Reported Decision : [2000] 34 ACSR 341 New South Wales Supreme Court CITATION : Craven-Sands & Ors v Koch & Anor [2000] NSWSC 374 CURRENT JURISDICTION: Equity Division FILE NUMBER(S) : SC 1879 of 1999 HEARING DATE(S) : 10,11,12,13 and 26 April 2000 JUDGMENT DATE : 19 May 2000 Maaike Craven-Sands (First Plaintiff) Colin Craven-Sands (Second Plaintiff) Peter Craven-Sands (Third Plaintiff) PARTIES : Johannes Craven-Sands (Fourth Plaintiff) William Craven-Sands (Fifth Plaintiff) Marianna Craven-Sands (Sixth Plaintiff) Beryl Anne Knox Koch (First Defendant) Alwin Rose Koch (Second Defendant) JUDGMENT OF : Bergin J COUNSEL : JR Wilson (Plaintiffs) P Blackburn-Hart (Defendants) SOLICITORS : Teece Hodgson & Ward (Plaintiffs) Conway MacCallum (Defendants) CATCHWORDS : Application for removal of trustees - Authorization by trustee/shareholders of payments of directors' fees to trustee - Conflict of interest and duty - Conduct less than standard expected of ordinary prudent person of business - Breaches of trust - Application to excuse trustees from personal liability pursuant to s 85(2) of Trustee Act 1925 LEGISLATION CITED : Trustee Act 1925 Companies Act 1961 In Re Dover Coalfield Extension, Limited (1908) 1 Ch 65 Smith v Langford (1844) 2 Beav 362. 48 ER 1221 Nissan v Grunden (1912) 14 CLR 297 In Re Sykes: Syles v Sykes (1909) 2 Ch 241 In MacAdam. Re Dallow v Codd (1946) 1 Ch 73 Waterhouse v Waterhouse & Ors (1998) 46 NSWLR 449 Aberdeen Railway Co v Blaikie Brothers (1854) 1 Macq. 461 Bray v Ford [1896] AC 44 Williams v Barton (1927) 2 Ch 9 Phipps v Broadman [1967] 2 AC 46 Breen v Williams (1995-1996) 186 CLR 71 CASES CITED : Fouche v The Superannuation Fund Board (1952) 88 CLR 609 Re Chapman; Cocks v Chapman [1896] 2 Ch 763 Hartigan Nominees P/L v Rydge (1992) 29 NSWLR 405 Pateman v Heyen (1993) 33 NSWLR 188 McMahon v Cooper (1904) 4 SR (NSW) 433 Guazzini v Pateson (1918) NSW SR 275 Miller v Cameron (1936) 54 CLR 572 Letterstedt v Broers 9 App Cas 371 Forster v Davies 4 De G.F. & J. 133 In Re Keeler's Settlement Trusts (1981) 1 Ch 156 In Re Masters Decd (1953) 1 WLR 81 Jacobs Law of Trusts 6th Edition DECISION : Order for Removal. Application pursuant to s 85(2) Trustee Act dismissed. THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION BERGIN J FRIDAY 19 MAY 2000 1879/1999 - MAAIKE CRAVEN-SANDS & ORS v KOCH & KOCH JUDGMENT 1 This is an application by the plaintiffs to remove the defendants from their position as trustees of the estate of the late Colin de Clouet Craven-Sands (the deceased) who died on 16 August 1987. The defendants have administered the trusts created by the will since 22 July 1988 when a grant of probate was made to them. 2 The plaintiffs are the widow (first plaintiff) of the deceased and the five children (second to sixth plaintiffs) of the deceased and the first plaintiff. The first defendant is the daughter of the deceased from his first marriage and the second defendant is her husband. 3 Under the will the first plaintiff is entitled to the income of the trust during her lifetime or until remarriage. The second to sixth plaintiffs are the beneficiaries of the reversionary interest in the estate. 4 Assets of the estate as at September 1999 comprised two shares in Marisa Pty Limited (the Marisa shares), a term deposit and money in a cheque account. The defendants are directors of Marisa Pty Ltd (Marisa) and hold the Marisa shares as trustees of the trust and beneficially for the estate. 5 Marisa is the registered proprietor of a property at 4/121 West Street, Balgowlah (the Balgowlah property) which is leased. The rental from the Balgowlah property is paid to Marisa. 6 The plaintiffs claim that the defendants should be removed from their positions as trustees because: (a) in authorising payments of $41,000 to the first defendant for "director's fees", "expenses" and "allowances" they have breached their fiduciary duty owed to the plaintiffs, preferring their own interests over those of the plaintiffs and have thereby reduced the income of the trust; (Directors' fees) (b) they have acted negligently and thereby breached their fiduciary duty to the plaintiffs in their retention of and relationship with the firm of accountants, Bond Patterson; (Bond Patterson) (c) they have managed the affairs of Marisa imprudently and acted hazardously and carelessly having thereby acted in breach of trust by engaging in litigation against the proprietors of Strata Plan 5249 in relation to the Balgowlah property; (Strata Plan litigation) (d) they have failed to inform the plaintiffs of the payment of directors' fee and the matters relating to Bond Patterson and the Balgowlah property litigation; (Failure to Inform) 7 The defendants filed a verified amended defence on 10 April 2000 in which they admitted that the first defendant received directors' fees, expenses and allowances in the amount of approximately $41,000. The defence pleaded that such receipt was pursuant to the advice of a solicitor, Mr Peter Kennedy, of Ebsworth and Ebsworth, given in January 1991 (The Ebsworth advice). 8 The defendants claimed the Ebsworth advice was that they were entitled to payment in respect of their time and effort in the form of executors' commission, after the preparation and passing of Probate accounts, and that the first defendant was entitled to payment in the form of directors' fees in the amount of $1000 for years 1980 to 1987 inclusive and $3000 for the years thereafter. 9 The defendants also claim that the Ebsworth advice was "confirmed" by Mr Coles the former accountant for the estate; a retired solicitor, but now deceased former director of Marisa, Mr Opie, and an accountant, Mr Anthony Patterson of Bond Patterson. The defendants also claimed that Mr Patterson's advice was that certain payments to the first defendant could be nominated as "allowances" thereby providing a tax benefit to the first defendant at no cost to the estate. 10 The defendants claim that all payments of directors' fees, expenses and allowances were made pursuant to what they believed had been the legal and accounting advice and in the belief that the first defendant was entitled to such payments. 11 The defendants deny the allegations in respect of Bond Patterson and the Strata Plan litigation and claim that the reason the plaintiffs were not informed of such events was because the first plaintiff instructed them not to inform any of the plaintiffs of such events. 12 By cross claim, the defendants seek relief from personal liability in respect of any established breaches pursuant to s 85 of the Trustee Act 1925. The defendants also seek a declaration that the first defendant is entitled to retain the "remuneration" paid to her by Marisa. 13 The defendants also seek judicial advice as to whether they would be justified in continuing to defend the Bond Patterson litigation and allocate legal costs in respect of that litigation equally between corpus and income or on some other basis. 14 This matter was expedited on 3 March 2000 and heard on 10, 11, 12, 13 and 26 April 2000 when Mr J Wilson, of counsel, appeared for the plaintiffs and Mr P Blackburn-Hart, of counsel, appeared for the defendants. The deceased 15 The deceased had been a Minister of Religion since 1953 with the Missions to Seamen (the Missions) and by 1970 was a Senior Chaplain. The Missions provided the deceased with accommodation at 2 Poole Street, Longueville (the Longueville property) whilst he was a Chaplain and thereafter for his retirement. 16 The deceased's first wife, whom he married on 3 October 1942, died in October 1969. The first defendant was born in March 1945 and there is a younger daughter who is now known as Christel Adamse (Ms Adamse). 17 The deceased and the first plaintiff were married in 1970 and lived in the Longueville property until 1980 when they went to England so that the deceased could take up a posting in Norfolk to close down the Missions at Great Yarmouth. The request for assistance 18 Prior to the departure for England the deceased asked the defendants to take care of his financial affairs whilst he was away. At that stage he anticipated being in England for approximately eighteen months until his retirement. The deceased granted a Power of Attorney to the first defendant but informed the defendants that he would still be available to make all the major decisions from England and requested them to assist him by carrying out any "routine functions" in Sydney. 19 In 1982 the deceased returned to Sydney for a visit. It had become clear that the deceased was not going to be able to return to Sydney for some time as he had been offered a position as Rector of three adjoining parishes just outside Ipswich in Suffolk. 20 During his visit he informed the defendants that he wanted them to be "compensated" for their time and efforts in managing his business affairs whilst he was away. He informed them that he had discussions with his lawyer and accountant in Sydney and he was hopeful that his financial situation would soon improve. The second defendant informed the deceased that he agreed that it would be "fair and reasonable to recompense" the defendants for their time and effort and for any expenses incurred. However the second defendant informed the deceased that they would only "take compensation if it can be afforded". 21 When the deceased, the first plaintiff and their family left to go to England in 1980 the deceased offered the defendants accommodation in the Longueville property. The defendants accepted that offer and moved into the premises for a period whilst their home in Gladesville was renovated. 22 After 1982, when it became clear that the deceased was to stay in England for a longer period, the defendants moved back into their own home and prepared the Longueville property for rental. They then managed that property concurrently with the real estate agent. 23 Although the detail is not clear, it is apparent that during his lifetime the deceased had advanced some moneys to his daughter, Ms Adamse. It is also apparent that so far as the defendants are concerned there was an understanding and a perception in the deceased that Ms Adamse would repay those moneys. 24 In 1984 the deceased purchased a chalet in Switzerland. It is apparent that the deceased was relying upon Ms Adamse repaying some of the advanced moneys to assist in the financing of the chalet. When this expectation was not realised the deceased communicated with the defendants for the purpose of ensuring that the rental from the Balgowlah property and the Longueville property were transferred overseas to assist with the financing of the chalet. 25 The deceased had planned a trip to Switzerland to make some form of application to the Swiss Government to alleviate the financial burden of the financing of the chalet. This plan was not pursued prior to the deceased's death on 16 August 1987. 26 The plaintiff returned to Australia in 1988 and recommenced residing in the Longueville property subject to a licence agreement with the Missions. The Will, The Family Trust and the Estate Trust 27 There was some complexity to the deceased's estate. There was a family trust and the estate trust. The trustees of the family trust were in the Channel Islands and the beneficiaries were the second to sixth plaintiffs. The defendants were the executors of the estate trust and eventually become the trustees. The beneficiaries of the estate trust are the first plaintiff as to the income for life or until any remarriage and the second to sixth plaintiffs as to the capital. 28 The only asset of the family trust was a debt owed by Marisa in the amount of $116,225 payable on demand and subject to interest at 18% per annum or the excess of income over expenditure in any accounting period whichever was the lesser. That asset was balanced in the family trust account by gifts and debts owing to the deceased. The debt as at 30 June 1982 amounted to $75,961. 