005 Colleen disclaimed any interest in the trust, and purported to amend the trust so that Louise was the appointor; on the same day, Louise purported to remove Appinville and appoint Colleen as trustee. In 2006, proceedings between Colleen, her former husband and Louise were settled, and a declaration was made that Colleen would hold the Property as trustee of a discretionary trust, and an order was made that it be transferred to her within 30 days. The Property was transferred to her some 3 years later in 2009, whereupon Colleen borrowed money on the security of a mortgage over it. Although Louise subsequently purported to appoint another company, Robana, as trustee, the Property was not transferred to Robana before Colleen was made bankrupt in 2012. Her trustee in bankruptcy lodged a caveat and applied to have the Property transferred to him. In separate proceedings between the trustee in bankruptcy and Robana, a declaration was made that the trustee in bankruptcy was entitled to be noted on the register in respect to the Property as the registered proprietor in lieu of Colleen.

Louise commenced proceedings against Colleen's trustee in bankruptcy, joining Robana, and seeking orders that the Property was held on the terms of Kenthurst Investments Trust and that it be transferred to Robana. The trustee in bankruptcy said that the Kenthurst Investments Trust was a sham, that the property had been Colleen's beneficially, and that the declaration in 2012 gave rise to a res judicata.

The primary judge found that the trust was not a sham, that the declaration in 2012 did not give rise to a res judicata, but dismissed the proceedings for want of standing. He also held that Robana had not been validly appointed as trustee because Colleen continued to be the Appointor (the purported amendment in 2005 being invalid), and favoured the view that there was no trustee.

Louise sought leave to appeal. On the strength of the primary judge's findings, Colleen purported to appoint Truthful Endeavour as trustee, and Louise filed a motion seeking joinder of Truthful Endeavour and the transfer of the Property to it. Colleen's trustee in bankruptcy filed a notice of contention and a separate application for leave to appeal from the findings of sham and res judicata in respect of which he had failed.

The issues for determination on appeal were:

(i) whether Kenthurst Investments Trust was a sham;

(ii) whether Colleen was a trustee of Kenthurst Investments Trust;

(iii) what effect the sequestration order had on Kenthurst Investments Trust;

(iv) what effect the caveat proceedings had on the current proceedings;

(v) whether Louise had standing to bring the proceedings below and

(vi) whether the trustee in bankruptcy's application for leave to appeal was competent.

The Court held, granting leave to appeal and allowing Louise's appeal and dismissing the notice of contention:

In relation to (i)

1. A sham transaction is one which takes a legally effective form but is intended by the parties to bear a different character: [58]-[61].

Equuscorp Pty Ltd v Glengallan Investments Pty Ltd [2004] HCA 55; (2004) 218 CLR 471, applied.

WT Ramsay v Inland Revenue Commissioners [1982] AC 300; Scott v Commissioner of Taxation (Cth) (No 2) (1966) 40 ALJR 265, followed.

2. A finding of sham is to be made cautiously. It is a strong finding, which cannot be made if another inference is at least equally open: [62]-[63].

National Westminster Bank plc v Jones [2001] 1 BCLC 98; Official Assignee v Wilson [2007] NZCA 122; [2008] 3 NZLR 45; Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) 18 FCR 449, followed.

3. A transaction will not be a sham merely because it is entered into with an improper motive: [68]-[70].

Chase Manhattan Equities Ltd v Goodman [1991] BCLC 897; Miles v Bull [1969] 1 QB 258; Barendse v Comptroller-General of Customs (1996) 136 FLR 243; In the matter of Idylic Solutions Pty Ltd; Australian Securities and Investments Commission v Hobbs [2012] NSWSC 1276, followed.

4. The trust was not a sham. In order for there to be a sham it was necessary that there be an intention that the discretionary trust created not bear its apparent legal consequence. That was not the case here. While there was an improper purpose, this was entirely consistent with the creation of a genuine discretionary trust. It was unsafe to rely on evidence years later that Colleen acted in breach of trust as evidence of a shamming intent in 2001: [73]-[77].

5. There was no "emerging sham", whereby a valid discretionary trust became a sham because a trustee and some beneficiaries chose to disregard it: [80]-[82].

Shalson v Russo [2003] EWHC 1637 (Ch); [2005] Ch 281; Official Assignee v Wilson [2007] NZCA 122; [2008] 3 NZLR 45; A v A [2007] EWHC 99 (Fam); [2007] 2 FLR 467, followed.

In relation to (ii)

6. Colleen became registered proprietor of the Property, no later than when she became the trustee, holding her legal title subject to the terms of the trust: [84].

Hillpalm Pty Ltd v Heaven's Door Pty Ltd [2004] HCA 59; (2004) 220 CLR 472; Bahr v Nicolay (No 2) [1988] HCA 16; (1988) 164 CLR 604; Mercantile Mutual Life Insurance Co Ltd v Gosper (1991) 25 NSWLR 32, applied.

7. A new trustee holds office from the time of his or her appointment, not from the time trust property is transferred: [85]-[86].

Lemery Holdings Pty Ltd v Reliance Financial Services Pty Ltd [2008] NSWSC 1344; (2008) 74 NSWLR 550; Young v Murphy [1996] 1 VR 279, followed.

In relation to (iii)

8. The sequestration order did not destroy the trust of which Colleen was trustee, nor, if Colleen were still the Appointor, did that power vest in her trustee in bankruptcy: [91]-[95].

Ex parte Gilchrist; Re Armstrong (1886) LR 17 QBD 521; Fonu v Merrill Lynch Bank and Trust Company (Cayman) Ltd [2011] UKPC 17; [2012] 1 WLR 1721, followed.

Re Burton; Wily v Burton (1994) 126 ALR 557, approved.

In relation to (iv)

9. The order in the caveat proceedings did not determine, and was not inconsistent with, the issue whether the trustee in bankruptcy held the Property on the terms of the Kenthurst Investments Trust: [100]-[101].

In relation to (v)

10. Louise had standing to bring the proceedings, irrespective of whether the trustee was Colleen or Robana: [106]-[112].

Alexander v Perpetual Trustees WA Ltd [2004] HCA 7; (2004) 216 CLR 109, applied; Re Louis Contini Foundation Trust [2004] NSWSC 881, followed.

The Court held, refusing leave to the trustee in bankruptcy to appeal:

In relation to (vi)

The trustee in bankruptcy's application for leave to appeal was incompetent save as to costs, for appeals only lie from orders which are adverse to the appellant: [117].

Commonwealth v Bank of New South Wales [1950] AC 235; Pittwater Council v Moore Development Group Pty Ltd [2004] NSWCA 278, followed.

Judgment

1. McCOLL JA: I agree with Leeming JA’s reasons and the orders his Honour proposes.

2. LEEMING JA: The respondent, Mr Schon Gregory Condon, is the trustee in bankruptcy of Ms Colleen Lewis, and is the registered proprietor of land at Robson Street, Kenthurst (Property). Proceedings were brought against Mr Condon by Ms Louise Lewis, Colleen Lewis' daughter, seeking a declaration that Mr Condon hold the Property in trust for her and other beneficiaries under a Deed dated 27 August 2001 creating the Kenthurst Investments Trust.

3. Louise Lewis seeks leave to appeal from a decision of a Judge of this Court (Rein J) dismissing her claim on the ground that she lacked standing to do so. Presumably leave was sought on the basis that, as the applicant claimed to be a beneficiary of a discretionary trust, there might not be a matter in issue whose value exceeded $100,000: cf Supreme Court Act 1970, s101(2)(r). No argument was directed to the point, and I express no view as to its correctness. Apart from the question of standing, the essential issue in this Court is whether Mr Condon holds the Property beneficially. Ultimately, that turns on whether, as Mr Condon contended, a trust purportedly created in 2001 on the day the Property was acquired, called the Kenthurst Investments Trust, was a sham, and the effect of orders subsequently made in this Court by Brereton J in 2006 and Nicholas J in 2012.

4. In my opinion, for the reasons which follow, although the Kenthurst Investments Trust was created with an intent to deceive others, the primary judge was right to conclude that it was not a sham trust. It did not (and could not) subsequently become a sham. Those legal conclusions are not contrary to, and in fact are reinforced by, the orders made by Brereton and Nicholas JJ. However, I respectfully disagree with the conclusion of the primary judge that the plaintiff lacked standing, and with his Honour’s tentative conclusion that there was no trustee. Accordingly, there should be a grant of leave to appeal and the appeal should be allowed. These reasons first deal with the parties and the complex history of the Kenthurst Investments Trust over the last twelve years, before turning to the legal principles governing sham trusts, res judicata and the standing of beneficiaries and their application to these appeals.

Parties

5. The applicant for leave to appeal and plaintiff in the proceedings below, is Louise Lewis. She and her sister Melissa Rayhill are daughters of Ms Colleen Lewis, who was also known at various times as Ms Colleen Rayhill and Ms Colleen Brennan. It is convenient to refer to the daughters and their mother, without intending any disrespect, as Louise, Melissa and Colleen. Colleen’s trustee in bankruptcy, Mr Condon, is the respondent in the first appeal and was the first defendant in the proceedings below. Mr Condon has also filed a summons seeking leave to appeal, although this relates only to a question of costs.

