Supreme Court New South Wales Medium Neutral Citation: Louise Lewis v Schon Gregory Condon as trustee of the bankrupt estate of Colleen Anne Rayhill (No 2) [2013] NSWSC 126 Hearing dates: 20 February 2013 Decision date: 22 February 2013 Jurisdiction: Equity Division Before: Rein J Decision: 1. Proceedings dismissed on the basis that the plaintiff does not have standing to bring proceedings 2. The parties to be heard on the issue of costs Catchwords: BANKRUPTCY - Property held by trustee in bankruptcy for payment of debts - Dispute as to whether the property falls within the bankrupt's estate EQUITY - Trust and trustees - Appointment, removal and estate of trustees - Appointor and incapacity to act as Appointor due to bankruptcy EQUITY - Beneficiaries of a discretionary trust - Standing to bring proceedings against third parties ESTOPPEL - Res Judicata - Privity ESTOPPEL - Res Judicata - Estoppel Cases Cited: Carl-Zeiss Stiftung v Rayner & Keeler Ltd (No 2) [1967] 1 AC 853, 910; [1966] 2 All ER 536; [1966] 3 WLR 125; [1967] RPC 497 Cromwell v County of Sac (1876) 94 US 351 McLean v Burns Philip Trustee Co Pty Ltd (1985) 2 NSWLR 623 Re Louis Contini Foundation Trust [2004] NSWSC 881 Spellson v George and Others (1987) 11 NSWLR 300 Texts Cited: Bower, Spencer, Turner and Handley, Res Judicata, 3rd ed (1996) Butterworths Ford, H.A.J and Lee, W.A., Principles of the Law and Trusts, Thomson Lawbook Co Heydon, J D and Leeming, M J, Jacobs' Law of Trusts in Australia, 3rd ed, 2006, LexisNexis Butterworths Category: Principal judgment Parties: Louise Lewis (Plaintiff) Mr Schon Gregory Condon as trustee of the bankrupt estate of Colleen Anne Rayhill (First Defendant) The Trustee of Kenthurst Investments Trust Robana Pty Ltd (Second Defendant) Representation: Counsel: Mr Paul Finch (Plaintiff) Mr Don Grieve QC (First Defendant) Solicitors: Mr Bruce Vernon Dennis (Plaintiff) Mr Michael Hayter (First Defendant) File Number(s): 2012/359743 Judgment 1REIN J: I handed down my reasons for judgment in this matter last Wednesday 13 February 2013. I drew attention to the issues that had not been the subject of argument and which I concluded the parties should be given an opportunity to address. 2These reasons should be read as supplementary to the earlier reasons and I shall use the definitions contained therein. 3The plaintiff relies on an affidavit of Ms Mellissa Rayhill sworn on 15 February 2013 the only other named discretionary object of the Trust and also the person nominated as the Appointor in the event of Mrs Lewis being "incapable of acting": see Exhibit A p 2. Ms Rayhill says that she supports the plaintiff's claims and that she will appoint a new trustee if the Court determines that the Property is trust property. 4A further development was an Amended Defence filed in Court on 20 February 2013 which added as a defence an assertion of the plaintiff's lack of standing to bring these proceedings. 5I have received written submissions from counsel which I shall refer to as the plaintiff's supplementary submissions and defendant's further supplementary submissions respectively. The following issues emerge from the supplementary submissions: (1)Who is the current trustee? (2)Has Mrs Lewis ceased to be the Appointor by reason of incapacity? (3)Does the plaintiff have standing to bring these proceedings? (4)Does the declaration made by Nicholas J give rise to a res judicata against Robana and hence the plaintiff. This issue has several sub-issues: (a)Did the declaration made by Nicholas J affect only the legal title? (b)Is Robana a privy of the plaintiff? (c)Is Mr Condon estopped from asserting res judicata against the plaintiff by virtue of what was said by Mr Dupree to Mr Dennis and to Nicholas J (see [26] - [28] and what is set out below at [16])? Who is the current trustee of the trust? 6The first defendant asserts that Appinville is the current trustee, since by the deed of 27 August 2005 Appinville was purportedly replaced by Mrs Lewis as trustee and the appointment was invalid. The plaintiff asserts that Appinville retired and there is currently no validly appointed trustee. The deed provided by clause 2: The retiring trustee is no longer trustee of the settlement and accordingly the appointment of the retiring trustee as trustee of the settlement is hereby terminated and is at an end subject only to the terms of this deed being registered pursuant to Part 23 of the Conveyancing Act 1919. Not only has Appinville not acted on behalf of the trust since 2005 but it also transferred the title of the Property in to Mrs Lewis' name. Its sole director and shareholder Mr Fraser did not regard the company as having any continued role as trustee (see T37.25 - T.38.8) and he has given evidence in support of Mr Condon's defence of the proceedings brought by the plaintiff against the interests of the Trust. Mr Grieve says that because the replacement by Mrs Lewis is ineffective, Appinville must remain as the trustee. I have considerable doubt that as a matter of construction of the deed Appinville must remain as the current trustee by reason of the failure of the appointment of Mrs Lewis as trustee but even if that was correct I think Appinville has long ago ceased to act as trustee. Has Mrs Lewis ceased to be the Appointor? 