Page 1

Page 2 1 of 10 DOCUMENTS: CaseBase Cases

XvA
[2000] 1 All ER 490; [2000] 1 EGLR 19 Court: EWHCCh Judges: Arden J Judgment Date: 30/7/1999

Catchwords & Digest

Trusts -- Trustees -- Liability for future claims -- Application for direction in respect of potential liabilities Where life tenant died, entitling defendant widow and children to residuary estate. Where trustee concerned about potential liability for remediation costs of contaminated land under liability scheme to be introduced when Pt IIA Environmental Protection Act 1990 (UK) came into force. Whether trustee has lien over trust fund for such potential liabilities. Whether trustee should be at liberty to invest and vary investments in accordance with terms of testator's will in relation to investments retained pursuant to lien. Whether trustee can charge for such actions in accordance with terms of will. Whether trustee can exercise powers of trustee of trust of land. Whether trustee should notify beneficiaries of exercise of its powers and give opportunity to comment. Held: Lien exists. Cases referring to this case Annotations: All CasesSort by: Judgment Date (Latest First) Annotation Case Name Citations Vertical Australia Pty Ltd v Air [2012] NSWSC 719; Cited Company Vertical-T LLC BC201204818 [2012] NSWSC 523; Cited Davis v Davis (No 2) BC201203269 Rosenberg v Fifteenth Eestin [2010] VSC 38; Cited Nominees Pty Ltd (No 2) BC201001008 (2008) 74 NSWLR 550; Lemery Holdings Pty Ltd v (2008) 1 ASTLR 225; Considered Reliance Financial Services Pty [2008] NSWSC 1344; Ltd BC200811095 Agusta Pty Ltd as trustees for Cavallino Unit Trust v Official [2008] NSWSC 685; Considered Trustee in Bankruptcy as trustee BC200805311 of bankrupt Estates of Ferella Journal articles referring to this case Article Name Trustees of Contaminated Land

Court NSW SC NSW SC VSC NSW SC NSW SC

Date 27/6/20 12 18/5/20 12 24/2/20 10 11/11/2 008 8/7/200 8

Signal

Citations (2000) 74(5) ALJ 285

Signal

Page 3 Cases considered by this case Annotations: All Cases Sort by: Judgment Date (Latest First) Annotation Case Name Citations [1948] Ch 206; [1948] Considered Brockbank, Re; Ward v Bates 1 All ER 287 Whiteley, In re; Whiteley v Considered (1886) 33 Ch D 347 Learoyd Distinguishe Pauling's Settlement Trusts [1963] 1 All ER 857; d (No2), In re [1963] 2 WLR 838 Legislation considered by this case Legislation Name & Jurisdiction Environmental Protection Act 1990 (UK)

Court EWHCC h EWCAC iv -

Date 27/1/1948 29/7/1886

Signal

Provisions Pt IIA

Page 4

Page 5 2 of 10 DOCUMENTS: CaseBase Cases

Balkin v Peck
(1998) 43 NSWLR 706; (1998) 98 ATC 4842; (1998) 40 ATR 15; BC9803370 Court: NSWCA Judges: Mason P, Priestley JA and Sheppard AJA Judgment Date: 24/7/1998

Catchwords & Digest

Trusts -- Trustees -- Right of indemnity -- Right of trustees to personal indemnity from beneficiaries Whether trustees entitled to indemnity from beneficiaries in respect of capital transfer tax paid by trustees. Where tax liability arose on death of life tenant and was imposed on trustees and remaindermen (beneficiaries); trustees overlooked tax liability; trust came to end when property sold and gross proceeds distributed to beneficiaries; tax subsequently paid by trustees personally without request by beneficiaries. Held: Beneficiaries liable to indemnify trustees. Taxation and revenue -- Tax planning -- Duty of care owed by legal practitioners -- Where solicitor appointed as trustee of trust Whether trustees who were solicitors breached duty of care by failing to advise beneficiaries of benefits and disadvantages of transferring ownership of trust property located in London to offshore company. Where proposed scheme of doubtful effectiveness, may have involved trustees in breach of duty to maintain control of trust assets, risked finding by United Kingdom revenue authorities that one beneficiary domiciled in England with adverse consequences for her tax position and for financial position of other beneficiaries; highly improbable that beneficiaries would have adopted scheme. Held: No negligence. Cases referring to this case Annotations: All CasesSort by: Judgment Date (Latest First) Annotation Case Name Citations [2011] VSC 653; Considered Harpur v Levy BC201110000 [2011] NSWSC 471; Considered Grizonic v Suttor; Wade v Suttor BC201103427 [2011] NSWSC 181; Cited Parkes-Linnegar v Watson (No 2) BC201104913 Toyama Pty Ltd v Landmark [2007] NSWSC 55; Considered Building Developments Pty Ltd BC200700496 (No 2) (2006) 68 NSWLR 193; Cited Kendell v Carnegie [2006] NSWCA 302; BC200608855 Fitzwood Pty Ltd v Unique Goal [2002] FCAFC 285; Considered Pty Ltd (in liq) BC200206793

Court VSC NSW SC NSW SC NSW SC NSW CA FCA

Date 15/12/2 011 23/5/20 11 18/3/20 11 9/2/200 7 3/11/20 06 14/11/2 002

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Page 6 Applied Countryside (No 3) Pty Ltd v Best [2001] NSWSC 1152; BC200108033 NSW SC 14/12/2 001

Journal articles referring to this case Article Name Failure to Restructure Trust for Tax Advantages not Negligence Negligence: Actions against professional advisers Women and the Law in Australia 2010 (book) Cases considered by this case Annotations: All Cases Sort by: Judgment Date (Latest First) Annotation Case Name Citations Causley v Countryside (No 3) Cited BC9603947 Pty Ltd Metcalfe v NZI Securities Cited BC9600627 Australia Ltd (1995) 95 ATC 4609; Cited Bayer v Balkin (1995) 31 ATR 295; BC9505375 [1995] 2 AC 207; [1996] ANZ ConvR Cited White v Jones 132; [1995] 1 All ER 691; [1995] 2 WLR 187 (1992) 175 CLR 353; (1992) 109 ALR 57; David Securities Pty Ltd v (1992) 66 ALJR 768; Cited Commonwealth Bank of (1992) 92 ATC 4658; Australia (1992) 24 ATR 125; (1992) Aust Contract R 90-020; BC9202662 (1987) 162 CLR 221; (1987) 69 ALR 577; Pavey & Matthews Pty Ltd v Cited (1987) 61 ALJR 151; Paul [1987] HCA 5; BC8701760 JW Broomhead (Vic) Pty Ltd [1985] VR 891; (1985) Cited (in liq) v JW Broomhead Pty 9 ACLR 593; (1985) 3 Ltd ACLC 355 Paul A Davies (Australia) Pty [1983] 1 NSWLR 440; Cited Ltd (in liq) v Davies (1983) 1 ACLC 1091 (1981) 180 CLR 370; (1981) 36 ALR 545; (1981) 55 ALJR 673; Cited Mahoney v McManus (1981) 6 ACLR 437; [1981] HCA 54; BC8100107 [1980] Ch 297; [1979] Cited Ross v Caunters 3 All ER 580; [1979] 3 WLR 605 Campbell (decd), Re; Rowe v Cited [1973] 2 NSWLR 146 McMaster Cited Wren v Mahony (1972) 126 CLR 212; [1972] ALR 307;

Citations (1998) 36(8) LSJ 42 (1999) 34(4) TIA 205 ISBN: 9780409325959

Signal

Court NSWCA FCA NSWSC

Date 2/9/1996 5/3/1996 14/9/1995

Signal

UKHL

16/2/1995

HCA

7/10/1992

HCA

4/3/1987

VSC NSWCA

3/8/1985 1/6/1983

HCA

8/10/1981

NSWSC HCA

15/6/1979 6/2/1973 1/2/1972

Page 7 (1972) 46 ALJR 163; BC7200360 (1969) 121 CLR 342; [1970] ALR 441; (1969) 43 ALJR 389; BC6900470 [1967] 2 NSWR 63; (1967) 69 SR (NSW) 38; (1967) 86 WN (Pt 2) (NSW) 259 [1963] WAR 171 [1936] 3 All ER 696; [1937] 1 KB 534; (1936) 106 LJKB 437; (1936) 156 LT 4; (1937) 53 TLR 126; (1936) 42 Com Cas 99 (1924) 144 NE 903 (1923) 201 NYS 900 (1922) 197 NYS 267 (1912) 16 CLR 285; (1912) 19 ALR 240; (1912) 13 SR (NSW) 583; BC1200010 (1912) 16 CLR 1; [1912] HCA 68; BC1215259 [1911] 1 Ch 194 [1901] AC 118; (1900) 70 LJPC 9; (1900) 83 LT 573; (1900) 17 TLR 126; (1900) 49 WR 209 (1881) 6 App Cas 855 (1872) LR7Exch 101; [1861-73] All ER Rep 135; (1872) 41 LJ Ex 62; (1872) 26 LT 367; (1872) 20 WR 416 (1853) 4 De GM & G 19; (1853) 43 ER 415 [1775-1802] All ER Rep 140; (1787) 2 Bos & P 270; (1787) 1 Cox Eq Cas 318; (1787) 29

Cited

Albion Insurance Co Ltd v Government Insurance Office of New South Wales Armstrong v Commissioner of Stamp Duties Zimpel (decd), Re; Morrison v Perpetual Executors Trustees & Agency Co & Sadler Brook's Wharf & Bull Wharf Ltd v Goodman Brothers Conroy (as Executor of Kingsley) v Equitable Trust Company of New York Equitable Trust Company of New York v Kingsley Equitable Trust Company of New York v Kingsley Rankin v Palmer

HCA

31/10/1969

Cited

NSWCA

5/5/1967

Cited

WASC

20/12/1962

Cited

EWCAC iv

18/11/1936

Cited Cited Cited Cited

HCA

3/6/1924 2/11/1923 12/12/1922 12/12/1912

Cited Cited/ Followed Cited/ Applied Cited

Ramsay v Lowther Matthews v Ruggles-Brise Hardoon v Belilios Fraser or Robinson v Murdoch Moule v Garrett Chippendale, Ex parte; Re German Mining Co Deering v Earl of Winchelsea

HCA EWHCC h UKPC UKHL

21/10/1912 31/10/1910 8/12/1900 3/8/1881

Cited Cited/ Followed Cited/ Followed

3/2/1872

23/6/1854 8/2/1787

Page 8 ER 1184 Followed German Mining Company, In re 4 DeM&G 19 -

Legislation considered by this case Legislation Name & Jurisdiction Capital Transfer Act 1984 (UK)

Provisions -

Page 9

Page 10

3 of 10 DOCUMENTS: Unreported Judgments NSW 27 Pages

BALKIN and ANOR v PECK and ANOR - BC9803370; [1998] 43 NSWLR 706
SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL MASON P, PRIESTLEY JA and SHEPPARD AJA CA 40744/95 12 February 1998, 24 July 1998
Trusts and trustees -- right of trustees to personal indemnity from beneficiaries Negligence -- duty of trustees in their capacity as solicitors of the trust Trusts and trustees -- general principles -- right of trustees to personal indemnity from beneficiaries -- tax liability arising from retention of assets by trustees -- trust assets distributed before tax liability paid by trustees Negligence -- duty of trustees in their capacity as solicitors of the trust -- whether failure to minimise tax payable on settlement Mr Rosenberg sought to provide income and a home in London for his sister, Mrs Urquhart. In consequence, Mr Rosenberg settled property on trustees by Deed of Settlement. The Trust Fund was settled upon trust to pay the income to Mrs Urquhart during her life and thereafter upon trust for the children of Mr Rosenberg, the Settlor. The Settlor had three daughters: Mrs Balkin, Mrs Blumberg and Mrs Smirin ("the remaindermen"). Mrs Balkin and Mrs Blumberg (the appellants) resided in Australia. The original trustees were Mr Rosenberg and Mr Bayer. When Mr Rosenberg died in 1975 he was replaced as trustee by Mr Peck. Mr Bayer is now deceased leaving Mr Peck as the surviving respondent. The fund settled upon the trust was used to purchase a flat in London which was the home of the life tenant between 1968 and her death on 2 February 1986. In July 1986 the trustees sold the flat for 320,000 pounds and distributed the net proceeds of sale to the remaindermen. Under the Capital Transfer Tax Act 1984 (UK) there was a "chargeable transfer" in BC9803370 at 2 relation to the London flat consequent upon the life tenant's death. This liability was entirely overlooked by the Trustees between 1986 and 1989, when the British Internal Revenue levied the tax upon the trustees. A request to the Settlor's daughters for funds to meet the tax was answered by Mrs Smirin but declined by the appellants. The trustees were forced to pay two-thirds of the tax liability out of their own funds together with interest. Proceedings were commenced by the trustees against the appellants for reimbursement. In response, the appellants brought a cross-claim against the trustees for failure to re-structure the settlement in a manner "tax effective" to the beneficiaries. Cohen J found each of the appellants liable to pay a sum representing

Page 11 one-third of the tax and a proportion of the interest accruing on the tax liability. His Honour also dismissed a Cross Claim against the trustees for negligence in their capacity as solicitors. HELD, dismissing the appeal: (1) A trustee has a right of indemnity in respect of liabilities incurred in favour of third parties provided that these liabilities are properly incurred. This right of indemnity is of two types: a right of indemnity out of the trust property itself, and an additional right to proceed against a beneficiary personally for recoupment. Such rights, unless grounded in contract or statute, derive from the unfairness of a person who gets all or part of the benefit of property or a legal transaction not bearing all or the proportionate part of the burden associated with it. Hardoon v Belilios [1901] AC 118; Causly v Countryside (No 3) Pty Ltd, Court of Appeal, unreported, 2 September 1996; J W Broomhead (Vic) Pty Ltd v J W Broomhead Pty Ltd [1985] VR 891; Armstrong v Commissioner of Stamp Duties (1967) 69 SR (NSW) 38, approved. (2) It was no objection to the availability of the right of personal indemnity that: (a) Indemnity was sought from more than one beneficiary. (b) The beneficiaries did not request the trustees to make the payment in question. BC9803370 at 3 (c) There were successive interests in the trust, such as life interests followed by a remainder interest. (d) The liability was a tax liability. (e) The trust had come to an end when its corpus had been entirely distributed. Re German Mining Co; Ex parte Chippendale (1853) 4 D M & G 19, 43 ER 415; Causly v Countryside (No 3) Pty Ltd, Court of Appeal, unreported, 2 September 1996; J W Broomhead (Vic) Pty Ltd v J W Broomhead Pty Ltd [1985] VR 891, Hardoon v Belilios [1901] AC 118, applied. (3) The trustees, in their capacity as solicitors, did not breach the duty of care owed to the beneficiaries.

Mason P
In Hardoon v Belilios [1901] AC 118 at 124 the right of trustees to a personal indemnity from a beneficiary in respect of liabilities incurred by reason of retention of the trust property was described by Lord Lindley as "well established" and "one as old as trusts themselves". As beneficiaries, the appellants contend that this right was not available to the trustees of the Fritz Rosenberg Settlement for various reasons. If held liable, they seek damages for negligence from the trustees in their capacity as the Settlement's solicitors. The negligence is said to be the failure to re-structure the Settlement in a manner "tax effective" to the beneficiaries. FACTS Mrs Clara Urquhart was South African by birth. She came to live in the United Kingdom in about 1955. She had a substantial income from business interests in South Africa and Swaziland, but owned no property in nor received any income from the United Kingdom. In 1968 Mrs Urquhart suffered a heart attack and required hospital treatment. Her brother Mr Fritz Rosenberg told his solicitor Mr Bayer that he wanted to buy a home in London for Mrs Urquhart to live in. He later gave Mr Bayer instructions to set up a trust which could provide Mrs Urquhart with a home in London during her lifetime. Mr Bayer was asked to be a trustee with Mr Rosenberg, and because of his close friendship with the family he agreed. Mr Rosenberg wanted the trust to be as simple as possible. At the same time he wished to avoid the imposition of tax or death duties on his estate arising out of it. He told Mr Bayer that he did not want to establish a trust outside England.

Page 12 In consequence, Mr Rosenberg settled property upon trustees by Deed of Settlement dated 13 March 1968. The Trust Fund was settled (in the events which happened) upon trust to pay the income to the Settlor's sister Clara Urquhart ("the life tenant") during her life and thereafter upon trust for the children of the Settlor. The Settlor had three daughters: Mrs Balkin, Mrs Blumberg and Mrs Smirin. The first two reside in Australia and they are the appellants. The original trustees were Mr Rosenberg and Mr Bayer. When Mr Rosenberg died in 1975 he was replaced as trustee by Mr Peck. Mr Bayer gave evidence at the trial but is now deceased. The respondent, Mr Peck, is the surviving respondent. The fund of 30,000 that was settled upon the trust was used to purchase a flat at London House, Avenue Road, London. This was the home of the life tenant between 1968 and her death on 2 February 1986. Cl4(d) of the Deed of Settlement gave the trustees power to permit any beneficiary to reside in any dwelling house which was subject to the trusts thereof. All of this was known to the three daughters of the Settlor in whom the remainder interest was vested. Under the Capital Transfer Tax Act 1984 (UK) ("the Act") (now known as the Inheritance Tax Act 1984) there was a "chargeable transfer" in relation to the London flat consequent upon the life tenant's death. This tax was levied upon the trustees. A request to the Settlor's daughters for funds to meet the tax was answered by Mrs Smirin but declined by the appellants. The trustees were forced to pay two-thirds of the tax liability out of their own funds together with interest. These proceedings were commenced for reimbursement. BC9803370 at 4 Cohen J found each of the appellants liable to pay a sum representing one-third of the tax together with certain interest accruing on the tax liability. He held that the trustees could not recoup so much of the interest they had incurred as was attributable to delay flowing from their mistake. His Honour also dismissed a Cross Claim against the trustees for negligence in their capacity as solicitors. UNITED KINGDOM CAPITAL TRANSFER TAX S1 of the Act provides that capital transfer tax ("CTT") shall be charged on the "value transferred" by a "chargeable transfer". A chargeable transfer is defined in s2 as "any transfer of value which is made by an individual but is not ... an exempt transfer". A transfer of value can be actual or notional: see generally, McCutcheon and Whitehouse, McCutcheon on Inheritance Tax 3rd ed, 1988, 1-03. One such notional transfer occurs in relation to settled property in which a person has an interest in possession. If a person dies entitled to an interest in settled property, the settled property in which the interest subsists is treated as having been comprised in the deceased's estate immediately before death: Id, p5. The charging provisions relating to settlements subsequent to their creation are to be found in PtIII of the Act (s43-s93). A person BC9803370 at 5 beneficially entitled to an interest in possession in settled property is treated for the purposes of the Act as beneficially entitled to the whole of the property in which the interest subsists (s49(1)). S52(1) provides in effect that a deemed transfer of value occurs upon the coming to an end of an interest in possession during the lifetime of a beneficiary. This includes the death of the beneficiary, because A treats the interest in possession as having been disposed of immediately prior to the death. S4(1) provides: "On the death of any person tax shall be charged as if, immediately before his death, he had made a transfer of value and the value transferred by it had been equal to the value of his estate immediately before his death." It was common ground that a tax liability arose by reason of the "value transferred" consequent upon the death of the life tenant (albeit that the transfer was deemed by s4(1) to have, occurred immediately before death). In this event the persons that became liable for the tax were both the trustees at the time of death and the three daughters of the Settlor. This is because s200 relevantly provided: "Transfer on Death200(1) The persons liable for the tax on the value transferred by a chargeable transfer

Page 13 made (under s4 above) on the death of any person are (a) ... BC9803370 at 6 (b) so far as the tax is attributable to the value of property which, immediately before the death, was comprised in a settlement, the trustees of the settlement; (c) ... (d) so far as the tax is attributable to the value of any property which, immediately before the death, was comprised in a settlement, any person for whose benefit any of the property or income from it is applied after the death." S237(1) effectively imposed a statutory charge over the property in favour of the Inland Revenue for unpaid tax. As indicated, it was common ground at the trial that CTT was payable in accordance with the provisions which I have summarised. Unfortunately, this liability was entirely overlooked by the Trustees between 1986 and 1989, and disputed by the appellants between 1989 and the trial of these proceedings in 1995. In July 1986 the trustees sold the flat for 320,000. In October 1986 the whole of the net proceeds of sale were distributed to the life tenant's three nieces as remaindermen under the Settlement. Before doing this Mr Bayer, who was the active trustee at the time, took the advice of counsel in London. Counsel was asked to advise whether the trustees would be liable for tax on the sale of the flat. Counsel confined himself BC9803370 at 7 to the precise question asked. He noted that a capital gain would arise on the sale of the flat and that this rendered the trustees prima facie liable to UK capital gains tax in the hands of the trustees. He concluded nevertheless that the sale transaction was exempt from capital gains tax because there was in effect a disposal of a private residence. In so concluding, counsel addressed only the provisions of the Capital Gains Tax Act 1979 (UK). He did not discuss the issue of liability for CTT under the Capital Transfer Tax Act 1984. His conclusion that "the gain on the disposal of the flat will be exempt from capital gains tax, and not liable to any other tax "(emphasis added) was literally correct. Unfortunately, it appears to have contributed to Mr Bayer overlooking the question of liability to CTT which, as previously indicated, arose upon the death of the life tenant as distinct from the sale of her former residence. In his evidence at trial Mr Bayer made it clear that he was aware of the CTT regime at all times since its commencement in 1975. CTT was introduced pursuant to the Finance Act 1975 (UK) which was later replaced by the Capital Transfer Tax Act 1984. Mr Bayer made no bones about the fact that he had been careless in overlooking the question of CTT both before and after distributing the net proceeds of sale of the flat to the remaindermen. BC9803370 at 8 It was in 1989 that Mr Bayer's attention was drawn to this oversight. His entreaties to the British Internal Revenue that he and his fellow trustee should be relieved of their personal liability f6r tax fell upon deaf ears. ISSUES IN THE APPEAL Neither at trial nor on appeal did the trustees base their claim upon the principles relating to payment of money under mistake. Such a claim would have focussed upon the beneficiaries' receipt of what would be regarded prima facie as an unjust enrichment, at least according to Australian law since David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353. Rather, the case was conducted on the basis that any right of reimbursement to the trustees stemmed from the payment which they later made to the Inland Revenue (UK). The trustees argued that, since this payment had been properly made in response to a lawful demand and since it related to the trust, the trustees had a right of personal indemnity from the appellants. A trustee has an established right of indemnity in respect of liabilities incurred in favour of third parties provided that these liabilities are properly incurred. This right of indemnity is of two types: a right of

Page 14 indemnity out of the trust property itself, and an additional right to proceed against a beneficiary personally for recoupment. (I have stated BC9803370 at 9 these propositions baldly.) When the trustees exhausted the trust assets by distributing them to the three sisters in October 1986 there ceased to be any trust property against which the former right could be exercised. Hence reliance upon the latter. The authority usually cited in support of the right of personal indemnity is the Privy Council decision in Hardoon v Belilios [1901] AC 118. Hardoon was an appeal to the Privy Council from a judgment of the Full Court of the Supreme Court of Hong Kong which affirmed a judgment of non-suit in favour of the respondent. The appellant was the registered holder of shares in a company. He held them on trust for the respondent, who was the sole beneficial owner of the shares. The circumstances giving rise to the trust relationship were complicated, but it is sufficient for present purposes to note that they did not arise out of any dealings between the appellant and the respondent and that the respondent had not been the party who had initiated the steps which led to the creation of the trust. The shares were not fully paid up when the company went into liquidation. Judgment had been entered in favour of the liquidator against the appellant for calls made on him in respect of the shares. It was against this judgment that the appellant sought indemnity. His claim had failed in the courts below because there was no evidence of any contract BC9803370 at 10 by the respondent to indemnify. However, the appellant succeeded in the Privy Council. It will be necessary to consider exactly what Hardoon decided and the principles lying behind it. For the moment it is appropriate to note that the appellants contended that personal indemnity was unavailable for one or more of the following reasons: 1. Indemnity was sought from more than one beneficiary. 2. The beneficiaries against whom indemnity was sought had not "requested" the trustees to make the payment in question. (The appellants were not the Settlor of the trust and were ignorant of the tax payment by the trustees before it was made.) 3. There were successive interests in the trust, being a life interest followed by a remainder interest. 4. The tax liability in question was not a trust expenditure in the sense required by the principle in Hardoon. 5. The trust had come to an end when the net proceeds of sale of the flat were distributed in October 1986. 6. The appellants had special defences to the trustees' claim, based upon the trustees' failure: BC9803370 at 11 (a) to "take the Trust offshore" before the death of the life tenant, thereby avoiding the tax liability which fell due on the deceased's death; and (b) to advise the appellants of the tax liability at the time when the trust assets were distributed. (There was no suggestion on the evidence that either appellant had acted to her detriment on the faith of the payment to her. Such a defence had been pleaded but it was not pressed.) The appellants also challenged the trial judge's dismissal of the Cross Claim against the solicitors. And, by a Supplementary Notice of Appeal they disputed the costs order made below. The concept underlying Hardoon Lord Lindley commenced his analysis of the legal issues in Hardoon by considering "on what principle an absolute beneficial owner of Trust property can throw upon his trustee the burdens incidental to its ownership". His response (at 123) was that: "the plainest principles of justice require that the cestui que trust who gets all the benefit of the property should bear its burden unless he can shew some good reason why his trustee should bear them himself The