6. Robana Investments Pty Ltd (Robana) was joined by Louise as the second defendant at trial, but was not a party to either appeal. As will be seen below, Louise and Colleen took steps purporting to appoint Robana as the trustee of the Kenthurst Investments Trust in 2011. Robana did not appear at the trial, in the course of which Mr Condon asserted, and Louise accepted, that Robana’s appointment was invalid. That is a matter to which I return below.

The history of the Kenthurst Investments Trust

(a) Creation of the trust and acquisition of the Property

7. By deed made on 27 August 2001, Mr Gordon Fraser settled $20 upon Appinville Pty Ltd as trustee of the Kenthurst Investments Trust. The terms of that trust were that Colleen was a “first corpus beneficiary”, her daughters Louise and Melissa were the “second corpus beneficiary” as well as the “alternate corpus beneficiary”, and the grandchildren of Colleen were the “third corpus beneficiary”. The assets of the trust were the original $20 and “all further money or property paid to or received by the trustees”. The assets of the trust were held for such of the beneficiaries at the distribution date as the trustee should determine in its absolute discretion (with provision made for distribution in default of such a determination which is not presently relevant). The distribution date was, simplifying slightly, 1 January 2040 or such earlier date as the trustee might in its absolute discretion determine. Income was likewise to be distributed to the various beneficiaries as the trustee should determine in its absolute discretion, again with provision for default distributions. There was no power to accumulate.

8. Colleen was the Appointor, unless she was incapable of acting, in which case Melissa was the Appointor. There was no other provision made to assign the power of appointment. The Appointor had power to appoint new trustees and remove existing trustees. The trustee with the consent of the Appointor had power to alter, revoke or add to any of the provisions of the deed, save so as to divest property to which a beneficiary had become absolutely entitled, or so as to extend the distribution date. It will be necessary to return to these provisions in more detail below.

9. On the same day, 27 August 2001, Appinville entered into a contract to purchase the Property from St George Bank Ltd. The contract stated that Appinville did so “as trustee for Kenthurst Investments”. The purchase price was $1,700,000, with a 10% deposit.

10. Although the sole director and shareholder of Appinville was Mr Fraser, the solicitors acting for it on the purchase wrote to “Mrs Colleen Lewis, Appinville Pty Limited” regarding the settlement which took place on 19 October 2001. The settlement statement indicated that the outstanding funds were to come from Permanent Trustee Ltd (in the amount of $1,064,115.51) with “Balance required to complete and received from you” of $482,576.08.

11. There was no dispute that the majority of the purchase price came from $1,085,000 drawn down pursuant to a Deed of Loan entered into between Appinville and Challenger Managed Investments Ltd on 19 October 2001, secured by a registered mortgage over the Property, and guaranteed by Colleen. The Deed contained clause 14:

“The Borrower represents and warrants that it is not the trustee of any trust.”

That clause was inconsistent with what appeared on the face of the contract for sale, and with the cases advanced at trial by both Louise and Mr Condon.

12. In 2002 and 2003 Appinville received two further advances from Challenger, in the amounts of $300,000 and $150,000 respectively. In evidence at trial was the deed of guarantee by which Colleen guaranteed Appinville’s obligations to repay the first of those advances; there is no reason to think that the 2003 advance was any different.

13. Normally in a case where a sham trust is alleged, much reliance will be placed upon subsequent conduct to support an inference that there was no intention ever to perform the declared trust. That was true here too, but Mr Condon also adduced evidence from Mr Gordon Fraser, who was the sole director and shareholder in Appinville when the Kenthurst Investments Trust was purportedly settled, with a view to establishing that the trust was a sham. Mr Fraser deposed to the following circumstances by which the Trust was created:

“’I met Colleen Rayhill, who is also known as Colleen Lewis, in about 2001. I was introduced to her by a mutual contact. After being introduced to her, I met with Ms. Rayhill several times in 2001, and during one of those meetings we had a conversation in words in or to the following effect:

She said: 'I'm in a complicated Court case. I've found a property which I want to buy, but I want to keep it away from my own name in the short term because of the Court case. I want to put it in a trust. I will be a beneficiary. The case might be over by Christmas, so it will be a short term thing, and then the property will be transferred back into my name. I will be accountable for all expenses.'

I said: 'My company, Appinville, could go on the title to the property. But there will be no income coming in so the expenses will have to be your responsibility. There will be land tax and capital gains tax.'"

14. Mr Fraser referred to his acknowledgment that he had settled $20 on trustee, and said that he did not make such a payment. He said that Appinville had not opened a bank account for the Kenthurst Investments Trust at that time. He said that:

“I regarded the Kenthurst Investments Trust as a device to help Colleen Rayhill. I wanted to assist her for a period of a few months to give the appearance to anyone opposed to her in the litigation she had mentioned to me, that the property at Kenthurst was held in a trust and was not an asset to which she was beneficially entitled.”

15. Mr Fraser said that after Appinville had acquired the Property, he forwarded correspondence relating to arrears of payments to Colleen, and assumed that she made payments. He said that Appinville did not make any payments. He did not prepare any accounts contemporaneously. Nor did he prepare any accounts relating to Appinville’s expenses as a trustee for the Kenthurst Investment Trust. His evidence was that: “There are no profit and loss statements, balance sheets, cash books, tax returns or BAS statements relating to Appinville’s activities as trustee for the Kenthurst Investments Trust of which I am aware”. However, in 2004 he prepared a document described as “Source Application of Funds and Assets and Liabilities for the period 1st April 2001 to 30th April 2004” which stated the source of funds to be loans from Paris King Investments and Challenger of $652,577 and $1,521,595 respectively. It may be noted that $652,577 is the sum of the $170,000 deposit and the “Balance required to complete and received from you” on the settlement statement, and that $1,521,595 is approximately the original amount lent by Challenger plus the $450,000 advanced in 2002 and 2003.

16. In cross-examination Mr Fraser was shown a statutory declaration he had made in which he had declared that Appinville held the settlement monies of $20, and conceded that he would not dispute that there was $20 held by the Trustee. He confirmed that he had no intention of buying the Property beneficially for Appinville.

17. No testimonial evidence was adduced from Louise or Colleen. There was no substantial challenge at trial to the conversations with Colleen to which Mr Fraser deposed, which the primary judge accepted took place.

(b) Colleen disclaims an interest in the trust and becomes trustee; Louise becomes Appointor

18. By Deed made on 26 August 2005 between Colleen and Appinville, Colleen, who was described as a “potential beneficiary”, “disclaims henceforth and forever each and all of the rights she, but for these presents, has as a potential beneficiary of the trust”.

19. By Deed made on 1 November 2005 between Colleen, Louise and Appinville, Colleen retired as Appointor and was purportedly replaced by Louise. The Deed comprised three recitals and five operative clauses:

“Recitals:

A.   By Deed (“the Deed”) dated 27th day of August 2001, the Kenthurst Investments Trust (“the Trust”) was established.

B.   The Retiring Appointor [Colleen] wishes to retire as Appointor under the Terms of the Trust and has given notice to the Trustee of that intention and has nominated Louise to replace her as the new Appointor of the Trust.

C.   The new Appointor has consented in writing to act as Appointor of the Trust and the Trust has agreed to the nomination of the new Appointor and the retirement of the Retiring Appointor.

Now this Deed Witnesses:

1.   The Appointor shall, from the date of resignation of the Retiring Appointor, take office as Appointor of the Trust.

2.   The new Appointor accepts the appointment.

3.   The Trust accepts the appointment of the new Appointor in accordance with the terms of the Trust deed.

4.   The Trust accepts the resignation of the retiring Appointor.

5.   This Deed shall for all purposes be deemed to have been executed by all parties on the date which it bears.”

20. At trial, counsel for Mr Condon contended that this purported appointment was invalid, and that Colleen remained as Appointor by reason of the terms of the deed of settlement, a submission which counsel for Louise embraced, and which the primary judge accepted. I refer under the heading “The effect of the transactions in 2005, 2006 and 2009” to the grounds on which Mr Condon relied to support the submission.

21. There was in evidence a separate deed also dated 1 November 2005 between the same parties. It named Appinville as the Retiring Trustee, Louise as the Appointor, and Colleen as the New Trustee. Its operative provisions were as follows:

“1.   THE appointor hereby appoints the new trustee to be trustee of the settlement in the place and stead of the retiring trustee.

2.   THE retiring trustee is no longer trustee of the settlement and accordingly the appointment of the retiring trustee as trustee of the settlement is hereby terminated and is at an end subject only to the terms of this deed being registered pursuant to Part 23 of the Conveyancing Act 1919.

3.   THE new trustee covenants that he will and does, testified by his execution on these presents, accept appointment as trustee of the settlement and will henceforth from the moment of execution hereof carry out the several obligations imposed on the trustee for the time being of the settlement as and when required so to do or as to her it seems necessary so to do in order to comply with the terms of the trusts therein contained and any of them.

4.   AS a condition precedent to appointment as trustee of the settlement the new trustee hereby quits claim to and withdraws as an object or potential object of the settlement and renounces and repudiates forever as and from the date hereof all had or might in the future have as an object of the settlement and/or as a member of a class of objects of the settlement or to be considered in the deliberation of the trustee in relations to the trusts of the settlement and disclaim absolutely in favour of the Sydney City Mission any rights which, but for these presents, the new trustee might receive thereunder.