7Mr Grieve made the point that, contrary to the plaintiff's submissions, that Mrs Lewis was incapable of appointing a new trustee (as Appointor) when she became bankrupt (para 4(c) of the plaintiff's supplementary submissions), the fact of bankruptcy does not preclude Mrs Lewis from acting as Appointor. Since a bankrupt can continue to act as trustee under a trust unless the trust deed prohibits such a course, the fact of bankruptcy does not of itself bring the trustee appointment to an end: see J D Heydon and M J Leeming Jacobs' Law of Trusts in Australia (LexisNexis Butterworths, 7th ed, 2006) [1413], there is no reason why an "Appointor" who has been made bankrupt cannot continue to act. If that is correct it means that Ms Rayhill is not the Appointor and has no power to appoint a new trustee, and that Mrs Lewis remains able to appoint a new trustee. Does a potential beneficiary under a trust have standing? 8There are no presently entitled beneficiaries under the Trust. The first corpus beneficiary (Mrs Lewis) has disclaimed any interest. The plaintiff and Melissa Rayhill are, according to the deed, the "second corpus beneficiar[ies]". They are also "the alternative corpus beneficiaries". The "third corpus beneficiaries" are the grandchildren of Mrs Lewis. Neither Appinville, or either of the purported trustee, has ever determined which of the potential beneficiaries or objects of the discretionary trust are to receive the capital or interest. 9Mr Grieve submits that a potential beneficiary does not have any right to bring proceedings against a third party and he cites as authority Jacobs' Law of Trusts in Australia, [2315] and Re Louis Contini Foundation Trust [2004] NSWSC 881. Paragraph [2315] from Jacobs' Law of Trusts in Australia is as follows: In any event, the rationale formerly offered for the rule [in Saunders v Vautier Cr & Ph 240] does not accommodate the modern so-called 'discretionary' trust, although the term is imprecise. There, in the place of 'beneficiaries' in the traditional sense who between them aggregate beneficial ownership of the trust property, there is a class of persons described in wide terms. This class is, in essence, the object of a trust power in the trustee to appoint either or both income or corpus and to do so periodically between members selected from the designated class on each such occasion, but reserving in the trustee a discretion as to the quantum of income or corpus appointed to any particular individual and a discretion to declare the exercise of the power on any occasion. In such cases, it is difficult to maintain that any particular object of the power has an interest in the trust fund and, indeed, the widespread use of discretionary trust as a means of avoiding death duties assumed there would be no such interest for the purpose of revenue legislation. Further, to say that as between all of them the objects enjoy beneficial ownership and therefore may, if all sui juris, invoke the rule in Saunders v Vautier, is to envisage a group interest greater than the aggregate of individual interest by attribution to the whole of a character not possessed in any degree by any of its parts. However, clearly the objects have the right to due administration of the trust, so that the trust is entirely in their interest. Is this sufficient to enfranchise the objects of the power, if all sui juris, to join and terminate the trust? 