Page 15 obligation is equitable and not legal, and the legal decisions negativing it, unless there is some contract or BC9803370 at 12 custom imposing the obligation, are wholly irrelevant and beside the mark. Even where trust property is settled on tenants for life and children, the right of their trustee to be indemnified out of the whole trust estate against any liabilities arising out of any part of it is clear and indisputable; although, if that which was once one large trust estate has been converted b the trustees into several smaller distinct trust estates, the liabilities incidental to one of them cannot be thrown on the beneficial owners of the others. This was decided in Fraser v Murdoch (6 App Cas 855), which was referred to in argument. But where the only cestui que trust is a person sui juris, the right of the trustee to indemnity by him against liabilities incurred by the trustee by his retention of the trust property has never been limited to the trust property; it extends further, and imposes upon the cestui que trust a personal obligation enforceable in equity to indemnify his trustee. This is no new principle, but is as old as trusts themselves." It was considered "quite immaterial " that there was no contractual relationship or that the respondent had never requested the appellant to become his trustee (ibid). It is understandable why Lord Lindley emphasised the equitable basis of the right in a trustee context. However, the notion of a right to contribution, recoupment or indemnity is not peculiar to equitable relationships. Such rights, unless grounded in contract or statute, derive from the unfairness of a person who gets all or part of the benefit of property or a legal transaction not bearing all or the proportionate part of the burden associated with it. Lord Lindley described this concept of correlative benefit/burden as "the plainest principle of justice" in BC9803370 at 13 Hardoon (at 123). In Causly v Countryside (No 3) Pty Ltd, Court of Appeal, unreported, 2 September 1996 this Court approved the statement of McGarvie J in J W Broomhead (Vic) Pty Ltd v J W Broomhead Pty Ltd [1985] VR 891 at 936 that "the basis of the principle is that the beneficiary who gets the benefit of the trust should bear its burdens unless he can show some good reasons why the trustee should bear the burdens himself". See also Mahoney v McManus (1981) 180 CLR 370 at 388; Paul A Davies (Australia) Pty Ltd v Davies [1983] 1 NSWLR 440 at 450. Many later authorities have preferred to use the concept of unjust enrichment to describe the same basal principle: cf Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221 at 256-7. Whatever its label, it is a concept that informs doctrines of equitable and legal contribution (Dering v Earl of Winchelsea (1787) 1 Cox 318, 29 ER 1184; Albion Insurance Co Ltd v Government Insurance Office (NSW), (1969) 121 CLR 342 at 350-2, marshalling (Ramsay v Lowther (1912) 16 CLR 1 at 23-4) and recoupment by varieties of sureties against those principally liable (Moule v Garrett (1872) LR 7 Ex 101 at 104). This concept has been applied to tax liabilities, where the person made liable to pay the impost did not enjoy any or all of the beneficial interest in the property attracting the tax: Brook's Wharf and Bull Wharf Ltd v Goodman Brothers [1937] 1 KB 534; Armstrong v Commissioner of BC9803370 at 14 Stamp Duties (1967) 69 SR (NSW) 38. In Armstrong (which involved contribution) Walsh JA applied the principle deriving from Brook's Wharf (an indemnity case), which he stated (at 45) as: "Where complete indemnity is sought on the ground that, although both plaintiff and defendant were liable to pay the debt, the defendant was, as between himself and the plaintiff, primarily liable, such a claim can be sustained where the debt is created by a revenue law." This principle has direct application in the present appeal, insofar as the liability to pay United Kingdom capital transfer tax was imposed upon both the trustees and remaindermen of the Trust by s200(1)(b) and s200(1)(d) of the Capital, Transfer Tax Act (UK) (supra). THE APPELLANTS' SUGGESTED LIMITATIONS ON HARDOON v BELILIOS I return to the way in which the case was argued here and below, by reference to Hardoon as a principle of the law of trusts. I have endeavoured to demonstrate the underlying rationale for the specific right declared

Page 16 by Lord Lindley. To understand that rationale is to reject the appellants' attempt to preclude application of Hardoon to multiple beneficiaries, beneficiaries who had not requested the payment in question, or beneficiaries who are remaindermen: see generally Hughes, "The Right of a Trustee to a Personal Indemnity from Beneficiaries" (1990) 64 ALJ 567. BC9803370 at 15 The principle in Hardoon has been applied to multiple beneficiaries on several occasions: see Re German Mining Co; Ex parte Chippendale (1853) 4 D M & G 19, 43 ER 4 15 (cited in Hardoon at 125); Matthews v Ruggles-Brise [1911] 1 Ch 194; J W Broomhead; Metcalfe v NZI Securities Australia Ltd, Federal Court of Australia, Full Court, unreported, 5 March 1996; Causley v Countryside (No 3) Pty Ltd, Court of Appeal, unreported, 2 September 1996. The requirement of a requested payment was rejected as long ago as Dering v Earl of Winchelsea (1787) 1 Cox 318, 29 ER 1184 and was regarded as "quite immaterial" in Hardoon (at 123). And there is an express statement justifying the application of the principle in relation to property settled on tenants for life and children in the passage set out above from Hardoon (at 123-4). The present case does not involve beneficiaries who are not sui juris, or entitled to a limited interest in the trust property, such as a life estate. (Whether that should be determinative can be left until a proper case arises.) It is true that a statement of Lord Lindley (at 127) reserves the situation touching shares held "for tenants for life", but I read this as addressing the issue of indemnity against life tenants; and certainly not casting doubt upon the application of Hardoon to a situation such as the present where the remainder interest has vested in possession by the very act giving rise to the liability sought to be recouped. BC9803370 at 16 The submission that the CTT tax liability incurred by the trustees fell outside Hardoon must also be rejected. It was argued that Hardoon only applies to trustee liabilities arising from the "mere fact of ownership" (per Lord Lindley at 125); and that the tax liability here arose as a consequence of the trustee's relationship with the life tenant imposed by the settlor. I confess to having difficulty in reading this expression of Lord Lindley as indicating some limitation on the right earlier expounded as deriving from the benefit/burden (or unjust enrichment) concept. See also Armstrong. Be that as it may, the liability imposed on the trustees here was a direct incident of an inevitable aspect of the settled property vested in them, ie the death of the life tenant. And an "ownership-based" liability is underscored by the statutory charge over the property for the unpaid tax (s237). Similar reasoning disposes of the submission that the liability was not incurred for the appellants' benefit. It is difficult to pinpoint the nub of the submission. After all, the property was at all times held on trust for the appellants. And it was the very transfer of "value" to the remaindermen, consequent upon the death of the life tenant, that attracted the tax liability. Had the tax not been paid, the statutory charge would have subsisted, as would the beneficiaries' personal liability to pay the tax. The fact that the appellants did not request the trustees to pay the tax BC9803370 at 17 is quite irrelevant, so long as the liability is a proper trust expense. A trustee's right of personal indemnity is not confined to cases where there is request or implied contract. Nor is it to the point that the flat was sold and the net assets distributed in late 1986. The trustee's liability to pay the tax arose earlier, upon the death of the life tenant. In July 1989 the appellants were approached by the trustees seeking indemnity, but were met with a prompt refusal based upon denial of any tax liability. But it is no longer in dispute that the trustees were obliged to pay the tax if the British revenue authorities pressed them to meet it. It is interesting that, while United States trust law does not recognise a general right equivalent to that established in Hardoon, a trustee there will have a claim to indemnity from a beneficiary personally if the trust estate has been conveyed to that beneficiary overlooking an obligation (such as a tax obligation) which the trustee was later required to pay: see Scott on Trusts 4th ed 249, 249.1; Equitable Trust Co v Kingsley 197 NY Supp 267 (1922), affd 201 NY Supp 900 (1923), affd 144 NE 903 (1924). It is no answer to the trustees' personal right of indemnity with respect to a proper trust expense to say that the trustees could have or even should have recouped the liability out of the trust property when it was in

Page 17 their BC9803370 at 18 hands. The personal right is distinct from the right of indemnity out of trust assets. It is not necessary to list all of the special defences to the right of indemnity to be able to say that nothing in the present case attracts any such special defence. The trustees might have pursued the beneficiaries before settling with the British revenue authorities: cf Rankin v Palmer (1912) 16 CLR 285 at 290-1; Wren v Mahony (1972) 126 CLR 212 at 225-6. But they were not bound to do so on pain of loss of their right. There was demand before proceedings were commenced, and absence of change of position. The distribution of what were believed to be the net trust assets in 1986 involved, in all probability, a payment made under mistake of law which was received by the appellants in Australia. However the law in Australia or England is to be regarded in the period prior to the High Court's decision in David Securities in 1992, the distribution certainly raised no equity against the trustees. It did not represent a breach of trust. Nor did it represent an accord and satisfaction. The alleged failure of the trustees to "take the trust offshore" before the death of the life tenant, thereby avoiding the tax liability which fell due on the deceased's death, represented no breach of trust causative of loss to the trust estate or the appellants. I strongly doubt whether it involved any breach of trust, in the light of the "absolute and uncontrolled discretion" BC9803370 at 19 vested in the trustees as to retention of trust investments in their original form: see cl4(a) and cl5 of Settlement. It certainly was not causative of any loss in the light of the findings on causation referred to below. Indeed it was entirely appropriate conduct on the trustees' part, for reasons addressed in the next portion of this judgment. It cannot operate to preclude the trustees' right of indemnity otherwise arising. THE APPELLANTS' CROSS CLAIM FOR DAMAGES AGAINST THE SOLICITORS The Settlor was domiciled outside the United Kingdom, which meant that, had the property in the settlement been situated outside the United Kingdom, no capital transfer tax would have been payable. However, the settlor's original instructions were to establish the trust in England. Evidence was given by a tax expert that, following the Finance Act 1975 (UK), it would have been possible to avoid ultimate CTT liability on the death of the life tenant by transferring the flat to the ownership of a company incorporated in, say, one of the Channel Islands or the Isle of Man. On the basis of this evidence the appellants claimed that the solicitors were in breach of their duty of care and were liable in damages for the amount of tax for which they sought recoupment. BC9803370 at 20 I am in entire agreement with what Cohen J has written on the issue of the appellants' Cross Claim against the trustees in their capacity as solicitors. I respectfully adopt it. It may be summarised as follows. Cohen J assumed that the solicitors owed a duty of care to the beneficiaries of the trust and that this duty extended to one of advice as to benefits and possible disadvantages, if any, which might arise from transferring ownership of the flat to an offshore company. Reference was made to Ross v Caunters [1980] Ch 297 and White v Jones [1995] 2 AC 207. The learned judge posed the question whether the failure to tell the beneficiaries of the effect of the statutory changes in 1975 or thereafter could amount to negligence from which any damages could flow. This question was answered in the negative, having regard to (1) expert evidence about the doubtful effectiveness of the proposed tax-avoidance scheme, including problems for the trustees in relation to their obligation to maintain ultimate control over trust assets; and (2) the serious risk that the scheme would have provoked close scrutiny by the United Kingdom revenue authorities of the increasingly debatable proposition that the life tenant retained a domicile outside the United Kingdom. Mr Bayer had actually turned his mind to this risk, and it was a real one. If the revenue BC9803370 at 21 authorities had determined that the life tenant acquired an English domicile, there would have been very

Page 18 serious adverse consequences to the life tenant's income tax position and in relation to the tax or duty payable upon her death. Had these risks come home, the appellants and their sister would have suffered. because they were the ultimate beneficiaries of the life tenant's estate. These risks meant that it was highly improbable that the beneficiaries and the life tenant would have opted to take the trust offshore had they been offered the prospect of doing so. Indeed it was held likely that the life tenant would have opposed this, with the probable consequence (whatever the views of the nieces) that the trustees would have exercised their very broad discretions under the trust instrument by adhering to the status quo. The solicitor trustees had to act impartially in considering whether to exercise any power to restructure the Settlement: see Re Zimpel [1963] WAR 171 at 174; Re Campbell [1973] 2 NSWLR 146. Of necessity, this meant that they did not have to prefer the interests of the residuary beneficiaries over that of the life tenant. And they were entitled to have regard to their express powers. It was also highly relevant that the three sisters were the residuary beneficiaries of the life tenant and, as such, their financial interests were vitally linked with those of the life tenant. BC9803370 at 22 COSTS BELOW The trial judge ordered the defendants to pay the costs of the plaintiffs of the claim and the cross-claim. I see no error in this. The appellants submit that some offset should have been made in relation to their success in limiting the trustees' claim to interest. Given the comparatively small amount of time apparently devoted to this issue, no appealable error is shown. ORDERS During the argument in the appeal it was noticed that the judgment entered does not reflect the trial judge's reasons in one obvious respect. The parties agreed that it should be amended by adding "each of" before the words "the defendants" in para1 of the judgment. I would therefore propose the following orders: 1. (By consent) amend the Minute of Judgment by adding "each of' before "the defendants " in para1. 2. Appeal dismissed with costs.

Priestley JA
For the reasons given by Mason P I agree that the facts of the present case fall in the area of trust law and equitable concepts of which Hardoon v Belilios [1901] AC 118 is a leading example. That means that the appeal against the order made by Cohen J in the proceedings commenced by the trustees must fail. I also agree, again for the reasons given by Mason P that Cohen J was right in dismissing the appellant's cross claim against the trustees. I agree with the orders proposed by Mason P.

Sheppard AJA
In this matter I have had the advantage of reading the judgment to be delivered by Mason P. I am in agreement with his Honour's reasons and conclusions, and with the order which he proposes. Order 1. Amend the Minute of Judgment by adding "each of" before "the defendants" in para1.

Page 19 2. Appeal dismissed with costs. Counsel for the appellant: D J Hammerschlag; H S Packer Solicitors for the appellant: Rosenblum & Partners Counsel for the respondent: M A Pembroke SC; A Leopold Solicitors for the respondent: Malleson Stephen Jaques

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4 of 10 DOCUMENTS: Victorian Reports/Judgments/1998 4 VR/QUINTON and Others v PROCTOR 1998 4 VR 469 - 25 May 1998 8 pages

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

SUPREME COURT OF VICTORIA Kellam J 5 March, 25 May 1998
Trusts and trustees -- Distribution of aliquot share of trust property -- Whether life tenant and remaindermen can require distribution -- Trustees -- Trustee refusing to agree to distribution -Vesting order to give effect to distribution -- Application to remove trustee -- Trustee Act 1958 (No. 6401) ss. 51(1), 52(2)(i). A life tenant and three remaindermen of a trust estate, all sui juris, agreed with one of the two trustees (who was also one of the remaindermen) that the proceeds of one of the trust's two remaining investments which had matured be paid to them. The other trustee refused to agree to the proposed distribution. The beneficiaries applied for a vesting order to give effect to the proposed distribution, and for an order removing the trustee who refused to agree to the distribution. Held, allowing the application for a vesting order: (1) The rule that a beneficiary absolutely entitled to an aliquot share of a trust fund is, unless a contrary intention appears, entitled to call for a transfer of that share extends to enable beneficiaries entitled in succession to combine to require payment or transfer of part of their interests in the fund, subject to the court retaining a discretion to refuse to order an inappropriate payment or transfer. Re Marshall; Marshall v Marshall [1914] 1 Ch. 192; Re Sandeman's Will Trusts; Sandeman v Hayne [1937] 1 All E.R. 368; Stephenson v Barclays Bank Trust Co. Ltd. [1975] 1 All E.R. 625 considered Smith v Snow (1818) 3 Madd. 10; 56 E.R. 413; In re Brockbank; Ward v Bates [1948] 1 Ch. 206 referred to (2) Since the defendant's refusal to agree to the proposed transfer reflected his genuinely held concerns as to the best interests of the trust and he had not placed himself in a position antagonistic to his duty as a trustee, the grounds for the exercise of the inherent jurisdiction to remove a trustee were not established. Miller v Cameron (1936) 54 C.L.R. 572 applied Originating motion This was an application by originating motion pursuant to s. 52(2)(i) of the Trustee Act 1958 for a vesting order to effect a distribution of part of a trust estate to the life tenant and remaindermen and an application for removal of one of the two trustees. The facts are stated in the judgment.

Page 22 S. P. Newton for the plaintiffs. J. K. Arthur for the defendant.

Kellam J
The testator, Mervyn Hector Southwell, made his will on 6 April 1974 and thereby appointed his wife's son, the first plaintiff, and his 1998 4 VR 469 at 470 brother-in-law, the defendant, as his executors and trustees. The trust of his residuary estate was of the income to his wife for life and after her death as to both capital and income to her three children as tenants in common in equal shares. Each of the beneficiaries is now of full age and capacity. The testator died on 19 December 1985 and probate of his will was granted to the first plaintiff and the defendant on 14 April 1986. Since that time the estate has been administered and the residuary estate has been and is held by the first plaintiff and the defendant as trustees in accordance with the terms of the will. The assets of the estate now consist of two investments. The first is an amount of $190,000 invested in Telstra bonds at an interest rate of 11.75% and due to mature in 2001. This investment earns approximately $400 per week, which is paid to the wife. The second asset is the sum of $39,000 which is held in a trust account in consequence of another investment having now matured. Upon the latter investment maturing, the wife and the children agreed that they did not desire that the sum of $39,000 should be reinvested, but rather should be paid out to them in full in equal shares. Solicitors acting on their behalf prepared an agreement, which was signed by each of them and was forwarded to the defendant in April 1997 with a request that he sign it. The proposed agreement provided for payment to the wife and children of the sum of $39,000 by four equal portions of $9750. The defendant has refused to sign the agreement. These proceedings were then commenced by the wife and children as plaintiffs against the defendant. The plaintiffs seek orders pursuant to s. 51(2)(i) of the Trustee Act vesting the sum of $39,000 in them as tenants in common in equal shares. They seek a further order removing the defendant as trustee and an order that he pay the costs of the proceeding as between solicitor and client. The issue between the parties is of a relatively limited compass. The defendant contends that the plaintiffs are not entitled to require the trustees to transfer only part of the trust estate to them. He contends that the plaintiffs must either permit the trusts in the will to be kept on foot, in which case the trusts must continue to be executed by the trustees without interference or direction by the beneficiaries, or they must, by agreement, extinguish and put an end to the trust. The plaintiffs do not seek to extinguish and put an end to the trust. They contend, however, that they are entitled to call upon the trustees to transfer the sum of $39,000 to them and that the defendant's failure to join with the first plaintiff, his co-trustee, in doing so is wrongful and that in consequence he should be removed as a trustee. Under s. 51(1) of the Trustee Act 1958 the court may make a vesting order on the grounds set out in s. 51(2). In particular s. 51(2)(i) provides that such an order may be made:
Where a trustee neglects or refuses to convey any property ... according to the direction of the person absolutely entitled to the same for twenty-eight days next after a request in writing has been made to him by the person so entitled.

According to the learned authors of Principles of the Law of Trusts, Ford and Lee, Law Book Company, 3rd ed., (1996) at para. 840.8:
This provision envisages a situation where the active duties of the trustee have come to an end because all the beneficiaries under the trust are of full age and capacity. The duty of the trustee in such case is to vest the title to the trust property in the beneficiaries so clothing the equitable title with the legal estate. If the trustee fails to perform this duty recourse may be had to this provision. It should be shown that the trustee has failed to perform her or his duty and if this is not shown a vesting order may be refused, although the Court may direct the trustee to take steps to ensure the vesting.

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1998 4 VR 469 at 471 It is clear law that if all the beneficiaries of a trust are of full age and capacity and between them entitled to the entire beneficial interest under the trust, the rule is that they may terminate the trust by requesting the trustee to transfer the trust assets to them or by their direction: see Ford and Lee at para. 16,090 and the authorities there cited. It appears to be clear that the rule operates to override an intention of the testator designed to prevent the beneficiaries from taking their shares until reaching an age beyond majority. Thus a direction in the will to the trustees to accumulate income for beneficiaries until after majority will not prevent the operation of the rule. This branch of the rule has come to be associated with the well known decision in Saunders v Vautier (1841) 4 Beav. 115; 49 E.R. 282. It appears to be clear also that the fact that the property is settled on trust for a life tenant and remainderman does not prevent the operation of the rule. As soon as the life tenant and remainderman are of full age and capacity the trust can be terminated and the life tenant may commute the life interest in return for a capital sum, with the remaindermen sharing the balance of the estate. (See Jacobs, The Law of Trusts, Law Book Company, 6th ed., (1997), at pp. 695-8; Anson v Potter (1879) 13 Ch. D. 141; Re White [1901] 1 Ch. 570 and Stephenson v Barclays Bank Trust Co. Ltd. [1975] 1 W.L.R. 882; 1 All E.R. 625.) However, it appears to be clear that apart from terminating the trust, the beneficiaries of a trust have no power to direct the trustee as to what he or she should or should not do in the exercise of his or her powers as a trustee. In In re Brockbank; Ward v Bates [1948] 1 Ch. 206 at 209 Vaisey J. said in a case where the beneficiaries submitted that they were entitled to force a trustee to retire, and to direct him (he having the power to nominate his successor), to appoint such person or persons as the beneficiaries desired:
It seems to me that the beneficiaries must choose between two alternatives: either they must keep the trust of the will on foot, in which case those trusts must continue to be executed by trustees duly appointed pursuant either to the original instrument or to the powers of s. 36 of the Trustee Act 1925 and not by trustees arbitrarily selected by themselves; or they must, by mutual agreement, extinguish and put an end to the trusts with the consequences which I have just indicated.

The defendant has submitted that the effect of the present application is that the plaintiffs do not seek to terminate the trust, but do seek to direct the defendant, as a trustee, to join in the transfer to them of the sum of $39,000 and in this manner the plaintiffs are directing the trustee as to the manner in which the trust is to be executed. Whilst the submission has an initial attractiveness, upon analysis it does not really address the critical issue. It is true that the plaintiffs seek to have the sum in question transferred to them by the trustees. But, in this, they do not seek to direct the trustees as to the exercise of their powers. This is because the trustees have no power under the will to effect the transfer. If the transfer is to be effected the authority for it must be found elsewhere. As I understand the position, the plaintiffs rely upon, or at least appear to be in a position to rely upon, a distinct rule but one related to the rule which permits termination of the trust. The further rule is that where one beneficiary is entitled absolutely to an aliquot share of a trust fund, unless a contrary intention appears, that beneficiary is entitled to call for payment or transfer of that share to him. The effect of this is to terminate the trust, but only in relation to that share. Otherwise the trust is unaffected: see Ford and Lee at para. 16,170. 1998 4 VR 469 at 472 The principles under consideration were reviewed and summarised in Stephenson v Barclays Bank Trust Co. Ltd. at W.L.R. 889; All E.R. 637 where Walton J. said:
Now it is trite law that the persons who between them hold the entirety of the beneficial interests in any particular trust fund are as a body entitled to direct the trustees how that trust fund is to be dealt with, and this is obviously the legal territory from which that definition derives. However, in view of the arguments advanced to me by [counsel for the respondents], and more particularly that advanced by him on the basis of the decision of Vaisey J. in Re Brockbank I think it may be desirable to state what I conceive to be certain elementary principles. (1) In a case where the persons who between them hold the entirety of the beneficial interest in any particular trust fund are all sui juris and acting together ("the beneficial interest holders") they are entitled to direct the trustees how the trust fund may be dealt with. (2) This does not mean, however, that they can at one and the same time override

Page 24
the pre-existing trusts and keep them in existence. Thus, in Re Brockbank itself the beneficial interest holders were entitled to override the pre-existing trusts by, for example, directing the trustees to transfer the trust fund to X and Y, whether X and Y were the trustees of some other trust or not, but they were not entitled to direct the existing trustees to appoint their own nominee as a new trustee of the existing trust. By so doing, they would be pursuing inconsistent rights. (3) Nor, I think, are the beneficial interest holders entitled to direct the trustees as to the particular investment they should make of the trust fund. I think this follows for the same reasons as the above. Moreover, it appears to me that once the beneficial interest holders have determined to end the trust they are not entitled, unless by agreement, to the further services of the trustees. Those trustees can of course be compelled to hand over the entire trust assets to any person or persons selected by the beneficiaries against a proper discharge, but they cannot be compelled, unless they are in fact willing to comply with the directions, to do anything else with the trust fund which they are not in fact willing to do ... So much for the rights of the beneficial interest holders collectively. When the situation is that a single person who is sui juris has an absolutely vested beneficial interest in a share of the trust fund, his rights are not, I think, quite as extensive as those of the beneficial interest holders as a body. In general, he is entitled to have transferred to him (subject, of course, always to the same rights of the trustees as I have already mentioned above) an aliquot share of each and every asset of the trust fund which presents no difficulty so far as division is concerned. This will apply to such items as cash, money at the bank or an unsecured loan, stock exchange securities and the like.