5.   Notwithstanding that these presents are intended to be fully binding and effective according to the terms hereof the parties hereto covenant that each of them his own respective expense will make execute and do and cause to be made executed and done all such instruments acts and things as shall be necessary give full and appropriate effect to the terms of this instrument."

22. Despite the identicality of parties and date, the two deeds are in different fonts, and very differently executed. Colleen has signed the former as Colleen Rayhill (twice), and the latter as Colleen Lewis. Appinville executed the latter by its common seal being affixed with the authority of Mr Fraser, whose signature on the former document is not witnessed nor was Appinville’s common seal used.

23. Mr Fraser also gave this evidence in relation to Appinville’s retirement in 2005:

“In about 2005 I had a number of conversations with Colleen Rayhill in which the subject of land tax on the Robson Road property was discussed. In one such conversation, words in or to the effect of the following were spoken:

She said: 'There are big land tax bills on Kenthurst. I can avoid land tax if I can show the land tax office that Kenthurst is my principal place of residence and that the trust is a bare trust.'

I said: 'If you don't want Appinville to be the trustee any more, I would be happy to oblige. I don't want to be involved.'"

24. Once again, Mr Condon contended at trial that this Second Deed made on 1 November 2005 was ineffective, and Appinville remained as trustee. Louise contended that Appinville retired and that there was currently no validly appointed trustee. The primary judge found that Appinville had long ago ceased to act as trustee, and seems to have proceeded on the basis that there was no trustee, a conclusion with which I respectfully disagree.

(c) The resolution of the Family Law proceedings in 2006

25. There were long-running proceedings in the Family Court between Colleen and her former husband, Mr Michael Rayhill, in the years preceding 2006. The proceedings in that court were transferred to the Supreme Court, where separate proceedings had been brought by Louise and Paris King Investments Pty Ltd (Paris King) against Colleen, Mr Michael Rayhill and a company Syfurn Pty Ltd. Indications of the complexity of those parallel proceedings may be seen in Paris King Investments Pty Ltd v Rayhill [2006] NSWSC 578.

26. Significantly for the purposes of this appeal, the proceedings were settled in September 2006. Orders were made by Brereton J by consent on 26 September 2006 and entered on 30 November 2006 in relation to the Supreme Court proceedings to which Louise and Colleen were parties. Those orders relevantly provided that:

“1. That within 30 days from the date of these Orders the parties do all things and execute all documents necessary to transfer the [Property] (hereinafter called “the Kenthurst property”) described as Folio Identifier 1/613606 from Apinville Pty Ltd to the wife.

2. As from the date of these Orders:

(a) the parties acknowledge that the Kenthurst property will be held by the wife as trustee of a discretionary trust.

…”

27. The references to “the wife” were references to Colleen. The orders noted that the parties had entered into a Deed of Settlement, although that document was not in evidence.

28. Notwithstanding the replacement of Appinville by Colleen as trustee by the deed of 1 November 2005, and the orders requiring the transfer by Appinville of the Property to Colleen, Appinville remained on the title. Appinville subsequently purported to enter into a “General Tenancy Agreement” in respect of the Property with Colleen, for a term of “Three years, plus three, plus three” starting on 1 December 2006 at a rent of $140 per week. The purpose of that document was not disclosed in the evidence.

29. Colleen did not become registered proprietor of the Property until 17 December 2009. Mr Fraser’s evidence was that:

“Despite the fact I had signed the [1 November 2005 Deeds], I did not sign a Transfer on Appinville’s behalf in relation to title to the Kenthurst property until about late 2009. …

Shortly before I signed the transfer deposed to in the preceding paragraph I had a conversation with Colleen Rayhill in words in or to the following effect:

She said: ‘I want Appinville to transfer Kenthurst into my name.

I said: ‘I will only sign a transfer if you pay me the money I am owed.

She said: ‘You’ll get your money’.”

30. The December 2009 memorandum of transfer recorded a consideration of $1 and provided that Appinville transferred to Colleen an estate in fee simple in the Property. The memorandum was undated, but was stamped on 17 November 2009. By letter dated 29 September 2009, the Office of State Revenue gave advice about the stamp duty treatment of the transfer. The letter recorded:

“You have stated that the above property is currently held by Appinville Pty Ltd as trustee for a discretionary trust. If it is the case that by this transfer you are changing the trustee of this same trust then you will need to lodge all the required evidence under Section 54(3) of the Duties Act 1997.

This evidence would be:

-   a copy of the stamped trust deed

-   a copy of the change of trustee

-   evidence that the property was bought as an asset of the trust such as a copy of the purchase contract

-   the relevant non revocable clause in the trust that the trustee can never be a beneficiary

-   any variations of the trust deed

-   the list of current beneficiaries and potential beneficiaries to show that Colleen Anne Rayhill is neither

-   $50 duty

Otherwise if this a different trust being created it will be liable to ad valorem duty with a valuation by a registered valuer required.”

31. None of the correspondence before or after that letter was in evidence.

(d) Further loans made to Colleen in 2009 and 2010

32. In October 2009, Colleen entered into a “Trust Agreement” with Jason Lewis and Kris Lewis. The agreement stated (inaccurately, in light of the evidence referred to above) that Colleen had been “appointed trustee by the honorable Justice Brereton in the Supreme Court September 2005”, and authorised Colleen to:

“seek borrowings ie finance from financial institutions in order to pay existing debts related to the trust, such as land tax. The trustee therefore should make all endeavors in order to obtain finance and is here by given authority to maintain and finance the property and any other assets of the trust on an on going bases and expenses relating to the trust and expenses relating to the beneficiaries career and living expenses [sic].”

33. The document was signed by Colleen as trustee, and Jason Lewis as a beneficiary; Kris Lewis did not sign it.

34. On 17 December 2009 a certificate of title issued, showing Colleen as the registered proprietor. At that time, there were no other dealings registered. There was no evidence explaining the seeming delay of four years following the orders made by Brereton J requiring Colleen to be registered as the proprietor, nor how the indebtedness which had been secured by mortgage over the Property had apparently been discharged.

35. Two days later, Colleen executed a suite of documents relating to a “short term private lending loan for business purposes from Mr Daniel Kalisher”, to be secured by a mortgage over the Property. The amount lent was $58,000, with an establishment fee of $7,680. The interest payable was $10,000 if the loan was repaid within one month, with provision for the term of the loan to be extended, at an interest rate of 48% per annum. The purpose of the loan was seemingly to make payments to The Next Step Entertainment Pty Ltd of $18,000, and to Mr Kris Lewis of $40,000. Otherwise, there was no explanation in the evidence for the loan, and there was no reference in the documents to Colleen holding the Property as a trustee.

36. By letter of offer dated 5 March 2010, ANZ offered to lend $750,000 to Colleen (ANZ loan), to be secured by a registered mortgage on the Property. That loan was drawn down and used to pay $85,138.55 to the Office of State Revenue, $78,000 to Daniel Kalischer, $10,000 to Gordon Fraser & Associates, $22,495 to Hunter Holden, and, putting to one side small disbursements, $522,501 to Colleen herself.

(e) The purported appointment of Robana

37. By deed dated 29 June 2011 between Louise, Colleen and Robana, Louise purported to remove Colleen as trustee and appoint Robana in her place. On the same date, a memorandum of transfer was executed. It was stamped on 8 July 2011 and stated that Colleen had transferred an estate in fee simple to Robana for consideration of $1. Colleen's signature was witnessed by Mr Neville Ayrouth. Mr Ayrouth swore an affidavit in the caveat proceedings referred to below in which he said that Robana was appointed the new trustee, and that “Colleen Lewis is not a beneficiary of such Trust”. This was correct only if her disclaimer, by deed dated 26 August 2005 to which I have referred above, was effective.

38. The memorandum of transfer was lodged, but was unaccompanied by the certificate of title (which it may be inferred was held by ANZ) or a consent from the mortgagee.

Colleen’s bankruptcy, the caveat proceedings and the order made by Nicholas J

39. The evidence does not disclose precisely when, but Colleen defaulted on the ANZ loan. She was made bankrupt on 14 May 2012 on the application of her former solicitor, Mr Russo, and Mr Condon was appointed her trustee in bankruptcy. Mr Russo was sent a letter dated 24 April 2012 signed by Mr Ayrouth which referred to the latter’s affidavit in the caveat proceedings and said:

“The affidavit was drafted by Colleen Lewis and her legal team however it was executed by myself without reading the content that it contained. … I am in the process of resigning from the company Robana Investment Pty Ltd.”

40. ANZ obtained an order for possession, which was the immediate cause of the proceedings at first instance being heard and determined with a very high level of expedition. However, ANZ was not a party to the present proceedings; it was common ground that the value of the Property considerably exceeded Colleen’s indebtedness, and that ANZ was entitled to exercise its power of sale.