10Reference should also be made to paragraph [314] of Jacobs' Law of Trusts in Australia dealing with the topic of discretionary trusts: The meaning of the expression 'discretionary trust' primarily is a matter of usage not doctrine. It is used to identify a species of express trust, one where the entitlement of beneficiaries to income, or to corpus, or both, is not immediately ascertainable; rather, the beneficiaries are selected from a nominated class by the trustee or some other person and this power (which may be a special or hybrid power) may be exercisable once or from time to time. The person with the right to select the cestui que trust thus holds a special power of appointment. Persons entitled in default of appointment might or might not be nominated. The chief jurisprudential interest of discretionary trusts is that a member of the class of possible objects of appointment has no proprietary interest in the trust assets (unless there is no other discretionary object), although the member does have standing to compel the proper administration of the trust. 11Mr Finch was unable to point to any case in which an object of a discretionary trust has been held entitled to bring proceedings against a third party and he did not provide any text in support of his contention that in principle such a claim is permissible. He does however point to cases which support the right of a person named as a potential object of entitlement under the trust to bring a claim for due administration against the trustee, and draws attention to the following passage of McLean v Burns Philip Trustee Co Pty Ltd (1985) 2 NSWLR 623, at 637 per Young J (as his Honour was then); (1985) 9 ACLR 926: As I have said before, the trust is the creature of Equity, rights under a trust exist only because of the orders an Equity Court may make and it is to my mind inconceivable that if a matter of mal-administration or, worse, fraud were brought to the attention of the Equity Court by the plaintiff who was a creditor, the court would not act on that motion. It certainly would not send the plaintiff away with his suit dismissed with costs because of lack of standing. Mr Finch also referred to Spellson v George and Others (1987) 11 NSWLR 300, 316 per Powell J (as his Honour was then): The question then is, whether a person whose status is only that of a potential object of the exercise of a discretionary power can properly be regarded as one of the cestuis que trust of the relevant trustee. I do not doubt that he can, and should, properly be so regarded, for although it is true to say that, unless, and until, the trustee exercises his discretion in his favour, he has no right to receive, and enjoy, any part of the capital or income of the trust fund, it does not follow that, until that time arises, he has no rights against the trustee. On the contrary, it is clear that the object of a discretionary trust, even before the exercise of the trustee's discretion in his favour, does have rights against the trustee (see, eg, Gartside v Inland Revenue Commissioners (at 605-606] per Lord Reid, (at 617-618) per Lord Wilberforce] - those rights, so it seems to me, are not restricted to the right to have the trustee bona fide consider whether or not to exercise his (the trustee's] discretion in his (the object's] favour, but extend to the right to have the trust property properly managed and to have the trustee account for his management, a view, I am glad to say, which appears to have been shared by both Holland J in Randall v Lubrano and Kenny J in Chaine-Nickson v Bank of Ireland. 12The passages from Jacobs' Law of Trusts in Australia and the two cases Mr Finch relies on, and which I have referred to above, recognise the right of potential beneficiaries to bring the proceedings against a trustee for mal-administration of the trust and the first defendant does not contend to the contrary. Mr Finch submits that since the Court recognises that the rights of a potential beneficiary to bring a mal-administration suit against the trustee, that stands as authority for the principle that a potential beneficiary can bring a derivative action. The first proposition however is quite separate from the second, and nothing in the passages from Jacobs' Law of Trusts in Australia, or the passages from the cases set out above, support his contention. In Re Louis Contini Foundation Trust Justice Campbell was considering whether a potential object of a discretionary trust could obtain an order for the appointment of a new trustee. His Honour held they could but he seems to have based that conclusion on the finding that: It is the three plaintiffs who, between them, are or include the people who have, or person who has, a presently vested interest in the trust property, though subject to divesting. (my emphasis) Re Louis Contini Foundation Trust is not concerned with a claim against a third party but his Honour's focus on the presently vested interest even for an application to appoint a new trustee does rather tell against the wider proposition for which the plaintiff contends. 