The case before me is not a case where a single person who is sui juris seeks transfer of his or her aliquot share of each and every asset of the trust fund. Rather this is a case where the beneficial interest holders combine to seek payment to them by the trustees of part of their interests in the trust fund. They assert that they have the right to require the trustee to pay to them that part of the fund held in trust and which is presently held by the trustee in cash deposit. Otherwise they desire the administration of the trust to continue in so far as the other part of the trust fund invested in Telstra bonds is concerned. It will be seen that the critical issue for determination is whether the rule that a beneficiary who is entitled to call for a transfer of his or her share extends to enable beneficiaries who are entitled in succession to combine to require transfer of part of a share, (specifically one asset in the trust fund). Neither counsel who appeared before me was able to direct my attention to any authority relating precisely to a situation such as is presently before the court. This is somewhat surprising, as one would have imagined the question presently before the court is one which would have arisen previously. Perhaps the reason is that generally, beneficiaries are unlikely to be attracted to piecemeal 1998 4 VR 469 at 473 distribution. Whatever the reason, my own researches have also been to no avail. Accordingly, I have found the issue to be not without difficulty. However, Lewin on Trusts, 16th ed., (1964), appears to support the contention of the plaintiffs. At p. 621 the following extract appears:
The beneficiary absolutely entitled may call upon the trustee to execute conveyances of the legal estate as he, the beneficiary, may direct, and of course the same principle applies in the case of other property, such as stock or shares, which passes by transfer ... Lord Eldon was of the opinion that a beneficiary could not require the trustee to divest himself from time to time of different parcels of the trust estate on the ground that the trustee had the right to say "If you mean to divest me of my trust, divest me of it altogether and then make your conveyance as you think proper" (Goodson v Ellison 3 Russ. 594) but that view appears erroneous. Smith v Snow (1818) 3 Madd 10.

In Smith v Snow (1818) 3 Madd. 10; 56 E.R. 413, Leach V.-C. said in relation to the question of whether a party who is entitled to a certain aliquot proportion of an ascertained sum could file a bill to have it transferred to him without joining in the proceeding the other persons who were entitled to other aliquot shares of the trust fund:
My only difficulty is whether trustees can be called upon to act in the execution of their trust, by parts, as in that case seven different bills might be filed against them; but that I think is not so great an inconvenience as the allowing of such a bill as this would be.

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

Page 25
There is no difficulty in dividing the preferred ordinary and the preferred shares into two halves, leaving one half in the hands of the trustee upon trust for [the beneficiaries other than the plaintiffs], the other half of the shares going to the plaintiffs, who are absolutely entitled to it. In those circumstances, it is settled law that, prima facie, the plaintiffs are entitled to have those shares transferred to them. Prima facie, that is so. But the court will not order that transfer to be made if there is some good ground to the contrary. The court has, I think, been rather careful never to define in precise terms exactly what would be good ground to the contrary. All I have to do in this case is to ascertain whether, on the facts now before me, there is some good ground for ignoring the plaintiffs' prima facie right to have half of the shares transferred to them.

In reaching this conclusion Clauson J. relied upon Re Marshall; Marshall v Marshall [1914] 1 Ch. 192. In that case the testator had left a large estate, the greater proportion of which was represented by shares in a public company. The plaintiffs had an absolute entitlement to one-quarter of the residue. However, the other three-quarters of the estate was settled upon trusts which were likely to last for many years. The Court of Appeal held, in accordance with established principle, that a person who is entitled indefeasably to an aliquot share of property, is entitled to have that share transferred to him. Phillimore L.J. said at 202-3:
The case of the trustees and the beneficiaries who oppose the claim ... has been rested on the power to retain given by the will. I think that this power cannot, per se, be relied upon as an answer to the appellants' request; the right to refuse to transfer is not given by this power. If there is such a right it rests upon the duty of the trustees to do their best for all the beneficiaries, it being their consequential duty to keep as large 1998 4 VR 469 at 474 a block of shares as possible together so as to have large voting power ... In certain cases I think this would be a true and sound reason for refusing the appellants' request, but in this case I agree that upon the balance of conflicting rights and interests there is not enough to deprive the appellants of their "prima facie" right.

True it is that in both Re Sandeman and Re Marshall the transfer of the share of the trust estate to which each of the beneficiaries was absolutely entitled extinguished each one's interest in the estate. However, I do not perceive any issue of principle that distinguishes such cases from the present case. In the case before me beneficiaries who are absolutely entitled have reached agreement between them to the effect that they desire a part of the property held on trust to be transferred to them. They do not, however, agree that the whole of the trust property should be transferred to them. They desire that the trust should continue for their benefit (and particularly for the benefit of the life tenant), as to the balance of such property. In my view there is no reason of principle why they should be precluded from achieving that result, just as there was none in the different circumstances before the courts in Re Marshall and Re Sandeman. If beneficiaries entitled in succession may combine to terminate a trust in its entirety, I can see no reason in principle why they should not be entitled to combine to terminate a trust in respect of aliquot shares or parts thereof. Of course one can readily envisage circumstances where, in a particular case, it may be inappropriate to permit transfer of a share or part of a share, e.g., where it requires sale of an asset. In such circumstances, the authorities establish that the court retains a discretion not to allow the transfer despite the prima facie right to it. In the present case, no grounds have been established by the defendant for refusing the plaintiffs' request. Accordingly there should be an order that, subject to any costs ordered to be paid in consequence of this application, the sum of $39,000 held on trust be transferred, in equal shares, to each of the beneficiaries absolutely entitled. The second issue raised by this application is the submission by three of the plaintiffs that the defendant trustee should be removed. This application is not joined by one of the plaintiff beneficiaries, Margaret Barnsley, who has consented only to the present application being made in respect of the payment to the beneficiaries of their shares of the sum of $39,000. The application is made by the other beneficiaries on the basis that it is submitted that there are serious doubts as to whether the defendant has acted in a bona fide manner in the interests of the beneficiaries. This submission is based upon the fact that the defendant initially resisted this application on the ground that the life tenant lacked capacity. The defendant later conceded that the life tenant did not lack capacity. It is submitted that the issue which has concerned the court (i.e., the issue of whether or not part only of the estate could be transferred to the beneficiaries leaving the balance on trust) was an issue raised at the last moment and that the defendant trustee was determined to hold all of the assets of the estate on trust irrespective of any obligation that he might have to do otherwise. Mr. Newton of counsel for the plaintiffs relies upon the fact that the defendant had threatened

Page 26 to leave all of the plaintiffs out of his own will in consequence of their application to make payment to them of the sum of $39,000. He relies also upon the statement of the defendant in the course of crossexamination that he would not transfer the whole of the estate to the beneficiaries if so requested because he said (at 37 of the transcript):
I promised Mr Southwell [i.e. the testator] that I would never let Mrs Southwell get the -- have the money. It was a discussion he and I had, and I promised I would never 1998 4 VR 469 at 475 give the money up to Mrs Southwell because of different things that we had, we were very friendly, and this is where it was, and it was and it's still my attitude.

However, he said further that if the court made an order he would accept the order because it "relieved his conscience". In a case such as the present one a court will be slow to remove a trustee from the office bestowed upon him by a testator and will do so only when it is satisfied that there are in existence circumstances which afford grounds upon which the jurisdiction will be exercised. In Miller v Cameron (1936) 54 C.L.R. 572 Dixon J. (as he then was) said at 580:
The jurisdiction to remove a trustee is exercised with a view to the interests of the beneficiaries, to the security of the trust property and to an efficient and satisfactory execution of the trusts and a faithful and sound exercise of the powers conferred upon the trustee. In deciding to remove a trustee the Court forms a judgment based upon considerations, possibly large in number and varied in character, which combine to show that the welfare of the beneficiaries is opposed to his continued occupation of the office. Such a judgment must be largely discretionary. A trustee is not to be removed unless circumstances exist which afford ground upon which the jurisdiction may be exercised.

In Monty Financial Services Ltd. v Delmo [1996] 1 V.R. 65 Ashley J. reviewed the authorities relating to the issue of removal of a trustee. There is no doubt that courts of equity have asserted and applied, over many years, an inherent jurisdiction to remove a trustee. In my view the grounds for the exercise of the inherent jurisdiction of the court to remove the defendant trustee in this case are not established. It is true that at an early stage after the request was made for payment out of the trust funds to the beneficiaries the defendant trustee expressed concern about whether or not the life tenant had capacity. I am not satisfied that this concern was not bona fide. It is also true that the defendant trustee in the course of giving evidence before me placed great weight on what he clearly perceived to be his moral obligations to the promise he had made to the testator to protect the trust funds in the interests of the life tenant. This, however, does not provide a ground for his removal. I do not accept that the trustee will in the future not comply with his obligations as a trustee. It is suggested that the fact that he has defended these proceedings renders him unsuitable to act as trustee. The fact that litigation has ensued with co-trustees on opposite sides of the record is a matter of serious concern. However, I am satisfied that the defendant's views and concerns were genuinely held in what he sees as the interests of the trust. I note also that the first plaintiff co-trustee is also a beneficiary and, as such stood to gain. Furthermore, in my view, notwithstanding that I have come to a different conclusion, the submissions made on behalf of the defendant are tenable and arguable submissions. It does not appear to me that the obligation of a trustee to pay out part of the total trust assets to beneficiaries when required by them is so obvious as a matter of law that the trustee should have complied with such obligation. I take it into account that the defendant stated he would accept the order of the court. Nor am I satisfied that it can be said that the trustee has placed himself in a position which is antagonistic to his duty as a trustee. Although it is true that the defendant trustee has failed to agree with his plaintiff co-trustee and possibly that a degree of antipathy and lack of co-operation has developed between them, that in my opinion is insufficient to justify an order for the removal of the defendant trustee. Once the asset which is the subject of this court order is distributed only one other asset will remain to be administered in the trust. I see no basis upon which it can be said that the defendant trustee will not 1998 4 VR 469 at 476 administer properly the trusts reposed in him. Accordingly, it does not appear to me to be appropriate to order in the discretion of the court that he be removed as trustee. I turn now to the issue of costs. The fundamental rule is that costs follow the event. However, where an executor, administrator or trustee is sued the following principles also apply. The trustee ordinarily has a

Page 27 right to be paid or to be indemnified for his costs out of the trust fund on a solicitor and client basis. See Renfrew v Birmingham [1937] V.L.R. 180 at 190. However, a trustee may lose this right of indemnity if he has neglected his duty or is guilty of some culpability or if in defending the proceeding he is, in reality, acting in his own interests. See Nowell v Palmer (1993) 32 N.S.W.L.R. 574. I have found the question of costs to be also a difficult one. The plaintiffs have succeeded on the issue of the payment of the $39,000, but have failed on the issue of the removal of the trustee. On the issue on which the plaintiffs were successful, I note that it was preceded by a requirement by them that the defendant sign the document which was proffered by their solicitor. That document provided that the defendant agreed to the payment. The plaintiffs were not entitled to require the defendant to sign the document or to agree to the payment of the $39,000, whatever their entitlement to payment. I take into account that the defendant's opposition to payment was motivated by the views expressed to him by the testator and of his concern for the integrity of the trust. In my view the appropriate order in all of the circumstances of this case is that the costs of the plaintiffs and the cost of the defendant be taxed as between solicitor and client and paid out of the estate. Accordingly, I order: (1) That, subject to the payment of any costs to be paid out of the estate in consequence of orders made in this proceeding, the trustee transfer the sum of $39,000 held on trust in equal shares to each beneficiary who is absolutely entitled. (2) That the costs of the plaintiffs and the costs of the defendant be taxed as between solicitor and client and be paid out of the estate. (3) That the summons otherwise be dismissed. Orders accordingly. Solicitors for the plaintiffs: Kee & Coutts. Solicitors for the defendant: MacKinnon Jacobs Horton & Irving Pty. P. H. BARTON BARRISTER-AT-LAW

Page 28

Page 29 5 of 10 DOCUMENTS: CaseBase Cases

Trust Company of Australia Ltd v Braid & Simmons

BC9800422 Court: VSC Judges: Eames J Judgment Date: 20/2/1998

Catchwords & Digest

Trusts -- Express trusts -- Distribution of proceeds to beneficiaries -- Rights of life tenants and remaindermen Apportionment of proceeds of realisation of property by mortgagee selling under power of sale. Where trustee of express trust lent trust money secured by mortgage, mortgagor defaulted and trustee entered into possession. Treatment of capital expenditure made by trustee after foreclosure in order to preserve mortgaged property. Whether capital expenditure should be deducted from sums available for distribution. Whether losses as between life tenants and remaindermen should be fairly apportioned and shared. Whether expenses relating to production of income to be deducted from amounts due to income beneficiaries, while capital beneficiaries to receive whole of capital. Whether in calculating sums to be taken into account in application of Re Atkinson, life tenants should be regarded as having been entitled to interest on capital sums applied by trustee for purpose of preservation of security. Whether allowance to be made in favour of life beneficiaries for loss of interest suffered by application of capital funds to preservation of security. Whether, in calculating sums due by way of income to life tenants, that sum should be calculated as net sum, after deduction of outgoings, or on basis that it is gross income, which was due to life tenants under mortgage, which is to be calculated. Held: Capital expended to preserve capital to be deducted from proceeds of sale before distribution. Interest foregone by life tenants not to be taken into account. Determination of quantum of interest due to life tenants based on gross interest. Cases considered by this case Annotations: All Cases Sort by: Judgment Date (Latest First) Annotation Case Name Citations Not (1938) 38 SR (NSW) Followed/ Permanent Trustee Co of 541; (1938) 55 WN Distinguishe NSW Ltd v MacPhillamy (NSW) 212b d Knott, In re; The Trustees [1937] VLR 244; Followed Executors and Agency Co Ltd [1937] ALR 456 v Knott (1933) 33 SR (NSW) Followed Smart's Settlement, In re 412 Not Farmer v Chard (1905) 5 SR (NSW)

Court NSWSC

Date 17/6/1938

Signal

VSC NSWSC NSWSC

25/6/1937 25/5/1933 19/5/1905

Page 30 Followed Applied Considered Considered Considered Atkinson, In re; Barbers' Co v Grose-Smith Cooper v Cooper Equity Trustees Co Ltd v MacMeikan Moore, Re; Moore v Johnson 342; (1905) 22 WN (NSW) 110a [1904] 2 Ch 160 (1902) 8 ALR 212 (1900) 25 VLR 593; (1900) 6 ALR 171 (1885) 52 LT 510 EWCAC iv VSC VSC 1/6/1904 30/6/1902 2/4/1900 22/1/1885

Page 31

Page 32

6 of 10 DOCUMENTS: Unreported Judgments Vic 22 Pages

TRUST COMPANY OF AUSTRALIA LTD v BRAID and ANOR BC9800422

SUPREME COURT OF VICTORIA CAUSES JURISDICTION EAMES J 4733 of 1997 11 December 1997, 20 February 1998
Trusts -- investment secured by mortgage -- default by mortgagor leads to foreclosure and sale -proceeds of sale insufficient to meet losses to life tenants and remaindermen -- application of principles in In Re Atkinson (1904) 2 Ch 160 for apportionment of dividends from proceeds of sale.

Eames J
The plaintiff is a company which has carried on business as a trustee company since 1885. It was previously known as Union-Fidelity Trustee Company of Australia Ltd. The plaintiff acts as trustee of a large number of deceased estates and inter vivos trusts and in that capacity invests the assets of the trusts and distributes the income and capital according to the terms either of the will of a testator or testatrix (in the case of deceased estates) or the Deed of Settlement (in the case of inter vivos trusts). In many of the deceased estates there are tenants for life who receive the income each year and there are also beneficiaries who have an entitlement to annual income in the case of the inter vivos trusts. On 23 February 1982 the plaintiff established under PtVII of the Trustee Companies Act (Queensland) and kept in its books a common fund known as the Common Fund No 2 ("the Mortgage Fund"). This common fund comprised three separate common funds known as MQ6, SQ6, and BQ6. The MQ6 Fund was conducted separately from the two others. By establishing each of the three common funds the plaintiff was able to pool cash assets of the trusts and invest the pooled amounts in various mortgage and other security investments. On or about 14 October 1988 the plaintiff, as trustee of the Mortgage Fund, lent $6.5M to Avram Venture Capital Pty Ltd ("Avram") out of the assets of the MQ6 Fund. The Avram loan was secured by a mortgage over a property at 1 Collins Street, Melbourne (hereafter referred to as "the premises"). On or about 31 October 1989 Avram defaulted in payment of interest due under the loan and on 17 November 1989 the plaintiff served Avram with a notice to pay the principle and outstanding interest. On 29 May 1990 the plaintiff decided to isolate the Avram loan from the other investments in the MQ6 Fund and therefore created a new Mortgage Realisation Common Fund MR1 ("the Realisation Fund") under the Trustee Companies Act 1984 (Vic), to which it transferred the Avram loan. The reason it did this was to facilitate the exercise of the rights of the plaintiff as mortgagee in respect of the Avram loan and to allow the continuation of the MQ6 Fund as an investment vehicle allowing both BC9800422 at 2 deposits and withdrawals without the need to freeze the whole MQ6 Fund. Each of the trusts and individuals who had an interest in the MQ6 Fund had the same proportionate interest in the Realisation

Page 33 Fund. This interest represented 26.4% of their investment in the MQ6 Fund. The plaintiff had entered into possession of the premises in 1989, and had attempted to auction the premises in March 1990 but the auction was unsuccessful. On 11 October 1991 the premises were let to No 1 Little Collins Street Pty Ltd for 12 years, commencing 1 January 1992. Due to the prevailing commercial difficulties in letting premises the plaintiff granted the lessee a rent free period for car parking until 31 December 1994 and for net office rental (but not outgoings) until 30 June 1995. The plaintiff also contributed $700,000 to capital works as inducements for the lessee to enter into the lease. On 4 February 1993 the plaintiff obtained an order for foreclosure under the mortgage over the premises at 1 Little Collins Street, Melbourne. The premises were put for sale by auction on 14 November 1996, but little interest was shown and the property was passed in. On 22 July 1997 the property was sold for $5,800,000. Settlement occurred on 5 August 1997. There is some debate as to the amount now available for distribution. On one view, the sum is $2,949,938, but if certain deductions are not permitted then the sum available is $3,036,880. I am not asked to resolve that debate. The sum obtained at the sale is insufficient, by many millions of dollars, to satisfy both the sums which was due under the mortgage to the income beneficiaries by way of interest on the investment, and to allow repayment in full of the capital to the remaindermen. From the time when it entered into possession of the premises in 1989 until 30 June 1996 the plaintiff dealt with the income received by deducting expenses (other than interest) and has distributed the balance of the funds received ($175,432) to the unitholders of the Realisation Fund. Since 1990 the Realisation Fund has incurred capital expenditure of $1,679,813 in relation to the premises. BC9800422 at 3 The firstnamed defendant represents all life tenants and income beneficiaries (or their estates) of the trusts (as defined in para3 of the affidavit of B G Barker sworn 19 March 1997) whose interests were terminated after 21 October 1989 and before 4 February 1993. The secondnamed defendant represents all the remaindermen of the trust. The plaintiff has applied to the Court by originating motion seeking: "The determination without administration of the following questions in relation to each of the estates and settlements ('the trusts') of which it is trustee and which have an interest in the Common Fund established by the plaintiff and known as the Mortgage Realisation Common Fund MR1: 1. Whether in the events which have happened, in the case of each of the Trusts the plaintiff should pay or apply any part of the funds to which it is entitled as Trustee out of the net proceeds of sale of the property known as 1 Little Collins Street Melbourne to or for the benefit of the life tenants or income beneficiaries (collectively 'the beneficiaries') of that Trust. 2. If yes to question 1, on what basis ought the amount to be paid to each of the beneficiaries be calculated?" The matter came before Master Evans who made an order on 31 July 1997 referring the following preliminary question to a judge: "In this proceeding, should the proceeds of realisation of the subject property be apportioned between life tenants and remaindermen for the said trusts pursuant to a rule in Re Atkinson (1904) 2 Ch 160 as at: (a) the date of foreclosure; (b) the date it first became apparent to the trustee as a matter of business certainty that the trust investment would be realised at a loss; (c) some other and, if so which date." On 17 October 1997 Smith, J delivered a judgment on the question of the appropriate date for apportionment of the losses pursuant to the question asked by Master Evans. His Honour held that the appropriate date was the date of foreclosure, namely, 4 February 1993. I gratefully acknowledge that I have

Page 34 drawn on his Honour's BC9800422 at 4 judgment, generally, and, in particular, for my opening description of the background information and history of this dispute. The issues now before me are threefold: first, as to the treatment of the capital expenditure which was made by the trustee after foreclosure in order to preserve the capital asset; secondly, whether, in calculating the sums to be taken into account in application of Re Atkinson the life tenants should be regarded as having been entitled to interest on the capital sums applied by the trustee for the purpose of preservation of the security; and, finally, whether in calculating the sums which were due by way of income to the life tenants, that sum should be calculated as a net sum, after deduction of outgoings, or on the basis that it is the gross income, which was due to the life tenants under the mortgage, which is to be calculated. As was made clear in the written outlines of arguments submitted on behalf of the defendants, and in the course of argument, there are a number of matters relevant to the calculation of and distribution from the available pool upon which there is no dispute between the parties. I note, for example, that there was apparent agreement with the proposition stated in Dr Hardingham's outline of arguments on behalf of the remaindermen (para9) that sums actually received by the life tenants in reduction of interest payable to them must be deducted from their entitlement. TREATMENT OF THE EXPENDITURE OF CAPITAL FUNDS USED TO PRESERVE THE SECURITY Interestingly, the difference in the respective positions of the parties as to the first issue does not involve any disagreement as to the state of the authorities. Dr Hardingham submitted that the contention which he advances is consistent with authority of this Court. Ms McMillan agrees that that is so, but submits that I am not bound to follow the applicable authority, and should not, since it leads to an unfair result, and since the decision of this Court on which Dr Hardingham primarily relies demonstrates flawed reasoning, and has not been followed in other States. Where default by a mortgagor has led to a sale of the mortgaged property, and, in turn, the sale reaped insufficient funds so as to enable the trustees to BC9800422 at 5 both pay the whole of the income which had been due to the life tenants up until the time of foreclosure, and also to return to the remaindermen the whole of the sum invested as capital, then a means of sharing equitably the losses had to be devised by the courts. It was held in Re Atkinson that the respective sums which should be paid to the life tenants and to the remaindermen from the proceeds of sale should be assessed as between them in proportion to the amounts due to them pursuant to the investment. The application of the principle in Re Atkinson requires the Court, therefore, to quantify the sums which the life tenants and remaindermen may claim to have been their due during and upon successful completion of the mortgage investment. That, in turn, requires consideration whether any of the sums expended by the trustee from the time of taking possession, until the date of foreclosure, should be taken into account in quantifying either the pool of funds available for distribution on Re Atkinson principles, or the quantum of the respective entitlements to income or capital of the life tenants and remaindermen which must be taken into account for calculation of their respective dividends from the pool. In Jacobs, "Law of Trusts in Australia", 5th Ed, the learned authors, at p505-p506, citing Permanent Trustee Co of NSW v MacPhillamy (1938) 38 SR(NSW) 541, state that where monies had been expended from capital by the trustee-mortgagee in order to protect the security asset, then such amounts should be added to the amount of the mortgage and treated as capital which would have been due to the remaindermen, in order to calculate the proportional allocation of the available sum, as between those entitled to capital and income, in accordance with the rule in Re Atkinson. The learned authors note, however, that the position in Victoria is different, because in Re Knott [1937] VLR 244, it was held by Lowe J that such amounts of capital expended to preserve the security should be deducted from the proceeds of sale before the apportionment is made, thereby reducing the pool. If that approach was adopted, then the remaindermen