41. Shortly after the sequestration order was made against Colleen's estate, Mr Condon lodged a caveat. Robana lodged a lapsing notice on 13 June 2012, on the basis that by reason of the 29 June 2011 deed, it was entitled to the legal title to the Property. On 20 July 2012 Mr Condon lodged a transmission application pursuant to s 90 of the Real Property Act 1900 (NSW). Mr Condon also commenced proceedings against Robana on 26 July 2012, seeking an extension of his caveat and a declaration that he was “entitled to be noted on the register in respect to [the Property] as the registered proprietor in lieu of Colleen Lewis”. In support of that application, Mr Condon asserted that Robana had no basis to claim any entitlement to be registered as the proprietor of the Property.

42. By Notice of Motion dated 4 October 2012, Robana sought an injunction preventing the registration of the transmission application. In support of that motion, Robana’s solicitor, Mr Dennis, swore that “the issues in this case relate to whether or not Colleen is a Trustee of the Property for the Kenthust Trust and whether Robana has been appointed as the new trustee for the Property”. Colleen served an affidavit in the same proceedings annexing the documents summarised above dealing with the history of the Kenthurst Investments Trust.

43. It seems that orders in accordance with Robana’s motion were never made. Mr Condon became registered as the proprietor of the Property. The lapsing notice and the caveat thereafter became moot. The proceedings against Robana came before Nicholas J on 26 October 2012, when there was no appearance for Robana. Counsel then appearing for Mr Condon sought declaratory relief, and a costs order. In the course of doing so he said:

“It is conceded, of course, that the trustee can’t get any better title than that which the registered proprietor has, but that doesn’t prevent his registration on title.”

44. His Honour made a declaration, in accordance with prayer 2 of the Summons, that Mr Condon was “entitled to be noted on the register in respect of folio identifier 1/613606 as the registered proprietor in lieu of Colleen Lewis”.

The proceedings before the primary judge

45. The following month Louise commenced proceedings, initially by summons dated 19 November 2012 with Mr Condon as the sole defendant. The summons was superseded by statement of claim dated 7 December 2012, which added Robana as the second defendant. The primary judge noted that Robana filed a submitting appearance. Louise sought three substantive orders:

1. A declaration that the First Defendant [Mr Condon] holds the Property in trust for the Plaintiff and other beneficiaries in accordance with the Discretionary Trust Deed dated 27 August 2001.

2. A declaration that the Trust is the owner of the Property [sic].

3. That the First Defendant forthwith transfer the Property to Robana as trustee of the Trust.

46. In his defence, Mr Condon said that the trust deed was a sham made with the intention of concealing the fact that Colleen was the sole beneficial owner of the Property, that Appinville entered into the contract for sale of land as agent and as trustee for Colleen, that Colleen provided the whole of the purchase price, that the purported lease was further evidence of the sham, that the transfer from Appinville to Colleen simply gave effect to the resulting trust, that the 2012 orders precluded Colleen's claim, that indefeasibility under s 42 of the Real Property Act 1900 (NSW) caused him to hold the Property absolutely free of any unrecorded interests, and that Louise was not a person interested in the Property within the meaning of s 92(1) of the Trustee Act 1925 (NSW) and had no standing or entitlement to commence or maintain the proceedings.

47. By her reply, Louise said that the orders made by Brereton J in 2006 bound Mr Condon and precluded him from making any claim on behalf of Colleen's estate as to the beneficial interest in the Property.

48. The primary judge made a finding of fact that the funds used to purchase the Property in 2001, other than those lent by Challenger Managed Investments Ltd, were contributed by Paris King. That finding was challenged on appeal by Mr Condon. The evidence supporting it was a statement of “source of funds” prepared by Mr Fraser in 2004. Objection was taken at trial to the hearsay nature of this evidence, but it was admitted, and Mr Fraser in cross-examination gave evidence that he had been the accountant of Paris King Investment. It will be abundantly clear from the foregoing that the trial was conducted on an incomplete evidentiary basis.

49. In my view, it was open to the primary judge to make the finding concerning the source of the funds for the Property’s purchase which he made. Of course, to say that part of the purchase price of the Property came from Paris King (whether by way of loan, or gift, is unclear, although such evidence as there was suggested the former) does not necessarily stand in the way of Mr Condon’s primary submission, namely, the Property was purchased with funds controlled by Colleen, together with money lent to Appinville by Challenger. For the reasons which follow, this appeal may be resolved on the footing urged by Mr Condon, and consistent with the limited evidentiary material available to the primary judge, namely, that the balance of the purchase price was sourced from funds directly or indirectly controlled by Colleen.

50. The primary judge determined the proceedings which came before him expeditiously, notwithstanding the complexity which will be apparent from the foregoing. His Honour did so in two stages: [2013] NSWSC 120 (first judgment) and [2013] NSWSC 126 (second judgment).

51. His Honour made three interrelated findings in the first judgment, delivered on 13 February 2013. First, he rejected the claim that the Kenthurst Investments Trust was a sham. Secondly, he held that the declaration made by Nicholas J was inconsistent with Robana becoming the legal owner of the property. Thirdly, he concluded that Robana had not been validly appointed. Those findings caused attention to be focused on the standing of Louise, and whether the 2012 declaration operated as a res judicata or issue estoppel against her.

52. Following a further hearing on those issues, his Honour dismissed the proceedings in his second judgment, on 22 February 2013, finding that Louise had no standing to bring the proceedings, although she was not precluded by the 2012 declaration from seeking to obtain title to the Property.

53. As I have said, Louise seeks leave to appeal from the dismissal of her proceedings on the ground that she lacked standing. By motion she seeks to join Truthful Endeavour Pty Ltd to the appeal. She says that following the decisions of the primary judge, Colleen as Appointor appointed Truthful Endeavour, a company of which she is a director, as trustee of the Kenthurst Investments Trust, and she seeks an order transferring the Property to it. Her application for leave to appeal was expedited, and was heard concurrently with the appeal. Mr Condon challenged, by way of notice of contention, the primary judge’s rejection of his claims of sham and res judicata. He also filed a summons seeking leave to appeal, although the only order made against him of which he complained was a partial costs order in his favour.

Was the Kenthurst Investments Trust a sham?

54. The first issue to be decided is whether the Kenthurst Investments Trust is a sham, because all other issues turn upon the answer to that question. The primary judge held that the purpose of establishing the Kenthust Investments Trust was to conceal Colleen's interest in the Property in the Family Court proceedings between Colleen and her former husband and also to evade taxation (first judgment at [20]). He said (first judgment at [23]):

“Having regard to the source of funds for the purchase of the Property and Appinville's involvement in the purchase, to the deed of 26 August 2005 and to the acknowledgement from Mrs Lewis in the proceedings before Brereton J, and the need for caution in concluding that a transaction is in fact fraudulent, I am unable to conclude that the parties to the 2001 deed "did not intend it to have the apparent or any legal consequence". Even assuming Mrs Lewis' conduct was improper that is not sufficient to make the transaction a sham. As Megarry J noted in Miles v Bull a "device" may be a perfectly genuine transaction: see Miles v Bull [1969] 1 QB 258 at 265. Mrs Lewis wanted to create a trust so that the asset she wished to acquire would not be treated as her own … (authorities cited omitted).”

55. The attack on that conclusion was based upon two matters: the challenged finding that both Appinville and Paris King contributed to the purchase price, and the submission that “it pays no regard to the crucial conversation” between Colleen and Mr Fraser when the trust was purportedly established.

56. In my opinion, the reasoning and conclusion of the primary judge in this respect are correct.

57. It is well-recognised that “sham” is an ambiguous term and uncertainty surrounds its meaning and application in various legal contexts: Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) 18 FCR 449 at 453; Raftland Pty Ltd v Federal Commissioner of Taxation [2008] HCA 21; (2008) 238 CLR 516 at [35]. It is necessary to use the term precisely.

58. The essence of a sham for present purposes is as stated by the High Court in Equuscorp Pty Ltd v Glengallan Investments Pty Ltd [2004] HCA 55; (2004) 218 CLR 471 at [46]:

“[Sham] refers to steps which take the form of a legally effective transaction but which the parties intend should not have the apparent, or any, legal consequences.”

59. That is to say, it is essential that there be an intention that the true transaction is different from that which would ordinarily be attributed to the transaction on the face of the documents. As Lord Wilberforce put it, “to say that a document or transaction is a ‘sham’ means that while professing to be one thing, it is in fact something different”: WT Ramsay v Inland Revenue Commissioners [1982] AC 300 at 323.

60. Basic to the legal notion of sham is that it is a confined and exceptional aspect of the process of giving legal meaning to a document, as Professor Conaglen has pointed out (“Sham Trusts” (2008) 67 CLJ 176 at 206):

“The relevance of the sham doctrine, and the difference between it and normal processes of construction, lies in the fact that it justifies the court in ignoring (as opposed to construing) the usual primary material regarding that transaction, and focusing its attention instead on all other material factors which indicate the arrangement that the parties in fact intended.”

61. That echoes the words of Windeyer J in Scott v Commissioner of Taxation (Cth) (No 2) (1966) 40 ALJR 265 at 279:

“The difficult and debatable philosophic questions of the meaning and relationship of reality, substance and form are for the purposes of our law generally resolved by asking did the parties who entered into the ostensible transaction mean it to be in truth their transaction, or did they mean it to be, and in fact use it as, merely a disguise, a facade, a sham, a false front ... concealing their real transaction.”