29 The assets of Marisa as at date of death were: · the Balgowlah property subject to mortgages to Starr-Bowkett Building Society; · two shares in Palm Court Ltd, a time share apartment in Noosa Queensland which was then standing in the name of the first defendant on trust for Marisa; · an unsecured loan to Ms Adamse with a principal of $17,000 and interest of approximately $17,000; · sixteen shares of nominal value $2 each in Ambassador Press Ltd; · shares in Starr-Bowkett Building Society; and · a right to receive rental from 2 Poole Street Longueville. 30 The assets of the estate at the date of death were: · two shares in Marisa; · $75,961 (at 30 June 1982) owed by the family trust to the deceased; and · the chalet in Switzerland. 31 The deceased and the first plaintiff jointly owned a property at Watagan near Cessnock in New South Wales subject to a mortgage to the Starr-Bowkett Building Society No 2. They held the property as joint tenants and it therefore passed by right of survivorship entirely to the first plaintiff subject to the mortgage. 32 The Swiss chalet had been purchased for three hundred thousand Swiss francs on 3 May 1984. The Swiss authorities would not permit a sale of the chalet except in exceptional circumstances until 17 May 1989. The chalet was subject to a first mortgage of two hundred and twenty thousand Swiss francs and a second mortgage of thirty thousand Swiss francs. Six months notice had to be given before those mortgages could be repaid and there appeared to be a capital gains tax of 30% on any profit realised over the original purchase price of the chalet. 33 Mortgage payments on the chalet were due on 30 June and 31 December in each year and as a result of the depreciation of the Australian dollar the remittances from Australia when converted into Swiss francs were insufficient to pay the interest due. It appeared from the deceased's records that his accounts in Switzerland were overdrawn and further enquires had to be made about what money would be available to the estate if the mortgagees exercised their power of sale. 34 Soon after the deceased's death, Mr Kennedy, of Ebsworth & Ebsworth, advised the first plaintiff that the only asset to which she was entitled was the property at Watagan; that the liabilities of the deceased were such that there was no income from any of his assets or from the family trust available to any of the plaintiffs; and that those assets would only become available for use once the debts were paid. 35 On 4 January 1991 the defendants wrote to the first plaintiff in the following terms: As you are aware the Estate Trust is now operational. We have discussed various matters relating to the Estate Trust in the past and we feel that it is an appropriate time to confirm in writing some of those matters in relation to areas of responsibility. Whilst some of the information would be 'old hat' it would nevertheless serve as a review to all parties concerned. The defendants then went on to detail the investment of funds, the expected period during which distributions would be made, matters relating to income tax, advice to the first plaintiff as to her responsibility to declare distributions in her tax return and then advised: We are required to ensure that the Estate Trust is administered in accordance with the terms of the will, that the funds are invested in bank guarantee deposits, that the quarterly distribution cheques are paid out to you, that any charges made to the Estate Trust are met by it, that all records are kept up-to- date and that all administrative functions are carried out. 36 After a series of meetings with the solicitors, accountants and counsel the family trust was collapsed in July 1991 and the debt owed to Marisa was extinguished. This left the defendants as trustees of the estate trust and directors of Marisa in which they held the shares beneficially for the estate. 37 The defendants allege that in 1992 the first plaintiff advised them that she was "not interested" in receiving any more details in respect of the estate or Marisa. The first plaintiff denies this allegation. The defendants claimed that the first plaintiff told them that she was happy to leave everything to them to make the decisions and that as a result of this conversation they did not send the first plaintiff the estate and company accounts and returns after 1992. 38 The first and second defendants separated for three months in late 1995. It is clear that the first plaintiff offered assistance to both the first and second defendant during this period of separation. The first plaintiff visited the second defendant and informed him of her concern for him, the first defendant and their children, and asked whether she could be of any help to him. 39 There is no doubt that the relationship between the plaintiffs and the defendants commenced to disintegrate in 1996 when there was a physical altercation between the third plaintiff and the second defendant. It is not clear what prompted this altercation but there were obvious tensions between the plaintiffs and defendants at that time. The defendants' solicitors wrote to the plaintiffs in the following terms: Our clients would be grateful if you or your son or any member of your family would cease and desist from interfering or communicating with our clients and their immediate family in any way, until such time as our clients wish to re-establish contact with you. By communicate we mean telephone, write to, visit or contact through an intermediary party…. We further advise that if you require our clients to attend to any administrative matters as Executors of the Estate of the late Colin Craven-Sands would you please put your requests in writing and accordingly they will be responded to in writing. 40 The second plaintiff also made contact with the second defendant in mid 1996 and requested some details in relation to his late father's estate. The responses that he received were apparently not satisfactory and the plaintiffs instructed solicitors in August 1996. 41 The plaintiffs' then solicitors, Toltz Associates, wrote to the defendants between August 1996 and February 1997 requesting documentation and information. When that information and documentation was not forthcoming those solicitors wrote to the defendants on 4 February 1997 indicating that if the documents and responses were not forthcoming within twenty one days, Court proceedings would be commenced. 42 After a change of solicitors to Messrs Teece Hodgson & Ward the plaintiffs commenced these proceedings on 31 March 1999. Marisa Pty Ltd 43 Marisa was incorporated in 1979 and the first defendant has been a director since 20 September 1979 and secretary since 12 November 1986. 44 As the deceased's death had left a vacancy on the Board of Directors of Marisa the defendants decided to approach Clifford Opie who was married to the first defendant's aunt. Mr Opie was a solicitor who had practised in Wollongong for approximately 40 years and at that time was working part-time in the practice with a view to eventually retiring. Mr Opie agreed to accept the nomination and was appointed as a director in January 1988 and was a director until 23 April 1994. 45 The second defendant has been a director since 23 April 1994. Mr G Coles, served as secretary between 26 February 1993 and 30 November 1993 and was also the auditor between 8 June 1989 and 23 April 1994. 46 The shares in Marisa are held by the defendants beneficially for the estate. Directors' Fees 47 Both defendants gave detailed evidence of their activities in looking after the deceased's financial affairs while he was overseas and their duties as executors and trustees and directors of Marisa after the deceased's death. 48 There is no doubt that there was some complexity to the deceased's financial affairs which made the initial management of the estate quite demanding, including the need to communicate with overseas solicitors and agents. This complexity also precipitated the need to take detailed legal, accounting and tax advice for the purposes of ascertaining and pursuing the appropriate method of "collapsing" the family trust. There were also numerous loans from Star-Bowkett which had to be analysed and paid in the most tax effective manner. There were also attendances at the Balgowlah property and dealings with the real estate agent managing the Balgowlah property. 49 However by 1993 the family trust had been collapsed and the Star-Bowkett loans had been repaid leaving the defendants with their duties as trustees of the estate and the management of Marisa's affairs, the principal activity of which was ensuring that the Balgowlah property was tenanted (tr.151-152). The Noosa time share property has taken up relatively little of the defendants' time and there has been no need for further management of the Longueville property since the plaintiffs returned from overseas to live in the property in 1988. 50 The Ebsworth advice upon which the defendants claimed they relied for their decision to pay directors' fees to the first defendant was given in January 1991. The terms of that advice were as follows: Mrs Koch is entitled to claim director's fees as a director of Marisa Pty Ltd. These fees must be approved by the shareholders who are the executors of the Estate Trust. We would be guided by Mr Coles' recommendations but believe it would be appropriate for you to claim fees of say $1,000 per annum from 1980 to 1987 and from 1987 fees within the range of $2,000 to $3,000 per annum. 51 The second defendant gave evidence that as he and the first defendant were not beneficiaries "of any kind" under the deceased's will they "could only be recompensed through the company" for their time and effort and out-of-pocket expenses. 52 The second defendant said that after he received the Ebsworth advice he contacted Mr Coles, the then accountant for the estate and the company and had a conversation with him about the Ebsworth advice. The second defendant claimed that Mr Coles had informed him that he felt comfortable with the proposed fees and advised him that "when the fees are claimed it will have to be taken out in lots of a series of years so that the backlog will be caught up". 53 Mr Coles gave evidence that he had absolutely no recollection of this conversation but was not in a position to deny that it occurred. 54 The second defendant also gave evidence that after he received the Ebsworth advice he went to see Mr Opie. He gave evidence that he told Mr Opie that he and the first defendant did not wish to claim commission from the estate because of the "costs involved" and that if they were to make any claim for fees it would be for directors' fees from the company for the first defendant. He asked Mr Opie to give him his "thoughts". 55 This reference to the "costs involved" seems to be at odds with the second defendant's evidence in his affidavit sworn on 10 April 2000 in which he said that in January 1991 he did not appreciate the significance of probate accounts nor the process involved. However, he was not challenged on this topic. 56 The second defendant gave evidence that Mr Opie read the letter and said "my word, you should be paid more than what is being recommended in fees as both of you have put so much work into this and for so long. I do not see any problem with claiming the directors' fees". 57 Although Mr Opie was a director until April 1994, he was apparently not asked to sign any resolution in 1993 even though, according to the second defendant's evidence, $5,000 was paid to the first defendant on 30 June 1993, nearly ten months prior to Mr Opie's demise. 