Page 35 would not have lost any portion of that additional capital sum by virtue of the default. On the other hand, were the approach in MacPhillamy to be the one adopted, then the remaindermen would suffer a loss as to that additional capital sum, although, by having that sum taken into account in the Re Atkinson BC9800422 at 6 calculations, the remaindermen might hope to recover some portion of that sum as part of their final dividend from the pool. Dr Hardingham, not surprisingly, submitted that I should follow Re Knott. The decision of Lowe J in Re Knott is quite brief. His Honour was concerned with an asset, left under a will, which comprised a right under contract for the sale of property owned by the testator. The purchaser made some payments of principal and interest, but then fell into arrears. In order to preserve the asset the executors paid various sums by way of outgoings due on the land. The property was sold for such sum as meant there was a deficiency as to funds required to meet both principal and interest. His Honour held that the distribution would follow the principles in Re Atkinson. As to the capital expenditure, his Honour simply stated that that sum was to be deducted from the fund before apportionment. No authority was expressly cited in support of that conclusion. In MacPhillamy, a case where trustees sold a mortgage property in a sum insufficient to meet the sums due to capital and interest, Nicholas J came to the opposite conclusion to Lowe J. Once again, the reasons of Nicholas J are very brief on this issue. Somewhat surprisingly, the only authority referred to by Nicholas J, but without any comment, was Re Knott, a decision which, as I said, was at odds with his Honour's decision, as to the treatment of such capital expenditure. There is some force in the suggestion of Ms McMillan, who appeared for the income beneficiaries/life tenants, that the decision in Re Knott merely reflected the application of the traditional principles relating to the respective entitlements and obligations of trustees and beneficiaries with respect to expenses incurred during the period of an investment of trust funds in property secured by a mortgage (see, for example, Ford and Lee, "Principles of the Law of Trusts", 3rd Ed, para11260). Those principles, whilst relevant to the situation where there had been no default by the mortgagor, should not be applicable, Ms McMillan submitted, when there has been default which was followed by foreclosure and then by a sale which produced insufficient funds to meet the entitlements of both life tenants and remaindermen. As Ms McMillan noted, although the established legal principles might stipulate that BC9800422 at 7 certain expenses during the currency of a mortgage investment are to be met from income rather than from capital - for example, ordinary recurring repairs to the property - the reality is that where the mortgage proceeds without default by the mortgagor then such expenses are in fact met by the mortgagor, and not by the life tenants. Ms McMillan submitted that I should apply the guiding principle which provides the conceptual basis for the approach adopted in Re Atkinson, namely, that losses as between life tenants and remaindermen should be fairly apportioned and shared, since neither was responsible for the default, and since both had suffered thereby. The decision in Re Knott was not in accordance with that principle, she submitted. Ms McMillan submitted that the decision in Re Knott presumed that the expenditure of the capital for preservation of the asset should be treated on the basis that since capital is the entitlement of the remaindermen, they are entitled to have it returned in full, and not to have it treated as being one incident in the loss which resulted from the default of the mortgagor. Were that decision to be followed, Ms McMillan submitted, would be to ignore the fact that not only were the sums applied solely to preserve the capital asset, but by so applying them to that purpose the trustees had denied to the life tenants their entitlement to have that capital sum invested on their behalf so as to gain interest thereon. The decision of Lowe J does not stand alone. Some implicit support for the approach in Re Knott is discernible in Equity Trustees v MacMeikan (1900) 25 VLR 593, and in Cooper v Cooper (1901) VLR 649, a decision of the Full Court, and a subsequent decision, under the same title, Cooper v Cooper (1902) 8 ALR 212, of Hodges J In MacMeikan, which was also a mortgage default case, sums had been expended for outgoings which were both of a capital nature and also represented items which would have been the responsibility for the tenants for life to have met, out of income, during the currency of a successful

Page 36 mortgage investment. Madden CJ held, at 598-599, that the capital outgoings should be first deducted from the sum available to be distributed, but when asked if that also applied to sums which had been paid out of income, said that that was not the case, because the tenant for life "was then receiving BC9800422 at 8 income and was under an obligation to satisfy these reasonable repairs, etc, and having satisfied them they are done with". The Full Court decision of Cooper v Cooper concerned a case where expenses of sale of mortgaged property had been deducted by the trustees from sums which had been received as rent. A'Beckett J (with whom Madden CJ and Hodges J agreed) observed, at 652, that the tenants for life could not succeed in their complaint that their entitlement had been thus reduced in favour of the capital beneficiaries. The Court held that it was only "the net proceeds of sale" which were to be available for distribution as between life tenants and remaindermen. Where, however, rental payments had been expended on the purchase of another capital item, then the tenants for life would have a legitimate complaint that their funds had been allocated to capital. The Full Court in that case granted liberty to apply, and the matter came before Hodges J (reported in (1902) 8 ALR 212). Hodges J held that the sum to be apportioned was to be first reduced by such amounts as had been expended in aid of preservation of the security, and held that that is what the Full Court had meant when it, in turn, had held that the pool for distribution was to represent only "the net proceeds of sale". His Honour held, at 212, that were it to be otherwise, and were sums such as those expended to enhance the sale, by way of advertising, etc, to be taken into account for the calculation of sums to be distributed, then: "...it would be to a degree unjust that the remaindermen should be advancing money for the purpose of making the sale more profitable, and for the purpose or allowing the tenants for life probably a slightly larger dividend, and that they should take a dividend only on the moneys so expended. By such a procedure in probably nearly every case the remaindermen would lose considerably, while the tenants for life would gain. And they would gain by proving on, and getting dividend on, the moneys which had been expended for the purpose of making the sale profitable." As is apparent, the benefit to the life tenants which his Honour had in mind was that the higher the sum received at auction the greater would be the pool of funds available upon which to apply the Re Atkinson apportionment. Save for that benefit, there would be no other direct benefit to the life tenants by virtue of the expenditure of such capital sums; indeed, the life tenants have been denied the benefit BC9800422 at 9 of interest which may have come to them had the additional capital sums been invested, rather than applied to the preservation of the mortgaged property. It might be argued, with some merit, that in the passage quoted, above, Hodges J rather understates the benefit which flowed to the remaindermen and understates the loss that would be produced to the life tenants, by such investment of capital sums. The contrary view, argued by Ms McMillan, is that the expenditure of such capital sums was to the benefit and to the detriment of both and that, especially if the life tenants are not to be entitled to have taken into account their lost income on that sum, fairness suggests that this sum should be included in the pool available for distribution. The significant benefit which would flow to the remaindermen were I to follow Re Knott was demonstrated by a series of calculations made by Ms McMillan, which suggested that the life tenants' dividend in applying Re Atkinson could be reduced by as much as 40% were that course to be adopted (and were I to reject, too, other arguments which she advanced as to the appropriate bases for calculation of the relevant sums to be taken into account when applying Re Atkinson). However, whatever doubts one may have as to the fairness of having the capital expenditure deducted from the sums available for distribution, as stipulated in Re Knott, the fact remains that there is clear authority, not only in the judgment of single judges of this Court but also in Full Court authority, consistent with the decision in Re Knott. It is to be noted, too that although Lowe J did not expressly refer to any authorities in Re Knott, both MacMeikan and the Cooper v Cooper cases had been cited to him in argument. Ms McMillan submitted that the underlying assumption, in all four cases, was that the principles applicable to the treatment of expenses where an investment is proceeding satisfactorily should be equally applicable

Page 37 to situations where the mortgagor is in default under the mortgage, and where a sale has resulted in an insufficiency of funds to meet all liabilities. Under established principles applicable during the successful course of a mortgage investment, life tenants are entitled to gain the whole of such interest as is actually paid or should have been paid up to the time of foreclosure, but from income must be deducted any amounts due by way of expenses BC9800422 at 10 relating to the production of income. The capital beneficiaries, on the other hand, are entitled to have the whole of the capital returned to them, and insofar as any of the capital is applied by the trustees to preserve the capital, the capital sums, being capital, remain due to the remaindermen. Ms McMillan submitted that the application of those rules to a situation where, through no fault of either, losses will occur for both life tenants and remaindermen, ignores the purpose which Re Atkinson sought to serve. I agree that the decided cases to which I was referred do not discriminate between, on the one hand, the situation where a mortgagor has fallen into arrears and caused losses to the life tenants and remaindermen, and on the other hand, the situation where there has not been a mortgagee sale which has produced an insufficient sum to meet those obligations. However, whilst the arguments advanced by Ms McMillan are not without their attraction, I consider that I should follow the authority cited, above, that authority not being distinguishable, nor obviously wrong. In any event, I do not consider that to follow Re Knott would be to defeat the objective sought to be attained by the principle in Re Atkinson. I therefore reject Ms McMillan's submission as to the treatment of the capital funds used to preserve the security. ENTITLEMENT TO INTEREST ON CAPITAL SUMS USED TO PRESERVE THE SECURITY Ms McMillan submitted that not only was it unfair to the life tenants that capital sums expended on preserving the security property were not brought into account when the Re Atkinson allocation was conducted, but the life tenants had also been deprived of interest which they could have gained on the capital sums which, instead of being invested so as to gain interest for the life tenants, were expended so as to preserve the security for the capital. Ms McMillan submitted, that if I acceded to her opponent's arguments as to the first issue, above, then in the absence of any authority against her submission on this second issue I should recognise and allow - to the benefit of the life tenants in the application of Re Atkinson - the loss of interest suffered by the application of capital funds to the preservation of the security. BC9800422 at 11 With the possible exception of Permanent Trustee Co of NSW v Fraser (1922) 22 SR (NSW) 541, which, in my opinion, turns on its own facts and is not analogous to the present application, Ms McMillan was unable to cite any authority which supported her contention that for the purposes of applying Re Atkinson allowance should be made for interest, in this way. One case which is possibly analogous is In Re Moore (1885) 52 LT (NS) 510. In that case Pearson J was dealing with a claim for compound interest made on behalf of life tenants. It was submitted to his Honour that not only had the default of the mortgagor denied payment to the life tenants of the sums due by way of interest, the life tenants had lost an additional sum of money, as represented by the interest which they could have earned by investing the instalments of interest paid to them by the mortgagors as they fell due. It was a claim, therefore to compound interest. His Honour rejected the argument that an allowance for that interest should be taken into account when making the calculations under Re Atkinson. Although the issue in that case was not identical to that which is raised by Ms McMillan, there are some similarities, in that although Ms McMillan is not arguing for compound interest, rather than for interest on another sum of capital which has been allocated towards protection of the security, rather than invested so as to gain interest, in both cases the losses identified by the life tenant arose solely by virtue of the fact that there had been unexpected default under a mortgage. In rejecting the claim to compound interest Pearson J held, at 433-34, as to the claim that the life tenant had lost the additional interest: " . . .the question before me is whether I have any fund out of which I can compensate him for that loss. Under the mortgage all that could have been got would have been the principal and simple interest" (my emphasis).

Page 38 Pearson J considered, and rejected, an argument that, as interest fell due, the executors should have sought and obtained judgments for the instalments of interest and could then have made the judgments a charge against the property. His Honour held that such charges would have arisen subsequent to the mortgage which provided only for simple interest. His Honour added: "I have, therefore, no fund at all out of which I can take the money for compensating the tenant for life in respect to BC9800422 at 12 compound interest. If I did allow it, I should be taking it out of other people's money to pay him." In other words, his Honour saw the Re Atkinson principles as requiring assessment only of the sum of interest actually due under the terms of the original mortgage. In the present application it may be said that whilst the tenants for life may identify the additional losses of interest (on the capital sums which had been utilised in support of the security) as losses which arose by virtue of the default, the actual entitlement which they had, had there been no default, is only for payment of the interest due under the mortgage. Whilst the life tenants seek to identify an additional and consequential loss in addition to the loss of interest which was directly due under the mortgage, so too might the remaindermen have identified additional and consequential losses. The courts do not appear to have recognised, for example, that the remaindermen have also suffered an additional loss by virtue of the fact that had the corpus been repaid in full, in a timely manner, they would have been able to invest the corpus and have gained interest thereupon. For the purpose of the calculations under Re Atkinson the remaindermen are confined to calculation of their entitlements to capital. Dr Hardingham sought to gain further support for his opposition to the application by reference to the brief response of Madden CJ to the suggestion made by counsel in MacMeikan that sums paid by the trustees out of interest after taking possession should be first repaid before the pool was calculated, just as sums taken out of capital for the purpose of preserving the security could be removed from the pool, in favour of the remaindermen, before its distribution. The Chief Justice rejected that proposition, but did so on the basis that when the particular expenses relating to the security had been paid from interest funds, the charges had been appropriately made, because not only was there interest being paid at that time but the items were items which were properly the responsibility of a life tenant, rather than a remainderman. I will discuss these remarks, in the judgment of Madden CJ, in more detail, later, when I consider the third of the issues before me. The passage in the judgment has some relevance to that third issue, but I do not consider that this decision provides much assistance on the present issue. BC9800422 at 13 The principle in Re Atkinson seeks to ensure, so far as is possible, that the life tenants and remaindermen recover as much as possible of the sums to which they respectively would have been directly entitled had the investment of capital been successful. In other words, in assessing the respective losses of life tenants and remaindermen the principle is concerned with the calculation of sums which, as a matter of fact and law, were due by way of interest or capital to the respective beneficiaries. This explains the references of Vaughan William LJ, at 165-166, in Atkinson to "that loss", and to "the security", in the following passage: "What was the security for? It was a security equally for the principal and interest. I will venture to enunciate, not a calculation, but a principle here which one ought to apply in these cases, and that principle is, that there having been a loss, one must take care that there is rateable equality in the incidence of that loss." The principle in Re Atkinson is not concerned with indirect or consequential losses which arose in consequence of the failure to recover the primary sums to which the life tenants and remaindermen would have been entitled under the mortgage. Furthermore, whereas it may be said, at least, that protection of the capital, by use of other capital, had a benefit for both life tenants and remaindermen, the claim for additional interest which is now advanced by Ms McMillan can be of benefit only to the life tenants. The claim to additional interest has no bearing on the recovery of the original investment fund, and interest due under it, but relates to an entirely distinct and consequential loss suffered by reference to funds other than the invested capital. I am not persuaded that it would be consistent with principle for the application of Re Atkinson to accede to

Page 39 Ms McMillan's argument on this second issue, and I conclude that the interest foregone on the additional capital sums is not to be taken into account for the Re Atkinson calculations. CALCULATION OF INTEREST DUE TO INCOME BENEFICIARIES/LIFE TENANTS As I earlier noted, Smith J has held that the calculation of the respective sums due to the income beneficiaries and to the remaindermen upon application of the principle in Re Atkinson should be determined as at the date of foreclosure. In that BC9800422 at 14 case it was decided that the apportionment is to be made in proportions which the sums due to the remaindermen, by way of capital, bear to the sums due to the life tenants, by way of interest. In assessing what was the sum by way of interest which was due to the life tenants under the mortgage Dr Hardingham submitted that the gross amount due for interest should have deducted from it such outgoings as rates, taxes, management fees, repairs and similar expenses which were incurred by the trustee - after taking possession - with respect to the property. Thus, Dr Hardingham submitted, it is the net interest, after deduction of such expenses, which is the figure which should be used in calculating that proportion of the total available pool which should be payable to the life tenants. In his written outline of argument Dr Hardingham listed a series of expenses which, he submitted, were appropriately deducted for that purpose. The items of expenditure listed by Dr Hardingham are undoubtedly regarded as the responsibility of the life tenants, rather than the liability to be met out of capital, when the mortgagor is in possession and paying interest under the mortgage. The items listed by Dr Hardingham are rates and taxes, insurances, management and agent's fees, interest paid, repairs, maintenance and power, trustees management fees and sundry administrative expenses. Counsel for the life tenants, Ms McMillan, submitted that in determining the sum due to the life tenants for the purpose of application of the Re Atkinson principles, the life tenants should be deemed entitled to the gross sum of interest, before any deductions had been made for any such outgoings. The question whether the life tenants were entitled to gross or net payment of interest once the trustee went into possession of the security property had been the subject of conflicting authority. According to the learned authors, Ford and Lee, "Principles of the Law of Trusts", supra, at para11380, whilst there was no actual decision on the issue in England, the position had never been questioned by the judges in that country that where the trustee entered into possession of a property which had secured a mortgage which was in arrears, it was from the net, and not the gross, income that the life tenants were entitled to be paid funds by way of income due to them. That position had been affirmed by A J Simpson CJ in Eq in Farmer v Chard (1905) 5 SR BC9800422 at 15 (NSW) 342. However, in Re Smart's Settlement (1933) 33 SR (NSW) 412, Harvey CJ in Eq held, that Farmer v Chard had been wrongly decided. Harvey CJ in Eq held, instead, that the gross sum due for interest had to be paid, first, to the life tenants, and only then would normal outgoings such as rates, taxes and repairs be paid by the trustee. Ford and Lee suggest that it was the decision in Re Smart's Settlement which was wrongly decided, and that it should not be followed in Victoria. Dr Hardingham urges me to adopt that suggestion, and to follow, instead, Farmer v Chard. The judgment in Farmer v Chard was very brief, and Simpson CJ in Eq did not actually offer any reasons for the conclusion which he reached. The absence of any reasons for the decision was not the subject of adverse comment by the learned authors, Ford and Lee. The authors did, however, criticise the reasoning of Harvey CJ in Eq in Re Smart's Settlement. The latter was not a case where foreclosure had occurred, but was a case where the trustees had sought directions as to the allocation of expenses as between life tenants and remaindermen when, as a result of default of the mortgagor (not only as to payments of interest, but also in making payments of rates, taxes and for repairs), they entered into possession. In that case, by indenture of settlement, the settlor had assigned various properties to the trustee upon which the trustee should derive interest and pay the interest to the settlor. Upon the death of the settlor the properties were to be dealt with under various trusts. One of the assets which was assigned to the trustees under the deed of

Page 40 settlement was a mortgage to secure a debt. It was that asset, the mortgage, which fell into arrears, not only in the payment of rates and taxes but also the mortgagor had failed to make necessary repairs. In a careful judgment, Harvey CJ in Eq examined the conclusion reached in Farmer v Chard, and acknowledged the legal acumen of Simpson CJ in Eq. His Honour held, however, that the decision in Farmer v Chard was so clearly wrong that he was compelled to decline to follow it. Harvey CJ held, at 415: "It is obvious that where a trustee goes into possession of mortgaged property, which is an investment of his trust funds, the trustee is not in possession of a settled property. He is in possession of a settled debt. It is the debt which is settled between the tenant for life and the BC9800422 at 16 remaindermen, and not the mortgaged property; and until foreclosure occurs, whereby the mortgaged property becomes trust property, and the only persons interested are the trustees on the one hand and the beneficiaries under the trust on the other, different considerations apply. One has to notice this fact, that the duties of the trustee with regard to the property are primarily those of a mortgagee in possession to his mortgagor. He goes into possession of a property over which there is an overriding charge to the local government authority for rates and taxes. He has no obligation to his mortgagor to pay those. His obligation to his beneficiaries to pay those is really determined by questions of salvage. Whether the mortgage did authorise him or not to pay the cost of rates and taxes and of necessary repairs and add them to the debt as a further charge, he has a right as against the mortgagor and a duty as against his beneficiaries to do both to the extent that he can charge the costs as a further advance. His rights as between himself and the mortgagor also determine the respective rights of the life tenants and remaindermen. As between them it has to be regarded as a problem whether it is advisable for the trustee to make a further advance on that mortgaged property; and any moneys, which are so advanced for the purpose of paying the overriding charges of rates and taxes or repairs in the nature of preservation of the property must be regarded as a further investment of capital funds." His Honour held that the error apparent in Farmer v Chard was that the judge treated the mortgaged property as being, itself, the asset which was settled under the trust, rather than it being the debt, as protected by the mortgage, which was the asset which had been settled. He highlighted that error by reference to the allocation of funds by the trustees in Farmer v Chard for the repairs to the mortgaged property. In effect, his Honour held that whilst running repairs to trust property - which had been mortgaged so as to attract interest - would be payable from income, rather than from capital, the same situation did not apply when it was repayment of a debt which was the entitlement of the life tenant. His Honour continued, at 416-417: "In my opinion there is no right under such circumstances to charge any portion of the repairs against the rents and profits. In my opinion the rents and profits have to be applied as between tenants for life and remaindermen in the same way as they have to be applied between the mortgagee-trustee and the mortgagor, that is to say, the rents and profits are first to be applied in payment of the interest on the mortgage. That is the amount which the tenant for life is entitled to receive. He is entitled to receive the income on the investment quite irrespective of what becomes of the mortgaged property, how much it BC9800422 at 17 has improved, or how much its rental value may increase in the hands of the trustee. Any increase of that sort enures to the benefit of the remaindermen, and not to the tenant for life. The tenant for life does not get any benefit from increased rents from the property. He is the tenant for life of a mortgage debt. His rights are limited to the interest payable on the mortgage debt; and, as between tenant for life and remaindermen under those circumstances, it seems to me that any moneys which have to be advanced by the trustee for rates and taxes and for repairs, which he is entitled to treat as a further advance on the mortgage moneys, must be treated as an advance solely made out of capital moneys not to be recouped out of income. Capital moneys are transferred from one form of investment to another, that is all. As soon as the property is foreclosed, a different position arises. It then strictly becomes a settled property, and there is no longer any question of making repairs as between the trustee mortgagee and the mortgagor in future. For those reasons I think that I should definitely decline to follow that portion of the decision in Farmer v Chard (supra)

Page 41 which directed that there should be a refund of the capital advanced by way of repairs out of income. The first sum to be paid out of rents and profits is the interest to the tenant for life. The balance of the income which is collected by the mortgagee in possession must be applied, as it would be applied as between himself and the mortgagor, that is to say, so far as it will extend in payment of rates and taxes or in payment of current repairs. Any further money required must be treated as between the mortgagee and the mortgagor, as a further advance; and, as between the tenant for life and remaindermen as a further investment of capital moneys of the estate. If there is a surplus it is applied in repayment of the capital debt." I have dealt with the reasons for decision of Harvey CJ in Eq in some detail so as to highlight the fact that the decision was a carefully considered one, which appears to be applicable to the facts of the case before me. The outcome which would result were I to follow that decision, also seems to me to be one which most fairly allows for a sharing of the losses which resulted both to the life tenants and to the remaindermen by virtue of the default under the mortgage. This, in turn, would accord with what was said to be "the fundament object of the rule in Re Atkinson which is to apportion the loss suffered by those whose entitlement was secured by the mortgage security in question and to do so in such a way as to achieve rateable equality" (per Smith J, in his earlier judgment in this case: unreported 17 October 1997, p24) BC9800422 at 18 The situation in the present case is, of course, different to that in Re Smart's Settlement, in that I am concerned with a situation where the property was eventually sold, but had realised insufficient funds to satisfy all beneficiaries. In such a situation it might be thought that it would be an overstatement to suggest that the life tenants would have no interest, at all, in the expenditure of money, for example, on repairs to the property. The sum realised at auction would determine the total available in the pool for distribution between life tenants and remaindermen. On the other hand, the payment of such sums as rates and taxes and other like expenses might also be thought to be of some benefit to the remaindermen in ensuring, indirectly, at least, the maximum sale price is obtained. Whilst these competing considerations might not equally be applicable, or with the same weight, to all of the outgoings listed by Dr Hardingham, I see no reason to differentiate between the listed items for the purpose of this assessment. They are all expenses incurred after the taking of possession and before foreclosure, and the reality of that situation is that both life tenants and remaindermen benefited from the expenditure of those sums, as they were part of the costs which were incurred so as to ensure that the property would be maintained in a good state, and be well managed so as to ensure that the maximum return would be obtained on sale of the property, thereby increasing the pool available for distribution. There being good reasons why I might follow the decision in Re Smart's Settlement, I turn to consider the criticism of that judgment. The learned authors, Ford and Lee, in "Principles of the Law of Trusts", para11380, after discussing the ambiguity inherent in references which appear in the authorities to the entitlement of a life tenant to "income" (given that it could mean net or gross income), concluded that having regard to the life tenant's entitlement to receive income of a business carried on by trustees, "the only sensible meaning to attribute to income in this context is the net income, after management expenses have been met. These expenses have always to be met, and it is submitted that the distinction made by Harvey CJ in Eq between property which is trust property and property which is a security for moneys lent, being the security which the trustees have BC9800422 at 19 taken upon themselves to possess and manage for the better protection of the loan made by the trustees, is a distinction which does not warrant the holding that income means gross and not net income." As earlier noted, the learned authors suggested that the decision in Re Smart's Settlement was contrary to the view "never questioned, even if never actually decided in England". The authors observed that legislation had been passed in New South Wales to "rectify the position" which resulted from the decision of Harvey CJ in Eq. The legislation in New South Wales, has subsequently been adopted in South Australia, Western Australia, and Queensland.