62. The sham doctrine is thus one of those relatively rare doctrines in the law where legal meaning is given to a document by reference to a subjective intention. Other examples are a plea of non est factum at law and a claim for rectification in equity. All these doctrines “must necessarily be kept within narrow limits”, for all subtract from the objective theory of contractual obligation, and if unchecked would cause “serious mischief”: see Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165 at [46]-[47]. This has long been the law: see for example Jordan CJ’s reasons in Perpetual Trustee Co (Ltd) v Bligh (1940) 38 SR NSW 33 at 39-40. In all these areas, strong evidence is required in order to displace the orthodox approach to construction. Hence the “heavy onus” that must be discharged by the plaintiff in a non est factum case (Petelin v Cullen (1975) 132 CLR 355 at 360) and the need for “clear and convincing proof” in a rectification suit (Franklins Pty Ltd v Metcash Pty Ltd [2009] NSWCA 407; (2009) 76 NSWLR 603 at [451]-[460]).

63. Because a finding of sham requires a finding of an intent to deceive, considerations associated with Briginshaw v Briginshaw (1938) 60 CLR 336 require a cautious approach: Raftland Pty Ltd v Commission of Taxation at [36]. Thus there is a “strong and natural presumption against holding a provision or a document a sham”: National Westminster Bank plc v Jones [2001] 1 BCLC 98 at [59] (Neuberger J). “A court will only look behind a transaction’s ostensible validity if there is a good reason to do so, and ‘good reason’ is a high threshold, since a premium is placed on commercial certainty”: Official Assignee v Wilson [2007] NZCA 122; [2008] 3 NZLR 45 at [52] (Robertson and O’Regan JJ). Lockhart J referred to “a strong finding, and one which cannot be made if another inference is at least equally open” in Sharrment Pty Ltd v Official Trustee in Bankruptcy at 461.

64. Sham in the sense relevant to this appeal is to be distinguished from other transactions to which legal opprobrium attaches, such as transactions entered into for an improper purpose, which have long been the subject of statutory attention, such as voidable settlements or conveyances to defraud creditors. Sham is also to be distinguished from the body of law (which ultimately turns on questions of statutory construction) as to whether apparently artificial transactions attract taxation advantages: see Fletcher v Federal Commissioner of Taxation [1991] HCA 42; (1991) 173 CLR 1 at 19 and Customs v Tower MCashback LLPI v Revenue and Customs Commissioners [2011] UKSC 19; [2011] 2 AC 457, decisions referred to by G Pagone, “Sham trusts” [2012] VicJSchol 5 and which reflect what Lord Walker described in the latter appeal at [80] as the “unremitting ingenuity of tax consultants and investment bankers determined to test the limits”. The High Court criticised applying the notion of sham to transactions which were legally effective, albeit that they had no “economic effect” and which did not involve “real money” in Equuscorp Pty Ltd v Glengallan Investments Pty Ltd at [46]-[51].

65. It is also necessary to be precise as to the extent to which a transaction is said to be a sham. The whole of the transaction may be a sham, or merely a part of it; see for example the clause found by the House of Lords to be a sham in the otherwise valid lease in AG Securities v Vaughan [1990] 1 AC 417. There may be a validly created trust, but a later settlement of property upon the terms of that trust may nonetheless be a sham: Official Assignee v Wilson at [57].

66. Moreover, there is no reason in principle why there may not be an intention genuinely held and documented to create a trust, but on quite different terms from that documented. In such a case, there is a valid intention to create a trust, whose terms are not as documented but instead accord with the subjective, shamming intention. Indeed, this is precisely the case advanced by Mr Condon. For there is no question but that Appinville held the Property as trustee: that was plain on the face of the contract for sale, and accorded with the evidence of subjective intention adduced by Mr Condon. The question is whether Appinville held the Property on a bare trust or a resulting trust for Colleen, or a discretionary trust in accordance with the Deed.

67. Counsel for Mr Condon put the case in two related ways: either the real intent was for Appinville to be a nominee or bare trustee, or else, because the whole of the purchase price save for loan money came from Colleen, Appinville held on resulting trust for her. In order to address the difficulty that Appinville borrowed in its own name, and accordingly is to be taken to have itself paid the majority of the purchase price (Calverley v Green [1984] HCA 81; (1984) 155 CLR 242 at 257-258), Mr Grieve pointed to the evidence that in effect Appinville was Colleen's agent, and that Appinville never itself repaid a dollar of the amount lent to it. The most favourable outcome from the perspective of her trustee in bankruptcy and her unsecured creditors was that Colleen had the whole beneficial interest in the Property.

68. Critical to this appeal is the proposition that a transaction will not be a sham merely because it was entered into with an improper motive. That is confirmed by two authorities relied on by the primary judge, Chase Manhattan Equities Ltd v Goodman [1991] BCLC 897 at 921 (“mere impropriety of motive is no ground for treating a transaction as a sham”) and Miles v Bull [1969] 1 QB 258 at 264 (“[i]f what is done is genuinely done, it does not remain undone merely because there was an ulterior purpose in doing it”). It is also affirmed by G Thomas and A Hudson, The Law of Trusts (2nd ed 2010), para 2.33, Lewin on Trusts (18th ed 2008), para 4.21 and Waters’ Law of Trusts in Canada (4th ed 2012) at 157-159. The same principle was stated by Lockhart J in Sharrment Pty Ltd v Official Trustee in Bankruptcy at 455, by the Court of Criminal Appeal (Beazley JA, Grove and Ireland JJ) in Barendse v Comptroller-General of Customs (1996) 136 FLR 243 at 257-258, and applied by Ward J (as her Honour then was) in In the matter of Idylic Solutions Pty Ltd; Australian Securities and Investments Commission v Hobbs [2012] NSWSC 1276 at [2044]-[2046].

69. The proposition that not every transaction entered into for a legally improper motive is a sham must also be correct in principle. There is a clear distinction between a settlement of property in favour of (say) a spouse intended to operate in its terms, but made with the intent of defrauding creditors, and a sham declaration of trust in favour of a spouse never intended to give rise to the ordinary incidents of a trust. Both are entered into for an improper purpose, but the legal meaning of the former accords with the language of the declaration (although it is apt to be set aside pursuant to statute), while the legal meaning of the latter is that there is no trust at all. The limited notion of what constitutes a sham does not swallow up the large class of other transactions entered into for a purpose regarded as improper by the law.

70. In short, every case of shamming intent involves a finding of intentional deception as to the effect of a document, but not every case of improper purpose is a sham. That is why, in my opinion, the major premise of Mr Condon’s attack upon the primary judge’s failure to find a sham is unsound.

71. The uncontroverted evidence is that Colleen wished to establish a trust so that it would appear for the purposes of a court case that she did not have legal title to the Property. She subsequently wished to become the legal owner of the Property in order to avoid land tax. It was not clear on the evidence as to whether, and if so, to what extent, there was in fact a deception of the Family Court, or the husband, or the revenue. But it is clear as a matter of law that such an intent to deceive, even if deception occurs in fact, does not suffice to conclude that the Kenthurst Investments Trust was a sham.

72. Mr Grieve's submissions on behalf of Mr Condon had particular force in three respects.

1. The first was in relation to the steps taken by Colleen in late 2009 and early 2010, when so far as the evidence disclosed, Colleen raised funds against the security of the Property for purposes that may readily be inferred to be personal to her.

2. The second was that Louise adduced no evidence from Colleen, nor any evidence that she was unable to do so, to contradict the squarely pleaded allegations of sham made by Mr Condon. Lord Sumption recently relied on the failure of a husband to give evidence to refute the wife's allegations that corporate defendants held property on trust for him to conclude that the allegation was established: Prest v Petrodel Resources Ltd [2013] UKSC 34 at [47]-[52], although that was a stronger case where there had been deliberate non-compliance with court orders, which may support an admission that the evidence would have been adverse, rather than merely that it would not have assisted: see Kuhl v Zurich Financial Services Australia Ltd [2011] HCA 11; (2011) 243 CLR 361 at [63]-[64] (Heydon, Crennan and Bell JJ).

3. The third was that the impression obtained from the whole of the conduct over a ten year period to the extent disclosed by the evidence is that Colleen executed documents from time to time to achieve immediate objectives, and disregarded them when it suited her. In the absence of any other explanation, how else to reconcile the formal renunciation of any interest in the trust in 2005 with the subsequent borrowing against the Property seemingly in part for her personal benefit?

73. In my view, however, the primary judge was correct to reject Mr Condon's claim that there was a shamming intent in 2001. What happened after 27 August 2001 is presently relevant only to support an inference as to the parties' intentions on 27 August 2001. I do not consider it at all safe to rely upon what occurred many years later in order to impute an intention on 27 August 2001. Accepting as I do for the purposes of this appeal that the whole of the purchase price came, directly or indirectly, from funds controlled by Colleen, and that her purpose was as deposed to by Mr Fraser, I proceed on the basis that Colleen and Mr Fraser intended to deceive Mr Rayhill and the Family Court. But in order for there to be a sham, it was necessary that there be an intention that the discretionary trust deed created by Mr Fraser not bear its apparent legal consequence. In my opinion, the conversation and state of mind to which Mr Fraser deposed were entirely consistent with the discretionary trust which made Colleen the Appointor and “first corpus beneficiary” operating according to its terms.