58 The Minutes of Marisa authorising payment of director's fees to the first defendant for the years 1993 to 1998 inclusive are signed by the defendants as directors. The second defendant was not a director in 1993 but it is apparent that these minutes were signed some years later. 59 Each of the Minutes records that the Company had resolved that "payment to Anne Koch for directors fees allowances etc. for the following financial years ended 30 June is hereby authorised". The Minutes then recorded the years to which the payments related and the amounts were designated as "director's fees", "allowances m.v." and "allowances other". 60 The second defendant gave evidence of the amounts, description and dates of the payments of the fees by Marisa to the first defendant. It was as follows: 61 The first defendant was paid the following amounts: · $5,000 on 30 June 1993 for the period 1980 to 1984; · $15,000 on 30 June 1994 for the period 1985 to 1991; · $10,000 on 29 June 1995 for the period 1992 to 1995; · $5,000 on 27 June 1996 for the period 1995 and 1996; · $3,000 on 21 May 1997 for 1997; and · $3,000 on 23 June 1998 for 1998. 62 The evidence of the payments made on the specific dates given by the second defendant is at odds with the accounts of Marisa Pty Ltd for the years in which the payments were said to have been made. 63 The Minutes of Marisa dated "1994"signed by the defendants as directors "authorised" payment of directors fees of $10,399, a motor vehicle allowance of $2,501 and other allowances of $2,100, totalling $15,000. Marisa's profit and loss statement for the year ending 30 June 1994 listed director's fees of $15,000 as an expense with no reference to any allowances. 64 The Minutes of Marisa dated "1995" signed by the defendants as directors "authorised" payments of directors fees of $5,399, a motor vehicle allowance of $2,501 and other allowances of $2,100 totalling $10,000. Marisa's profit and loss statement for the year ending 30 June 1995 listed as expenses $1,700 as bonuses and commissions, $5,399 as director's fees, $2,501 as motor vehicle leasing charges and $2,100 for travel and accommodation totalling $11,700. 65 The Minutes of Marisa dated "1996" signed by the defendants as directors "authorised" payments of director's fees of $3,598 and a motor vehicle allowance of $1,402 totalling $5,000. Marisa's profit and loss statement for the year ended 30 June 1996 listed as expenses $1,898 director's fees and $1,402 motor vehicle leasing charges totalling $3,300. 66 The second defendant gave evidence that all of the fees claimed up to 1995 had been initially "recorded as directors' fees". No minutes, other than the ones to which I have referred, were in evidence. The second defendant said that nothing had been claimed as motor vehicle expenses or out-of-pocket expenses and that the first defendant had declared those amounts as director's fees in her personal tax return for those financial years. 67 The second defendant said that it was not until February or March 1996 when Mr Patterson telephoned him that he was given advice that the fees could be split up into directors' fees and deductible allowances. Mr Patterson advised that an amended tax return for the first defendant could be filed and that he would record the directors' resolutions showing the split up of fees and allowances. 68 The first defendant admitted that it was "possible" that the Minutes of Marisa authorising the payments of director's fees and allowances to her were brought into existence at the same time to regularise payments that had already been made. Payments were commenced in 1993 and it is apparent from the second defendant's evidence that these Minutes may not have been prepared until 1996. Distribution to the Plaintiff 69 There was no income into or distribution from the estate in 1988 or 1989. However the distributions to the first plaintiff in the years 1990 to 1998 were as follows: $10,780 in 1990; $7,514 in 1991; $5,301 in 1992; $3,874 in 1993; $418 in 1994; $4212 in 1995; $6249 in 1996; $19,331 in 1997; and $4,985 in 1998. 70 The 1997 payment to the first plaintiff included $8,000 as a dividend from Marisa and $4,500 as imputed credits. 71 In the period 1993 to 1996 in which the first plaintiff received payments totalling $14,753 the first defendant received payments totalling $35,000. Mr Kennedy's letter of 25 June 1991 72 During the course of his cross examination the second defendant was asked whether, after he had received the Ebsworth advice, he had received any further communication from Mr Kennedy concerning payment of director's fees. He said "I do not remember" (tr.107). 73 The second defendant was then shown a letter from Mr Kennedy to the defendants dated 25 June 1991 (Exhibit D). That letter included the following: We recommend that Mr and Mrs Koch continue to act without payment by Marisa Pty Ltd or the estate of Colin Craven Sands so that no claim can be made by the children or Maaike Craven Sands that such payments are depleting their assets. If you wish to be paid commission you must seek the approval of the Court. 74 The second defendant gave the following evidence about that letter: Q You didn't disclose that letter in your affidavit, did you? A Because I didn't remember receiving it. Q You didn't remember receiving it? A Yes. Q But having had it shown to you, you now recall receiving it, is that the case? A I have a copy in my file. Q A recommendation made by Mr Kennedy in Item five is, in a sense a significant modification of the advice that he gave in his letter of January 1991, isn't it? A I don't agree on that. Q You don't agree? A Yes. Q Well, tell me why it isn't a significant modification of his advice? A Mr Kennedy says here that he recommends. Q Yes. A The advice that we got in January 1991 clearly says "you are entitled to claim commission from the estate" and as a second item, "you are entitled to claim director's fees from the company". here is a difference between the entitlement and the recommendation. Q Tell me, in the circumstances where on 15 January 1991 Mr Kennedy said that you were entitled to claim director's fees but then five months later he says "I recommend that you continue to act without payment", didn't that cause you to think that perhaps his original advice was being overtaken by the recommendation that he was giving? A Sorry, I said to you I cannot remember having received this letter. I - the first time I can remember receiving this letter is last week with Gil Coles' submission in his subpoena. On receiving that letter, I then checked my files and I came across that letter in my files. Q When you went back to your files and located your copy of Mr Kennedy's letter, did that cause you to recall the receipt of the letter back in June 1991? A Sorry, I can't remember that. Q So you have got a complete blank, have you, as to the receipt of that letter? A Yes, yes, I have actually written and received dozens and dozens of letters from Mr Kennedy in that period of time - three to four years, and I can't remember any - I mean, this particular letter. ( Tr 8-109) 75 The second defendant's evidence that in the week before the trial commenced, he had remembered receiving Mr Kennedy's June 1991 letter, makes his first answer to Mr Wilson that he could not remember any further communication quite unreliable and most curious. 76 The second defendant was tested further about his memory of the June letter. In June 1991 the defendants were seeking advice from Mr Kennedy in relation to their possible liability in respect of a claim that may be brought by two of the plaintiffs who were, at that time, minors. 77 This concern arose in circumstances where the family trust was to be collapsed and the defendants required the plaintiffs to release them from any claims in respect of that process. As two of the plaintiffs were minors they could not give such a release and the defendants wrote to Mr Kennedy on 19 June seeking his advice on this and other matters. 78 On 21 June 1991 the defendants attended a conference with Mr Kennedy at counsel's chambers in the city and then attended a further conference with Mr Kennedy immediately afterwards at the offices of Ebsworth & Ebsworth for approximately one and a half hours. Mr Kennedy's evidence was that the defendants were concerned about a possible claim against them by the minor plaintiffs "down the track". 79 During the course of the latter conference the second defendant informed Mr Kennedy that the defendants had been "doing the administration of the estate without payment" and raised a number of questions for Mr Kennedy including whether the defendants would be liable to pay tax in respect of certain estate matters. The second defendant also asked Mr Kennedy to provide a statement of account and an estimated cost for completion of outstanding matters. In response to these and other matters Mr Kennedy wrote the 25 June 1991 letter to the defendants. 80 The second defendant accepted in his evidence that the issue of the defendants' liability was addressed in Mr Kennedy's letter of 25 June 1991. He maintained that although he received the letter he had no recollection of receiving it. After denying that he went through the correspondence from Ebsworth & Ebsworth for the purpose of preparing the very lengthy affidavit that he swore in the proceedings the following evidence was given: Q Is this what you tell the Court, that when you came to prepare documents to be presented on your behalf to the Court in defence of this claim, you didn't look at any documents received from Ebsworth & Ebsworth? A I didn't have to actually, I had important documents that - relevant documents already taken out and they were in plastic folders in my filing cabinet in a suspended file. And some of those documents had already given - I had given Mr Patterson the copy of the will, the probate document. See, I don't have to go back to my file. My file is a file, if I take it out, it gets all messed up. I have to put everything back again, you see. Its not a - my file is not an arch file like this, it's actually a file where I have got put everything through in the original. And I didn't have to go into my old files for my affidavit. (Tr. 207) 81 The first defendant gave evidence after the second defendant. The first defendant said that she did not remember receiving the letter in June 1991 (Tr 128). The first defendant said that if she had read the letter when it came in she would have checked back with Mr Kennedy "as to exactly what he meant" because it was "a very different conclusion from the one that he had explained to us in January of the same year". 82 The first defendant gave evidence that if Mr Kennedy had confirmed that it was his recommendation for them not to charge directors' fees she would have "accepted that advice of course" and "certainly" would not have made a decision to have Marisa pay directors' fees. 83 Further evidence was elicited from the first defendant by Mr Blackburn-Hart that this letter was drawn to the first defendant's attention in his chambers on 9 April 2000, the day before the commencement of this trial. It is apparent that the letter was contained in the plaintiffs' bundle of documents which had been served on the defendants' legal representatives on 7 April 2000. 84 After the conference in counsel's chambers the first defendant and the second defendant checked and confirmed that the letter was in their files. The first defendant said that on Monday morning, 10 April 2000, when asked to verify the defence, she did not have the letter in her mind at the time nor did she realise that she needed to bring the existence of that letter to the attention of the Court. 