New South Wales Supreme Court CITATION : Re Baylily Pty Ltd [2010] NSWSC 6 HEARING DATE(S) : 15 January 2010 JUDGMENT DATE : 21 January 2010 JURISDICTION : Equity Division JUDGMENT OF : Harrison J Questions answered as follows: 1. Yes. DECISION : 2. Yes. 3. No. 5. No. 6. Not answered. CATCHWORDS : TRUSTS - s 63 Trustee Act 1925 – judicial advice – whether corporation removed as trustee of a discretionary trust pursuant to an exercise by an appointor of his power to appoint a new trustee would be justified in defending proceedings taken against it in its capacity as trustee of the trust – question answered 'no'. Acts Interpretation Act 1901 (Cth) Corporations Act 2001 (Cth) LEGISLATION CITED : First Corporate Law Simplification Act 1995 (Cth) Fringe Benefits Tax Assessment Act 1986 Interpretation Act 1987 Trustee Act 1925 CATEGORY : Procedural and other rulings Australian Broadcasting Commission v Australian Performing Right Association Ltd [1973] HCA 36; (1973) 129 CLR 99 Bluescope Steel Ltd (formerly BHP Steel Ltd) v Australian Workers' Union [2004] NSWIRComm 222; (2004) 137 IR 176 CASES CITED : Friend v Brooker [2009] HCA 21; (2009) 239 CLR 129 Hide and Skin Trading Pty Ltd v Oceanic Meat Traders Ltd (1990) 20 NSWLR 310 Macedonian Orthodox Community Church St Petka Incorporated v His Eminence Petar The Diocesan Bishop of The Macedonian Orthodox Diocese of Australia and New Zealand [2008] HCA 42; (2008) 237 CLR 66 PARTIES : Baylily Pty Ltd (ACN 003 993 397) FILE NUMBER(S) : SC 2010/11275 COUNSEL : G A Sirtes SC with E M Peden (Plaintiff) SOLICITORS : Bruce Stewart Dimarco Lawyers (Plaintiff) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION HARRISON J 21 January 2010 2010/11275 Re Baylily Pty Ltd (ACN 003 993 397) JUDGMENT 1 HIS HONOUR: Baylily Pty Ltd seeks judicial advice pursuant to s 63 of the Trustee Act 1925. It wishes to know whether or not it should defend Supreme Court Equity Division proceedings number 50127 of 2009 commenced against it that are currently pending in this Court. Background 2 David MacRae and Susan MacRae operate various farming and agricultural activities through several companies and trusts, which are collectively known as Pacific Plantations. Baylily is one of the companies in that group. Mr and Mrs MacRae have two children, one of whom is Scott Alexander MacRae. Scott MacRae Investments Pty Ltd and Scott MacRae are the plaintiffs in the proceedings just referred to. Baylily is the first defendant together with other companies in the Pacific Plantation group. 3 James Mathers, the settlor, appointed Baylily as the trustee of the Scott MacRae Trust pursuant to a settlement on 12 December 1996. Some of the terms of the Trust Deed are referred to later in these reasons. Mr and Mrs MacRae and Robert Bruce are the directors of Baylily. Scott MacRae was a director of Baylily between 7 January 1997 and 9 April 2009. Scott MacRae is a discretionary beneficiary of the Scott MacRae Trust. 4 On 13 November 2008 Scott MacRae executed a Deed of Change of Trustee appointing Scott MacRae Investments Pty Ltd as a new trustee. Clause 7(1) of the Trust Deed gave Scott MacRae the power to appoint a new trustee. Scott MacRae is the sole director and shareholder of Scott MacRae Investments Pty Ltd. 5 Assets held by Baylily on the trusts created by the Scott MacRae Trust include a unit in Pacific Lennox Properties Unit Trust, an entity related to Pacific Plantations, and one half of a residential property in Queensland in which Scott MacRae currently resides. That property has since been transferred from Baylily to Scott MacRae Investments Pty Ltd. Baylily is said to remain liable for the debt secured by a mortgage over that property. 6 Baylily is sued in its capacity as trustee of the Scott MacRae Trust. In accordance with orders made by the Court on 11 December 2009 in the pending proceedings, Baylily is required to file and serve a Commercial List Response by 29 January 2010. In the course of seeking instructions and preparing a response to Baylily's amended summons in those proceedings it formed the view that it should seek judicial advice before taking further steps in the proceedings. This is because Baylily is concerned to know whether or not it is presently the trustee of the Scott MacRae Trust and what may be the scope of its duty to account to the beneficiaries of the trust in circumstances where it may no longer be the trustee, where it has no financial or other means of its own to do so and where it may not have any right of indemnity from trust property. Questions 7 The High Court of Australia recently considered the operation of s 63 in Macedonian Orthodox Community Church St Petka Incorporated v His Eminence Petar The Diocesan Bishop of The Macedonian Orthodox Diocese of Australia and New Zealand [2008] HCA 42; (2008) 237 CLR 66. At [74] the Court said the following: "[74] A necessary consequence of the provisions of s 63 of the Act is that a trustee who is sued should take no step in defence of the suit without first obtaining judicial advice about whether it is proper to defend the proceedings. In deciding that question a judge must determine whether, on the material then available, it would be proper for the trustee to defend the proceedings. But deciding whether it would be proper for a trustee to defend proceedings instituted about the trust is radically different from deciding the issues that are to be agitated in the principal proceeding. The two steps are not to be elided. In particular, the judicial advice proceedings are not to be treated as a trial of the issues that are to be agitated in the principal proceedings." 