74. To test that proposition, let it be assumed that Colleen's “complicated court case” in fact had concluded by Christmas 2001, as she (optimistically) hoped at the time. Colleen could then have asked Mr Fraser to cause Appinville to accelerate the distribution date and to distribute the Property to her. If (as Mr Condon contended) the whole of the purchase price and outgoings and mortgage repayments had been met by her, it would be open to him with no breach of trust, to form the view that that was an appropriate exercise of Appinville's power as trustee. If he proved unwilling to do so, Colleen was free to replace Appinville as trustee. It is perfectly regular for a settlor or a third party to contribute to the purchase price of property which is to be held on trust; to the extent that Colleen did so, that does not in my view compel a conclusion of sham.

75. To put the matter another way, the creation of a genuine discretionary trust was entirely consistent with Colleen's objectives as stated by her in the conversation with Mr Fraser. Colleen wanted to conceal her interest in the Property, presumably from her husband and the Family Court. But she also wished to be able to resume full beneficial entitlement to the Property when the need for secrecy was over. The creation of the discretionary trust enabled her to achieve both objectives. The Property was placed in the name of Appinville. Yet Colleen could effectively bring the trust to an end whenever she chose, thereby regaining the beneficial (and indeed, if she wanted, legal) title to the Property.

76. The most probative evidence, namely, the evidence of what occurred in August 2001, is in my view wholly consistent with the absence of a sham. It follows, in the words of Lockhart J, that the strong finding of sham cannot be made: cf Sharrment Pty Ltd v Official Trustee in Bankruptcy at 461.

77. That conclusion is of course wholly consistent with what occurred in 2005 and 2006, when Colleen renounced any interest in the Kenthurst Investments Trust and became bound by an order that she become the legal owner of the Property, and formally acknowledged that she held the Property as trustee for a discretionary trust. Plainly that order bound Louise and Colleen, who were parties to it. Mr Grieve ultimately accepted that the trustee in bankruptcy was likewise bound by it. He was, with respect, correct to do so. Mr Grieve noted that Brereton J’s order did not refer to the Kenthurst Investments Trust, but instead merely to “a discretionary trust”. However, all that matters for present purposes is that the terms of that order are inconsistent with Colleen holding the Property, when legal title to it was transferred to her beneficially. The primary judge was in my view correct to rely on those matters.

78. In reaching that conclusion, it has not been necessary to address the debatable question whether the requisite intention in a sham trust is that of the settlor alone, or that of the settlor and the trustee. Here the formal settlor was Mr Fraser and the trustee was his creature Appinville, and if it be necessary to look to the intention of Colleen who caused the Property to be conveyed to Appinville, her intention was, on the evidence, the same as his.

79. Finally, I note that there is ample basis for inferring that neither Colleen nor those advising her had a sophisticated understanding of trusts. The false notion that a trust is a legal person may be found in the contemporaneous documents, in the pleadings (“declarations were sought that “the Trust is the owner of the Property”), in the plaintiff's affidavits, and in the submissions advanced by her counsel. But that false premise (which, as Hill J has noted, is encouraged by some tax legislation (HP Mercantile Pty Ltd v Commissioner of Taxation [2005] FCAFC 126; (2005) 143 FCR 553 at [2])) does not support the conclusion that the trust was a sham.

Was there an “emerging sham”?

80. As noted above, it is difficult to reconcile Colleen’s disclaimer of any rights as a “potential beneficiary” of the trust in 2005 with her conduct in 2009 and 2010 in borrowing money against the security of the Property seemingly for her personal expenses (for example, $10,000 to Gordon Fraser & Associates and $22,495 to Hunter Holden). However, there are two reasons why in my opinion it is not open to conclude that a trust validly created in 2001 had become a sham prior to Colleen’s bankruptcy, with the result that Colleen, and subsequently Mr Condon, owned the Property in equity, a notion which has been called by some an “emerging sham”. The first reason is that no such case was pleaded or advanced at the trial. The second is that there can be no “emerging sham trust” when, as here, the class of beneficiaries is not closed. In the case of other transactions (such as a licence or a lease) an originally effective transaction may, by subsequent agreement of the parties, be permitted to allow its “shadow to mask their new arrangement”: Marac Finance Ltd v Virtue [1981] 1 NZLR 586 at 588. This was described in Hitch v Stone [2001] STC 214 at [68]:

“[T]he fact that parties subsequently depart from an agreement does not necessarily mean that they never intended the agreement to be effective and binding. The proper conclusion to draw may be that they agreed to vary their agreement and that they have become bound by the agreement as varied.”

81. But there is no equivalent notion in the law of trusts, save to the extent that the rule in Saunders v Vautier (1841) Cr & Ph 240; 49 ER 282 is available. A trust once validly constituted does not change in nature because the trustee and some of the beneficiaries subsequently chooses no longer to abide by the obligations of the trust relationship. Such conduct may amount to a breach of trust, and may lead to the removal of the trustee, but does not destroy the proprietary and personal rights and obligations which came into existence when the trust was created. That conclusion accords with what Rimer J said in Shalson v Russo [2003] EWHC 1637 (Ch); [2005] Ch 281 at [216]:

“If the money never became trust money, then it was not settled property. If it did, and Mr Russo simply misappropriated it by using his de facto control of WIB, then what he was doing was misappropriating trust assets.”

82. It also accords with what was said in Official Assignee v Wilson at [57], as had been anticipated by J Palmer, “Dealing with the Emerging Popularity of Sham Trusts” [2007] NZ Law Rev 81 at 106, and in A v A [2007] EWHC 99 (Fam); [2007] 2 FLR 467 at [42]-[44].

The effect of the transactions in 2005, 2006 and 2009

83. Colleen was purportedly appointed trustee in 2005, she was ordered to become the legal owner of the Property in 2006, and she became its legal owner in 2009. The primary judge acceded to the parties' agreement that the purported transmission of the power of appointment from Colleen to Louise was invalid, and concluded that therefore its purported exercise by Louise to appoint Colleen as trustee was invalid (first judgment at [35]). Hence his Honour's tentative conclusion that the trust lacked a trustee (second judgment at [6]). The existence and identity of a trustee is directly relevant to the question of standing.

84. I respectfully disagree with the legal conclusion that there was no trustee. A private trust is a relationship between the owner of property and its beneficiaries, which has both personal and proprietary elements. The only significant property held subject to the Kenthurst Investments Trust was the Property. Irrespective of the efficacy of the 1 November 2005 deeds, the transmission of the legal title to the Property from Appinville to Colleen in 2009 could not of itself impair the existence of the trust, for Colleen was the opposite of a bona fide purchaser for value without notice. While she became the registered proprietor, she did so with full knowledge of the terms of the trust. Colleen's legal title was subject to the terms of the trust: Hillpalm Pty Ltd v Heaven’s Door Pty Ltd [2004] HCA 59; (2004) 220 CLR 472 at [54], per McHugh ACJ, Hayne and Heydon JJ; Bahr v Nicolay (No 2) [1988] HCA 16; (1988) 164 CLR 604, at 637-638, per Wilson and Toohey JJ; Mercantile Mutual Life Insurance Co Ltd v Gosper (1991) 25 NSWLR 32, at 36-37, per Kirby P; at 42, per Mahoney JA. (The statements of principle in Gosper are not affected by doubts expressed as to the actual decision in that case: Paradise Constructors & Co Pty Ltd v Poyser [2007] VSCA 316; (2007) 20 VR 294, at [39]-[40], per Neave JA (with whom Redlich JA agreed)). Her substitution for Appinville, and Appinville's subsequent non-involvement in relation to the Property merely had the effect of altering the identity of one of the parties (the trustee) to the trust relationship.

85. In my view, the primary judge was correct to be reluctant to accede to the submission that Appinville remained the trustee (second judgment at [6]). Appinville had no title to any trust property, and more importantly had no entitlement to become the owner of any trust property. A new trustee holds office from the time of appointment, not from the time title to trust property is transferred, which may be immediately in the cases of choses in action, or upon registration of a transfer or other entry in the register in the case of land: see Trustee Act 1925 (NSW), ss 9(1) and (3), and Lemery Holdings Pty Ltd v Reliance Financial Services Pty Ltd [2008] NSWSC 1344; (2008) 74 NSWLR 550 at [52]-[54]. That is why a new trustee can sue to redress a breach of trust committed before his or her appointment without the aid of a vesting order: Young v Murphy [1996] 1 VR 279 at 281. But Appinville had executed a deed stating that it retired as trustee, had transferred the property to Colleen, and had ceased to play any role in the affairs of the trust. It unquestionably had power to do those things, and they were effective to cause it no longer to be the trustee.

86. However, in my view the primary judge erred (first judgment at [35]-[36]) in acceding to the parties’ joint submission that there was, in 2012, no trustee because of the invalidity of the 1 November 2005 deeds. Colleen was the trustee at least from 2009 when she became registered proprietor of the Property until 2012 when Mr Condon was registered. Having found that the trust was not a sham, Colleen could not hold the Property beneficially. Her legal title was subject to the terms of the trust.