85 In cross examination the first defendant said that she did not remember seeing the letter in 1991 and that she had no recollection of having seen it prior to Sunday 9 April 2000 when it was drawn to her attention in Mr Blackburn-Hart's chambers. When asked whether, having seen the letter, she felt that the affidavit put forward only part of the story in connection with the advice about the payment of directors' fees she said: It concerned me when I looked at this on Sunday afternoon, it concerned me that this was revealed to me, but I must say I didn't connect it with the affidavit that I had sworn, because I had sworn that at a time when I actually hadn't remembered seeing this letter. (Tr. 133) 86 The first defendant was pressed as to how this letter could have been overlooked when the original affidavit was prepared and the file was available to her for the purposes of preparing the affidavit. The first defendant's answer was "I am sorry, I don't know" (Tr 133). 87 The first defendant agreed that the letter contained material which was relevant to the basis upon which directors' fees were authorised. She agreed that the second defendant was fairly fastidious in terms of attending to his affairs and she also agreed that the fact that the document was in the files meant that it must have been received by either or both of the defendants at some time. The following evidence was then given: Q It is difficult to think of a circumstance where a letter from a solicitor was received by you and your husband and both of you did not read it, isn't it. A Both of us. There were some letters that I didn't read. I relied on my husband who, as you say, is a fastidious person, and he would consider letters coming before, for example, exhibit D being sent out and coming in response to his letters, and also letters following exhibit D, he would be the sort of person that would keep a check on the information that was being given him and ..I relied on him for that, and I trusted him in those areas. (Tr 140-141) 88 When asked whether the defendants understood that they could have resigned as trustees in 1991 the first defendant said: I suppose that was something we had in the back of our minds but we had a feeling of loyalty to continue our duties because it had not been a very simple sorting out of affairs and we felt we should continue because we wanted, I think what we felt was, we wanted to do the right thing. We had a lot of people to answer to and for and that seemed to be the way we should go, to continue. (Tr 147) 89 The second defendant gave evidence that he did not consult with the plaintiffs about the payment of directors' fees because Mr Kennedy had not advised him that he had to consult them. The first defendant gave the following evidence about that matter: Q They had no knowledge of the practice that had been commenced in 1993, of paying directors' fees? A Not as far as I know, no, we didn't tell them. Q I want to suggest to you that it was in your interest to keep the practice from them. A That is not exactly true. Q Well you see if you had sent documents for the 1993 year showing that you had paid yourself director's fees of $5,000, you would have expected a complaint? A We would have discussed it. I guess then as a result we would have sat down and talked about it but there wasn't any interest. The general feeling that I have was that those were the affairs Alwin and I needed to look after and it wasn't necessary to tell anything to Mrs Craven-Sands. Q Don't you think if you had said to Mrs Craven-Sands in the 1993 year, "I'm going to pay myself or the company is going to pay me a director's fee of $5,000" she might have said "that might mean that I don't get any money from the company"? A I don't know whether she would have understood that. Q …..the proposition I am putting to you (is) that you took a step that provided the benefit to yourself, that is, the receipt of director's fees and you deliberately kept that step from Mrs Craven-Sands? A I don't agree with what you have just said. I saw that as fees for duties that had been done. Q If I understand what you are saying, you were attempting to pay yourself for work that you had done from 1980 onwards, that is what you are saying, is it? A Fees and compensation, yes, for finances from our family budget that had been used to do the things that my father had expected us to do and which we agreed to do and further than that, I think we did our best to do what we thought was right? Q But the step that was taken in 1993, that is, the decision to pay directors' fees, that was something that this company had never done before, wasn't it? A Yes, because it just could not even be considered, it wasn't in a position, it was in such a mess. So from 1993, when the affairs appeared to be more settled then it seemed to be the right time to consider it. Q If it was the right time to consider it, why wasn't there some open discussion with the beneficiaries about the step that was proposed? A But we had discussions altogether from time to time as needed and we did not discuss this. HH:Q Mr Wilson wants to know why not? He wants to know why not? A Why not? Q Yes? A Oh, I don't know why we didn't discuss those directors' fees. Although we had discussions, we didn't habitually sit down and discuss everything because there wasn't that sort of interest. There wasn't that sort of interest from the beneficiaries about anything much that we did. From time to time we would mention some things, some difficulty we might have come across but generally it wasn't something that we talked about unless it was brought up by them and I really don't know how to answer that question. (Tr 155-157) 90 In 1993 the first plaintiff had contacted the defendants because she needed $500 for repairs on her motor vehicle. The evidence is that the first plaintiff spoke to the first defendant and said "Can you advance me $500 from the money on term deposit. I need the money to pay a car bill". The first plaintiff's evidence was that the first defendant responded "No. Can't you ask legacy for a gift" to which the first plaintiff responded "I find it very humiliating going cap in hand to a charity. You don't know what it is like having to take charity all the time". 91 The first defendant said that she told the first plaintiff "I will discuss it with Alwin and get back to you with what the possibilities are". On the following day the second defendant telephoned the first plaintiff and said to her that she could have the $500 but there would be a need to break a term deposit and "you will stand to lose some considerable interest". The second defendant apparently cautioned the first plaintiff in the following terms: You need to consider this carefully, however, if you need the money urgently we can give the bank notice to break the term deposit. The decision is entirely up to you. 92 The first defendant gave evidence that the first plaintiff informed the defendants that she was not prepared to forego the loss of interest as she did not need the $500 that urgently. 93 This was a situation that arose in the very year that the defendants decided to pay the first defendant $5000. Notwithstanding the conversation in which the defendants gave advice to the plaintiff that the money that she was to receive would be reduced if the term deposit was broken, they both took the view that the payment of directors' fees from the company to which the first plaintiff would otherwise ultimately be entitled was something that they did not need to discuss. 94 The first defendant said that she did not connect that request for $500 with the decision to charge directors' fees and therefore did not discuss it with the first plaintiff. In her re-examination the first plaintiff said that as far as she could remember the decision to take directors' fees was made after the conversation about the $500 for car repairs. 95 It is apparent that Mr Kennedy was never informed that the directors' fees were paid. His retainer was terminated in about September 1991, revived for a purpose in 1992 and terminated again in 1993. It revived in about September 1996 and finished in about March 1997. During those periods Mr Kennedy only acted on reference of matters from Mr and Mrs Koch or in response to the telephone calls he received from the plaintiffs. 96 In 1996 Mr Kennedy suggested to the second plaintiff that he should take control of the assets. Mr Kennedy reported that advice to the defendants who resisted the second plaintiff taking over the assets and said "Not at this time. Things are stabilising". Expert Evidence 97 The defendants relied upon evidence from Mr John Leonard Poole, solicitor and principal of Maurice Buckley CT Poole & Son. Mr Poole is an accredited Wills and Estates practitioner and practices solely in this area preparing accounts, administering estates and acting as solicitor for various estates. In the last ten years he has prepared on average five sets of estate accounts per year and made an average of five applications per year for executor's commission. 98 Mr Poole gave evidence of the nature and preparation of accounts with emphasis upon particular aspects that he thought important. More pertinently he indicated that as the accounts had not been prepared in the form to which he had referred, he found it very difficult to make any estimate of the possible commission payable to the defendants. 99 Mr Poole recognised that in the administration of the affairs of the deceased the management of the assets and the management of Marisa were interconnected. He opined that an executor should not be able to receive commission on the income of Marisa and at the same time receive commission on that part of the income of the estate that is represented by the dividend received by the estate from Marisa. 100 Mr Poole was of the opinion that the commission that the Registrar might allow to the trustees on the passing of accounts might range between $2,400 and $4,000 but was of the view that the Registrar would be likely to award more than that range if provided with evidence of the difficult nature of the administration of the estate. He estimated the cost of preparation of the accounts would be $7,650. 101 Mr Poole gave the following evidence: As an executor does not have a right to commission but is obliged to act gratuitously, it follows an executor must account for all profits on the estate of the deceased which accrue during the administration. The normal rule is that an executor is not entitled to retain remuneration such as director's fees for his own benefit where he gains the emolument by virtue of his holding in a company as director. The exception to this rule is where he obtains the authority of the Court on a proper application for that purpose. 102 He was cross examined about his expression of opinion in relation to the normal rule and gave the following evidence: Q Now you were talking about an exception, where the person was appointed a director before the date of death and it had been represented to that person he would be compensated at a time when the company became able to compensate him and, thirdly, that point of time arrived after the death of the testator? A Yes. Q I want to take these further matters into account: there are two issued shares in the company held beneficially by the executors on behalf of the estate? A Yes. Q And I also want you to take into account the proposition that dividends paid on those shares are paid into the estate and then to a life tenant? A Yes. Q Wouldn't the resolution by the two executor shareholders that there be a payment of directors' fees to one of the directors put the executors into a position of conflict between duty and interest? A Yes, I agree with that. Q And as a consequence any decision by the executor/shareholder to pay some form of compensation to one of the directors would be an illustration of interest before duty? A Yes. Q And, secondly, would represent the obtaining of a profit by a person in a fiduciary position. A Yes. (Tr 167) 103 It seemed to me that this cross examination was very pertinent to the facts of this case and to the circumstances in which the defendants placed themselves when they "authorised" the payments by Marisa to the first defendant. Books and records 104 The second defendant gave evidence of the regime that was in place from 1980 until 1993 in respect of the payment of accounts. Mr Gil Coles had the cheque book for Marisa and if the defendants received an invoice for payment they would telephone Mr Coles' office and request a cheque to be drawn and the unsigned cheque would be posted to the defendants. 