Page 42 The NSW legislation, s39A(1) of the Trustee Act 1925, provided that where trust capital was invested under a mortgage and the trustee entered into possession the trustee was obliged to first pay rents, taxes, rates, outgoings and insurance premiums, as well as the costs of executing necessary repairs, plus sums expended in keeping down all annual sums or other payments, and the interest on all principal sums having priority to the mortgage. Thereafter, it was the balance of such funds, ie the net interest, which was to be applied according to the terms of the trust for the benefit of the beneficiaries. However, far from the legislation "rectifying" the position by overcoming the effect of Re Smart's Settlement, it expressly adopted that decision. In Jacob's "Law of Trusts in Australia" 5th Ed, para1959, the learned authors simply state that prior to the legislation being enacted, the law on this matter was settled by Re Smart's Settlement. Furthermore the authors of Jacobs then observed that by s39A(3) the legislation "preserves the right of the life tenant to whole or partial recoupment of the income lost to him by the trustee making the payments of rates and other outgoings out of the income, for the amounts so expended are, by subs(3), to be regarded as arrears of interest." S39A(3) provided that where funds secured under the mortgage are recovered, either in whole or part, and whether by forced sale or by repayment in full that part of the income applied by the trustee to meet the expenses and outgoings referred to in s39A(l) is to be treated as arrears of interest due to the life tenant. In BC9800422 at 20 effect, Ms McMillan submitted, the life tenants would be held entitled to have the gross income which had been due to them under the mortgage taken into account, not the net, for the purposes of a Re Atkinson calculation. I have been guided by the decided cases in determining the first two issues in this case, but, on the third issue I am urged to reject the decision of a senior equity judge which has not been overturned in the sixty years since it was decided. I find myself quite unpersuaded by the argument of the learned authors, Ford and Lee, in "Principles of the Law of Trusts" in support of the contention that Re Smart's Settlement was wrongly decided. The submission that fairness dictates that the life tenants have their entitlement to gross receipts of income, rather than net receipts, taken into account when the Re Atkinson calculation is made, is strengthened, in my opinion, when, as I have held, the remaindermen are to be entitled to have capital payments deducted from the pool, although those sums have been applied to the preservation of the security, and have been applied (as I have also held) without any compensation being awarded to the life tenants for lost income on those funds so expended. If the remaindermen gain such a benefit with respect to payments made after the mortgagor has defaulted (which produced detriment to the life tenants as well as the remaindermen), then, in my opinion, payments of rates and taxes and the like should be treated as being equally for the benefit of both groups in those circumstances. Why, then, should not the life tenants be entitled to have their gross entitlements to income taken into account for the purpose of the calculation? Dr Hardingham submitted that the correctness of the decision in Farmer v Chard, and, therefore the correctness of the observation in Ford and Lee, could be gleaned from a cryptic response of Madden CJ in MacMeikan, supra, at 598-599, to which I have earlier referred. Having concluded that, for the purpose of a Re Atkinson calculation, sums expended from corpus by way of fire insurance, repairs and similar expenses (items which, he held, would ordinarily be payable from income and not corpus) should be deducted from the pool before the Re Atkinson calculations were made, his Honour was asked whether payments for such items of expense as had been BC9800422 at 21 made from income should also be deducted before the calculation was made. His Honour responded that that was not so because the life tenant: "was rightly charged with that. She was then receiving income and was under an obligation to satisfy those reasonable repairs, etc, and having satisfied them, they are done with". I accept that the situation in the present case bears similarities to that discussed by Madden CJ, insofar as the present issue is concerned. As is disclosed in Exhibit "PBF-2" to the affidavit of Paul Brereton Falkiner

Page 43 Simmons, sworn 1 May 1997, at the time when the trustees took possession of the property in the present case (in December 1989) the property was fully tenanted and rents were received by the trustees for the entire time until foreclosure. It was from those rental returns that the trustees made payments of rates and taxes, insurances, management and agents fees, interest, repairs, maintenance and power, and legal expenses. The balance was then paid to the life tenants. The decision in MacMeikan was not considered by Harvey CJ in Re Smart's Settlement, which was decided some thirty years later. The response made by Madden CJ to the question of counsel is made not made with the benefit of any argument of counsel as to the appropriate principles which should be applied, and apart from the brief reasons which I have quoted, above, no reasons are given for the response of the Chief Justice to the question. In those circumstances, I am not persuaded that the carefully reasoned decision of Harvey CJ in Eq should be rejected. Accordingly, although not bound to follow the decision in Re Smart's Settlement, I am satisfied to do so. The determination of the quantum of interest due to the life tenants for the purpose of the calculation and application of Re Atkinson should, therefore, be based upon the gross interest due, not the net interest. OTHER MATTERS Counsel for the trustee observed that although some $1.679M in capital expenditure occurred, that expenditure benefited not merely the defendants in this case but also beneficiaries under other trusts. Thus, some adjustment may be needed before calculation is made of the appropriate sum related to capital expenditure which should BC9800422 at 22 be factored into the calculations for the application of the Re Atkinson principle. I merely note that fact. I have not been asked to make any ruling on that matter, but it seems likely that the parties will reach agreement as to the appropriate adjustment which should be made. Finally, I note that Ms McMillan foreshadowed an application to challenge the entitlement, at all, to claim the sums charged by the plaintiff trustee, by way of its expenses of management of the fund, or else to challenge the quantum of those charges. Such an application is not raised by the originating motion. I indicated to counsel that I would consider giving directions, if requested, relating to the litigation of that issue, but would not deal with the issue in the proceedings which were before me. Order The answer to the questions posed in the Originating Motion are as follows: 1. Yes. 2. In accordance with the terms of this judgment. I will hear the parties as to costs and any consequential orders. Counsel for the plaintiff: Mr T Murphy Solicitors for the plaintiff: Aitken Walker & Strachan Counsel for the first defendant: Ms C McMillan Solicitors for the first defendant: Maddock Lonie & Chisholm Counsel for the second defendant: Dr I Hardingham QC Solicitors for the second defendant: Purves Clarke & Richards

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Page 45

7 of 10 DOCUMENTS: Victorian Reports/Judgments/1998 4 VR/TRUST COMPANY OF AUSTRALIA LIMITED v BRAID and Another - 1998 4 VR 97 - 17 October 1997 17 pages

TRUST COMPANY OF AUSTRALIA LIMITED v BRAID and Another - [1998] 4 VR 97

SUPREME COURT OF VICTORIA Smith J 26 September, 17 October 1997
Trust and trustees -- Life tenant and remainderman -- Capital and income -- Insufficiency of mortgage security -- Apportionment of loss -- Date for apportionment. Where trust moneys have been lent on the security of a mortgage, the trustee forecloses and a loss is incurred on realisation, the loss is borne by life tenants and remaindermen in the same proportion as the arrears of interest and the capital debt bore to one another as at the date of foreclosure and not as at the date when it became apparent as a matter of business certainty that the security would be insufficient to cover interest and the capital repayment. Re Atkinson [1904] 2 Ch. 160 applied Re Broadwood's Settlements [1908] 1 Ch. 115; Re Knott [1937] V.L.R. 244 followed Re Ancketill's Estate; Ex parte Scottish Provident Institution (1891) 27 L.R. Ir. 331; Stewart v Kingsale [1902] 1 I.R. 496; Re Scarfe [1923] S.A.S.R. 459; Permanent Trustee Co. of New South Wales Ltd. v Macphillamy (1938) 38 S.R. (N.S.W.) 541 considered Re Moore (1885) 54 L.J. Ch. 432; 33 W.R. 447; Re Foster (1890) 45 Ch. D. 629 referred to Originating motion The trustee of a number of trusts by originating motion sought answers to certain questions concerning the date for apportionment of losses between the life tenants and remaindermen of the trusts which resulted from a deficiency after foreclosure on a mortgage securing a loan of trust funds and realisation of the mortgage property. The facts are stated in the judgment. T. P. Murphy for the plaintiff. C. F. McMillan for the first defendant. I. J. Hardingham for the second defendant.

Smith J

Page 46

The application The plaintiff is a trustee company previously known as the Union-Fidelity Trustee Company of Australia Limited. It acts as trustee of a large number of deceased estates and inter vivos trusts. In many of these estates and trusts there 1998 4 VR 97 at 98 are persons entitled to income either as tenant for life in the deceased estates or as beneficiaries of inter vivos trusts entitled to income each year. The first-named defendant represents all life tenants and income beneficiaries (or their estates) of the trusts (as defined in para. 3 of the affidavit of B. G. Barker sworn 19 March 1997) whose interests were terminated after 21 October 1989 and before 4 February 1993. The second-named defendant represents all the remaindermen of the trusts. The plaintiff has applied to the court by originating motion seeking:
The determination without administration of the following questions in relation to each of the estates and settlements ("the Trusts") of which it is trustee and which have an interest in the Common Fund established by the plaintiff and known as the Mortgage Realisation Common Fund MR1. 1. Whether in the events which have happened, in the case of each of the Trusts the Plaintiff should pay or apply any part of the funds to which it is entitled as Trustee out of the net proceeds of sale of the property known as 1 Little Collins Street, Melbourne to or for the benefit of the life tenants or income beneficiaries (collectively "the beneficiaries") of that Trust. 2. If yes to Question 1 on what basis ought the amount to be paid to each of the beneficiaries be calculated?

The issue to be determined was further refined by Master Evans by order made 31 July 1997 as follows:
In this proceeding, should the proceeds of realisation of the subject property be apportioned between life tenants and remaindermen of the said trusts pursuant to a rule in Re Atkinson [1904] 2 Ch. 160 as at: (a) The date of foreclosure; (b) The date it first became apparent to the trustee as a matter of business certainty that the trust investment would be realised at a loss; (c) Some other (and, if so, which) date.

Background to the application On 23 February 1982, the plaintiff established a common fund known as the Common Fund No. 2 under Pt 7 of the Trustee Companies Act 1968 (Qld). This common fund comprised three common funds described as MQ6, SQ6 and BQ6. The MQ6 fund was conducted separately from the other two funds. The purpose of the funds was to enable the plaintiff to pool cash assets of the trusts and invest the pooled amounts in a variety of mortgages and other trustee security investments, investments that would not have been available to the trusts concerned individually. Individuals also invested moneys with the company which were placed in the common fund to be invested as part of the common fund. It seems that on 14 October 1988 the plaintiff lent from the assets of the MQ6 fund, the sum of $6.5 million, to Avram Venture Capital Pty. Ltd. ("Avram"). The loan was secured by a mortgage over No. 1 Little Collins Street, Melbourne. The terms of the mortgage included as additional security guarantees provided by John Avram and Kathy Avram. Approximately 12 months later, on about 31 October 1989, Avram defaulted in paying interest. The plaintiff served Avram on 17 November 1989 with a notice to pay the principal and outstanding interest. The plaintiff attempted unsuccessfully to sell the premises by auction on 14 March 1990. Following the unsuccessful sale, the plaintiff decided to isolate the Avram loan from the other investments in the MQ6 fund by creating under the Trustee Companies Act 1984 a new mortgage realisation common fund MR1

Page 47 1998 4 VR 97 at 99 described in the proceedings as "the realisation fund". It transferred the Avram loan to that fund. Each of the trusts and individuals who had an interest in the MQ6 fund had the same proportionate interest in the realisation fund. Unit holders of the MQ6 fund, including co-trustees and beneficiaries of the trusts and investments, were informed of the establishment of the realisation fund in about May and August of 1990. On 4 February 1993, the plaintiff obtained an order for foreclosure under the mortgage over the premises. The result was that the premises thereby became an asset of the realisation fund. Following its entry into possession of the premises in 1989, the plaintiff dealt with the income by deducting expenses other than interest and distributing the balance to the unit holders in the realisation fund. Since 1990 the realisation fund has incurred capital expenditure of $1.717 million in relation to the premises. On 11 October 1991, the premises were let to No. 1 Little Collins Street Pty. Ltd. for 12 years from 1 January 1992. The lease was varied by deed dated 7 April 1995. In accordance with the prevailing commercial circumstances, the plaintiff granted the lessee a rent-free period for car parking until 31 December 1994 and for net office rental (but not outgoings) until 30 June 1995. The plaintiff also contributed $700,000 to capital works as an inducement to enter into a lease. The amount due under the loan to the date of foreclosure on 4 February 1993 was $12,331,211. On 14 November 1996, the premises were put up for sale by public auction. Little interest was received and the property was passed in at $6.6 million. It was subsequently sold on 22 July 1997 for $5,800,000. Settlement took place on 5 August 1997. The amount available for distribution is approximately $2,949,938.00. Common ground It is common ground, and appropriately so, in my view, that where trust moneys have been lent on the security of property and a loss is incurred on realisation, the loss should be apportioned between the life tenant and remainderman in accordance with the principles set out in Re Atkinson [1904] 2 Ch. 160. In that case part of the residuary estate of the late John Atkinson was invested in a mortgage over three farms in Essex. In January 1889, the interest began to fall into arrears and the trustees entered into possession in May 1889. From that date the rents received were paid to the tenants for life but they were insufficient to meet the interest and it was apprehended that when the property was sold the proceeds would be insufficient to pay the principal and arrears of interest in full. The Court of Appeal determined that the sum realised by the security ought to be apportioned between the tenant for life and the remainderman in the proportion which the amount due for arrears of interest bears to the amount due in respect of the capital debt. Vaughan Williams L.J. at 165-6 stated:
What was it a security for? It was a security equally for the principal and the interest. I will venture to enunciate, not a calculation, but a principle here which one ought to apply in these cases, and that principle is, that there being a security for principal and interest and there having been a loss, one must take care that there is rateable equality in the incidence of that loss. Now I proceed to make the calculation which follows upon that principle, and I will take the very words of In re Moore [54 L.J. Ch. 432, 434] Re Moore (1885) 54 L.J. Ch. 432; 33 W.R. 447, "The apportionment of [the sum to be dealt with] will be in the proportions which [the amount due for capital] and [the amount due to the tenant for life for arrears of interest] bear to one another."

1998 4 VR 97 at 100 Romer L.J. analysed the issue as follows at 166:

What is to be done under the circumstances? I should have thought that the way to proceed was clear. In the first place, as to the interest which was paid to the tenant for life, it is clear that the tenant for life was entitled to receive it and to retain it, and that the remaindermen could have no possible claim or equity against the tenant for life in respect of the sums so received in any point of view whatever. That being so, what is the relative position of the tenant for life and the remaindermen so far as concerns the property which remains as security for the debt? They are simply in the position of two persons who have one security for the two debts belonging to them respectively. Notwithstanding the payment of interest to the tenant for life, so far as concerns his arrears of interest the tenant for life has a right as against the remaindermen to have those arrears charged upon the security. The security is a

Page 48
security, not only for principal, but for interest, and that is the right which the tenant for life had against the security and against the remaindermen, and I fail to see any equity on the part of the remaindermen which would enable them to challenge that right. Then, when the security is insufficient to pay the two debts charged upon it, I should have thought it would follow as a matter of clear right that the tenant for life could say to the remaindermen, "Apportion our security, which is a security for my debt as well as yours, between us in proportion to the amount of the debts, in the same way as you would if you had a mortgage given for two separate debts and the security proved insufficient. You would apportion the insufficient proceeds between the two mortgage debts." That, on principle, ends the case.

Cozens-Hardy L.J. delivered a concurring judgment. It is to be noted that at the time judgment was given in that case, it was not clear what the final debt would be and it was acknowledged that that could not be determined until the estate was finally realised when there could then be a final adjustment of rights between the parties. The court accepted, however, that a provisional adjustment could be made at that time with the proceeds then available. It is also common ground that, in the circumstances of this case, the principle enunciated in Re Atkinson should be applied no later than the date of foreclosure -- 4 February 1993. The parties accepted, correctly in my view, the authorities which apply the principle as at that date in cases where the trust security is a mortgage and the trustee forecloses. The two principal cases to which I was referred were Knox v Phillips (1918) 19 S.R. (N.S.W.) 7 and Re Horn's Estate [1924] 2 Ch. 222. In Knox v Phillips the estate funds were advanced on 16 April 1889 on the security of two mortgages. The mortgagor paid interest until 16 October 1894 when it fell into arrears and the trustees entered into possession. The trustees remained in possession until 30 October 1901 and then foreclosed. The trustees attempted to sell the property but were not successful until 1912 when a small portion of the property was sold for 1000. In 1916 the balance of the property was sold for 8000 on a deposit of 1500. The balance was secured by a mortgage bearing interest at 5% per annum. The rents and interest on the purchase money collected by the trustees were insufficient to pay the life tenant the amount of interest secured by the original mortgages. It seems that there was no dispute that the rule in Re Atkinson applied but counsel for the life tenant, while contending that the life tenant could not claim interest after the date of foreclosure at the rate stipulated in the mortgage (presumably the original mortgage) contended that the life tenant was entitled to some allowance. Street C.J. in Equity rejected this argument. He said: 1998 4 VR 97 at 101
It may be hard upon her, but the position, as I see it, is this. The effect of the statutory foreclosure was to extinguish the mortgage debt altogether: Fink v Robertson ((1907) 4 C.L.R. 864)Fink v Robertson (1907) 4 C.L.R. 864. The only debt, therefore, owing to the tenant for life under the mortgage was the amount of interest due at the time of foreclosure and the effect of the foreclosure was to convert the land into a security for that amount and for the amount of the capital debt. The amount due to the tenant for life for arrears of interest was fixed and ascertained by the foreclosure, and after that there was no obligation on the part of anybody to pay interest. She was entitled to whatever the land yielded in the way of rents and profits but this was all.

His Honour concluded that the amount obtained on the sale of the property should be apportioned between the tenant for life and the remainderman:
... in the proportion which the amount due for arrears of interest at the time of foreclosure bears to the amount due in respect of the capital debt.

It is to be noted that in that case the trustees were in possession as mortgagees in possession from 16 October 1894 to 30 October 1901 when they foreclosed on the mortgage. It is not clear in the report whether any arrears of interest built up over that period and whether during that period it was apparent that the security was insufficient to pay principal and interest in full. The issues do not appear to have been canvassed and it was assumed that the life tenant was entitled to claim the interest in arrears at the date of foreclosure. The issue resolved was the question of the entitlement of the life tenant after foreclosure. In the case of Re Horn's Estate decided six years later, P. O. Lawrence J. had to consider a situation where the trustees acting under a power in a will had invested trust money on the security of nine mortgages over

Page 49 nine leasehold estates. This was done between 1891 and 1899. The mortgagor became bankrupt and the trustees foreclosed in December 1915. Subsequently, four of the nine properties were sold but as at 1924, five remained unsold. The net rent of the property exceeded the amount of interest on the mortgage debt formerly secured on the property in the case of two of the five remaining properties. In the case of another two of the properties the net rent was about equal to the amount of the former interest, but in the case of one of the five properties the net rent was less than the amount of the former interest. The trustees of the will sought an answer to the question whether the whole of the net rents of the five properties which remained unsold ought to be treated as income or whether any part ought to be treated as capital. P. O. Lawrence J. considered the situation of the life tenant and remainderman prior to and up to foreclosure and expressed his conclusion as follows at 227:
... all proper apportionments which were or ought to have been made in respect of the rents received during the period preceding the order for foreclosure are not to be disturbed, and when the property is ultimately sold, if the net proceeds of sale amount to or exceed the aggregate of the amount of the interest on the mortgage debt on such property which was in arrear at the date of the order for foreclosure and of the amount of such mortgage debt, the tenant for life will be entitled to receive out of the net proceeds of sale the amount of such interest in arrear, and, if the net proceeds of sale do not amount to such aggregate, the tenant for life will be entitled to receive a proportionate part of the net proceeds of sale calculated in accordance with the rule laid down in In re Atkinson.

Thus it was assumed that the life tenant was entitled to receive the arrears of interest outstanding at the date of foreclosure from the proceeds of sale. Looking at the position as from the date of the order for foreclosure, P. O. Lawrence J. said: 1998 4 VR 97 at 102
... the position is changed to this extent, that the trust fund is no longer represented by a debt, to the interest on which the tenant for life is entitled, but is represented by the property comprised in the mortgage, the net rents of which pending sale a tenant for life is entitled to receive. If this be the true view, no rule of law relating to the apportionment of capital and income between tenant for life and remainderman will be prejudiced, notwithstanding that, as from the date of the order for foreclosure, the tenant for life is entitled to receive the whole of the rents.

He concluded his analysis as follows:

In the result, I am of opinion that the tenants for life are entitled to receive the whole of the net rents of the five properties in question from the date of the order for foreclosure until sale, although in two cases such rent exceeds the interest on the mortgage debt formerly secured on the property. It follows logically from this that the tenants for life will not, by reason of the net rent of one of the properties having since the date of the order for foreclosure been less than the amount of the interest on the mortgage debt formerly secured on such property, be entitled to claim any part of the proceeds of sale of such property when sold as compensation for such deficiency.

Again, the judgment proceeded on the basis that there was no dispute about the position of the parties on and prior to foreclosure and the issue raised was the entitlement after foreclosure. Both judgments relied upon the principle that, on foreclosure, the trust funds were no longer represented by a debt bearing interest but by the property over which the mortgage was secured. Issues in contention In this matter, the issue raised by the persons entitled to the remainder of the estates and trusts is whether, in the circumstances of the present case, a date prior to the date for foreclosure is the appropriate date at which the life tenant's loss should be identified for the purpose of applying the principle laid down in Re Atkinson. In particular, it is put that there was a date at which it became clear as a matter of business certainty that the security for the loan would be insufficient to cover the interest and the capital repayment. It is put on behalf of the persons entitled to the remainder that the principle in Re Atkinson applies at that date and that the life tenants and income beneficiaries are not entitled to reimbursement out of the proceeds of any sale of any arrears of interest that accrued between that date and the date when the trustees foreclosed on the mortgage. In other words, they argue that the loss of the life tenants and income beneficiaries crystallised at the earlier date. Three cases are relied upon in support of this argument. They

Page 50 are Re Ancketill's Estate; Ex parte Scottish Provident Institution (1891) 27 L.R. Ir. 331, Stewart v Kingsale [1902] 1 I.R. 496 and Re Scarfe [1923] S.A.S.R. 459. It is necessary to examine these authorities in some detail. Authorities relied upon by the second defendant Re Ancketill's Estate concerned a trust where a sum of 4116 13s 4d was held in trust for William Robert Ancketill for life with remainder over. The sum was invested in a mortgage affecting three denominations of lands which at the time of the hearing were to be sold. Ancketill sub-mortgaged his interest in the mortgage to a Miss Girdlestone. The sub-mortgage as from 7 August 1884 had been vested in third parties. Ancketill, the life tenant, died on 9 March 1889. At that time arrears of interest under the mortgage totalled 839 14s 1d. At the time the matter came to trial there was a sum of 52 8s 2d received from rents being held to the credit of the matter. Application was made to have this amount paid over to the sub-mortgagees of the life interest and for a continuing order for 1998 4 VR 97 at 103 payment out of the rents till the whole of the arrears of interest of 839 14s 1d had been paid off. The application was opposed by the persons entitled to the remainder. They argued that the security would be a deficient one and that the owner of the life estate in the fund, or his assignees, were not entitled to be paid in full. They further argued that the loss should be apportioned between those entitled as sub-mortgagees of the life interest and those entitled to the remainder of the estate. Munro J. found that the properties over which the original mortgage was granted would not realise enough to pay off the mortgage and the interest due on it. He said that if the land were then sold and the deficiency ascertained there was no doubt that the loss would be apportioned between the life estate and the remainder. He said that the apportionment of the purchase money should be in the proportions which the arrears of interest (839 14s 1d) and the amount due for principal and interest from 9 March 1889 on the mortgage had to one another (applying Re Moore (1885) 54 L.J. Ch. 432; 33 W.R. 447 which was followed in Re Atkinson). He accepted the submissions made on behalf of the persons entitled to the remainder that the same principle applied where the land had not yet been sold provided it could be clearly shown that there would be a deficiency. His Honour said that he did not wish to tie up in court the money then held and he directed payment to be made to the sub-mortgagees of the life interest until the sum of 400 including the present payment had been made to them. His view was that their loss would not exceed the balance of their claim and he was assuming that the probabilities were that the land would be sold before the 400 was paid. He said that the account could then be adjusted as of the date of his judgment. Counsel for the remaindermen in the present case submits that this assists their case because Munro J. chose a date other than the date of realisation as the date for the apportionment of the loss between the life tenant and remainderman. He submits that the result in that case was that the remainderman could not claim interest lost after the relevant date. He acknowledges, however, that Munro J. did not spell out that consequence. There is nothing in his Honour's reasons that in my view lends support to the proposition put forward on behalf of the persons entitled to the remainder in this case. From the facts of the case, it would appear that the crystallisation of the life tenants' entitlement to arrears of interest occurred not at a date where it was clear as a matter of business certainty that the security was inadequate to cover interest, arrears and capital but as at the date of death of the life tenant. While it is not clear on the facts of the case, there seems to have been a real possibility that the security was insufficient at a date prior to the date of the death of the life tenant. It is true that Munro J. spoke of an adjustment as between life tenant and remainderman occurring as of the date of the judgment and not at some later date such as a date of foreclosure, but it is unclear why his Honour chose that date. There is nothing to indicate that he chose that date because that was the date at which it was clear that the security was insufficient as a matter of business certainty. In any event, he was not stating that the arrears to which the life estate would be entitled crystallised at that date. In Stewart v Kingsale [1902] 1 I.R. 496 a residuary personal estate valued at 17,000 was left by the will of Robert Smythe to be held on trust for two successive life tenancies with the remainder over to certain persons. This amount was lent on the security of a mortgage over certain lands in County Galway by indenture dated 1 July 1875. The interest on the mortgage debt fell into arrears and, in 1880, the trustees of

Page 51 the estate presented a petition for the sale of the lands 1998 4 VR 97 at 104 and the appointment of a receiver. On 8 September 1880 the order for sale was made absolute and a receiver was appointed on 4 November 1880. The first life tenant died on 13 July 1898. At the time of her death there was due to her estate for interest on the mortgage debt of 17,000 a sum of 1777 3s 0d. A sum of 987 was subsequently paid by the receiver to the trustees out of the rents of the land on account of the mortgage debt. The trustees paid the amount over to the executors of the first life tenant leaving a sum of 790 3s 0d due to her estate. The interest on the mortgage debt of 17,000 due to the second life tenant up until 12 April 1901 and from the date of the death of the first life tenant totalled 2127 6s 7d. The land was subsequently sold to the tenants under the Land Purchase (Ireland) Acts. By order of the Land Judge dated 24 April 1901 the sum of 10,028 2s 8d in guaranteed loan stock (the equivalent of 9351 3s 1d) was transferred to the trustees. A certificate was endorsed on the indenture of mortgage to the effect that 6530 4s 4d had been paid on account of the principal sum of 17,000 and the sum of 2820 18s 9d on account of interest. From 24 April 1901, no money or stock was received by the trustees of the will in respect of the mortgage debt or the interest on it. It appears that a further sum of 800, being the proceeds of further sales, was to be shortly transferred to the trustees and they would be entitled to have the unpaid balance due to them registered as a first charge against the sum of 6339 guaranteed land stock which the Irish Land Commission had retained. The amount realised would be insufficient to pay in full the principal sum of 17,000 and interest thereon. One of the mortgagors died in 1884 an undischarged bankrupt. The other mortgagor had no property available for payment if judgment was recovered against him under the covenant for payment. The trustees issued an originating summons to obtain directions as to the respective rights of the several persons entitled under the will of the testator to the capital and income of the funds representing the sum of 17,000. The issue at stake was the principle on which the moneys recovered or which might be recovered were to be divided between the executors of the late tenant for life, the existing tenant for life and the persons entitled in remainder so that the result might be apportioned fairly between them. The Master of the Rolls commenced his reasons for judgment by referring to what he described as "the recognised principle" laid down in Cox v Cox (1869) L.R. 8 Eq. 343. Quoting from James V.-C. in that case at 344-5 he said:
The true principle in all these cases is, that neither the tenant for life nor the remainderman is to gain an advantage over the other -- neither is to suffer more damage in proportion to his estate and interest than the other suffers -from the default of the obligor. The two must share the loss in the same way as they would have shared it had it occurred when they first became entitled in possession to the fund.