87. It is neither necessary nor appropriate to express a concluded view on the point, but it is at least open to doubt two elements of the reasoning attaching to the 1 November 2005 deeds (being a matter as to which the primary judge did not have the benefit of argument). The only reason put forward for the inability of Louise to replace Colleen as Appointor was the terms of clause 3:

“The Appointor of the Trustee is Colleen Lewis and if she is incapable of acting, then Mellissa Rayhill is the Appointor of the Trustee. The Trustees shall be the first trustees of the Trust until replaced by the Appointor.”

88. But clause 15 conferred a power on the trustee, with the consent of the Appointor:

“[B]y Deed to alter revoke or add to any of the provisions in this Trust Deed and make new provisions to the exclusion of or in addition to any of the provisions at the time being in force and any such Trust Deed shall be subject in like manner to be altered revoked or added to by a subsequent Deed.”

89. That power was subject to provisos, none of which is relevant. It is, in my opinion, plain that one valid exercise of the power of amendment would have been “Replace the reference to Colleen in clause 3 by Louise”. The power resembles that contained in the trust deed considered by this Court in Kearns v Hill (1990) 21 NSWLR 107, where Mahoney JA saw no reason to place any limitation upon its generality, and Meagher JA, with whom the other members of the Court agreed, said that the evident purpose of the power to vary “any” provision was to ensure maximum flexibility. The same reasoning is apt to apply here. In my view, it is difficult to see why the “Deed of Appointment and Retirement of Appointor”, to which the trustee and the Appointor were party, was any different in substance from the textual amendment hypothesised above, or how there could be any want of power to effectuate that variation.

90. Secondly, and irrespective of the legal effect of that deed, the same three parties executed a deed also dated 1 November 2005, the effect of which was for Appinville to be replaced by Colleen as trustee. At that time, either Colleen or Louise was the Appointor of the Kenthurst Investments Trust. Both Colleen and Louise were party to the Deed, and both plainly intended by executing the deed for Colleen to succeed Appinville. In my view, there is no reason why those parties, between them, lacked power to replace Appinville, which wished to retire as trustee, with Colleen. However, the operation of that deed was expressly subject to its being registered (cl 2). There was no evidence as to whether this had occurred; if not, then Colleen did not have the right to call for the transfer of the Property: Trustee Act, s 9(7) and see Synergy Concepts Pty Ltd v Rylegrove Pty Ltd (in liq) (1997) 8 BPR 15,555 at 15,557 and Hillcrest (Ilford) Pty Ltd v Kingsford (Ilford) Pty Ltd (No 2) [2010] NSWSC 285 at [48]-[53].

The effect of the sequestration order

91. Upon the making of the sequestration order on 14 May 2012, s 58 of the Bankruptcy Act 1966 (Cth) applied. That had the effect that such interest as Colleen had in the Property vested forthwith in equity in Mr Condon. Legal title did not vest forthwith in Mr Condon. (Section 90 of the Real Property Act 1900 (NSW) establishes a procedure whereby a trustee in bankruptcy can obtain registration as proprietor of land pursuant to the vesting effected by s 58(2) of the Bankruptcy Act). Mr Condon ultimately took advantage of that procedure to become registered proprietor of the Property and thereby acquire legal title.

92. But it is clear law that those statutory vestings do not destroy any trust of which the bankrupt was a trustee. Section 116(2)(a) of the Bankruptcy Act excludes from the vesting property held by the bankrupt in trust for another person, and s 82 of the Real Property Act excludes notice of trusts on the register. It follows that neither the vesting effected by s 58(1) nor the title created by registration of a transfer of an “estate in fee simple” to Mr Condon on which he relied destroyed any trusts in respect of the Property.

93. Also upon the making of the sequestration order, Colleen became a person disqualified from managing corporations by Corporations Act 2001 (Cth), s 206B(3), and immediately ceased to be a director by reason of s 206A(2). As it happened, Colleen was the sole director of Truthful Endeavour. However, despite a submission made on behalf of Mr Condon to the contrary, Colleen’s bankruptcy did not prevent the sole member of Truthful Endeavour from appointing Louise as a director. A company may act either by its board, or by a resolution of its members, and where as here a company has a single member, a resolution may be passed by the member recording it and signing the record: s 249B; see Sheahan v Londish [2010] NSWCA 270; 80 ACSR 337.

94. I favour the view that Louise was the Appointor of the Kenthurst Investments Trust by the time the sequestration order was made. However, if Colleen were the Appointor, there is no reason to think that the power now vests in Mr Condon. The power to remove and replace a trustee is precisely that: a power, not property. The starting point is what Fry LJ said in Ex parte Gilchrist; Re Armstrong (1886) LR 17 QBD 521 at 530-531:

“The question is, whether the general power of appointment given to the bankrupt is her ‘separate property’ within the meaning of sub-s. 5 of s. 1 of the Act of 1882. To my mind the question is one of the most elementary description, and, if it had not been argued as it has, I should have thought it unarguable. No two ideas can well be more distinct the one from the other than those of ‘property’ and ‘power’. ... A ‘power’ is an individual personal capacity of the donee of the power to do something. That it may result in property becoming vested in him is immaterial; the general nature of the power does not make it property. ... Not only in law but in equity the distinction between ‘power’ and ‘property’ is perfectly familiar.”

95. True it is that that principle is merely the starting point in any particular statutory context: see Fonu v Merrill Lynch Bank and Trust Company (Cayman) Ltd [2011] UKPC 17; [2012] 1 WLR 1721. However, the Australian bankruptcy legislation preserves the distinction, and in Re Burton; Wily v Burton (1994) 126 ALR 557 Davies J held that a power to remove a trustee and appoint a replacement was not property falling within s 116 of the Bankruptcy Act.

96. It may be as a matter of construction that, if Colleen continued to be the Appointor, once the sequestration order was made she became “incapable of acting” within the meaning of cl 3; it is commonplace for clauses of this nature to make express provision for the bankruptcy of the Appointor (cf Sapphire (SA) Pty Ltd v Ewens Glen Pty Ltd [2011] FCA 600 at [9] and Austec Wagga Wagga Pty Ltd v Rarebreed Wagga Pty Ltd [2012] NSWSC 343 at [106]). But this issue is doubly removed from those arising on the appeal and I do not express a view on it one way or the other.

Effect of the order made by Nicholas J

97. Mr Condon submitted that the order made by Nicholas J on 26 October 2012, although made in the absence of Robana, was a final order which created a res judicata defence to Louise’s claim.

98. Mr Condon faced a dilemma in advancing that submission. On the one hand, if Robana was the trustee of the Kenthurst Investments Trust, then a judgment against it would bind the beneficiaries to that trust. As Brooking J said in Young v Murphy [1996] 1 VR 279 at 286:

“[T]he trustee’s judgment swallows up the beneficiary’s claim. If … the trustee’s action is unsuccessful, then the adjudication will by the same token, in the absence of fraud or collusion, bind the beneficiaries. This must be so on principle, since the trustee and beneficiary are privies, and authority is not wanting.”

99. However, Mr Condon positively advanced to Nicholas J, and Louise accepted, a submission that Robana was not validly appointed as trustee. If so, then Louise could not be bound by a res judicata. No broader argument based on Anshun estoppel was pleaded or advanced before the primary judge or on appeal; cf Rippon v Chilcotin Pty Ltd [2001] NSWCA 142; (2001) 53 NSWLR 198 and Simmons v Henwood [2013] NSWCA 184 at [75]-[84].

100. It is not necessary to resolve this dilemma. The issue before Nicholas J was whether Mr Condon had a caveatable interest. Plainly, he did, from the time of the sequestration order and his appointment as trustee in bankruptcy, for by dint of s 58 of the Bankruptcy Act he was entitled to become the registered proprietor. That was so irrespective of whether or not Colleen, or for that matter Appinville or Robana, was the trustee of the Kenthurst Investments Trust. Even if a new trustee has not obtained title to trust property from a retiring trustee before a sequestration order is made against the latter, that does not prevent the trustee in bankruptcy from having a caveatable interest derived from s 58. Consistently with that position, Mr Condon’s application to obtain registration of title under s 90 of the Real Property Act 1900 (NSW) did not positively assert the absence of a trust; he merely denied that Robana had any basis to lodge a lapsing notice. Moreover, the terms of the order made by Nicholas J say nothing about any equitable interests in respect of the Property. In any event, such interests are not to be recorded on the register, as was properly pointed out by counsel then appearing for Mr Condon.

101. Accordingly, in my opinion the primary judge was correct in his second judgment to revisit what he had said (without the assistance of authorities from counsel in his earlier reasons) and to reject the defence of res judicata based on the order made by Nicholas J.

Standing

102. When the proceedings before the primary judge were heard and determined, Mr Condon was the registered proprietor of the Property. He claimed to hold it for the benefit of creditors. Louise had joined Robana and had claimed that it was the trustee and entitled to have title to the Property transferred to it, although she did not adduce evidence that Robana was unwilling to sue. By the time of the second hearing, Louise accepted that Robana was invalidly appointed and contended that there was no trustee (a position which would avoid her being bound by the decision of Nicholas J and strengthen her claim to standing).