105 The first defendant would then sign the cheque and the invoice would be paid. If Mr Coles' office received an invoice he would prepare the cheque and then send the cheque together with the invoice to the defendants and the first defendant would sign the cheque and pay the invoice. 106 Any deposits received either by Mr Coles' office or the defendants would be deposited directly into the cheque account and at the end of the financial year all the deposit slips and paid invoices were given to Mr Coles for preparation of the financial statements and tax returns. The rent from the Balgowlah property was paid directly into Marisa's bank account. 107 The second defendant said that in the early 1990's this system was "not working out". He claimed that this was mainly due to the staff turnover and because Mr Coles was spending a lot of time out of the office. This was the reason the second defendant gave for moving Marisa's bank account from the ANZ Bank to the State Bank. Marisa's accounts were then administered by the defendants. 108 It is also apparent that there was some disagreement between Mr Coles and the second defendant at the time the second defendant decided to retain Mr Patterson of Bond Patterson. This is apparent from the terms of the defendant's facsimile to Mr Coles of 3 May 1993 (Ex J, p 140-141). Mr Coles' response (Ex J, p 137-139) rejected the defendant's allegations against him with what appears to be a professional explanation of the matters pertinent to the work that his firm had carried out for them. 109 The defendants admitted that no record of any out-of-pocket expenses had been kept. The defendants also admitted that no records had been kept in relation to any apportionment of the use of the motor vehicle, the subject of the motor vehicle allowance paid to the first defendant. 110 However, the second defendant provided a detailed explanation as to the whereabouts of some of the records of Marisa and the estate. In his affidavit sworn on 10 April 2000 he explained that just prior to the time that he was made redundant in 1997 he had "found it convenient" to have the estate and company files and records stored in his office at work for ease of reference when consulting with his solicitors. 111 The defendant explained that after his redundancy in 1997 and in the course of cleaning up his office he placed "some of the things" from Marisa and the estate into boxes in his office. 112 After providing much detail about an inability to place the estate and Marisa's records in his car because of the unavailability of a trolley the second defendant said that when he returned the following week the boxes were gone. He said that the Marisa and estate documents that had been "lost" included the bank statements going back to 1987, bank record books and butts from used cheque books and deposit books, receipts, invoices and rental lease records. 113 The second defendant gave evidence that it was possible that copies of banks statements and receipts and invoices could be available in the box of items returned from Bond Patterson but not the cheque butts and deposit butt books. He said "it is not possible to say that the required information will be available in its entirety". 114 The first plaintiff gave evidence that in 1996 in a conversation with the first defendant the first defendant informed her that the second defendant had told her to "sign blank cheques" regarding the estate. The first defendant informed the first plaintiff that she was "so fed up with it all" that she just signed the blank cheques and left them on the table. 115 In response to that evidence the first defendant said in her affidavit: The conversation referred to was at a time of the height of the domestic difficulties between myself and Alwin. I recall that at that time I signed a blank cheque. This happened on only one occasion and was at the height of the domestic difficulties that Alwin and I were having. These difficulties lasted for about six months or so and did not affect the administration of the estate. We then became reconciled and have had no further problems. 116 The second defendant described an occasion when he requested the first defendant to sign a blank cheque. He said that he was in a hurry to get to work one morning when he remembered that he had to send a cheque to the first plaintiff for the distribution of the estate's income. He said that he intended to get a counter cheque from the bank and he did not have time to sit down and work out the amount of the distribution and was therefore unable to write the details on the cheque. 117 As he was pressed for time he said he placed the cheque book on the kitchen bench top and called out to the first defendant asking her to sign the cheque. He said he did not recall whether he mentioned to the first defendant that the cheque was in respect of the distribution to the first plaintiff. The first defendant signed the cheque and the second defendant picked up the cheque book as he "hurriedly headed for my car to drive to work in Bondi Junction". The second defendant said that having worked out the amount for distribution he obtained a counter cheque and posted the cheque to the first plaintiff that day. He said he was unable to recall asking the first defendant to sign any other blank cheques. 118 This explanation was given in the second defendant's affidavit sworn on 31 January 2000. Immediately after that explanation the second defendant said "all cheques and funds from the estate have been accounted for". The second defendant then exhibited a spreadsheet "compiled" by the first defendant and himself showing income, expenditure and beneficial distributions over the period 1990 to 1997. 119 The second defendant said that the figures shown in the spreadsheet had been taken from the "records of the estate and have been reconciled with all invoices, receipts and cheque butts for each particular year". No mention was made of the fact that some of this material had been "lost" in 1997. This was not disclosed until the second defendant swore another affidavit on the first day of the trial. Alleged breach of trust 120 The defendants submit that the first defendant has acted as a director of Marisa since 1979 and has done so pursuant to a contract of employment (the contract) the terms of which are found in Marisa's Articles of Association (the Articles) (ex A) and Table A of the Companies Act 1961 (Table A). 121 The defendants submit that an important term of the contract is found in Regulation 70 of Table A which provides: 70. The remuneration of the director shall from time to time be determined by the company in general meeting. That remuneration shall be deemed to accrue from day to day. The directors may also be paid all travelling, hotel, and other expenses properly incurred by them in attending and returning from meetings of the directors or any committee of the directors or general meetings of the company or in connection with the business of the company. 122 It is submitted that the director's fees and allowances paid to the first defendant was "remuneration" as determined in the general meetings of Marisa pursuant to the contract and as referred to in the various resolutions of Marisa from 1993 to 1998. In the written Outline of Contentions the defendants submitted that the directors' fees were appropriated by one of the defendants as payment for the work which they had both done, not only as directors of Marisa Pty Limited, but also as the executors/trustees of the estate. 123 Although the defendants hold the shares in Marisa beneficially for the estate it is submitted that the first defendant's position as director and her contract of employment preceded her appointment as trustee. It is submitted that her capacity to receive remuneration as a director is unaffected by her subsequent appointment as trustee with its consequent duties to the plaintiffs. 124 It is submitted that the money was received not by virtue of her position as trustee, but by virtue of her separate contract with Marisa: In Re Dover Coalfield Extension, Limited (1908) 1 Ch 65 per Cozens-Hardy MR at 69 (Fletcher Moulton and Farwell LJJ agreeing). 125 The defendants relied upon a passage in Jacobs Law of Trusts R.P.Meagher & W.M.C.Gummow 6th Ed at par 1749. The particular portion relied upon is as follows: Just as a trustee director is not required to account for director's fees where he was appointed a director before he became and, semble, even though he may be from time to time thereafter re-appointed as director, so it is possible on one view of the authorities, that where a testator has dealt in his business during his lifetime with one who subsequently is appointed by him his executor or trustee with power to carry on that business, there is nothing to prevent the trustee from continuing to deal with himself in the ordinary course of the trust business and thereby to make a profit. 126 The authorities relied upon by the learned authors in support of the first proposition that the trustee director is not required to account if he was appointed as a director before he became a trustee is In Re Dover Coalfields Extension Ltd (1908) 1 Ch 65. That was the appeal decision affirming the decision of Warrington J which found that the director's remuneration had not been obtained by the use of the shares which he held beneficially for a company other than the company that was paying him the director's fees. 127 In that case the directors' fees were already fixed in the Company's Articles of Association and no question had arisen in relation to the directors exercising a discretion or decision whether such fees should be paid. In the present case the decision to pay directors' fees, which would diminish the fund available to the trust, was a decision made by the person who was to receive the fees who owed a duty to the beneficiaries of the trust to act in the best interests of the trust. 128 In respect of the latter proposition, within the portion of the paragraph relied upon, the learned authors referred to a number of authorities in particular Smith v Langford (1844) 2 Beav 362; 48 ER 1221. In that case a testator, a victualler, authorised his executors and trustees to carry on his trade for the benefit of his family with full powers for that purpose. One of the executors was a brewer and the other was a spirit merchant and had provided goods to the testator during his lifetime. After the testator's death they carried on the business and continued to supply beer and spirits for which they had charged a fair and current market price. One of the beneficiaries brought an action seeking a special direction that the executors should only be allowed the cost price of the supplies. 129 Lord Langdale MR said at 1222 that he "could not suppose that the testator, who had himself directed his business to be conducted by these defendants, expected they would be deprived of the usual fair profit". 