13A beneficiary can only bring proceedings against a third party in "exceptional circumstances": see H.A.J Ford and W.A. Lee, Principles of the Law and Trusts (Thomson Lawbook Co) [1.8410] and the cases there cited. I am not satisfied that a potential object of the trust has standing to bring a claim against a third party but even if potential beneficiaries do have standing I think the proceedings would have to involve all identifiable potential beneficiaries (either as plaintiffs or defendants) and not merely one of them. Ms Rayhill, whose interest in the Trust is identical with the plaintiff, whilst supporting the plaintiff's claim, has not joined in the action and nor have Mr Jason Lewis and Mr Kris Lewis who have asserted that they are beneficiaries (see Annexure I(a) of the plaintiff's affidavit of 13 November 2012) and who may fall within the third corpus of beneficiaries. Neither Ms Rayhill, who is a potential beneficiary under the Trust and who the plaintiff now asserts is also the Appointor, has ever appointed a trustee and even now, appraised of the problem she has not done so to enable the new trustee to seek to intervene in the proceedings. Mrs Lewis, if she remains the Appointor, and in my view she does, has not appointed a new trustee. There was no evidence tendered which demonstrates that, prior to the attack by the first defendant on Robana's position as trustee (and at a time when the plaintiff was asserting that Robana was the trustee in whose name the property should be placed: see order 3 of the relief claimed in the Statement of Claim filed 7 December 2012 which claim for relief incidentally remains unamended), the plaintiff had sought to have Robana take any steps in relation to establishing that Mrs Lewis did not own the Property beneficially or to have Robana removed by reason of its failure to do so. As I have noted, Robana previously had taken action by lodging a caveat and resisting Mr Condon's entitlement to registration, and filed a submitting appearance in these proceedings. 14Mr Finch claimed that the Court has an inherent power to ensure due administration of trusts but that is not the same as permitting an object to bring proceedings against a third party and there is no evidence before me that Mrs Lewis (or Ms Rayhill if I am wrong to conclude that Ms Rayhill is not the Appointor) could not or would not act to appoint a new trustee who would have standing to bring proceedings leaving aside the res judicata point. 15I therefore conclude that the plaintiff has no standing to bring the proceedings and I would dismiss the case on that basis. Res Judicata 16In [26], [27] and [28] of the earlier reasons I set out what Mr Dupree had said to Mr Dennis and to his Honour. Mr Finch also now relies on the fact that Mr Condon in the 2012 proceedings sought, by his Summons, a declaration that "pending further orders of the Court the Plaintiff, is entitled to be noted on the register... ...as the registered proprietor in lieu of Lewis": see para 14 of the plaintiff's supplementary submission and refers to what he claims was irregularities in the way in which the matter came before Nicholas J on 26 October 2012. Mr Finch in the plaintiff's supplementary submissions (see para 19) has referred to the following passage in further support of his contention that the declaratory judgment "was only affecting the registration (legal title) and not the beneficial interests" (see para 21 of the plaintiff's supplementary submissions): His Honour: What does s58 of the Bankruptcy Act say? Mr Dupree: It says that it is the duty of the trustee to get in the property of the bankrupt and this piece of property is clearly the property of the bankrupt. It is conceded, of course, that the trustee can't get any better title than that which the registered proprietor has, but that doesn't prevent registration. 17Mr Finch contends that the declaration was quite limited in scope and that the plaintiff does not challenge the registration of Mr Condon in lieu of Mrs Lewis and that this was recognised in both what Mr Dupree said to Mr Dennis and to Nicholas J. 18Mr Finch also contends that to permit the first defendant to rely on res judicata in the light of what Mr Dupree said to Mr Dennis (see [26]) and what Mr Dupree said to his Honour, would involve a considerable degree of unfairness to the beneficiaries of the trust. Although he did not go so far in his written submissions he asserted in oral submissions that, in effect, Mr Condon is estopped from asserting res judicata in this case (see T4.41 - T5.44), and that Nicholas J "was given an express representation that this would not affect the equitable rights" (T5.14 - 15) and that Mr Condon's case involved him or his counsel in "misleading the court" (T4.45). 