8 In these circumstances Baylily originally sought answers to six specified questions. One of those has since been abandoned. The following questions remain: 1. Whether upon the true construction of clause 7(5) of the Scott MacRae Trust Deed the power of appointment is validly exercised if the person exercising it then appoints his or her corporate alter ego as the trustee? 2. Whether upon the true construction of clause 7(6) of the Scott MacRae Trust Deed the reference to the expression "trustee" is restricted to the incoming trustee (as opposed to the outgoing trustee or both the incoming and outgoing trustee)? 3. Whether Baylily remains the trustee of the Scott MacRae Trust Deed? 5. If the answer to 3 is "no", is Baylily entitled to a right of indemnity or reimbursement or a charge from or over the assets of the trust for undertaking any work regarding the creation/provision of accounts pursuant to clause 11 of the Scott MacRae Trust Deed or otherwise? 6. Based on the answers to the questions 1-5 above (some or all), would Baylily be justified to defend proceedings no 50127 of 2009? Consideration Question 1 9 Clause 7(1) of the Scott MacRae Trust Deed is in the following relevant terms: "7(1) The power to appoint a new trustee in the place of an existing trustee or in addition to or jointly with an existing trustee and the power to remove a trustee shall subject to the following provisions of this clause be vested in: (a) Scott Alexander MacRae during his lifetime …" 10 Clause 7(5) of the Scott MacRae Trust Deed is as follows: "7(5) The power to appoint a new trustee as in this clause contained shall not be exercised in favour of the Settlor, the person exercising the power of appointment, a person who has transferred property to the trustee other than for full consideration to be held on the trusts of this deed, or a person who has gifted moneys to the trustee to be held as an accretion to the trust fund." 11 The plaintiff submits that the first question should be answered "no". This is said to be for the following reasons. 12 Clause 7(5) provides that Scott MacRae shall not exercise the power of appointment of a new trustee "in favour of … the person exercising the power of appointment". By Deed Poll of Change of Trustee made on 13 November 2008 pursuant to clause 7, Scott MacRae appointed Scott MacRae Investments Pty Ltd as trustee of the Scott MacRae Trust with effect from that day, and Baylily was removed as trustee at the same time. The appointment of Scott MacRae Investments Pty Ltd was approved by resolution of its directors. 13 Baylily submits that in endeavouring to discern the parties' intent, and in construing the meaning of the words used, a document will be given a commercial, reasonable and rational operation: Australian Broadcasting Commission v Australian Performing Right Association Ltd [1973] HCA 36; (1973) 129 CLR 99 at 109; Hide and Skin Trading Pty Ltd v Oceanic Meat Traders Ltd (1990) 20 NSWLR 310. Baylily contends that the appointment as trustee of a company of which Scott MacRae is the sole director and shareholder is invalid for the following reasons: 1. There was no requirement to include such a restriction on the power of appointment because the so-called "obvious" intention of the sub-clause was to prevent the appointor from being able personally to control the trust completely and absolutely. That intention would have been frustrated or defeated in the events that have occurred in the present case if the appointment of Scott MacRae Investments Pty Ltd as trustee were permitted to remain valid and effective. 2. If the appointor could overcome its terms by setting up a corporate "alter ego" and appointing such a company to take complete and effective control of the trust the clause would be deprived of its operation and effect. 3. Paragraph 22(1)(a) of the Acts Interpretation Act 1901 is said to provide assistance. It is relevantly as follows: "22(1) In any Act, unless the contrary intention appears: (a) expressions used to denote persons generally (such as "person", "party", "someone", "anyone", "no-one", "one", "another" and "whoever"), include a body politic or corporate as well as an individual; …" See also s 21 Interpretation Act 1987 (NSW), s 761FA Corporations Act 2001 and s 136(1) Fringe Benefits Tax Assessment Act 1986. 4. Frequently words used in the singular are taken to include the plural and vice versa. Baylily contended that it would not be an unreasonable or uncommercial construction for "person" also to mean "persons" and thereby to include a corporation of which the appointor was a sole director and shareholder. 5. "Person" can be interpreted to mean "legal person" rather than natural person: see, for example, Bluescope Steel Ltd (formerly BHP Steel Ltd) v Australian Workers' Union [2004] NSWIRComm 222; (2004) 137 IR 176. Applying such a construction, "person" in the Trust Deed would include a company of which the appointor was the sole director and shareholder. 