130 In Nissan v Grunden (1912) 14 CLR 297, Griffith CJ referred to the decision of the Master of the Rolls and said at 303: That to the ordinary person seems to be eminently sensible, and I am not surprised that the decision stood for 60 years without being challenged. I suppose that case was known to lawyers in Australia 60 years ago. Doubt was cast upon it in the recent case of In Re Sykes; Sykes v Sykes (1909) 2Ch 241. I venture however to think that the circumstances in Australia are to be taken into consideration. It was a commonsense rule when laid down, and having been in existence 60 years ago in Australia, may possibly still be the law here, notwithstanding in In Re Sykes. 131 The Chief Justice's reference to In Re Sykes was that portion of Cozens-Hardy MR's judgment in which he said that he did not think that the case of Smith v Langford was authority which could be relied upon as a guide in the future (at 249-250). 132 The defendants rely upon these authorities in support of the proposition that the deceased knew that the first defendant was a director of Marisa and wanted her to become a trustee of his estate as well as maintaining her position as a director. From this it is submitted the Court should infer that the deceased endorsed the payment of remuneration to the first defendant notwithstanding her obligations as trustee. 133 However, it seems to me that the cases relied upon are distinguishable from the facts in this case. In those cases there had been a course of conduct in which there had been a supply of goods and/or services by the executors to the deceased's business during his lifetime. Additionally, there was a system whereby the executors in those cases had been paid certain amounts for the provision of those services. 134 In this case although the deceased had apparently indicated to both defendants that he would like them to be compensated at some stage no compensation was paid to them during his lifetime. Indeed, when the deceased expressed this wish, the second defendant qualified the position by saying that such compensation should only occur if it could be "afforded". 135 It is apparent that up until 1993 compensation could not be afforded. In 1993 it was decided by the defendants that fees should be paid in respect of previous years during which it is apparent compensation could not be afforded. 136 In this case the only way in which the first defendant was able to obtain payment of director's fees and allowances which the defendants characterise as "remuneration" pursuant to Regulation 70 of Table A, was by the exercise of her discretion in voting as a shareholder at the Annual General Meeting. At that time she was exercising a discretion not as a director but as the trustee holding the shares beneficially for the estate. Thus the opportunity to receive the remuneration was gained as the result of the exercise of the discretion vested in the trustees: In MacAdam. Re Dallow v Codd (1946) 1 Ch 73 at 82.8. 137 The second defendant's position is different from that of the first defendant. He became a director of Marisa in April 1994, some years after his appointment as trustee. It was his position as trustee by which he became the shareholder in Marisa. The first set of fees paid to the first defendant was $5,000 paid in June 1993 for the years 1980 to 1984 inclusive. This was ten months before the second defendant became a director. He said that Mr Opie was too ill at that time to continue his duties and therefore he was acting as a director for all intents and purposes. As I have said earlier, there was no evidence of any resolution other than the Minute dated 1993 which was signed by the second defendant as director authorising the 1993 payment. 138 However, it is clear that the second defendant was both a director and shareholder at the time the payments to the first defendant were authorised in the years 1994 to 1998. In each of those years he exercised his discretion as the trustee/shareholder in voting in favour of payment to his wife of director's fees and allowances. When voting he had the conflict of interest over duty. He owed a duty to the trust to act in the best interest of the trust but favoured his interest in authorising payments to his wife. 139 Windeyer J in Waterhouse v Waterhouse & Ors (1998) 46 NSWLR 449 referred to Re Lucking's Will Trusts [1967] 3 All ER 726 and Bartlett v Barclays Bank Trust Co Ltd (No 1) (1980) 1 Ch 515 and said at p 484 that the principle established by those cases appears to be that trustee/shareholders must exercise their powers as shareholders for the benefit of the trusts and vote their shares accordingly. 140 After referring to Butt v Kelson (1951) 1 Ch 197 and Walker v Willis (1969) VR 778, His Honour expressed the view that those cases were not dealing with the case where the duty of a director conflicted with his interest and duty as a trustee. His Honour went on the analyse Princess Anne of Hesse v Field (1963) NSWR 998 and Mordecai v Mordecai (1988) 12 NSWLR 58 and said: Where a person has two sets of powers and exercises one power in a way which is detrimental to the particular body for which it is held the result of which exercise is detrimental to a trust in respect of which such person is trustee holding shares in the company of which he is a director on trust, then the beneficiary can sue for breach of that trust. 141 The rule of universal application prohibiting fiduciaries from entering into engagements in which they have, or possibly have, a personal interest conflicting with those whom the fiduciaries are bound to protect has application in this case: Aberdeen Railway Co v Blaikie Brothers (1854) 1 Macq. 461 at 471; Bray v Ford [1896] AC 44 at 51; Williams v Barton (1927) 2 Ch 9 at 11; Phipps v Boardman [1967] 2 AC 46 at 106. 142 In this case the defendants exercised their powers as trustees of the trust and acted to the detriment of the trust in preferring the interests of the first defendant, and indirectly the second defendant, over the interests of the beneficiaries. I adopt the biblical injunction issued by Gaudron and McHugh JJ in Breen v Williams (1995-1996) 186 CLR 71 at 108 that duty and self interest, like God and Mammon, make inconsistent calls on the faithful. 143 I am of the view that both defendants were placed in a position of conflict at the time of the Annual General Meetings. I am of the view that they preferred the interests of the first defendant over the interests of the plaintiffs in that the payment of $41,000 to the first defendant diminished the available funds to the trust. 144 By preferring their own interests to those of the trust and beneficiaries to whom they owed a duty, the defendants were in breach of their fiduciary obligations and thereby committed a breach of trust. The Bond Patterson litigation 145 Mr Coles had been the accountant for the deceased for many years and also of the estate until 1992. The second defendant said that, apart from the dispute he had with Mr Coles, he wanted to have an accountant that was closer to his place of work and therefore decided to instruct Mr Patterson of Bond Patterson. He checked with the Society of Certified Practising Accountants, the Department of Fair Trading and the Australian Securities Commission to ascertain whether there were any complaints against Mr Patterson before deciding to retain him. 146 The second defendant requested a schedule of Mr Patterson's fees. Mr Patterson declined that request and informed the second defendant that "the fees for preparation of the annual accounts are transaction based" and "I can assure you that I will provide quality and timely service and will charge reasonable fees". 147 By 6 October 1993 the second defendant was experiencing difficulties in obtaining timely service from Mr Patterson. In a letter of that date the second defendant wrote: I am concerned that it is taking so long to release the draft financial statements so that I can scrutinise it and get back to you for any changes or explanations. The Australian Taxation Office has also notified that the tax return for 1993 must be lodged before the beginning of December 1993 if we are to avoid any penalty. Seeing that the accounts have been completed for some considerable time I would appreciate if you could give it some priority and release the draft financial statements to me in the next few days. 148 Matters seemed to decline and by 13 April 1994 the second defendant once again wrote to Mr Patterson and said: It is now ten months since I first saw your firm and handed over the accounts of Marisa P/L for preparation of the financial statements and tax return for year ended 30 June 1993. To date I have not even seen the draft financial statements of Marisa P/L which your firm has supposed to have completed many months ago (last year) Also outstanding since July of last year is the tax return for the Craven-Sands Estate Trust for year ended 30 June 1993. Having requested all the matters to be completed by 30 April 1994 the defendant said that if that did not happen he would, without notice, seek the services of another accounting firm to complete the necessary financial documents. 149 One of the matters which apparently contributed to the delay was the defendants' failure to pay Mr Coles' final account, thus preventing the delivery of the records to Mr Patterson. However this was attended to in July 1994. 150 On 11 September 1994 the second defendant returned Marisa's 1993 annual return to Mr Patterson unsigned with a letter which claimed: My wife and I are outraged at your audacious request that she sign and return to your office the 1993 annual return which is inaccurate, incomplete and has no financial data on it whatsoever. You must think that we are idiots in asking us to sign a blank declaration and to leave it to you to insert the rest thereafter. Under no circumstances will the 1993 annual return be signed in the form which you have forwarded it to us in. Furthermore the annual return will not be signed unless the supporting 1993 financial statements and tax returns are also finalised and ready for signature and lodgement. (Ex. 10) 151 In the result Marisa incurred penalties and late lodgement fees. 152 By June 1995 the relationship did not appear to be improving. In a letter of 16 June 1995 (Ex. 10) the defendants wrote: Over the past two years as a client of Bond Patterson (Accountants) we have not been treated in a professional manner as one would expect to be treated and is accustomed to. Messages are often ignored, responsiveness is tardy, service is utterly unreliable, the accounting information is not always presented accurately and requires frequent reworking (several drafts), the information cannot be readily explained by you due to lack of preparation before discussions and the whole process drags on and on, appointments are not adhered to and the work is not completed in the agreed time frame thereby imposing on us unacceptable penalties, the threat of legal action being taken against us by the ASC and exposing us to most embarrassing situations and unwarranted anxiety. (Ex. 10) 153 Further penalties and late lodgement fees were incurred and on 22 May 1997 the second defendant wrote to Mr Patterson, once again complaining about the delay in finalising the 1996 accounts. 154 In early 1998 the defendants terminated Mr Patterson's retainer and instructed BKR Walker Wayland. The defendants notified Bond Patterson of the change and requested them to hand over the books and records to BKR Walker Wayland. The books and records were not produced apparently as a result of questions about outstanding fees for the period 1993 to 1997. 155 Marisa commenced legal proceedings for the production of the books and records and Bond Patterson commenced legal proceedings for the payment of the fees. 156 The proceedings against Bond Patterson for the production of the books and records were apparently successful and such documents as were available were apparently produced. The litigation brought by Bond Patterson in relation to the outstanding fees is still pending. Legal fees of more than $28,000 have been incurred. 