103. The primary judge accepted that there was a trust, in respect of which Colleen had disclaimed any interest: second judgment at [8]. It was common ground that any discretionary object of the trust had standing to bring proceedings against the trustee for maladministration. Mr Finch, appearing for Louise, submitted that in principle, a “derivative action” could likewise be brought by a discretionary object, but his Honour rejected that submission. His Honour referred to Re Louis Contini Foundation Trust [2004] NSWSC 881, but distinguished that decision because it had been held that the plaintiffs who there were seeking the appointment of a new trustee pursuant to s 92 of the Trustee Act were all of the beneficiaries who had a presently vested interest in the trust property. His Honour noted that there were some beneficiaries who were not parties to the proceeding, and said that there was no reason why there might not be a valid appointment of a new trustee who would have standing to bring the proceedings, on the assumption (which in my opinion was correctly made) that there was no res judicata from the orders made by Nicholas J.

104. No doubt that was the reason for the purported appointment of Truthful Endeavour as trustee by Colleen on 25 February 2013, and Louise’s motion, which was heard simultaneously with the appeals, for the Property to be transferred to it.

105. The approach adopted by the primary judge of deferring the question of standing is, with respect, problematic, especially where reasons were given resolving issues prior to standing being determined. After 13 February, a finding had been made that the Kenthurst Investments Trust was not a sham, from which Mr Condon could not appeal (see Re French Caledonia Travel Service Pty Ltd v Elatri [1992] FCA 227 (Lockhart, Gummow, Foster JJ)), made at the instance of a person whom he claimed lacked standing, which claim the Court subsequently accepted; cf Robinson v Western Australian Museum (1977) 138 CLR 283 at 302-303 (Gibbs J).

106. In my view, standing is to be approached as follows. First, there was a bona fide claim that there was trust property to which Mr Condon held legal title, but of which he was said not to be the trustee. Secondly, one asks who, when the proceedings were commenced and maintained, was the trustee of the Kenthurst Investments Trust if that claim was made out. That question is not free from complexity, but the only candidates are Colleen and Robana. My tentative view set out earlier in these reasons at [87]-[90] is that the 2005 Deeds were valid, which would mean that Robana was appointed trustee and Louise was the Appointor. However, Robana chose not to participate in the hearings before the primary judge, for reasons not apparent on the evidence, although its sole shareholder was Mr Ayrouth.

107. If, in accordance with my tentative view, Robana was the trustee when the proceedings were heard and determined, then it was the proper plaintiff to recover the Property. It seemingly refused to do so. It is clear law that when a trustee is unwilling to take steps to get in trust property, a beneficiary may do so, on terms that the beneficiary join the trustee.

108. In Alexander v Perpetual Trustees WA Ltd [2004] HCA 7; (2004) 216 CLR 109 at [55]-[56], Gleeson CJ, Gummow and Hayne JJ said:

“In Ramage v Waclaw, Powell J reviewed many of the authorities, including the judgment of James LJ in Sharpe v San Paulo Railway Co, which support the proposition that, where relief is sought in the equitable jurisdiction of the Supreme Court against a third party, a beneficiary may sue in his own name, joining as defendants the trustee and any other beneficiaries, but only where there are "special circumstances". One reason for this restriction, given by James LJ in Sharpe, is the avoidance of the vexation of the third party by multiple suits. Powell J held that the "special circumstances" were not confined to collusion between the trustee and the third party, or the insolvency of the trustee. But the general principle is that stated by Scott:

"The interests of the beneficiaries of a trust are protected against a third person acting adversely to the trustee through proceedings brought against him by the trustee and not by the beneficiaries. As long as the trustee is ready and willing to take the proper proceedings against the third person, the beneficiaries cannot maintain a suit against him."

Minters referred to statements of principle by the Privy Council in Hayim v Citibank NA. Their Lordships referred to some of the authorities discussed by Powell J in Ramage, including Sharpe, and concluded that "special circumstances" included a failure by the trustees to perform their duty to the beneficiaries to protect the trust estate or the interests of the beneficiary therein. Nothing there said assists the arguments by Minters that the plaintiffs had the necessary entitlement for Pt IV of the Act (citations omitted).”

109. Other examples in this Court where in exceptional circumstances a beneficiary has been held to be able to sue a third party are Ramage v Waclaw (1988) 12 NSWLR 84 at 90-91 and Lamru Pty Ltd v Kation Pty Ltd (1998) 44 NSWLR 432 at 436-438. The law in England is similar: Roberts v Gill & Co [2010] UKSC 22; [2011] 1 AC 240, mentioned by J Edelman, “Two Fundamental Questions for the Law of Trusts” (2013) 129 LQR 66 at 74-75.

110. It is not necessary, in order to resolve this appeal, to address the complex questions underlying equitable “ownership” of property, to which Justice Edelman has referred in his article, and of which a beneficiary’s right in special circumstances to sue a third party is an element. In contrast with the position in Alexander, Robana was not ready and willing to advance a claim against Mr Condon, the legal owner of property held on trust, but who denied the existence of the trust asserted against him. In accordance with the statements of principle extracted above (to which it seems the primary judge was not referred) and the maxim that equity will not let a trust fail for want of a trustee, there were special circumstances such that Louise had standing to sue. Louise was not the only person with a presently vested interest in the trust property (cf Re Louis Contini Foundation Trust [2004] NSWSC 881). Nonetheless, as a “second corpus beneficiary”, in circumstances where the “first corpus beneficiary” had disclaimed all interest in the trust property, she was the person best placed to advance the claim if Robana was unwilling or unable to do so.

111. Even if the appointment of Robana as trustee was invalid, in my opinion Louise still had standing. In that situation, Colleen continued as trustee, but she had been made bankrupt. Her trustee in bankruptcy, Mr Condon, denied that he held the Property on the Kenthurst Investments Trust, and Colleen was poorly placed to advance the claim against Mr Condon: her statement to her trustee disclosed assets of $4050 and debts of $1,335,545. Insolvency of the trustee has long been regarded as constituting exceptional circumstances: see Ramage at 90 and 91.

112. It follows that in my opinion the proceedings should not have been dismissed for want of standing. Further, the claim that there was no sham, but a discretionary trust with beneficiaries other than Colleen of whom Louise was one, is to be upheld. Mr Condon is not entitled to administer Colleen’s bankrupt estate on any other basis.

Costs

113. The primary judge apportioned the costs orders by reference to the issues debated before him at the two hearings. Both parties challenged the orders as to costs. For the foregoing reasons, the costs discretion falls to be re-exercised, and having regard to her success on appeal, should be re-exercised in favour of Louise. Mr Condon should pay the costs of the appellant at first instance and on the application for leave to appeal and of the appeal.

Orders and what this appeal does not decide

114. I am conscious that the rejection of Mr Condon’s submission that he holds the Property for the benefit of creditors because the Kenthurst Investments Trust was a sham does not resolve all of the issues between the parties. It will have been noted that I have not determined whether Louise is now the Appointor (although I favour the view that she is); it would be wrong to have done so given the scope of the appeal. The fact that Colleen, Louise and Melissa seem to have acted in concert in relation to Truthful Endeavour suggests that it may be possible to for the question of the identity of the Appointor and trustee to be resolved consensually. In the circumstances, the appropriate order in the unusual circumstances of this appeal is declaratory relief that the Property is an asset of the Kenthurst Investments Trust, and to remit the proceedings (including the notice of motion concerning Truthful Endeavour) to the primary judge to consider what further relief (if any) is appropriate.

115. On the other hand, I have also made no determination as to whether there have been breaches of trust by Colleen, nor whether there was an entitlement by Colleen, as trustee, to be indemnified from the Property for expenses, if any, incurred by her as trustee (for example, although some of the ANZ Loan monies may have been used for private purposes, others may have been proper trust expenses). To that extent, Mr Condon may have an entitlement to the proceeds of sale of the Property which takes priority over that of the beneficiaries: see Lemery at [20] and the decisions there cited. Nothing in these reasons should be taken as determining those questions one way or the other.

116. I propose these orders. In the first appeal:

1. Grant leave to appeal.

2. Appeal allowed.

3. Set aside the orders made on 22 February 2013, and in lieu thereof, declare that the Property is an asset of the Kenthurst Investments Trust.

4. Order that the respondent pay the appellant’s costs at first instance and on appeal.

5. Dismiss the notice of contention.

6. Remit the proceedings, including the motion dated 7 June 2013, to the primary judge to consider what further relief (if any) is appropriate.

117. Mr Condon’s application for leave to appeal was incompetent except insofar as it concerned costs, for appeals only lie from orders which are adverse to the appellant: Commonwealth v Bank of New South Wales [1950] AC 235 at 294; Pittwater Council v Moore Development Group Pty Ltd [2004] NSWCA 278 at [3]. For the reasons above, it is not appropriate to grant leave in respect of the costs order. I would dismiss Mr Condon’s summons seeking leave to appeal, and order that Mr Condon pay the costs of the summons.

118. SACKVILLE AJA: I agree with the orders proposed by Leeming JA and with his Honour's judgment.

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Amendments

08 November 2013 - "Lord Sumption" changed to "Lord Sumption JSC"
Amended paragraphs: 72

09 February 2015 - In [115] "Conlon" replaced by "Condon".

Decision last updated: 09 February 2015