14 Baylily accepted that there is no express prohibition in the Trust Deed of the appointment of Scott MacRae Investments Pty Ltd, or its equivalent, as a new trustee. Moreover, any such corporation that may be appointed as a new trustee would have the same fiduciary duties and obligations towards the beneficiaries of the trust as Scott MacRae, and they would have the same remedies against the company as they would have had against him. 15 Baylily submits that a purposive interpretation of clause 7(5), which gives effect to its apparent intent, ought therefore to be preferred. 16 In my opinion the question should be answered "yes". First, clause 1(1) of the Trust Deed defines "person" to include a company. However, the word "person" where it is used in the expression "the person exercising the power of appointment" is in the circumstances of this case an unambiguous reference to Scott MacRae. The impugned exercise by him of the power to appoint a new trustee is not a purported exercise of the power to appoint himself. If the appointor had been a company the definition of person would have extended to prohibit that company from appointing itself. The reverse does not follow. The fact that Scott MacRae is a person does not therefore mean that he and his company are the same thing by reason of the further fact that the definition of person includes a company. 17 Secondly, the terms of the sub-clause are clear and unambiguous. There is no express prohibition on the appointment of companies of which the appointor is a sole director and shareholder. As Baylily concedes, if the Trust Deed had been intended to include such a provision it could have done so. Single director and shareholder companies were permitted at the time of the settlement: see First Corporate Law Simplification Act 1995, assented to on 17 October 1995. 18 Thirdly, and for the same reason that the terms of the sub-clause are clear and unambiguous, there is no apparent basis to suggest that such an intention should be ascribed to the draughtsman. 19 Baylily's arguments appear to me to be not so much reasons why its proposed interpretation of the Trust Deed should be adopted as complaints about the most likely result of their natural and ordinary meaning. They assume an intention or purpose to deprive an appointor of the power to appoint a corporation, of which he or she may be a sole director and shareholder, simply because the degrees of control exercised by a trustee personally or through the medium of such an entity are likely to be identical. The intention assumed is not obvious in the way suggested. The obvious intention was to prohibit an appointor appointing himself or herself or itself. Nothing going beyond that emerges as obvious to me. Corporations have a distinct legal character, an unremarkable fact recently reaffirmed in Friend v Brooker [2009] HCA 21; (2009) 239 CLR 129. Scott MacRae is not Scott MacRae Investments Pty Ltd and Scott MacRae Investments Pty Ltd is not Scott MacRae. 20 There is nothing that is uncommercial, unreasonable or irrational in Scott MacRae having appointed Scott MacRae Investments Pty Ltd as trustee of the Scott MacRae Trust. Such a course was not expressly or impliedly prohibited by the Trust Deed and there is no obvious reason why it should have been. Question 2 21 Clause 7(6) of the Scott MacRae Trust Deed is as follows: "7(6) The power to appoint or remove a trustee may be exercised by memorandum under hand or by deed, and where the trustee is a corporation shall be approved by resolution of its directors. Nothing within this deed shall be taken as limiting the right to appoint a corporation or a resident of a place outside New South Wales or Australia as a trustee of the Trust." 22 Baylily contended that the expression "and where the trustee is a corporation" as it appears in that subsection should be read as meaning "and where the outgoing or incoming trustee is a corporation". This question has attracted Baylily's attention in the present context because as the outgoing trustee its approval of the appointment of Scott MacRae Investments Pty Ltd as the new trustee was not sought. 23 In my opinion the expression refers only to an incoming trustee. First, the reference is to the singular "trustee" and not the plural "trustees". Secondly, an incoming trustee could not be appointed without its consent. Thirdly, and decisively, any other meaning would hand to an outgoing corporate trustee the power to veto or fetter the appointor's exercise of the power to appoint a new trustee. Such an apparently or at least potentially irreconcilable conflict would be inimical to the orderly conduct and administration of the trust. 24 I would answer this question "yes". Question 3 25 It follows from the answers to questions 1 and 2 that the answer to question 3 is "no". Question 5 26 Baylily conceded that if the answer to question 3 was "no", then the answer to question 5 must also be "no". Question 6 27 Baylily contended that if it remains the trustee of the Scott MacRae Trust then it would be justified in defending the proceedings, but conceded if it were no longer the trustee that any decision by it to defend the proceedings would be a commercial decision for it to make and not a question properly the subject of judicial advice. I agree. Conclusion 28 In the circumstances I answer the questions as follows: 1. Yes. 2. Yes. 3. No. 5. No. 6. 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