157 Another peculiarity to the relationship between the defendants and Mr Patterson was that no fees were rendered to Marisa from 1993 to 1999. The first time the fee notes were delivered was after the defendant had terminated the retainer of Bond Patterson and retained BKR Walker Wayland. Although there were entries in each of two years in Marisa's accounts of fees of approximately $8,000 to Bond Patterson, the second defendant said that it was agreed that the fees were not to be paid until a detailed account had been provided by Bond Patterson. As no account had been provided the fees were not paid. 158 Although the second defendant requested accounts during the period 1993 to 1999 and further requests were made from BKR Walker Wayland after 1998 it was not until the 16 February 1999 when the accounts for the period 1993 to 1999 were produced. 159 The correspondence between the defendants and Mr Patterson paints a picture of extraordinary delay in the preparation of the financial accounts and returns for Marisa and in the provision of accounts for services rendered. 160 When asked why the second defendant tolerated such delay over a period of six years he said that he thought that the accountant would "come good" and accordingly had given him the chance to produce what had been requested. 161 Although a great deal of correspondence is in evidence in respect of the communications from the second defendant to Bond Patterson there is relevantly little in evidence in answer to that correspondence. However, it is apparent from the accounts provided by Bond Patterson that there were numerous conferences held with the second defendant. 162 When asked why a negotiated settlement was not pursued in relation to the outstanding fees litigation, the second defendant said he had two long discussions with Mr Patterson in August 1997, which was before his retainer was terminated, and then gave the following evidence; Q. It wouldn't harm your position if you attended a meeting with your solicitor and Mr Patterson and with Mr Patterson's solicitor to see if the litigation over fees could not be compromised, would it? A. I mean we were really wanting some particulars before we could get to that stage. Q. So you wouldn't be prepared to make some offer to resolve those proceedings on the basis of your recollection of events, meetings, taking into account the work that Mr Patterson performed? A. If Mr Patterson was so concerned about it, and if he wanted to make an offer, he could have at any time made an offer to us, and we could have considered it in that case. We might have considered it. Q. My question was directed to your position. What I am suggesting to you, if you attend a settlement conference with your solicitor, with Mr Patterson, with Mr Patterson's solicitor, you can discuss the matters in dispute, you make an offer of settlement on the basis of your acceptance ..., and on the basis of the work Mr Patterson did, couldn't you? A. Yes, we could have, except that Mr Patterson couldn't give us that information. We could have. (tr.102-103) 163 On 3 November 1999 Bond Patterson's solicitors wrote to the defendants' solicitors in the following terms: As you know, my client has consistently maintained a position that outstanding matters can be resolved by way of discussion yet your client appears to have taken a course of action in complete opposite to resolving issues by way of conciliation and negotiated settlement. (Ex 31) When asked whether, after receipt of this letter, consideration was given to a meeting with Mr Patterson and his legal advisers, the second defendant said: We really wanted some particulars . 164 Bond Patterson's accounts detail numerous dates upon which it is claimed conferences were held with and advice was given to the second defendant. The second defendant was not in a position to deny the detail in those accounts as he did not keep a full record of when he attended the Bond Patterson's offices for conferences. However he said that he met "very little" with Mr Patterson. 165 The plaintiffs submit that the way in which the defendants managed the business of Marisa, in failing to keep an appropriate check on Bond Patterson and persisting with the relationship after it was abundantly clear that delay in the production of returns and financial statements was the norm rather than the exception, was far below the standard of the ordinary prudent person in business: Fouche v The Superannuation Fund Board (1952) 88 CLR 609 at 641. 166 The plaintiffs submit that this was reckless particularly having regard to the fact that Marisa suffered the imposition of late fees and fines as a result of the delays. Although loss of trust funds is not proof per se of wrongdoing: Re Chapman; Cocks v Chapman [1896] 2 Ch 763 at 775, it is a factor to be taken into account in all the circumstances of the management of the business. 167 I am of the view that an ordinary prudent person in business would have attempted to negotiate the fees without incurring $28,000 in legal fees thus far. I am also of the view that it would have been in the interests of Marisa and the estate that as soon as the delays continued after 1993 and 1994 no further instructions should have been provided to Bond Patterson. 168 I am of the view that the management of Marisa's affairs by the defendants in providing the accountant with a chance to "come good" over such a lengthy period with the consequent imposition of fines and late fees together with the failure to seek a negotiated settlement in respect of the fees does amount to a failure to exercise reasonable care and is below the standard of the ordinary prudent person in business. I am satisfied that the defendants breached their duties as trustees in this regard. 169 No material has been placed before me to suggest that delay did not occur and certainly no material has been placed before me to suggest that the delay was caused by the defendants rather than the accountant, except the delay caused by the defendants' failure to pay Mr Coles fees and the consequent retention of Marisa's books by him until payment was made. However I should say that caution should attach to the observations that I have made in relation to the tardiness and delay of the accountant. The accountant was not a party to these proceedings and has not had any opportunity to address the criticisms of him in this Court. The Strata Plan Litigation 170 On 15 December 1990 the proprietors of Strata Plan no 5249 (the Body Corporate) of which the Balgowlah property was part, attended the Annual General Meeting. The defendants were not present. The Minutes of that meeting record that the Body Corporate unanimously agreed that each proprietor pay an increased levy of $1000 to cover ordinary expenses and a $2000 levy to pay for the driveway resurfacing. The levies were due on 28 February 1991 and 31 March 1991 respectively. A copy of those Minutes were forwarded to the defendants. 171 In April 1991 the defendants informed the Secretary of the Body Corporate by letter that they would pay the $1,000 levy, but were not in a position to "release any funds" for the levy in respect of the driveway repairs as "bank overdraft rates are considerably high". The defendants assured the Secretary that when a contract for carrying out the repair work had been signed and a copy provided to them they would forward a cheque "for our contribution towards it"(Ex 21). 172 The defendants were notified of the convening of a special meeting of the Body Corporate to be held on 27 July 1991 to discuss the non-payment of the special levy by unit 4. In response to this notice the defendants wrote to the Secretary referring her back to the April letter and advising her that "at this point in time" they would "continue to maintain that assurance depending on what proceedings might take place in the future which could cause us to review our stance". 173 The letter concluded by reiterating that the defendants were not in a position to advance any funds for an indefinite period unless "of course the Body Corporate agrees to pay us interest on the special levy at the going overdraft rate" (Ex 21). In the meantime interest was being incurred on the outstanding levy that the defendants were refusing to pay. 174 The next Annual General Meeting of the Body Corporate was held on 17 December 1991 and on this occasion the defendants were present. The Minutes note that the Secretary advised the proprietors that "unit 4 was not financial" and thereby "not entitled to vote in respect of each motion". The Minutes refer to various quotes that had been obtained for the work required to fix the driveway. It was resolved that an additional $863.50 was to be levied immediately towards the cost of the repair and resurfacing of the driveway. 175 By December 1991 the defendants had commenced proceedings before the Strata Titles Board with the aim of invalidating the resolution in which the $2000 levy was imposed in the Annual General Meeting in December 1990 and confirmed at the meeting on 27 July 1991. The defendants instructed legal practitioners to appear for them at the hearing before the Strata Titles Board. 176 Those proceedings were heard on 26 February 1992 when the defendants were represented by counsel and the Body Corporate was represented by a solicitor. The proceedings were dismissed because the defendants had not transferred the property out of the deceased's name at the time of the proceedings and therefore did not have standing as "proprietors". 177 The Body Corporate incurred legal fees of $2,030 and Marisa had to contribute $507.50 as part of those costs. Marisa's solicitor's waived their fees but counsel's fee had to be paid. 178 Correspondence and documentation in evidence in relation to rectification of the driveway at this property demonstrates beyond doubt that there was agreement that a levy should be struck in respect to the necessary work. The Body Corporate held meetings and made specific inquiries in relation to the cost of the works and discussed the levy prior to unanimously resolving to impose the levy in 1990. At the 1991 Annual General Meeting detailed quotes were tabled but the defendants persisted with their action in the Strata Titles Board. 179 The first defendant was of the view that there was a personality clash between the second defendant and the Secretary of the Body Corporate. I am satisfied from the observations I have made of both the second defendant and the Secretary of the Body Corporate that the tension between them still exists. 180 The first defendant also gave evidence that the defendants felt somewhat "excluded" and did not have the same sense of camaraderie that would have existed with the Body Corporate had they lived at the Balgowlah property. Although not embracing this as part of the reason for not paying the levy, the first defendant suggested that it was a cause for a breakdown in understanding and effort. However the first defendant suggested that such breakdown was at the feet of the Secretary of the Body Corporate. 181 I disagree. It seems to me that the defendants conduct and their evidence before me in suggesting that they needed more than that which was provided at the 1991 Annual General meeting before the levy would be paid was quite unreasonable. I am convinced that the tension of the personality clash was a real factor in the way in which the defendants approached this matter. 182 The defendants' firm position was that they would not pay the levy before the contract was signed. To require a contract to be signed by the Body Corporate with no certainty as to whether the defendants would pay the levy because, as they said in their letter, they might "review their stance", was quite unreasonable. 