The debate before the Master of the Rolls appears to have been whether he should follow the decision of Re Moore (1885) 54 L.J. Ch. 432; 33 W.R. 447 or the decision of Re Foster (1890) 45 Ch. D. 629. In Re Foster, Kay J. had held that in apportioning an available fund between the tenant for life and the remainderman the fund to be apportioned should be arrived at by adding to the capital moneys produced by the sale all the moneys that had been received by the tenant for life. He then estimated how much the tenant for life would have received if the mortgage interest had been regularly paid deducting income tax. He took the capital sum which the remaindermen would be entitled to on the supposition that the capital of the mortgaged debt had been fully paid. He then 1998 4 VR 97 at 105 divided the fund between the tenant for life and the remainderman in the proportion of those two amounts which each ought to have received. Thus the apportionment he proposed required the life tenant to share the moneys the life tenant had received with the remainderman. The Master of the Rolls rejected that approach "unhesitatingly" at 511 and adopted the approach put forward in Re Moore (also followed in Re Atkinson) where the life tenant was permitted to retain moneys received and permitted to share in the sum realised on the basis of the proportion borne by the arrears of interest to the capital sum payable to the remaindermen.

Page 52 He explained his decision as follows at 511-12:

A tenant for life of a fund which becomes diminished by means of a breach of trust (to which he is not a party), or by the bankruptcy of a debtor, or by fall in value of the securities on which the trust money is invested, may have received the income of the fund before any such calamity for a long series of years. The amount of income so enjoyed may equal or largely exceed any sum which would be coming to him, on any equitable calculation, out of the remnant of the fund. In either case he will, under the decision of Re Foster ... receive nothing. Yet the payment of the income which has been received by him has in no way caused the loss or diminished the fund to which the remainderman is entitled. The diminution is caused by an act which wrongs both remainderman and tenant for life as from its date. Before its occurrence the income received was rightfully received. Each payment of income or interest belonged to the tenant for life. If withheld, he could have enforced each and every payment by regular process of law; and in no conceivable event could it be recovered back from him in the absence of fraud or the like.

The Master of the Rolls concluded that:

The rule in Re Moore ...Re Moore (1885) 54 L.J. Ch. 432; 33 W.R. 447 ensures to those interested in the trust fund equality of treatment in respect of rights and interests injuriously affected by the loss which diminishes the fund.

The Master of the Rolls then dealt with the specific case in a passage relied upon by counsel for the remaindermen in this case. He stated at 512-13:
But the loss of the fund ought only to affect injuriously the interests of those entitled to it as from the date of the loss. This must be the case where the loss is total. Why then should there be a difference when the loss is partial only I fail to see. Thus the date of the breach of trust, bankruptcy, or decline of securities, or the time at which it becomes apparent that there must be a loss (Ancketill's Estate [(1891) 27 L.R. Ir. 331] Re Ancketill's Estate; Ex parte Scottish Provident Institution (1891) 27 L.R. Ir. 331) is, in my opinion, the time at which persons entitled in succession are injured and the adjustment as between them should commence and take effect as of that date; and this is, I conceive, the correct interpretation of what was said in Cox v Cox.

He then stated:
In the present case I cannot see any other date to which this consequence is to be attached than the date of the sale. For all that appears, although the interest had partly fallen into arrear, the trust fund and interest on it might have been adequately secured all along until the sale.

Counsel for the remaindermen submits that Stewart v Kingsale is authority for the proposition that the adjustment between the life tenant and the remaindermen is to take effect in a case such as the present when it is clear that there must be a loss. To achieve that conclusion, however, it is necessary to read the phrase "the adjustment as between them should commence" as meaning that "the adjustment as between them should be undertaken and the loss of the second life tenant crystallised." The Master of the Rolls in any event adopted the date of sale of the 1998 4 VR 97 at 106 property as the date at which the adjustment was to "commence and take effect." That would be the date, on the alternative view, on which the loss of the second life tenant crystallised so far as the loss on the previous investment was concerned. Assuming the Master of the Rolls selected the date of sale as the date after which the second life tenant was entitled to no compensation for loss of interest from the original investment, he did not have to consider whether it would be consistent with authority to fix an earlier date as the date after which the life tenant could not recover arrears of interest out of any proceeds of sale, even though the life tenant's interests remain secured over the property in question. The third case referred to is Re Scarfe [1923] S.A.S.R. 459. George Scarfe died on 14 April 1903. The trustees of his estate held one-seventh of the residuary estate for the benefit of Mr. Scarfe's sister, Ellen Laura Scarfe, during her life. After her death it was to pass to certain persons absolutely. On 17 February 1913, the trustees advanced 6000 to a Mr. Gardener on the security of a mortgage over freehold land. At the time it had been valued at 9426. A further loan was made on 6 September 1913 of 300 on a second mortgage of the land together with a bill of sale on household furniture, farm stock, implements and plant

Page 53 and growing crops. Further moneys were advanced on similar securities up and until May 1915 totalling 380. Ellen Laura Scarfe died on 7 June 1917. At the date of her death the sum of 796 12s 9d was due to her for arrears of interest. Following her death, the sum of 385 12s 9d had been received in various instalments as payment of interest. At the date of the summons, 20 July 1922, an amount of 2103 19s 4d was owed for interest due on the principal moneys and the total amount due for principal and interest was 8103 9s 4d. In 1921 the property had been valued at 4942. The report does not reveal the value of the plant, stock, and other relevant property. Following the issuing of the summons and prior to the hearing of it, the security was realised for a sum considerably less than the moneys advanced. The trustees had distributed the sum of 385 12s 9d which had been received on account of interest after the death of the life tenant by apportioning the payments when received between the estate of the life tenant and the remainderman in proportion to the amounts owing to them respectively at the time of each payment. Questions asked in the proceedings were directed to whether that action had been correct and, if not, what action should have been taken. The court was also asked to determine on what principle moneys obtained for realisation of the security should be distributed in the event that they were insufficient to satisfy both principal moneys and arrears of interest. In that case, counsel for the life tenant contended, relying on, inter alia, Re Atkinson, that the date of realisation and that date alone was the point at which the adjustment should be made and that the money to be then apportioned should be the proceeds of the sale and those proceeds only. Counsel for the remainderman submitted that this involved a too rigid application of the principle to the extent that it is sought to confine apportionment to the date of realisation. Gordon J. accepted the latter view. He said, inter alia, that counsel's position was supported by the decision in Stewart v Kingsale and by the decision in Re Ancketill's Estate. Gordon J. quoted the passage quoted above from Stewart v Kingsale where the Master of the Rolls appeared to be stating that the time at which the adjustment commenced and should take effect is the time at which it became apparent that there must be a loss. He went on to say that the Court of 1998 4 VR 97 at 107 Appeal in Re Atkinson gave "unqualified approval to the judgment in Stewart v Kingsale" and then referred to statements from Re Atkinson which refer to the principle laid down in Re Moore and stated that the Master of the Rolls in Stewart v Kingsale had correctly chosen between Re Foster and Re Moore. It seems to me that Gordon J. took that approval too far if, as he seemed to do, he treated the passages as approving not just the preference for Re Moore but as approving the proposition that the adjustment was to commence and take effect as from the date at which it became apparent that there must be a loss. Nonetheless, Gordon J. treated the approval as applying to that aspect of the judgment in Stewart v Kingsale and treated it as deciding that:
... the adjustment of loss between life tenant and remainderman on an insufficient security should be made as from the time it becomes apparent there must be a loss.

He then stated at 463:

... It seems to me that the fact that at the death of the tenant for life the arrears of interest amounted to 796 indicated a strong probability of loss, though, as the Master of the Rolls said in Stewart v Kingsale, it does not follow that because interest has partially fallen into arrear the trust fund and the interest on it might not be adequately secured till the sale.

He then continued at 464:

But what may have been regarded as a probable loss at the death of the tenant for life in 1917 surely ripened into what may be called a business certainty of loss in the year 1918, when, notwithstanding the further advances which had been made to the mortgagor, only 5 4s 8d was paid towards arrears of interest, the debt being then 6,680.

Page 54

He declined to confirm the method of apportionment used by the trustees as being a final adjustment. He held instead however:
... that the 385 17s 9d received as interest after the death of the life tenant should be brought into hotchpot, and when this has been done, the aggregate of the arrears of interest and the purchase money should be divided upon the principle of In re Atkinson.

Counsel for the remaindermen sought to interpret his Honour's reasons as indicating that as from the business certainty date of 1918, the remainderman bore any interest loss and that, thus, the decision supported the argument he was putting that the date of business certainty is the date at which the losses of the parties are crystallised. Counsel conceded, however, that in the relevant passages his Honour did not say what he meant by "arrears of interest". Counsel submitted that the judge was saying that the amounts to be apportioned are crystallised as at that date. A difficulty with counsel's argument is that the case appears to me to have focused on the way in which the sum of 385 17s 9d was to be distributed, it being interest received after the death of the life tenant. Further, his Honour simply speaks about applying to the hotchpot created by the purchase money and the 385 17s 9d "the aggregate of the arrears of interest." Nowhere does his Honour indicate that the remaindermen should be deprived of the opportunity to seek to recover the arrears of interest from 1918 to 1923. If that was what his Honour was intending to direct his remarks to, one would have expected some express reference to that issue. The explanation for the decision may lie in the lack of any evidence as to the precise interest arrears in respect of which the sum of 385 17s 9d was received. 1998 4 VR 97 at 108 It is unclear from the judgment whether the 385 12s 9d constituted payment of arrears of interest that had accrued prior to her death or whether they related to the payment of interest as it accrued after her death. If it was the latter, then it was income to which the remaindermen were entitled and should not have been brought into hotchpot in my view. If it was the former, on the authorities, it was money to which the life tenant was entitled without reduction. If Gordon J. had no evidence before him to indicate that the sum had been received in respect of any particular arrears of interest or could be appropriated to any particular arrears of interest, he was confronted with the task of deciding how to fairly distribute that amount between the life tenant and the remainderman. The fairest way that could be done may have been to include it in the total sum to be apportioned and for it then to be apportioned according to the proportions of loss borne by the life tenant and remainderman. His Honour also appears to have used the business certainty date as the date from which to place funds in the sum to be apportioned but not as the date at which the losses of the life tenant and remainderman were to crystallise. It is the latter that is the issue to be determined in this case. In light of the foregoing analysis, it seems to me that the above three authorities relied upon on behalf of counsel for the remaindermen in the present case cannot be shown to support his contentions. Authorities relied upon by the first defendant There is also authority where the date of business certainty of loss could have been used as the date at which the apportionment was to occur and after which the life tenant ceased to have any entitlement but it was not. I refer first to the case of Re Broadwood's Settlements [1908] 1 Ch. 115. In that case a mortgage of 18,000 over a farm was settled on 10 December 1884 on successive trusts for two life tenants and a remainderman without making any provision for arrears of interest then outstanding for three years and owing to the settlor. The interest payments continued in arrears. Under the settlement, the settlor became the first life tenant. The first life tenant died on 8 July 1893 and the second life tenant died on 22 January 1903. The mortgagor had worked the farm together with another farm which also was mortgaged. There was an

Page 55 arrangement for the payment of net income to each mortgagee. The net incomes were insufficient to meet the interest in either case. An error was made in the apportionment between the two mortgages. The trustees on 11 August 1905 recovered a sum of 1028 representing income which had been wrongly paid to the mortgagees of the second farm. The mortgagor continued to work the first farm as manager to the trustees from 11 October 1902 to 11 October 1906. On that day, the trustees let the farm at a rent of 515 and on 29 November of the same year received 2368 for the sale of farm stock provided out of and representing the income earned from 11 October 1881 to 11 October 1906. At that stage, the interest was heavily in arrears and the security was greatly depreciated. Interestingly, foreclosure procedures had been commenced but no order had been made. It was held that the representatives of the first life tenant could not claim any arrears of interest owing at the date of the original settlement against the other beneficiaries, but that the sums of 1028 and 2368 and all accruing rent received up to the time of foreclosure must be treated as a payment on account of all arrears of interest owing at the date of payment and must be apportioned between the estates of the two life tenants and the remaindermen in proportion to the 1998 4 VR 97 at 109 amounts owing to them for arrears of interest at the date when the particular sum was received. Swinfen Eady J. described the issues and resolution of them in the following terms at 121-2:
The question is how the two sums of 1,028 and 2,368 and the accrued and accruing rent are to be dealt with. The mortgage security is admittedly insufficient; but it has not been realised, and although foreclosure proceedings are pending, they have not been completed. The property consists of a farm let at 515 a year. Until foreclosure absolute, I am of opinion that the income must be distributed rateably between the persons entitled to the income, and the proper method will be to take the date when each sum is or was received or recovered and apportion that sum in proportion to the amounts owing to the respective estates for arrears of interest at that date. That is to say, each sum received or recovered is to be treated as a payment on account of all arrears claimable by the representatives of the first and second life tenants and the remainderman, and is to be apportioned rateably between them in accordance with the arrears owing to them respectively. It is in this way that the 1,028, or the residue of it, and the 2,368 will be applied, and the subsequent rents ought to be applied in the same manner until foreclosure absolute. It is obvious that the amount due to the remainderman will be gradually increased and the amount due to the life tenant's representatives diminished, by this method of application. That, however, is the proper way to divide the income.

The amounts payable to the life tenants were crystallised at their death. It is apparent from the report of the case, however, that as a matter of business certainty the security was inadequate for a long time and shortly after it was given. The security held was the same as that which existed at the time the arrears accrued in respect of the first and second life tenants and subsequently, after their death, in respect of the remaindermen. Swinfen Eady J. concluded that until foreclosure, the sums received as rent or interest should be treated as payment on account of all arrears between the first and second life tenants and remaindermen and to be apportioned rateably between them in accordance with the arrears of interest owing to them. Plainly, he was assuming that until foreclosure occurred a different regime would not apply. It is to be noted that he was referred not only to Re Atkinson but also to Stewart v Kingsale and Re Ancketill. He did not apply what was said, in Re Scarfe, to be the principle to be derived from Stewart v Kingsale. The cases appear to have been cited by counsel for the second life tenant to support an argument that the above amounts should be apportioned in proportion to the amounts owing to income and capital at the date each payment was received. Swinfen Eady J. appeared to reject the argument. He responded, "That principle is applicable when the security is realised and the capital loss ascertained": at 120. The next case to consider is the case of Re Knott [1937] V.L.R. 244. William George Knott died on 7 November 1927. By his will he directed that income from the residue of his estate should be paid to his children during their lives and that after their death the corpus should be divided amongst his grandchildren. Shortly prior to his death, on 9 June 1927, he had entered into a terms contract of sale of certain land for the sum of 25,000. Interest was payable on the outstanding balance of purchase money. The purchaser paid the deposit prior to the testator's death and after his death paid five instalments totalling 6250 together with 3038 5s 8d by way of interest. On 9 July 1935, the executor sued the purchaser for the balance of purchase money and interest. The action was compromised on 31 October 1936 on terms that

Page 56 the purchaser should pay, in addition to the moneys already paid under the contract, the further sum of 6250 and the executors would receive the purchaser's interest in the land. The contract 1998 4 VR 97 at 110 of sale was cancelled and the purchaser released from any further obligations. The land reverted to the executors. At that time the land was vacant and not earning any income and it remained in that condition thereafter except that parts were sold as building allotments. The executors took out an originating summons to determine who was entitled to the instalments of 6250, the 6250 paid under the compromise, the land when it reverted to the plaintiff, the sums paid for parts of the land subsequently sold and any future receipts from future sales. Questions were also raised as to whether certain sums should be treated as paid out of capital or income. Lowe J. accepted that the apportionment principle laid down in Re Atkinson was the correct one. He stated that principle as being at 248:
... that one must take the amount due to the tenant for life for arrears of interest and the amount due to the remainderman for capital, and apportion the fund in question in proportion to those amounts respectively.

He indicated that that was not in dispute and went on to say:

But there was some contest as to what was the proper date as at which such apportionment should be made, and as to the rate of interest at which the arrears due to the life tenant should be computed. No distinction need be made in this case between the date of the agreement of compromise and the date when the money was paid under such agreement and the land retransferred, for they are the same date. That date is the date at which, in my opinion, the arrears should be computed. That is the date when the asset existing at the testator's death assumes a form which discloses a deficiency or, to put it in another way, when a new asset is substituted for the old asset. I think that In re Atkinson; Barbers Co. v Gross Smith supports this view.

His Honour does not appear to have been referred to the three cases mentioned above relied upon by counsel for the remaindermen in this case. They, however, rely upon the comment that Lowe J. makes that the date to be selected was the date when the deficiency was disclosed. Counsel for the life tenants and income beneficiaries point to the latter part of the same sentence as supporting their argument because it speaks of the date being the date when a new asset is substituted for the old. Looking at the facts of Re Knott it seems clear that any deficiency would have been clear as a matter of business certainty well before 31 October 1936. Thus, on balance, it appears to me that it does not support the argument of those claiming the remainder in this case. There is also authority to the contrary of the position advanced for the remaindermen in this case. I refer to the case of Permanent Trustee Co. of New South Wales Ltd. v Macphillamy (1938) 38 S.R. (N.S.W.) 541. In that case, the trustees of the estate of Charles Macphillamy had advanced the sum of 12,000 secured over freehold and conditional purchase land on 27 August 1928. The mortgagors were required to pay half yearly instalments of interest. They did so up to and including 1929 and thereafter fell into arrears. From 1930 until 1935, the trustees made payments out of capital on the conditional purchase instalments relating to the properties and insurance premiums totalling 1029 and 127 respectively. The mortgagors had been obliged to make these payments under the terms of the mortgage. The trustees exercised their power of sale entering into contracts of sale on 6 August and 16 October 1936. The total selling price was 10,000. Contracts were completed on 17 December 1937. On that date, the mortgagors owed 6686 7s 6d for interest. The trustees took out an originating summons to determine whether any and if so what adjustment should be made as between life tenants and remaindermen with respect to the amounts owing for interest and the amounts owing in respect of the payments by the trustees for conditional purchase instalments and insurance premiums. 1998 4 VR 97 at 111 It had been put for the remaindermen that the principle to be derived from Stewart v Kingsale was based on the proposition that from the date when the loss becomes certain the capital is in the position of being uninvested. It cannot produce any income, therefore the life tenants are not entitled to any interest. It was put that the life tenant bears the burden of the postponement of the realisation of the security. In his reasons for judgment, Nicholas J. summed up the argument for the remaindermen in the following

Page 57 terms at 547-8. He said:

In the present case it is argued on behalf of the remaindermen that another date should be chosen and that the persons interested in the income, in computing their claims should not be allowed any arrears of interest accrued due since it became a business certainty that the mortgage securities would not realise the amounts due for principal and interest. In the alternative, it was argued that the final date for computing interest should be the date of the contract of sale and not the date of completion. I understood it to be admitted by counsel that there was no direct authority for the first of these propositions but they contended that it was supported by three decisions -- Stewart v Kingsale; In re Ancketill's Estate; and In re George Scarfe -- or of some dicta which are to be found in these decisions. In none of these cases was the question propounded the same in principle as that now before me.

His Honour went on to note that when Stewart v Kingsale was decided there were two methods of apportionment that had been approved by judges of first instance -- the two approaches that had been suggested in Re Moore and in Re Foster -- the former being subsequently approved by the Court of Appeal in Re Atkinson. His Honour then proceeded to review the authorities. After referring to the three authorities at some length descriptively, his Honour analysed the cases as follows at 551:
In two of the three cases cited, the Court held that a date other than the date of realisation should be taken as the date at which the amounts owing to the different parties interested should be ascertained. None of the three cases appears to me to support the claim now made on behalf of the remaindermen that when the amounts to be taken into account on apportionment are assessed the life tenant should not be allowed to take into account the interest unpaid since the year 1929 or the year 1932 [probably incorrect -- 1930]. In the case now before me the life tenants have received nothing since 1929 and if it were established that a deficiency in the securities had become a business certainty in 1929 or 1932 [probably 1930] there is nothing that they could bring into hotchpot.

His Honour rejected the arguments put forward for the remaindermen as against the life tenants. On the issue as to whether the date of the contracts for sale or the date of completion should be taken as the date on which the apportionment should take place his Honour chose the date of the contract. He did so stating at 552:
From those dates, the nature of the investments was changed and that I think is the test to be applied under the circumstances of this case: see In re Horn's Estate; In re Knott, notwithstanding the difficulties of administration to which Mr. Wilson has drawn my attention.