19Read literally the declaration made by Nicholas J merely permits Mr Condon to be registered as the proprietor of the land. The approach which I set out in my earlier reasons (see [26]) is one that I think would, absent consideration of what Mr Dupree said to Mr Dennis and what Mr Dupree said to Nicholas J, apply to require a wider reading rather than a literal reading. The question which I must now answer is whether the wider reading, which after all is derived only from context, should be adopted in the light of what Mr Dupree said to Mr Dennis and to his Honour. In my view it ought not. Mr Dupree, by what he told his Honour, accepted that registration of Mr Condon as registered proprietor did not affect the beneficial rights and the combined effect of both his statement to the Court and to Mr Dennis was that Robana's claim that the Property was really property of the Trust was yet to be determined. His statement to the Court that the declaration was "otiose" and had no utility "other than as to costs" only reinforces that view. Confined to its precise terms, the declaration of Nicholas J is not inconsistent with the claim by the plaintiff that the Property was, and is, actually held in trust for the Trust. If it was held in trust by Mrs Lewis, it is not property that falls into her bankrupt estate as I have, in my earlier reasons, explained. 20It follows, in my view, that the declaration made by Nicholas J does not preclude the trustee of the Trust from seeking to recover the Property from Mr Condon. 21The parties were also in dispute as to whether the plaintiff and Robana are privies for the purpose of the principle of res judicata. As is stated in Spencer Bower, Turner and Handley, Res Judicata (Butterworths, 3rd ed, 1996) a judgment operates against not only the parties to the earlier litigation but to those who are privy to them in "blood, title or interest". The only potentially relevant category here is "in interest". Further, Spencer Bower, Turner and Handley state (see pp 231-232): Privies include any person who succeeds to the rights or liabilities of the party upon death or insolvency, or who is otherwise identified in estate or interest. It is essential that the party to be estopped by privity must have some kind of interest, legal or beneficial, in the previous litigation or its subject matter. In support of this proposition Carl-Zeiss Stiftung v Rayner & Keeler Ltd (No 2) [1967] 1 AC 853, 910; [1966] 2 All ER 536; [1966] 3 WLR 125; [1967] RPC 497 is cited in the text as is the decision in Cromwell v County of Sac (1876) 94 US 351 at 352, 360. In Cromwell v County of Sac the plaintiff in 2012 proceedings (Mr Smith) was treated as privy of Mr Cromwell when he had brought an action on bonds issued by the County of Sac, solely "for the use and benefit" of Mr Cromwell. 22 Mr Finch submits that since Robana was not validly appointed as trustee, it was an interloper and hence that there is no relationship to support the claimed privity. I do not accept that contention. Robana was in the 2012 proceedings propounding the interests of the trust and hence the interests of potential beneficiaries. Had Robana succeeded in those proceedings the trust property would have been secured to the benefit of the potential beneficiaries and I do not think Mr Condon could have successfully contended that the finding was not binding against him because Robana was not validly appointed no point having been taken in those proceedings as to Robana's appointment as trustee. In my view if the plaintiff otherwise had standing to bring these proceedings she had a relevant interest in the 2012 proceedings and would be bound by the outcome, were it, contrary to the view I have expressed above, to preclude the trustee of the Trust from advancing the claim that the plaintiff now advances. 23In respect of the contention of the plaintiff that the first defendant is estopped from relying on res judicata, Mr Grieve drew my attention to the fact that this contention had not been pleaded and therefore cannot be agitated. Mr Finch did not respond to that submission. In light of this and the conclusion I have reached on the effect of the declaration, I do not need to consider this issue further. Conclusion 24Given my conclusion that the plaintiff does not have standing to bring the proceedings they should be dismissed. 25I will hear the parties on the issue of costs. ********** 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. Decision last updated: 27 February 2013