183 To incur costs and interest, thereby reducing the funds available in the trust in part by reason of a personality clash, which I am satisfied it was, was conduct inconsistent with the standard of that expected of the ordinary prudent person of business. In this regard I am satisfied that the defendants breached their duty as trustees. Failure to inform the plaintiffs 184 Although this matter was raised at the outset of the trial Mr Wilson did not make any final submissions on it. In response, Mr Blackburn-Hart did not make any submissions about it on the assumption that it was no longer pressed by the plaintiffs. Mr Wilson did not demur to this suggestion and made no further submission. 185 In all the circumstances I have therefore assumed that this part of the plaintiffs' case has not been pursued which may or may not have been influenced by what Mahoney JA said in Hartigan Nominees Pty Ltd v Rydge (1992) 29 NSWLR 405 at 431C. In any event nothing further needs to be said in relation to this aspect of the plaintiffs' case. Application under s85 Trustee Act 1925 186 The defendants submitted that such breaches as I have found to be established should be excused pursuant to s 85(2) of the Trustee Act 1925. It is submitted that at all times the defendants have acted honestly and reasonably and ought fairly to be excused for the breaches of trust. 187 The court has a wide discretion on such an application but the onus is on the defendants to establish that they acted honestly and reasonably. The Court can only accede to such an application if it is satisfied that the trustees did so act and that they ought fairly to be excused: Pateman v Heyen (1993) 33 NSWLR 188 at 199. A factor to be taken into account in the consideration of whether it would be fair to excuse a trustee is whether the trustee has worked gratuitously. 188 In the exercise of this discretion the Court does not want to be hard on a trustee who has tried to act honestly and reasonably but it must take care not to encourage laxity of dealing. The Court must look at the whole of the circumstances in which the breach occurred: McMahon v Cooper (1904) 4 SR (NSW) 433 at 438. 189 As to the breach in relation to the authorisation and payment of directors' fees and allowances it is submitted that at all times the defendants acted honestly and reasonably. The defendants submitted that such conduct was consistent with and pursuant to the advice they had received from their legal representatives in the Ebsworth advice and from their accountants that the first defendant had an entitlement to directors fees. In those circumstances it is submitted that the Court would be satisfied that the defendants ought fairly to be excused. 190 As to the breach in relation to Bond Patterson it was submitted that the retainer of that firm and the subsequent litigation was pursued in the hope that the matter could be ultimately resolved in the best interests of the beneficiaries. Mr Blackburn-Hart submitted these were not "hanging offences". 191 It was submitted that the involvement in the Strata Plan litigation was now seven years ago and was also characterised in submissions as one that would not be a "hanging offence". 192 No question has been raised in respect to a lack of honesty in relation to the defendants' actions in the Bond Patterson breach or in the Strata Plan litigation breach. However the plaintiffs have mounted a case which calls for a decision as to whether the defendants acted honestly in respect of the authorisation of the payments of directors' fees. 193 It is submitted that the Court would not accept the defendants claims that they did not recollect seeing the letter of 25 June 1991 in which Mr Kennedy recommended against the payment of directors' fees. 194 It is clear that the defendants did not bring this letter to the attention of their lawyers prior to the commencement of this litigation. It is also clear that the defendants received the letter and it was in their files. Indeed the surrounding correspondence and communication with the accountants and Ebsworth and Ebsworth in mid 1991 leads to the irresistible conclusion that the letter was received and read for the purposes of seeking further advice. 195 The explanation that the second defendant did not go to his file for the purpose of preparing his evidence because his file would become "messy" is one that I found quite incredible. The first defendant simply did not have an explanation as to how this letter could have been overlooked. 196 The first defendant said that the second defendant controlled the files and she trusted him to bring matters to her attention. Sometimes she would open letters addressed to them but at other times the second defendant would open them. Although the first plaintiff gave evidence that the first defendant had told her that she had given up with the estate because the second defendant was making it so complicated, the first defendant's evidence was in stark contrast to such a situation. The first defendant said that the defendants would discuss the affairs of the estate, it appears sometimes at length, before any steps were taken. 197 In the light of this evidence I find the defendants' failure to recollect seeing that part of Mr Kennedy's letter of 25 June 1991 relevant to the payment of director's fees extremely curious. However even if they did see it in 1991, the second defendant expressed the view that Mr Kennedy's recommendation not to pay director's fees was not inconsistent with the view that he had expressed in his earlier letter that the first defendant was "entitled" to the director's fees. The first defendant said in evidence that she thought the later advice was inconsistent with the earlier advice. 198 It is difficult to understand how the first defendant could have forgotten such advice if in fact she did see the letter. Explanations which come to mind on the evidence before me include: i that the first defendant did not see the letter at the time it was received or subsequently, notwithstanding the contents of the letters to the solicitors and accountants at around that time in relation to aspects of advice therein; and/or ii it really was as the first plaintiff said the first defendant told her it was, that the first defendant was signing blank cheques and leaving the management of the estate to her husband the second defendant. 199 However although I found the defendants' evidence in relation to this letter very unsatisfactory I am not satisfied that I can make a finding of dishonesty in relation to the payment of directors' fees in all the circumstances. I am however satisfied that the defendants did not act reasonably in failing to address the advice given to them by Mr Kennedy in June 1991. This is particularly so in the light of the first defendant's evidence that she would not have authorised the payments if she had been aware of the advice. 200 I am also satisfied that the defendants have failed to establish that they acted reasonably in relation to the Bond Patterson and Strata Plan matters. Nothing was placed before me to suggest that the tolerance of delay and apparent inactivity in circumstances of the imposition of fines and late fees could be characterised as reasonable. 201 Although it is a long time ago I regard the confrontational approach adopted in respect of the Strata Plan litigation as quite unreasonable. 202 In all the circumstances I am not satisfied that the defendants have established that they acted reasonably in relation to any of the established breaches. In those circumstances an essential prerequisite for the Court to excuse the defendants pursuant to s 85 of the Trustee Act 1925 has not been met. I therefore refuse to exercise my discretion in their favour. Removal 203 Mr Blackburn-Hart submitted that the defendants' conduct in this case was far less culpable than the conduct of the trustees in Guazzini v Pateson (1918) NSW SR 275. He submitted that the eminently fair approach adopted by Street CJ in Eq would provide appropriate guidance for me to be persuaded not to remove the defendants as trustees. 204 The exercise of this discretion is not penal in character. The dominant consideration is upon the welfare of the beneficiaries: Miller v Cameron (1936) 54 CLR 572; Letterstedt v Broers 9 App Cas 371. 205 I do not agree that the approach adopted by the Chief Judge in Equity in Guazzini v Pateson is one that gives me guidance in relation to the circumstances of this case. In that case a number of grounds of complaint involved circumstances in which the trustees had been duped by a less than honest relative, who was providing services to the trust, into believing that the administration was in order. The trustees had failed to put in place appropriate mechanisms for detection of the dishonest conduct. 206 The court in that case accepted certain explanations that were given by the trustees in their evidence and saw no reason to doubt their bona fides. It seemed that the Court was comfortable that the interests of the beneficiaries were not at risk by leaving the trustees in their respective positions. 207 In this case I am of the view that the welfare of the beneficiaries and the estate generally is at risk if I were to allow the trustees to remain. The history disclosed in the evidence, including the writing of blank cheques, on the plaintiffs' version, or just one blank cheque on the defendants' version; the evidence of the lost books and the records of the estate and Marisa; the confrontational approach and tactics adopted by the second defendant in particular in respect of the litigation with Bond Patterson and Strata litigation and the willingness to tolerate inordinate delay to the point where late fees and fines are imposed gives me absolutely no confidence that the interests of the beneficiaries will be properly served. 208 There are the further matters of the obvious hostility between the defendants and the plaintiffs, including the physical altercation between the third plaintiff and the second defendant, the lack of trust between them, and the need to communicate through legal representatives even before these proceedings were commenced. 209 Friction and hostility are not of themselves reasons for removal of trustees: Forster v Davies 4 De G.F.& J. 133 at 139; Letterstedt v Broers supra at 389. However I am satisfied that the friction and hostility in this case has had a cumulative effect on the disintegration of the trustees capacity to carry out their duties. 210 For the benefit of the estate and the welfare of the beneficiaries I am of the view that it is appropriate in all of the circumstances that the trustees be removed. 211 Mr Blackburn-Hart has referred me to authority to suggest that the Court has jurisdiction to make an order permitting the first defendant to retain the $41,000 paid to her by Marisa: In Re Keeler's Settlement Trusts (1981) 1 Ch 156; In Re Masters Decd (1953) 1 WLR 81. He submits that I should make an order to that effect. I am not satisfied in the circumstances of my findings above that the first defendant should be authorised to retain those moneys. Orders 212 The parties are to bring in Short Minutes of Order reflecting these findings and my intention to make an order for removal of the defendants as trustees and I will hear counsel in respect of the appointment of new trustees. I intend also to make orders in terms of paragraphs 40 (ii), (iii) and (v) of the Statement of Claim. 213 In the circumstances of my findings the application for judicial advice is not appropriate. The Cross Claim will be dismissed. I will hear counsel on the order sought in paragraph 40 (iv) of the Statement of Claim and on costs. *********** Last Modified: 09/25/2000 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.