His Honour treated the amounts expended from corpus in respect of conditional purchase instalments and insurance premiums as sums to be added to the amounts deemed to have been invested in the relevant mortgages and treated as part of the corpus for the purpose of the calculation in Re Atkinson. Conclusion The three authorities relied upon by counsel for the remaindermen are, in my 1998 4 VR 97 at 112 view, unsatisfactory for the reasons indicated in my discussion of them. They do not, in my view, support the position advanced for the remaindermen in this case. That position may be said to have been rejected by Nicholas J. in Macphillamy's case Permanent Trustee Co. of New South Wales Ltd. v Macphillamy (1938) 38 S.R. (N.S.W.) 541. If the three cases were authority for what counsel alleged, they seem to me to run counter to the fundamental principles enunciated in the authorities that the property is security for both principal and interest and that there should be a rateable equality of distribution of the losses between the life tenant and the remainderman out of the realised proceeds. In the present case, the losses of the life tenants and income beneficiaries continued until foreclosure. In particular, those losses continued after it became clear as a matter of business certainty that the security for the loan and interest and arrears of interest was insufficient. To adopt the argument put forward on behalf of those entitled to the remainder seems to me to advantage unfairly those entitled to the remainder. It is put for the remaindermen that if the business certainty date is not selected it would be left to the trustee to determine the date of apportionment by deciding when to foreclose or sell. It is put that if the date when

Page 58 the loss as a matter of business certainty is clear is selected as the apportionment date then that is avoided. It seems to me, however, that it is more likely that a fair apportionment will result if the date of apportionment is, in effect, determined by the trustee. The trustee has obligations to act fairly as between the beneficiaries and is thus well placed to act in such a way as to cause a fair date of apportionment to be established. The date of business certainty loss will not necessarily achieve that result. Chance will determine the outcome which may or may not be fair. There also appears to me to be a grave practical disadvantage with the test proposed by the remaindermen. It would require an assessment to be made in each case as to when as a matter of business certainty the deficiency appeared. In many, if not most, cases this will be unclear and necessitate an application to the court for the establishment of that date. It is also not clear what is to be considered in determining whether there is the required deficiency or not. Counsel for those entitled to the remainder in this case submitted that it would not be ascertained by reference to the capacity of any borrower or guarantor. It would solely be a matter of determining the deficiency in money terms of the security if it were sold having regard to interest then due and the capital sum lent. This argument, however, appears to me to ignore the reference to "business certainty" in the authorities relied upon. It also runs into difficulty in this case in any event because determining the business certainty of loss so far as security for the loan is concerned would require an assessment of the value of the guarantees provided as part of the security for the loan. Ultimately, however, it appears to me that to rely upon the date at which a loss situation emerged as a matter of business certainty is to introduce a test which will ignore the fundamental object of the rule in Re Atkinson which is to apportion the loss suffered by those whose entitlement was secured by the mortgage security in question and to do so in such a way as to achieve rateable equality. It is necessary to identify the loss suffered by each relevant party, to identify the sum realised on the security and to distribute it to those entitled in proportion to their relative losses. Accordingly, the questions raised should be answered as follows: (a) Yes. (b) No. 1998 4 VR 97 at 113 (c) No. Questions answered accordingly. Solicitors for the plaintiff: Aitken Walker & Strachan. Solicitors for the first defendant: Maddock Lonie & Chisholm. Solicitors for the second defendant: Purves Clarke Richards. G. L. SCHOFF BARRISTER-AT-LAW

Page 59

Page 60 8 of 10 DOCUMENTS: CaseBase Cases

Trust Company of Australia Ltd v Braid

[1998] 4 VR 97; BC9706056 Court: VSC Judges: Smith J Judgment Date: 17/10/1997

Catchwords & Digest

Trusts -- Express trusts -- Distribution of proceeds to beneficiaries -- Rights of life tenants and remaindermen Application for determination as to how proceeds of sale of trust property should be allocated as between life tenants and remaindermen. Where trust incurred loss after foreclosing on loan and selling security at amount which did not cover outgoings incurred. Whether loss to be apportioned between life tenants and remaindermen in accordance with principles set out in Re Atkinson, that is that the proceeds realised ought to be apportioned between life tenants and remaindermen in proportion which amount due for arrears of interest bears to amount due in respect of capital debt. Whether date of apportionment should be the date of foreclosure on security. Whether loss of life tenants and remaindermen crystallised at date on which it became clear that security for loan insufficient. Held: Date of foreclosure to be used for apportionment of proceeds of sale. Journal articles referring to this case Article Name Construction of Wills in Australia 2007 (book) Cases considered by this case Annotations: All Cases Sort by: Judgment Date (Latest First) Annotation Case Name Citations (1938) 38 SR (NSW) Permanent Trustee Co of Considered 541; (1938) 55 WN NSW Ltd v MacPhillamy (NSW) 212b Knott, In re; The Trustees [1937] VLR 244; Considered Executors and Agency Co Ltd [1937] ALR 456 v Knott Horn's Estate, In re; Public Considered [1924] 2 Ch 222 Trustee v Garnett Questioned Scarfe, In re [1923] SASR 459 (1918) 19 SR (NSW) 7; Considered Knox v Phillips (1918) 36 WN (NSW) 14

Citations ISBN: 9780409320954

Signal

Court NSWSC VSC EWHCC h SASC NSWSC

Date 17/6/1938 25/6/1937 20/2/1924 20/11/1923 21/12/1918

Signal

Page 61 Considered Applied Explained Explained Broadwood's Settlements, In re Atkinson, In re; Barbers' Co v Grose-Smith Stewart v Kingsale Ancketill's Estate, In re [1908] 1 Ch 115 [1904] 2 Ch 160 [1902] 1 IR 496 (1891) 27 LR Ir 331 EWHCC h EWCAC iv 24/10/1907 1/6/1904 15/3/1902 13/5/1891

Page 62

Page 63

9 of 10 DOCUMENTS: Unreported Judgments Vic 24 Pages

TRUST COMPANY OF AUSTRALIA LTD v BRAID and Anor BC9706056

SUPREME COURT OF VICTORIA CAUSES JURISDICTION SMITH J 4733 of 1997 26 September 1997, 17 October 1997
Trusts -- apportionment of losses of life tenant and remaindermen -- date for apportionment.

Smith J
THE APPLICATION The plaintiff is a trustee company previously known as the Union-Fidelity Trustee Co of Australia Ltd. It acts as trustee of a large number of deceased estates and inter vivos trusts. In many of these estates and trusts there are persons entitled to income either as tenant for life in the deceased estates or as beneficiaries of inter vivos trusts entitled to income each year. The first-named defendant represents all life tenants and income beneficiaries (or their estates) of the trusts (as defined in para3 of the affidavit of BG Barker sworn 19 March 1997) whose interests were terminated after 21 October 1989 and before 4 February 1993. The second-named defendant represents all the remaindermen of the trusts. The Plaintiff has applied to the Court by originating motion seeking: "The determination without administration of the following questions in relation to each of the estates and settlements ('the Trusts') of which it is trustee and which have an interest in the Common Fund established by the plaintiff and known as the Mortgage Realisation Common Fund MR1. 1. Whether in the events which have happened, in the case of each of the Trusts the Plaintiff should pay or apply any part of the funds to which it is entitled as Trustee out of the net proceeds of sale of the property known as 1 Little Collins Street, Melbourne to or for the benefit of the life tenants or income beneficiaries (collectively 'the beneficiaries') of that Trust. 2. If yes to Question 1 on what basis ought the amount to be paid to each of the beneficiaries be calculated?" The issue to be determined was further refined by Master Evans by order made 31 July 1997 as follows: "In this proceeding, should the proceeds of realisation of the subject property be apportioned between life tenants and remaindermen of the said trusts pursuant to a rule in Re Atkinson (1904) 2 Ch 160 as at: (a) The date of foreclosure; BC9706056 at 2 (b) The date it first became apparent to the trustee as a matter of business certainty that the trust investment

Page 64 would be realised at a loss; (c) Some other (and, if so, which) date." BACKGROUND TO THE APPLICATION On 23 February 1982, the plaintiff established a common fund known as the Common Fund No 2 under Pt7 of the Trustee Companies Act (Queensland). This common fund comprised three common funds described as MQ6, SQ6 and BQ6. The MQ6 fund was conducted separately from the other two funds. The purpose of the funds was to enable the plaintiff to pool cash assets of the trusts and invest the pooled amounts in a variety of mortgages and other trustee security investments, investments that would not have been available to the trusts concerned individually. Individuals also invested moneys with the company which were placed in the common fund to be invested as part of the common fund. It seems that on 14 October 1988 the plaintiff lent from the assets of the MQ6 fund, the sum of $6.5 million, to Avram Venture Capital Pty Ltd ("Avram"). The loan was secured by a mortgage over No 1 Little Collins Street, Melbourne. The terms of the mortgage included as additional security guarantees provided by John Avram and Kathy Avram. Approximately twelve months later, on about 31 October 1989, Avram defaulted in paying interest . The plaintiff served Avram on 17 November 1989 with a notice to pay the principal and outstanding interest. The plaintiff attempted unsuccessfully to sell the premises by auction on 14 March 1990. Following the unsuccessful sale, the plaintiff decided to isolate the Avram loan from the other investments in the MQ6 fund by creating under the Trustee Companies Act 1984 (Vic) a new mortgage realisation common fund MR1 described in the proceedings as "the realisation fund". It transferred the Avram loan to that fund. Each of the trusts and individuals who had an interest in the MQ6 fund had the same proportionate interest in the realisation fund. Unit holders of the MQ6 fund, including co-trustees and beneficiaries of the trusts and investments, were informed of the establishment of the realisation fund in about May and August of 1990. BC9706056 at 3 On 4 February 1993, the plaintiff obtained an order for foreclosure under the mortgage over the premises. The result was that the premises thereby became an asset of the realisation fund. Following its entry into possession of the premises in 1989, the plaintiff dealt with the income by deducting expenses other than interest and distributing the balance to the unit holders in the realisation fund. Since 1990 the realisation fund has incurred capital expenditure of $1.717 million in relation to the premises. On 11 October 1991, the premises were let to No 1 Little Collins Street Pty Ltd for twelve years from 1 January 1992. The lease was varied by deed dated 7 April 1995. In accordance with the prevailing commercial circumstances, the plaintiff granted the lessee a rent-free period for car parking until 31 December 1994 and for net office rental (but not outgoings) until 30 June 1995. The plaintiff also contributed $700,000 to capital works as an inducement to enter into a lease. The amount due under the loan to the date of foreclosure on 4 February 1993 was $12,331,211. On 14 November 1996, the premises were put up for sale by public auction. Little interest was received and the property was passed in at $6.60 million. It was subsequently sold on 22 July 1997 for $5,800,000. Settlement took place on 5 August 1997. The amount available for distribution is approximately $2,949,938.00. COMMON GROUND It is common ground, and appropriately so, in my view, that where trust moneys have been lent on the security of property and a loss is incurred on realisation, the loss should be apportioned between the life tenant and remainderman in accordance with the principles set out in In Re Atkinson [1904] 2 Ch 160. In that case part of the residuary estate of the late John Atkinson was invested in a mortgage over three farms in Essex. In January 1889, the interest began to fall into arrears and the trustees entered into possession in May 1889. From that date the rents received were paid to the tenants for life but they were insufficient to meet the interest and it was apprehended that when the property was sold the proceeds would be

Page 65 insufficient to BC9706056 at 4 pay the principal and arrears of interest in full. The Court of Appeal determined that the sum realised by the security ought to be apportioned between the tenant for life and the remainderman in the proportion which the amount due for arrears of interest bears to the amount due in respect of the capital debt. Vaughan Williams LJ (at 165) stated: "What was it a security for? It was a security equally for the principal and the interest. I will venture to enunciate, not a calculation, but a principle here which one ought to apply in these cases, and that principle is, that there being a security for principal and interest and there having been a loss, one must take care that there is rateable equality in the incidence of that loss. Now I proceed to make the calculation which follows upon that principle and I will take the very words of In Re Moore (54 LJ(Ch) 432, 434):'The apportionment of [the sum to be dealt with] will be in the proportions which [the amount due for capital] and [the amount due to the tenant for life for arrears of interest] bear to one another'." Romer LJ analysed the issue as follows (at 166): "What is to be done under the circumstances? I should have thought that the way to proceed was clear. In the first place, as to the interest which was paid to the tenant for life, it is clear that the tenant for life was entitled to receive it and to retain it, and that the remaindermen could have no possible claim or equity against the tenant for life in respect of the sum so received in any point of view whatever. That being so, what is the relevant position of the tenant for life and the remainderman so far as concerns the property which remains as security for the debt? They are simply in the position of two persons who have one security for the two debts belonging to them respectively. Notwithstanding the payment of interest to the tenant for life, so far as concerns his arrears of interest the tenant for life has a right as against the remaindermen to have those arrears charged upon the security. The security is a security, not only for principal, but for interest, and that is the right which the tenant for life had against the security and against the remaindermen, and I fail to see any equity on the part of the remaindermen which would enable them to challenge that right. Then, when the security is insufficient to pay the two debts charged upon it, I should have thought it would follow as a matter of clear right that the tenant for life could say to the remaindermen, 'Apportion our security which is a security for my debt as well as yours, between us in proportion to the amount of the debts, in the same way as you would if you had a mortgage given for two separate debts and the security proved insufficient. You would apportion the insufficient proceeds between the two mortgage debts'. That on principle ends the case." BC9706056 at 5 Coussens Hardy LJ delivered a concurring judgment. It is to be noted that at the time judgment was given in that case, it was not clear what the final debt would be and it was acknowledged that that could not be determined until the estate was finally realised when there could then be a final adjustment of rights between the parties. The Court accepted, however, that a provisional adjustment could be made at that time with the proceeds then available. It is also common ground that, in the circumstances of this case, the principle enunciated in Re Atkinson should be applied no later than the date of foreclosure - 4 February 1993. The parties accepted, correctly in my view, the authorities which apply the principle as at that date in cases where the trust security is a mortgage and the trustee forecloses. The two principal cases to which I was referred were Knox v Phillips (1918) 19 SRNSW 7 and In Re Horn's Estate (1924) 2 Ch 222. In Knox v Phillips the estate funds were advanced on 16 April 1889 on the security of two mortgages. The mortgagor paid interest until 16 October 1894 when it fell into arrears and the trustees entered into possession. The trustees remained in possession until 30 October 1901 and then foreclosed. The trustees attempted to sell the property but were not successful until 1912 when a small portion of the property was sold for 1,000. In 1916 the balance of the property was sold for 8,000 on a deposit of 1,500. The balance was secured by a mortgage bearing interest at 5 per centum per annum. The rents and interest on the purchase money collected by the trustees were insufficient to pay the life tenant the amount of interest

Page 66 secured by the original mortgages. It seems that there was no dispute that the rule in In Re Atkinson applied but counsel for the life tenant, while contending that the life tenant could not claim interest after the date of foreclosure at the rate stipulated in the mortgage (presumably the original mortgage) contended that the life tenant was entitled to some allowance. Street CJ in Equity rejected this argument. He said: "It may be hard upon her, but the position, as I see it, is this. The effect of the statutory foreclosure was to extinguish the mortgage debt altogether: Fink v Robertson (4 CLR 864). The only debt, therefore, owing to the tenant for life under the mortgage was the amount of interest due at the time of foreclosure and the effect of the foreclosure was to convert the land into security for that amount and for the BC9706056 at 6 amount of the capital debt. The amount due to the tenant for life for arrears of interest was fixed and ascertained by the foreclosure, and after that there was no obligation on the part of anybody to pay interest. She was entitled to whatever the land yielded in the way of rents and profits but this was all." His Honour concluded that the amount obtained on the sale of the property should be apportioned between the tenant for life and the remainderman: "in the proportion which the amount due for arrears of interest at the time of foreclosure bears to the amount due in respect of the capital debt." It is to be noted that in that case the trustees were in possession as mortgagees in possession from 16 October 1894 to 30 October 1901 when they foreclosed on the mortgage. It is not clear in the report whether any arrears of interest built up over that period and whether during that period it was apparent that the security was insufficient to pay principal and interest in full. The issues do not appear to have been canvassed and it was assumed that the life tenant was entitled to claim the interest in arrears at the date of foreclosure. The issue resolved was the question of the entitlement of the life tenant after foreclosure. In the case of In Re Horn's Estate' decided six years later, P O Lawrence J had to consider a situation where the trustees acting under a power in a will had invested trust money on the security of nine mortgages over nine leasehold estates. This was done between 1891 and 1899. The mortgagor became bankrupt and the trustees foreclosed in December 1915. Subsequently, four of the nine properties were sold but as at 1924, five remained unsold. The net rent of the property exceeded the amount of interest on the mortgage debt formally secured on the property in the case of two of the five remaining properties. In the case of another two of the properties the net rent was about equal to the amount of the former interest, but in the case of one of the five properties the net rent was less than the amount of the former interest. The trustees of the will sought an answer to the question whether the whole of the net rents of the five properties which remained unsold ought to be treated as income or whether any part ought to be treated as capital. P O Lawrence J BC9706056 at 7 considered the situation of the life tenant and remainderman prior to and up to foreclosure and expressed his conclusion as follows (at 227): "... all proper apportionments which were or ought to have been made in respect of the rents received during the period preceding the order for foreclosure are not to be disturbed and when the property is ultimately sold, if the net proceeds of sale amount to or exceed the aggregate of the amount of the interest on the mortgage debt on such property which was in arrear at the date of the order for foreclosure and of the amount of such mortgage debt, the tenant for life will be entitled to receive out of the net proceeds of sale the amount of such interest in arrear, and, if the net proceeds of sale do not amount to such aggregate, the tenant for life will be entitled to receive a proportionate part of the net proceeds of sale calculated in accordance with the rule laid down in In Re Atkinson." Thus it was assumed that the life tenant was entitled to receive the arrears of interest outstanding at the date of foreclosure from the proceeds of sale. Looking at the position as from the date of the order for foreclosure, P O Lawrence J said:

Page 67 "... the position is changed to this extent, that the trust fund is no longer represented by a debt, to the interest on which the tenant for life is entitled but is represented by the property comprised in the mortgage, the net rents of which pending sale a tenant for life is entitled to receive. If this be the true view, no rule of law relating to the apportionment of capital and income between tenant for life and remainderman will be prejudiced, notwithstanding that, as from the date of the order for foreclosure the tenant for life is entitled to receive the whole of the rent" He concluded his analysis as follows: "In the result, I am of opinion that the tenants for life are entitled to receive the whole of the net rents of the five properties in question from the date of the order for foreclosure until sale, although in two cases such rent exceeds the interest on the mortgage debt formally secured on the property. It follows logically from this that the tenants for life will not, by reason of the net rent of one of the properties having since the date of the order for foreclosure been less than the amount of the interest on the mortgage debt formally secured on such property, be entitled to claim any part of the proceeds of sale of such property when sold as compensation for such deficiency." Again, the judgment proceeded on the basis that there was no dispute about the position of the parties on and prior to foreclosure and the issue raised was the BC9706056 at 8 entitlement after foreclosure. Both judgments relied upon the principle that, on foreclosure, the trust funds were no longer represented by a debt bearing interest but by the property over which the mortgage was secured. ISSUES IN CONTENTION In this matter, the issue raised by the persons entitled to the remainder of the estates and trusts is whether, in the circumstances of the present case, a date prior to the date for foreclosure is the appropriate date at which the life tenant's loss should be identified for the purpose of applying the principle laid down in In Re Atkinson. In particular, it is put that there was a date at which it became clear as a matter of business certainty that the security for the loan would be insufficient to cover the interest and the capital repayment. It is put on behalf of the persons entitled to the remainder that the principle in In Re Atkinson applies at that date and that the life tenants and income beneficiaries are not entitled to reimbursement out of the proceeds of any sale of any arrears of interest that accrued between that date and the date when the trustees foreclosed on the mortgage. In other words, they argue that the loss of the life tenants and income beneficiaries crystallised at the earlier date. Three cases are relied upon in support of this argument. They are In The Matter of The Estate of William Ancketill (1891) 27 IR 331, Stewart v Kingsale [1902] 1 IR 496 and In Re George Scarfe (1923) SASR 459. It is necessary to examine these authorities in some detail. AUTHORITIES RELIED UPON BY THE SECOND DEFENDANT In The Matter of The Estate of William Ancketill concerned a trust where a sum of 4,116 13s 4d was held in trust for William Robert Ancketill for life with remainder over. The sum was invested in a mortgage affecting three denominations of lands which at the time of the hearing were to be sold. Ancketill submortgaged his interest in the mortgage to a Miss Girdlestone. The sub-mortgage as from 7 August 1884 had been vested in third parties. Ancketill, the life tenant, died on 9 March 1889. At that time arrears of interest under the mortgage totalled 839 14s 1d . At the time the matter came to trial there was a sum of 52 8s 2d received from rents being held to BC9706056 at 9 the credit of the matter. Application was made to have this amount paid over to the sub-mortgagees of the life interest and for a continuing order for payment out of the rents till the whole of the arrears of interest of 839 14s 1d had been paid off. The application was opposed by the persons entitled to the remainder. They argued that the security would be a deficient one and that the owner of the life estate in the fund, or his assignees, were not entitled to be paid in full. They further argued that the loss should be apportioned

Page 68 between those entitled as sub-mortgagees of the life interest and those entitled to the remainder of the estate. Munro J found that the properties over which the original mortgage was granted would not realise enough to pay off the mortgage and the interest due on it. He said that if the land were then sold and the deficiency ascertained there was no doubt that the loss would be apportioned between the life estate and the remainder. He said that the apportionment of the purchase money should be in the proportions which the arrears of interest (839 14s 1d) and the amount due for principal and interest from 9 March 1889 on the mortgage had to one another (applying In Re Moore 54 LJ (Ch) 432 which was followed in In Re Atkinson). He accepted the submissions made on behalf of the persons entitled to the remainder that the same principle applied where the land had not yet been sold provided it could be clearly shown that there would be a deficiency. His Honour said that he did not wish to tie up in court the money then held and he directed payment to be made to the sub-mortgagees of the life interest until the sum of 400 including the present payment had been made to them. His view was that their loss would not exceed the balance of their claim and he was assuming that the probabilities were that the land would be sold before the 400 was paid. He said that the account could then be adjusted as of the date of his judgment. Counsel for the remaindermen in the present case submits that this assists their case because Munro J chose a date other than the date of realisation as the date for the apportionment of the loss between the life tenant and remainderman. He submits that the result in that case was that the remainderman could not claim interest lost after the relevant date. He acknowledges, however, that Munro, J did not spell out that consequence. BC9706056 at 10 There is nothing in His Honour's reasons that in my view lends support to the proposition put forward on behalf of the persons entitled to the remainder in this case. From the facts of the case, it would appear that the crystallisation of the life tenants' entitlement to arrears of interest occurred not at a date where it was clear as a matter of business certainty that the security was inadequate to cover interest, arrears and capital but as at the date of death of the life tenant. While it is not clear on the facts of the case, there seems to have been a real possibility that the security was insufficient at a date prior to the date of the death of the life tenant. It is true that Munro J spoke of an adjustment as between life tenant and remainderman occurring as of the date of the judgment and not at some later date such as a date of foreclosure, but it is unclear why His Honour chose that date. There is nothing to indicate that he chose that date because that was the date at which it was clear that the security was insufficient as a matter of business certainty. In any event, he was not stating that the arrears to which the life estate would be entitled crystallised at that date. In Stewart v Kingsale (above) a residuary personal estate valued at 17,000 was left by the will of Robert Smythe to be held on trust for two successive life tenancies with the remainder over to certain persons. This amount was lent on the security of a mortgage over certain lands in County Galway by indenture dated 1 July 1875. The interest on the mortgage debt fell into arrears and, in 1880, the trustees of the estate presented a petition for the sale of the lands and the appointment of a receiver. On 8 September 1880 the order for sale was made absolute and a receiver was appointed on 4 November 1880. The first life tenant died on 13 July 1898. At the time of her death there was due to her estate for interest on the mortgage debt of 17,000 a sum of 1,777 3s 0d. A sum of 987 was subsequently paid by the receiver to the trustees out of the rents of the land on account of the mortgage debt. The trustees paid the amount over to the executors of the first life tenant leaving a sum of 790 3s 0d due to her estate. The interest on the mortgage debt of 17,000 due to the second life tenant up until 12 April 1901 and from the date of the death of the first life tenant totalled 2,127 6s 7d. The land was subsequently sold to the tenants under the Land Purchase (Ireland) Acts. By order of the Land Judge dated 24 April 1901 the sum of 10,028 2s 8d BC9706056 at 11 in guaranteed loan stock (the equivalent of 9,351 3s 1d) was transferred to the trustees. A certificate was endorsed on the indenture of mortgage to the effect that 6,530 4s 4d had been paid on account of the principal sum of 17,000 and the sum of 2,820 18s 9d on account of interest. From 24 April 1901, no money or stock was received by the trustees of the will in respect of the mortgage debt or the interest on it. It appears that a further sum of 800, being the proceeds of further sales, was to be shortly transferred to the trustees and they would be entitled to have the unpaid balance due to them

Page 69 registered as a first charge against the sum of 6,339 guaranteed land stock which the Irish Land Commission had retained. The amount realised would be insufficient to pay in full the principal sum of 17,000 and interest thereon. One of the mortgagors died in 1884 an undischarged bankrupt. The other mortgagor had no property available for payment if judgment was recovered against him under the covenant for payment. The trustees issued an originating summons to obtain directions as to the respective rights of the several persons entitled under the will of the testator to the capital and income of the funds representing the sum of 17,000. The issue at stake was the principle on which the moneys recovered or which might be recovered were to be divided between the executors of the late tenant for life, the existing tenant for life and the persons entitled in remainder so that the result might be apportioned fairly between them. The Master of the Rolls commenced his reasons for judgment by referring to what he described as "the recognised principle" laid down in Cox v Cox LR 8 Eq 343. Quoting from Vice-Chancellor James in that case at p344 he said: "The true principle in all these cases is, that neither the tenant for life nor the remainderman is to gain an advantage over the other - neither is to suffer more damage in proportion to his estate and interest than the other suffers - from the default of the obligor. The two must share the loss in the same way as they would have shared it had it occurred when they first became entitled in possession to the fund." The debate before the Master of the Rolls appears to have been whether he should follow the decision of In Re Moore 54 LJ Ch 432 or the decision of Re Foster 45 ChD 629. In Re Foster, Kaye J had held that in apportioning an available fund between the BC9706056 at 12 tenant for life and the remainderman the fund to be apportioned should be arrived at by adding to the capital moneys produced by the sale all the moneys that had been received by the tenant for life. He then estimated how much the tenant for life would have received if the mortgage interest had been regularly paid deducting income tax. He took the capital sum which the remaindermen would be entitled to on the supposition that the capital of the mortgaged debt had been fully paid. He then divided the fund between the tenant for life and the remainderman in the proportion of those two amounts which each ought to have received. Thus the apportionment he proposed required the life tenant to share the moneys the life tenant had received with the remainderman. The Master of the Rolls rejected that approach "unhesitatingly" (at 511) and adopted the approach put forward in In Re Moore (also followed in In Re Atkinson) where the life tenant was permitted to retain moneys received and permitted to share in the sum realised on the basis of the proportion borne by the arrears of interest to the capital sum payable to the remaindermen. He explained his decision as follows: "A tenant for life of a fund which becomes diminished by means of a breach of trust (to which he is not a party), or by the bankruptcy of a debtor, or by fall in value of the securities on which the trust money is invested, may have received the income of the fund before any such calamity for a long series of years. The amount of income so enjoyed may equal or largely exceed any sum which would be coming to him, on any equitable calculation, out of the remnant of the fund. In either case he will, under the decision of Re Foster ... receive nothing. Yet the payment of the income which has been received by him has in no way caused the loss or diminished the fund to which the remainderman is entitled. The diminution is caused by an act which wrongs both remainderman and tenant for life as from its date. Before its occurrence the income received was rightly received. Each payment of income or interest belonged to the tenant for life. If withheld, he could have enforced each and every payment by regular process of law; and in no conceivable event could it be recovered back from him in the absence of fraud or the like" (511-512). The Master of the Rolls concluded that: "The rule in Re Moore ensures to those interested in the trust fund equality of treatment in respect of rights and interests injuriously affected by the loss which diminishes the fund." BC9706056 at 13 The Master of the Rolls then dealt with the specific case in a passage relied upon by counsel for the

Page 70 remaindermen in this case. He stated: "But the loss of the fund ought only to affect injuriously the interests of those entitled to it as from the date of the loss. This must be the case where the loss is total. Why then should there be a difference when the loss is partial only I fail to see. Thus the date of the breach of trust, bankruptcy, or decline of securities, or the time at which it becomes apparent that there must be a loss (Ancketill's Estate 27 LR IR 331) is, in my opinion, the time at which persons entitled in succession are injured and the adjustment as between them should commence and take effect as of that date; and this is, I conceive, the correct interpretation of what was said in Cox v Cox (at 512-513)." He then stated: "In the present case I cannot see any other date to which this consequence is to be attached than the date of the sale. For all that appears, although the interest had partly fallen into arrear, the trust fund and interest on it might have been adequately secured all along until the sale." Counsel for the remaindermen submits that Stewart v Kingsale is authority for the proposition that the adjustment between the life tenant and the remaindermen is to take effect in a case such as the present when it is clear that there must be a loss. To achieve that conclusion, however, it is necessary to read the phrase "the adjustment as between them should commence" as meaning that "the adjustment as between them should be undertaken and the loss of the second life tenant crystallised". The Master of the Rolls in any event adopted the date of sale of the property as the date at which the adjustment was to "commence and take effect". That would be the date, on the alternative view, on which the loss of the second life tenant crystallised so far as the loss on the previous investment was concerned. Assuming the Master of the Rolls selected the date of sale as the date after which the second life tenant was entitled to no compensation for loss of interest from the original investment, he did not have to consider whether it would be consistent with authority to fix an earlier date as the date after which the life tenant could not recover arrears of interest out of any proceeds of sale, even though the life tenant's interests remain secured over the property in question. BC9706056 at 14 The third case referred to is In Re George Scarfe (above). George Scarfe died on 14 April 1903. The trustees of his estate held one-seventh of the residuary estate for the benefit of Mr Scarfe's sister, Ellen Laura Scarfe, during her life. After her death it was to pass to certain persons absolutely. On 17 February 1913, the trustees advanced 6,000 to a Mr Gardener on the security of a mortgage over freehold land. At the time it had been valued at 9,426. A further loan was made on 6 September 1913 of 300 on a second mortgage of the land together with a bill of sale on household furniture, farm stock, implements and plant and growing crops. Further moneys were advanced on similar securities up and until May 1915 totalling 380. Ellen Laura Scarfe died on 7 June 1917. At the date of her death the sum of 796. 12s 9d was due to her for arrears of interest. Following her death, the sum of 385 12s 9d had been received in various instalments as payment of interest. At the date of the summons, 20 July 1922, an amount of 2,103 19s 4d was owed for interest due on the principal moneys and the total amount due for principal and interest was 8,103 9s 4d. In 1921 the property had been valued at 4,942. The report does not reveal the value of the plant, stock, and other relevant property. Following the issuing of the summons and prior to the hearing of it, the security was realised for a sum considerably less than the moneys advanced. The trustees had distributed the sum of 385 12s 9d which had been received on account of interest after the death of the life tenant by apportioning the payments when received between the estate of the life tenant and the remainderman in proportion to the amounts owing to them respectively at the time of each payment. Questions asked in the proceedings were directed to whether that action had been correct and, if not, what action should have been taken. The court was also asked to determined on what principle moneys obtained for realisation of the security should be distributed in the event that they were insufficient to satisfy both principal moneys and arrears of interest.

Page 71 In that case, counsel for the life tenant contended, relying on, inter alia, In Re Atkinson, that the date of realisation and that date alone was the point at which the adjustment should be made and that the money to be then apportioned should be BC9706056 at 15 the proceeds of the sale and those proceeds only. Counsel for the remainderman submitted that this involved a too rigid application of the principle to the extent that it is sought to confine apportionment to the date of realisation. Gordon J accepted the latter view. He said, inter alia, that counsel's position was supported by the decision in Stewart v Kingsale and by the decision in In Re Ancketill's Estate. Gordon J quoted the passage quoted above from Stewart v Kingsale where the Master of the Rolls appeared to be stating that the time at which the adjustment commenced and should take effect is the time at which it became apparent that there must be a loss. He went on to say that the Court of Appeal in In Re Atkinson gave "unqualified approval to the judgment in Stewart v Kingsale" and then referred to statements from In Re Atkinson which refer to the principle laid down in In Re Moore and stated that the Master of the Rolls in Stewart v Kingsale had correctly chosen between In Re Foster and In Re Moore. It seems to me that Gordon J took that approval too far if, as he seemed to do, he treated the passages as approving not just the preference for In Re Moore but as approving the proposition that the adjustment was to commence and take effect as from the date at which it became apparent that there must be a loss. Nonetheless, Gordon J treated the approval as applying to that aspect of the judgment in Stewart v Kingsale and treated it as deciding that: "... the adjustment of loss between life tenant and remainderman on an insufficient security should be made as from the time it becomes apparent there must be a loss." He then stated: "... It seems to me that the fact that at the death of the tenant for life the arrears of interest amounted to 796 indicated a strong probability of loss, though, as the Master of the Rolls said in Stewart v Kingsale, it does not follow that because interest has partially fallen into arrear the trust fund and the interest on it might not be adequately secured till the sale" (at 463). He then continued: "But what may have been regarded as a probable loss at the death of the tenant for life in 1917 surely ripened to what may be called a business certainty of loss in the year 1918, when, notwithstanding the further BC9706056 at 16 advances which had been made to the mortgagor, only 5 4s 8d was paid towards arrears of interest, the debt being then 6,680" (at 464). He declined to confirm the method of apportionment used by the trustees as being a final adjustment. He held instead however: "... that the 385 17s 9d received as interest after the death of the life tenant shall be brought into hochpot, and when this has been done, the aggregate of the arrears of interest and the purchase money shall be divided upon the principle of In Re Atkinson." Counsel for the remaindermen sought to interpret His Honour's reasons as indicating that as from the business certainty date of 1918, the remainderman bore any interest loss and that, thus, the decision supported the argument he was putting that the date of business certainty is the date at which the losses of the parties are crystallised. Counsel conceded, however, that in the relevant passages His Honour did not say what he meant by "arrears of interest". Counsel submitted that the judge was saying that the amounts to be apportioned are crystallised as at that date. A difficulty with counsel's argument is that the case appears to me to have focussed on the way in which the sum of 385 17s 9d was to be distributed, it being interest received after the death of the life tenant.

Page 72 Further, His Honour simply speaks about applying to the hotchpot created by the purchase money and the 385 17s 9d " the aggregate of the arrears of interest". Nowhere does His Honour indicate that the remaindermen should be deprived of the opportunity to seek to recover the arrears of interest from 1918 to 1923. If that was what His Honour was intending to direct his remarks to, one would have expected some express reference to that issue. The explanation for the decision may lie in the lack of any evidence as to the precise interest arrears in respect of which the sum of 385 17s 9d was received. It is unclear from the judgment whether the 385 12s 9d constituted payment of arrears of interest that had accrued prior to her death or whether they related to the payment of interest as it accrued after her death. If it was the latter, then it was income to which the remaindermen were entitled and should not have been brought into hochpot in my view. If it was the former, on the authorities, it was money to which the life tenant was entitled without reduction. If Gordon J had no evidence before him to indicate that the BC9706056 at 17 sum had been received in respect of any particular arrears of interest or could be appropriated to any particular arrears of interest, he was confronted with the task of deciding how to fairly distribute that amount between the life tenant and the remainderman. The fairest way that could be done may have been to include it in the total sum to be apportioned and for it then to be apportioned according to the proportions of loss borne by the life tenant and remainderman. His Honour also appears to have used the business certainty date as the date from which to place funds in the sum to be apportioned but not as the date at which the losses of the life tenant and remainderman were to crystallise. It is the latter that is the issue to be determined in this case. In light of the foregoing analysis, it seems to me that the above three authorities relied upon on behalf of counsel for the remaindermen in the present case cannot be shown to support his contentions. AUTHORITIES RELIED UPON BY FIRST DEFENDANT There is also authority where the date of business certainty of loss could have been used as the date at which the apportionment was to occur and after which the life tenant ceased to have any entitlement but it was not. I refer first to the case of In Re Broadwood's Settlements (1908) 1 Ch 115. In that case a mortgage of 18,000 over a farm was settled on 10 December 1884 on successive trusts for two life tenants and a remainderman without making any provision for arrears of interest then outstanding for three years and owing to the settlor. The interest payments continued in arrears. Under the settlement, the settlor became the first life tenant. The first life tenant died on 8 July 1893 and the second life tenant died on 22 January 1903. The mortgagor had worked the farm together with another farm which also was mortgaged. There was an arrangement for the payment of net income to each mortgagee. The net incomes were insufficient to meet the interest in either case. An error was made in the apportionment between the two mortgages. The trustees on 11 August 1905 recovered a sum of 1,028 representing income which had been wrongly paid to the mortgagees of the second farm. The mortgagor BC9706056 at 18 continued to work the first farm as manager to the trustees from 11 October 1902 to 11 October 1906. On that day, the trustees let the farm at a rent of 515 and on 29 November of the same year received 2,368 for the sale of farm stock provided out of and representing the income earned from 11 October 1881 to 11 October 1906. At that stage, the interest was heavily in arrears and the security was greatly depreciated. Interestingly, foreclosure procedures had been commenced but no order had been made. It was held that the representatives of the first life tenant could not claim any arrears of interest owing at the date of the original settlement against the other beneficiaries, but that the sums of 1,028 and 2,368 and all accruing rent received up to the time of foreclosure must be treated as a payment on account of all arrears of interest owing at the date of payment and must be apportioned between the estates of the two life tenants and the remaindermen in proportion to the amounts owing to them for arrears of interest at the date when the particular sum was received. Swinfen Eady J described the issues and resolution of them in the

Page 73 following terms (at 121-2): "The question is how the two sums of 1,028 and 2,368 and the accrued and accruing rent are to be dealt with. The mortgage security is admittedly insufficient; but it has not been realised, and although foreclosure proceedings are pending, they have not been completed. The property consists of a farm let at 515 a year. Until foreclosure absolute, I am of opinion that the income must be distributed rateably between the persons entitled to the income, and the proper method will be to take the date when each sum is or was received or recovered and apportion that sum in proportion to the amounts owing to the respective estates for arrears of interest at that date. That is to say, each sum received or recovered is to be treated as a payment on account of all arrears claimable by the representatives of the first and second life tenants and the remaindermen, and is to be apportioned rateably between them in accordance with the arrears owing to them respectively. It is in this way that the 1,028 or the residue of it, and the 2,368 will be applied, and the subsequent rental to be applied in the same manner until foreclosure absolute. It is obvious that the amount due to the remaindermen will be gradually increased and the amount due to the life tenants' representatives diminished, by this method of application. That however is the proper way to divide the income." BC9706056 at 19 The amounts payable to the life tenants were crystallised at their death. It is apparent from the report of the case, however, that as a matter of business certainty the security was inadequate for a long time and shortly after it was given. The security held was the same as that which existed at the time the arrears accrued in respect of the first and second life tenants and subsequently, after their death, in respect of the remaindermen. Swinfen Eady J concluded that until foreclosure, the sums received as rent or interest should be treated as payment on account of all arrears between the first and second life tenants and remaindermen and to be apportioned rateably between them in accordance with the arrears of interest owing to them. Plainly, he was assuming that until foreclosure occurred a different regime would not apply. It is to be noted that he was referred not only to In Re Atkinson but also to Stewart v Kingsale and In Re Ancketill. He did not apply what was said, in In Re George Scarfe, to be the principle to be derived from Stewart v Kingsale. The cases appear to have been cited by counsel for the second life tenant to support an argument that the above amounts should be apportioned in proportion to the amounts owing to income and capital at the date each payment was received. Swinfen Eady J appeared to reject the argument. He responded, "That principle is applicable when the security is realised and the capital loss ascertained" (at 120). The next case to consider is the case of In Re Knott (1937) VLR 244. William George Knott died on 7 November 1927. By his will he directed that income from the residue of his estate should be paid to his children during their lives and that after their death the corpus should be divided amongst his grandchildren. Shortly prior to his death, on 9 June 1927, he had entered into a terms contract of sale of certain land for the sum of 25,000. Interest was payable on the outstanding balance of purchase money. The purchaser paid the deposit prior to the testator's death and after his death paid five instalments totalling 6250 together with 3,038 5s 8d by way of interest. On 9 July 1935, the executor sued the purchaser for the balance of purchase money and interest. The action was compromised on 31 October 1936 on terms that the purchaser should pay, in addition to the moneys already paid under the contract, the further sum of 6,250 and the executors would receive the purchaser's interest in the BC9706056 at 20 land. The contract of sale was cancelled and the purchaser released from any further obligations. The land reverted to the executors. At that time the land was vacant and not earning any income and it remained in that condition thereafter except that parts were sold as building allotments. The executors took out an originating summons to determine who was entitled to the instalments of 6,250, the 6,250 paid under the compromise, the land when it reverted to the plaintiff, the sums paid for parts of the land subsequently sold and any future receipts from future sales. Questions were also raised as to whether certain sums should be treated as paid out of capital or income. Lowe J accepted that the apportionment principle laid down in In Re Atkinson was the correct one. He stated that principle as being: "... that one must take the amount due to the tenant for life for arrears of interest and the amount due to the

Page 74 remainderman for capital, and apportion the fund in question in proportion to those amounts respectively." (at 248) He indicated that that was not in dispute and went on to say: "But there was some contest as to what was the proper date as at which such apportionment should be made and as to the rate of interest at which the arrears due to the life tenant should be computed. No distinction need be made in this case between the date of the agreement of compromise and the date when the money was paid under such agreement and the land retransferred, for they are the same date. That date is the date at which, in my opinion, the arrears should be computed. That is the date when the asset existing at the testator's death assumes a form which discloses a deficiency or, to put it in another way, when a new asset is substituted for the old asset. I think that in In Re Atkinson; Barbers Co v Gross Smith supports this view." His Honour does not appear to have been referred to the three cases mentioned above relied upon by counsel for the remaindermen in this case. They, however, rely upon the comment that Lowe J makes that the date to be selected was the date when the deficiency was disclosed. Counsel for the life tenants and income beneficiaries point to the latter part of the same sentence as supporting their argument because it speaks of the date being the date when a new asset is substituted for the old. Looking at the facts of In Re Knott it seems clear that any deficiency would have been clear as a matter of BC9706056 at 21 business certainty well before 31 October 1936. Thus, on balance, it appears to me that it does not support the argument of those claiming the remainder in this case. There is also authority to the contrary of the position advanced for the remaindermen in this case. I refer to the case of The Permanent Trustee Co of New South Wales Ltd v Macphillamy (1938) 38 SRNSW 541. In that case, the trustees of the estate of Charles Macphillamy had advanced the sum of 12,000 secured over freehold and conditional purchase land on 27 August 1928. The mortgagors were required to pay half yearly instalments of interest. They did so up to and including 1929 and thereafter fell into arrears. From 1930 until 1935, the trustees made payments out of capital on the conditional purchase instalments relating to the properties and insurance premiums totalling 1,029 and 127 respectively. The mortgagors had been obliged to make these payments under the terms of the mortgage. The trustees exercised their power of sale entering into contracts of sale on 6 August and 16 October 1936. The total selling price was 10,000. Contracts were completed on 17 December 1937. On that date, the mortgagors owed 6,686 7s 6d for interest. The trustees took out an originating summons to determine whether any and if so what adjustment should be made as between life tenants and remaindermen with respect to the amounts owing for interest and the amounts owing in respect of the payments by the trustees for conditional purchase instalments and insurance premiums. It had been put for the remaindermen that the principle to be derived from Stewart v Kingsale was based on the proposition that from the date when the loss becomes certain the capital is in the position of being uninvested. It cannot produce any income, therefore the life tenants are not entitled to any interest. It was put that the life tenant bears the burden of the postponement of the realisation of the security. In his reasons for judgment, Nicholas J summed up the argument for the remaindermen in the following terms (at 547). He said: "In the present case it is argued on behalf of the remaindermen that another date should be chosen and that the persons interested in the income, in computing their claims should not be allowed any arrears of interest accrued due since it became a business certainty that the mortgage securities would not realise the amounts due for principal and interest. In the alternative, it was argued that the final date for BC9706056 at 22 computing interest should be the date of the contract of sale and not the date of completion. I understood it to be admitted by counsel that there was no direct authority for the first of these propositions but that they contended that they was supported by three decisions - Stewart v Kingsale; In Re Ancketill's Estate; and In Re George Scarfe - or of some dicta which are to be found in these decisions. In none of these cases was

Page 75 the question propounded the same in principle as that now before me" (at 547-548). His Honour went on to note that when Stewart v Kingsale was decided there were two methods of apportionment that had been approved by judges of first instance - the two approaches that had been suggested in In Re Moore and in In Re Foster - the former being subsequently approved by the Court of Appeal in In Re Atkinson. His Honour then proceeded to review the authorities. After referring to the three authorities at some length descriptively, His Honour analysed the cases as follows: "In two of the three cases cited, the Court held that a date other than the date of realisation should be taken as the date at which the amounts owing to the different parties interested should be ascertained. None of the three cases appears to me to support the claim now made on behalf of the remaindermen that when the amounts to be taken into account on apportionment are assessed the life tenants should not be allowed to take into account the interest unpaid since the year 1929 or the year 1932 [probably incorrect - 1930]. In the case now before me the life tenants have received nothing since 1929 and if it were established that a deficiency in the securities had become a business certainty in 1929 or 1932 [probably 1930] there is nothing that they could bring into hotchpot" (at 551). His Honour rejected the arguments put forward for the remaindermen as against the life tenants. On the issue as to whether the date of the contracts for sale or the date of completion should be taken as the date on which the apportionment should take place His Honour chose the date of the contract. He did so stating: "From those dates, the nature of the investments was changed and that I think is the test to be applied under the circumstances of this case: see In Re Horn's Estate; In Re Knott, notwithstanding the difficulties of administration to which Mr Wilson has drawn my attention" (at 552). His Honour treated the amounts expended from corpus in respect of conditional purchase instalments and insurance premiums as sums to be added to the amounts deemed to have been invested in the relevant mortgages and treated as part of the corpus for the purpose of the calculation in In Re Atkinson. BC9706056 at 23 CONCLUSION The three authorities relied upon by counsel for the remaindermen are, in my view, unsatisfactory for the reasons indicated in my discussion of them. They do not, in my view, support the position advanced for the remaindermen in this case. That position may be said to have been rejected by Nicholas J in Macphillamy's case. If the three cases were authority for what counsel alleged, they seem to me to run counter to the fundamental principles enunciated in the authorities that the property is security for both principal and interest and that there should be a rateable equality of distribution of the losses between the life tenant and the remainderman out of the realised proceeds. In the present case, the losses of the life tenants and income beneficiaries continued until foreclosure. In particular, those losses continued after it became clear as a matter of business certainty that the security for the loan and interest and arrears of interest was insufficient. To adopt the argument put forward on behalf of those entitled to the remainder seems to me to advantage unfairly those entitled to the remainder. It is put for the remaindermen that if the business certainty date is not selected it would be left to the trustee to determine the date of apportionment by deciding when to foreclose or sell. It is put that if the date when the loss as a matter of business certainty is clear is selected as the apportionment date then that is avoided. It seems to me, however, that it is more likely that a fair apportionment will result if the date of apportionment is, in effect, determined by the trustee. The trustee has obligations to act fairly as between the beneficiaries and is thus well placed to act in such a way as to cause a fair date of apportionment to be established. The date of business certainty loss will not necessarily achieve that result. Chance will determine the outcome which may or may not be fair. There also appears to me to be a grave practical disadvantage with the test proposed by the remaindermen. It would require an assessment to be made in BC9706056 at 24 each case as to when as a matter of business certainty the deficiency appeared. In many, if not most, cases

Page 76 this will be unclear and necessitate an application to the Court for the establishment of that date. It is also not clear what is to be considered in determining whether there is the required deficiency or not. Counsel for those entitled to the remainder in this case submitted that it would not be ascertained by reference to the capacity of any borrower or guarantor. It would solely be a matter of determining the deficiency in money terms of the security if it were sold having regard to interest then due and the capital sum lent. This argument, however, appears to me to ignore the reference to "business certainty" in the authorities relied upon. It also runs into difficulty in this case in any event because determining the business certainty of loss so far as security for the loan is concerned would require an assessment of the value of the guarantees provided as part of the security for the loan. Order Ultimately, however, it appears to me that to rely upon the date at which a loss situation emerged as a matter of business certainty is to introduce a test which will ignore the fundamental object of the rule in In Re Atkinson which is to apportion the loss suffered by those whose entitlement was secured by the mortgage security in question and to do so in such a way as to achieve rateable equality. It is necessary to identify the loss suffered by each relevant party, to identify the sum realised on the security and to distribute it to those entitled in proportion to their relative losses. Accordingly, the questions raised should be answered as follows:

1 2 3

(a) Yes. (b) No. (c) No.

Counsel for the plaintiff: Mr T Murphy Solicitors for the plaintiff: Aitken Walker & Strachan Counsel for the 1st defendant: Miss C McMillan Solicitors for the 1st defendant: Maddock Lonie & Chisholm Counsel for the 2nd defendant: Dr I Hardingham Solicitors for the 2nd defendant: Purves Clarke & Richards

Page 77

Page 78 10 of 10 DOCUMENTS: CaseBase Cases

McElwaine, In the Matter of the Estate of

BC9702485 Court: QSC Judges: Williams J Judgment Date: 6/6/1997

Catchwords & Digest

Succession -- Wills and codicils -- Construction of will -- Vesting of beneficiary's interest contingent on death of life tenant Where testator survived by wife and three children at time of death. Where will provided for life interest in estate to wife with remainder to children. Where one child of deceased died subsequently, himself survived by two children of his first marriage and second wife. Where testator's wife later died. Where testator's will provided that if child of his should die "before attaining a vested interest" in estate, his share shall pass to his children. Whether children of testator had vested interest in estate prior to death of life tenant. Whether testator's son's interest passed to his children or formed part of his estate. Held: Persons who are to ultimately take interest in residue not determined until after life tenant's death. Testator's son did not have vested interest in estate at time of his death. Cases referring to this case Annotations: All CasesSort by: Judgment Date (Latest First) Annotation Case Name Citations [2008] NSWSC 1378; Cited De Martin v Jacobs BC200811348 Cases considered by this case Annotations: All Cases Sort by: Judgment Date (Latest First) Annotation Case Name Citations Ritchie (decd), Re; Union Considered Trustee Company of Australia [1949] St R Qd 90 Ltd v Ritchie

Court NSW SC

Date 16/12/2 008

Signal

Court QSC

Date 8/7/1947

Signal

---- End of Request ---Download Request: Tagged Documents: 41-50 Time Of Request: Friday, October 26, 2012

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